2021 Blue Notes Commercial Law PDF

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Ad maiorem Dei gloriam.

GRACE ANN Q. BAJO
TIMOTHY JACOB J. PALAFOX
20 21 C H AI R PE R S O N S
KATHLEEN KAE Z. ENDOZO MEG V. BUENSALIDO

ARISTEO RAPHAEL T. MARBELLA III MARIE KAYLA C. GALIT
20 21 AD MI NI ST R A TI V E CO M MI T TE E HE A D S 20 21 A C AD E MI C C O M MI T TE E HE AD S
CARLOS ROSAURO N. MANALO

MA. CRISTINA ASUNCION
20 21 A C AD E MI C C O M MI T TE E U N D E R ST U D I E S
DEAN JOSE MARIA G. HOFILENA ATTY. TAKAHIRO KENJIE C. AMAN

ATTY. MARIA CECILIA G. NATIVIDAD ATTY. CHRISTINE JOY K. TAN
ATTY. FERDINAND M. NEGRE ATTY. ROEL A. REFRAN
ATTY. ELMORE O. CAPULE ATTY. IVY D. PATDU
20 21 C O M ME R CI AL LA W F A CU L TY A D V I SE R S
CARLO ANTON J. DEL MUNDO ALIYAH ROSH DY TIMOTHY JACOB J. PALAFOX

JONAH MAE M. SAMPANG DIANNE P. MULINGTAPANG ANNA YSABELLE A. VELUZ
MARK JOSEL P. VIVIT MART AMIEL J. LAFORTEZA JIM MATTHEW O. HAM
SIEGFRED G. PEREZ TALISA MARI D. DELA ROSA
20 21 C O M ME R CI AL LA W SU BJE CT HE A D S
ISABELLE BEATRIZ DLS. GINEZ RIVER M. GADDI LUIS TEODORO B. PASCUA

TERESA JOANNA C. ROSALES JASMINE R. BRIONES JAYE MARIE C. MARTINEZ
LESLIE ANNE M. CASTILLO ANGELIE MARIE PINTOR IRISH MAE GARCIA
AUBREYLAINE M. SALAZAR
20 21 C O M ME R CI AL LA W U ND E R S TU D I E S
ROSEANNE REALUBIN MIKKO RINGIA ANA SAMANTHA ISABELA PARUNGAO

KATRINA ANGELA D. LOYOLA ISABELLA SABIO MARIA ANTOINETTE C. DUQUE
20 21 C O M ME R CI AL LA W V OLU NTE E R S
JONATHAN DF. TORRES
GAEL PAULINE R. MORALES
RIA ALEXANDRA D. CASTILLO
NICOLE ANN C. PAGLICAWAN
JULIANNE BEATRICE N. ROSARIO
20 21 C R E ATI V E S
JOSEPH BILL P. QUINTOS STEFI MONIKA S. SUERO

SAMANTHA J. MAGAOAY KATHLEEN C. ROMINA
FREEDOM JUSTIN B. HERNANDEZ SERMAE ANGELA G. PASCUAL
20 21 TE C H NI CA L 2 02 1 FI N AN CE
AINA RAE L. CORTEZ CHRISTIAN GIO R. SENARLO

LUMINA ALINEA O. AQUINO MAEDEN M. BORCELANGO
ANNA MARIE GRACE M. ANTONIO IMI LIZA B. ESPINA
MARY STEPHANIE CABRERA CRUZ FRANCIS SABIN BELTRAN
CLARISSE MAE D. ZAPLAN ANTHONY JEFFERSON Y. JULIO
20 21 S PE CI AL P R OJ E C TS 20 21 LO GI STI C S
DONN MARIE ISABELLE BALINA MELISSA GABRIELLE P. REMULLA

ALISHA BEATRICE A. VERGARA GRACIELLA RACHEL D. ROBLES
PRISHA LEIGH D. CRUZ DANELLA DIANE D. DIMAPILIS
ALITHEA C. SORIANO REYNALDO M. REVECHE
AARON C. CHENG CZAREANA JOUSCH T. PARRA
20 21 M AR K E TI N G 20 21 PU BLI C R E L A TI ON S
JUSTIN LUIGI V. HERNANDEZ
20 2 0 C HAI R P E R SO N
YVES PETER CARLO D. MEDINA THERESE ANNE C. ESPINOSA

KATRINA ISABELLE G. PIMENTEL HAZEL VIANCA I. ORTEGA
GENICA GALE F. LAHOZ VINCE ZYRENCE T. BARLONGAY
20 2 0 AD MI NI S TR ATI V E CO M MI T TE E HE A D S 20 2 0 HO TE L C O M MI TTE E HE A D S
EUNICE A. MALAYO MEG V. BUENSALIDO

FRANCES CHRISTINE P. SAYSON MARIE KAYLA C. GALIT
20 2 0 A CAD E MI C CO M MI T TE E HE AD S 2 02 0 A CA D E M I C CO M MIT T E E U N D E R S T U DI E S
DEAN JOSE MARIA G. HOFILENA ATTY. TAKAHIRO KENJIE C. AMAN

ATTY. MARIA CECILIA G. NATIVIDAD ATTY. CHRISTINE JOY K. TAN
ATTY. FERDINAND M. NEGRE ATTY. ROEL A. REFRAN
ATTY. ELMORE O. CAPULE ATTY. IVY D. PATDU
20 2 0 CO M ME R CI AL LA W F A CU L TY A D V I SE R S
JONAH MAE M. SAMPANG JUSTIN NICHOLAS T. SY

WENDELL A. LAXAMANA EZEKIEL MANUEL B. GARCIA
ELDEN ROCAMORA MARINELA ISABELLE M. CAPISTRANO
SERGIO LUIS M. MERCADO JIM MATTHEW O. HAM
REYNALEIGH H. DE LOS REYES BENIGNO P. ENCISO
20 2 0 CO M ME R CI AL LA W SU BJE CT HE A D S
TIMOTHY JACOB J. PALAFOX ALIYAH ROSH DY CARLO ANTON J. DEL MUNDO

DIANNE P. MULINGTAPANG SIEGFRED G. PEREZ MART AMIEL J. LAFORTEZA
TALISA MARI D. DELA ROSA MARK JOSEL P. VIVIT ANNA YSABELLE A. VELUZ
20 2 0 CO M ME R CI AL LA W U ND E R S TU D I E S
MARIA ANTOINETTE C. DUQUE CHAVI LEVINE REYES KATRINA ANGELA D. LOYOLA

MARIA ANGELICA TORIO VICTORIA FAY V. CHANG HOSEA LEJIAN SALAZAR
CARLO DEL MUNDO ALYSSA MARIE L. SIYCHA HOSEA L. SALAZAR
YIELA SANTIAGO SARA KARMINA D. AVILLON MARLO CAPACITE
KEVIN B. GAMAD JOHANN ANGELO C. BULATAO BRIAN PINEDA
20 2 0 CO M ME R CI AL LA W V OLU NTE E R S
ATENEO CENTRAL
BAR OPERATIONS 2020/21 COMMERCIAL LAW
TABLE OF CONTENTS
I. INSURANCE ......................................................................................................................................................... 2
A. CONCEPT OF INSURANCE ................................................................................................................................... 3

B. ELEMENTS OF AN INSURANCE CONTRACT .......................................................................................................... 3
C. CHARACTERISTICS AND NATURE OF INSURANCE CONTRACTS ............................................................................ 6
D. CLASSES OF INSURANCE ..................................................................................................................................... 7
E. VARIABLE CONTRACTS ....................................................................................................................................... 8
F. INSURABLE INTEREST ......................................................................................................................................... 8
1. IN LIFE/HEALTH ..................................................................................................................................................8
2. IN PROPERTY ......................................................................................................................................................9
3. DOUBLE INSURANCE AND OVER INSURANCE ...................................................................................................11
4. MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY .................................................................................12
G. PERFECTION OF THE CONTRACT OF INSURANCE ............................................................................................... 13
1. OFFER AND ACCEPTANCE / CONSENSUALITY ...................................................................................................13
2. PREMIUM PAYMENT ........................................................................................................................................15
3. NON-DEFAULT OPTIONS IN LIFE INSURANCE ...................................................................................................16
4. REINSTATEMENT OF A LAPSED POLICY OF LIFE INSURANCE .............................................................................17
5. REFUND OF PREMIUMS ....................................................................................................................................17
H. RESCISSION OF INSURANCE CONTRACTS .......................................................................................................... 18
1. CONCEALMENT ................................................................................................................................................18
2. MISREPRESENTATION/OMISSIONS ..................................................................................................................20
3. BREACH OF WARRANTIES .................................................................................................................................21
I. CLAIMS SETTLEMENT AND SUBROGATION ........................................................................................................ 24
1. NOTICE AND PROOF OF LOSS ...........................................................................................................................24
2. GUIDELINES ON CLAIM SETTLEMENT ...............................................................................................................25
J. BUSINESS OF INSURANCE; REQUIREMENTS ....................................................................................................... 27
K. INSURANCE COMMISSIONER AND ITS POWERS ................................................................................................ 28
II. PRE-NEED ......................................................................................................................................................... 47
A. DEFINITION ...................................................................................................................................................... 47
1. PRE-NEED PLANS ..............................................................................................................................................47
2. PRE-NEED COMPANY .......................................................................................................................................47
B. REGISTRATION OF PRE-NEED PLANS ................................................................................................................. 47
C. LICENSING OF SALES COUNSELOR AND GENERAL AGENT .................................................................................. 48
D. DEFAULT AND TERMINATION .......................................................................................................................... 48
E. CLAIMS SETTLEMENT ........................................................................................................................................ 49
III. TRANSPORTATION LAW .................................................................................................................................. 52
A. COMMON CARRIERS ........................................................................................................................................ 53

1. DILIGENCE REQUIRED OF COMMON CARRIERS ................................................................................................54
2. LIABILITIES OF COMMON CARRIERS .................................................................................................................55
3. CLASSIFICATION OF TRANSPORT NETWORK VEHICLE SERVICES AND TRANSPORT NETWORK COMPANIES ....55
B. VIGILANCE OVER GOODS .................................................................................................................................. 55
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1. EXEMPTING CAUSES .........................................................................................................................................55

2. CONTRIBUTORY NEGLIGENCE ..........................................................................................................................58
3. DURATION OF LIABILITY ...................................................................................................................................58
4. STIPULATION FOR LIMITATION OF LIABILITY ....................................................................................................58
5. LIABILITY FOR BAGGAGE OF PERSONS..............................................................................................................59
C. SAFETY OF PASSENGERS ................................................................................................................................... 60
1. VOID STIPULATIONS .........................................................................................................................................60
2. DURATION OF LIABILITY ...................................................................................................................................61
3. LIABILITY FOR ACTS OF OTHERS ........................................................................................................................61
4. LIABILITY FOR DELAYS IN THE COMMENCEMENT OF VOYAGE .........................................................................62
5. LIABILITY FOR DEFECTS IN EQUIPMENT AND FACILITIES ..................................................................................62
6. EXTENT OF LIABILITY FOR DAMAGES ................................................................................................................62
D. BILL OF LADING ................................................................................................................................................ 62
1. THREE-FOLD CHARACTER .................................................................................................................................62
2. DELIVERY OF GOODS ........................................................................................................................................63
3. PERIOD FOR FILING CLAIMS..............................................................................................................................63
4. PERIOD FOR FILING ACTIONS ...........................................................................................................................64
5. EFFECTS OF STIPULATIONS ...............................................................................................................................64
E. MARITIME COMMERCE .................................................................................................................................... 64
1. CHARTER PARTIES ............................................................................................................................................64
2. LIABILITY OF SHIPOWNERS AND SHIPPING AGENTS .........................................................................................65
3. ACCIDENTS AND DAMAGES IN MARITIME COMMERCE ...................................................................................66
4. CARRIAGE OF GOODS BY SEA ACT ....................................................................................................................68
F. PUBLIC SERVICE ACT ......................................................................................................................................... 70
1. DEFINITION OF PUBLIC UTILITY ........................................................................................................................70
2. NECESSITY FOR CERTIFICATE OF PUBLIC CONVENIENCE ..................................................................................70
3. FIXING OF RATE ................................................................................................................................................71
4. UNLAWFUL ARRANGEMENTS ..........................................................................................................................72
5. APPROVAL OF SALE, ENCUMBRANCE OR LEASE OF PROPERTY ........................................................................72
G. THE WARSAW CONVENTION ............................................................................................................................ 73
1. APPLICABILITY ..................................................................................................................................................73
2. LIMITATION OF LIABILITY .................................................................................................................................73
3. WILLFUL MISCONDUCT ....................................................................................................................................74
IV. BUSINESS ORGANIZATIONS ............................................................................................................................ 76
A. PARTNERSHIPS ................................................................................................................................................ 80
1. GENERAL PROVISIONS ......................................................................................................................................80
A. DEFINITION ................................................................................................................................................80
B. ELEMENTS .................................................................................................................................................80
C. CHARACTERISTICS .....................................................................................................................................80
D. RULES TO DETERMINE EXISTENCE ............................................................................................................80
E. PARTNERSHIP TERM ..................................................................................................................................81
F. PARTNERSHIP BY ESTOPPEL .......................................................................................................................82
G. PARTNERSHIP AS DISTINGUISHED FROM JOINT VENTURE .......................................................................82
H. PROFESSIONAL PARTNERSHIP...................................................................................................................83
I. MANAGEMENT ...........................................................................................................................................83
2. RIGHTS AND OBLIGATIONS OF PARTNERSHIP AND PARTNERS.........................................................................84
A. RIGHTS AND OBLIGATIONS OF THE PARTNERSHIP ...................................................................................84
B. OBLIGATIONS OF PARTNERS AMONG THEMSELVES .................................................................................85
C. OBLIGATIONS OF PARTNERS TO THIRD PERSONS .....................................................................................89
3. DISSOLUTION AND WINDING UP ......................................................................................................................90
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A. CAUSES OF DISSOLUTION (ART. 1830) ......................................................................................................90

B. EFFECTS OF DISSOLUTION .........................................................................................................................91
C. RIGHTS OF PARTNERS UPON DISSOLUTION ..............................................................................................92
D. WHEN BUSINESS OF DISSOLVED PARTNERSHIP IS CONTINUED ...............................................................93
4. LIMITED PARTNERSHIP .....................................................................................................................................93
A. CHARACTERISTICS OF LIMITED PARTNERSHIP ..........................................................................................93
B. GENERAL PARTNERSHIP V. LIMITED PARTNERSHIP ..................................................................................94
C. REQUIREMENTS FOR FORMATION OF LIMITED PARTNERSHIP .................................................................94
D. CONSENT/RATIFICATION OF ALL LIMITED PARTNERS NEEDED ................................................................94
E. SPECIFIC RIGHTS OF LIMITED PARTNERS ...................................................................................................94
F. REQUISITES FOR RETURN OF CONTRIBUTION OF LIMITED PARTNER .......................................................94
G. LIABILITIES OF A LIMITED PARTNER ..........................................................................................................95
H. DISSOLUTION OF LIMITED PARTNERSHIP .................................................................................................95
I. AMENDMENT OF CERTIFICATE OF PARTNERSHIP ......................................................................................95
B. CORPORATION ................................................................................................................................................. 96
1. DEFINITION OF CORPORATION ........................................................................................................................96
2. CLASSES OF CORPORATIONS ............................................................................................................................97
3. NATIONALITY OF CORPORATIONS ..................................................................................................................100
4. CORPORATE JURIDICAL PERSONALITY............................................................................................................102
A. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY .................................................................................103
B. DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION ...................................................................106
5. CAPITAL STRUCTURE ......................................................................................................................................109
A. NUMBER AND QUALIFICATIONS OF INCORPORATORS ...........................................................................109
B. MINIMUM CAPITAL STOCK AND SUBSCRIPTION REQUIREMENTS ..........................................................110
C. CORPORATE TERM (SEC. 11) ...................................................................................................................110
D. CLASSES OF SHARES OF STOCK (SEC. 6) ..................................................................................................111
6. INCORPORATION AND ORGANIZATION .........................................................................................................112
A. PROMOTER..............................................................................................................................................112
B. SUBSCRIPTION CONTRACTS ....................................................................................................................113
C. PRE-INCORPORATION SUBSCRIPTION (SEC. 60) ......................................................................................113
D. CONSIDERATION FOR STOCKS (SEC. 61) .................................................................................................113
E. ARTICLES OF INCORPORATION ................................................................................................................114
F. CORPORATE NAME (SEC. 17) ...................................................................................................................115
G. REGISTRATION, INCORPORATION AND COMMENCEMENT OF CORPORATE EXISTENCE (SEC. 18) ........117
H. ELECTION OF DIRECTORS OR TRUSTEES (SEC. 23) ..................................................................................118
I. ADOPTION OF BY-LAWS ...........................................................................................................................118
J. EFFECTS OF NON-USE OF CORPORATE CHARTER (SEC. 21) .....................................................................120
7. CORPORATE POWERS .....................................................................................................................................121
A. GENERAL POWERS; THEORY OF GENERAL CAPACITY .............................................................................121
B. SPECIFIC POWERS: THEORY OF SPECIFIC CAPACITY ................................................................................121
C. POWER TO EXTEND OR SHORTEN CORPORATE TERM (SEC. 36) .............................................................121
D. POWER TO INCREASE OR DECREASE CAPITAL STOCK OR INCUR, CREATE, INCREASE BONDED
INDEBTEDNESS (SEC. 37) .............................................................................................................................122
E. POWER TO DENY PRE-EMPTIVE RIGHTS (SEC. 38) ...................................................................................122
F. POWER TO SELL OR DISPOSE CORPORATE ASSETS (SEC. 39)...................................................................122
G. POWER TO ACQUIRE OWN SHARES (SEC. 40) .........................................................................................123
H. POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR FOR NON-PRIMARY PURPOSE
(SEC. 41).......................................................................................................................................................123
I. POWER TO DECLARE DIVIDENDS (SEC. 42) ...............................................................................................124
J. POWER TO ENTER INTO MANAGEMENT CONTRACT (SEC. 43) ................................................................124
K. LIMITATIONS ...........................................................................................................................................124
L. DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION ....................................................................................125
M. DOCTRINE OF EQUALITY OF SHARES ......................................................................................................125
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N. TRUST FUND DOCTRINE ..........................................................................................................................125

O. HOW CORPORATE POWERS ARE EXERCISED ..........................................................................................126
8. STOCKHOLDERS AND MEMBERS ....................................................................................................................127
A. FUNDAMENTAL RIGHTS OF STOCKHOLDERS AND MEMBERS ................................................................127
B. PARTICIPATION IN MANAGEMENT .........................................................................................................127
C. PROPRIETARY RIGHTS ..............................................................................................................................129
D. REMEDIAL RIGHTS ...................................................................................................................................135
E. OBLIGATIONS OF A STOCKHOLDER .........................................................................................................135
F. MEETINGS ................................................................................................................................................135
9. BOARD OF DIRECTORS AND TRUSTEES ...........................................................................................................138
A. REPOSITORY OF CORPORATE POWERS ...................................................................................................138
B. TENURE, QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS ....................................................139
C. REQUIREMENT OF INDEPENDENT DIRECTORS (SEC. 22) .........................................................................140
D. ELECTIONS ...............................................................................................................................................140
E. REMOVAL (SEC. 27) .................................................................................................................................143
F. FILLING OF VACANCIES (SEC. 28) .............................................................................................................143
G. COMPENSATION (SEC. 30) ......................................................................................................................144
H. DISLOYALTY .............................................................................................................................................144
I. BUSINESS JUDGMENT RULE .....................................................................................................................145
J. SOLIDARY LIABILITIES FOR DAMAGES ......................................................................................................145
K. PERSONAL LIABILITIES .............................................................................................................................145
L. RESPONSIBILITY FOR CRIMES ...................................................................................................................146
M. SPECIAL FACT DOCTRINE ........................................................................................................................146
N. INSIDE INFORMATION .............................................................................................................................146
O. CONTRACTS.............................................................................................................................................146
P. EXECUTIVE AND OTHER SPECIAL COMMITTEES ......................................................................................147
Q. MEETINGS ...............................................................................................................................................147
10. CAPITAL AFFAIRS ..........................................................................................................................................150
A. CERTIFICATE OF STOCK ...........................................................................................................................150
B. WATERED STOCK (DILUTED STOCK) ........................................................................................................152
C. PAYMENT OF BALANCE OF SUBSCRIPTION .............................................................................................153
D. SALE OF DELINQUENT SHARES ................................................................................................................154
E. ALIENATION OF SHARES ..........................................................................................................................155
F. CORPORATE BOOKS AND RECORDS.........................................................................................................156
11. DISSOLUTION AND LIQUIDATION .................................................................................................................157
A. MODES OF DISSOLUTION: .......................................................................................................................157
B. METHODS OF LIQUIDATION ....................................................................................................................161
12. OTHER CORPORATIONS................................................................................................................................162
A. CLOSE CORPORATIONS ...........................................................................................................................162
B. NON-STOCK CORPORATIONS .................................................................................................................165
C. EDUCATIONAL CORPORATIONS ..............................................................................................................168
D. RELIGIOUS CORPORATIONS ....................................................................................................................169
E. ONE PERSON CORPORATIONS .................................................................................................................170
F. FOREIGN CORPORATIONS .......................................................................................................................173
13. MERGER AND CONSOLIDATION ...................................................................................................................178
A. DEFINITION AND CONCEPT .....................................................................................................................178
B. CONSTITUENT AND CONSOLIDATED CORPORATIONS ............................................................................179
C. PLAN OF MERGER OR CONSOLIDATION (SEC. 75) ...................................................................................180
D. ARTICLES OF MERGER OR CONSOLIDATION (SEC. 78) ............................................................................180
E. PROCEDURE OF CONSOLIDATION OR MERGER .......................................................................................180
F. EFFECTIVITY OF MERGER OR CONSOLIDATION .......................................................................................181
G. LIMITATIONS OF MERGER AND CONSOLIDATION ..................................................................................181
H. EFFECTS OF MERGER OR CONSOLIDATION .............................................................................................182
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14. INVESTIGATIONS, OFFENSES, AND PENALTIES .............................................................................................182

A. AUTHORITY OF COMMISSIONER .............................................................................................................182
B. SANCTIONS FOR VIOLATIONS ..................................................................................................................183
C. AUTHORITY OF THE SECURITIES AND EXCHANGE COMMISSION (JURISDICTION) ..................................184
V. SECURITIES .................................................................................................................................................... 189
A. STATE POLICY ................................................................................................................................................. 189

B. DEFINTION OFSECURITIES .............................................................................................................................. 189
C. KINDS OF SECURITIES ..................................................................................................................................... 190
1. EXEMPT SECURITIES .......................................................................................................................................191
2. EXEMPT TRANSACTIONS ................................................................................................................................191
3. NON-EXEMPT TRANSACTIONS .......................................................................................................................193
D. POWERS AND FUNCTIONS OF THE SECURITIES AND EXCHANGE COMMISSION ............................................... 193
E. PROCEDURE FOR REGISTRATION OF SECURITIES............................................................................................. 194
F. PROHIBITIONS ON FRAUD, MANIPULATION, AND INSIDER TRADING .............................................................. 199
1. MANIPULATION OF SECURITY PRICES ............................................................................................................199
2. SHORT SALES ..................................................................................................................................................199
3. OPTION TRADING ...........................................................................................................................................200
4. FRAUDULENT TRANSACTIONS ........................................................................................................................200
G. PROTECTION OF INVESTORS .......................................................................................................................... 201
1. TENDER OFFER RULE ......................................................................................................................................201
2. RULES ON PROXY SOLICITATION ....................................................................................................................202
3. DISCLOSURE RULE ..........................................................................................................................................202
VI. BANKING ...................................................................................................................................................... 205
A. THE NEW CENTRAL BANK ACT ........................................................................................................................ 206

1. STATE POLICIES ..............................................................................................................................................206
2. CREATION OF THE BANGKO SENTRAL NG PILIPINAS (BSP) .............................................................................206
3. RESPONSIBILITY AND PRIMARY OBJECTIVE ....................................................................................................206
4. CORPORATE POWERS .....................................................................................................................................207
5. OPERATIONS OF THE BANGKO SENTRAL NG PILIPINAS ..................................................................................207
A. AUTHORITY TO OBTAIN DATA AND INFORMATION ................................................................................207
B. SUPERVISION AND EXAMINATION ..........................................................................................................207
C. AUTHORITY TO APPROVE TRANSFER OF SHARES ....................................................................................208
D. PROHIBITIONS .........................................................................................................................................208
E. EXAMINATION AND FEES.........................................................................................................................209
6. MONETARY BOARD, POWERS AND FUNCTIONS.............................................................................................209
7. HOW THE BANGKO SENTRAL NG PILIPINAS HANDLES BANKS IN DISTRESS ....................................................211
A. CONSERVATORSHIP .................................................................................................................................211
B. CLOSURE ..................................................................................................................................................212
C. RECEIVERSHIP ..........................................................................................................................................212
D. LIQUIDATION ...........................................................................................................................................213
8. ADMINISTRATIVE SANCTIONS ON SUPERVISED ENTITIES ..............................................................................214
9. SUPERVISION AND REGULATION OF BANK OPERATIONS ...............................................................................215
A. LOANS AND OTHER CREDIT ACCOMMODATIONS ...................................................................................215
B. SELECTIVE REGULATION ..........................................................................................................................216
B. LAWS ON SECRECY OF BANK DEPOSITS ........................................................................................................... 217
1. PURPOSE ........................................................................................................................................................217
2. PROHIBITED ACTS ...........................................................................................................................................217
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3. DEPOSITS COVERED........................................................................................................................................218
4. EXCEPTIONS ...................................................................................................................................................218
5. GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS .....................................................................221
6. PENALTIES FOR VIOLATION ............................................................................................................................221
C. GENERAL BANKING ACT ................................................................................................................................. 222
1. DEFINITION AND CLASSIFICATION OF BANKS .................................................................................................222
2. DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST ENTITIES ..............................................................223
3. BANK POWERS AND LIABILITIES .....................................................................................................................224
A. CORPORATE POWERS ..............................................................................................................................224
B. BANKING AND INCIDENTAL POWERS ......................................................................................................224
4. DILIGENCE REQUIRED OF BANKS IN VIEW OF FIDUCIARY NATURE OF BANKING ............................................225
5. NATURE OF BANK FUNDS AND BANK DEPOSITS .............................................................................................225
6. GRANT OF LOANS AND SECURITY REQUIREMENTS ........................................................................................226
A. RATIO OF NET WORTH TO TOTAL RISK ASSETS .......................................................................................226
B. SINGLE BORROWER’S LIMIT (SBL) ...........................................................................................................226
C. RESTRICTIONS ON BANK EXPOSURE TO DIRECTORS, OFFICERS, STOCKHOLDERS, AND THEIR RELATED
INTERESTS....................................................................................................................................................227
D. PROHIBITED ACTS OF BORROWERS ........................................................................................................228
E. FLOATING INTEREST RATES AND ESCALATION CLAUSES .........................................................................228
7. PENALTIES FOR VIOLATIONS ..........................................................................................................................229
A. FINE, IMPRISONMENT .............................................................................................................................229
B. SUSPENSION OR REMOVAL OF DIRECTOR OR OFFICER ..........................................................................229
C. DISSOLUTION OF BANK ...........................................................................................................................229
D. PHILIPPINE DEPOSIT INSURANCE CORPORATION ACT .................................................................................... 230
1. BASIC POLICY ..................................................................................................................................................230
2. POWERS AND FUNCTIONS OF THE PHILIPPINE DEPOSIT INSURANCE CORPORATION; PROHIBITIONS ..........230
3. CONCEPT OF INSURED DEPOSITS ...................................................................................................................231
4. LIABILITY TO DEPOSITORS ..............................................................................................................................231
A. DEPOSIT LIABILITIES REQUIRED TO BE INSURED WITH PHILIPPINE DEPOSIT INSURANCE CORPORATION
.....................................................................................................................................................................231
B. COMMENCEMENT OF LIABILITY ..............................................................................................................231
C. DEPOSIT ACCOUNTS NOT ENTITLED TO PAYMENT .................................................................................231
D. EXTENT OF LIABILITY ...............................................................................................................................231
E. DETERMINATION OF INSURED DEPOSITS ................................................................................................231
F. CALCULATION OF LIABILITY .....................................................................................................................232
5. CONCEPT OF BANK RESOLUTION ...................................................................................................................233
6. ROLE OF THE PHILIPPINE DEPOSIT INSURANCE CORPORATION IN RELATION TO BANKS IN DISTRESS ...........234
A. CLOSURE AND TAKEOVER .......................................................................................................................234
B. CONSERVATORSHIP .................................................................................................................................234
C. RECEIVERSHIP ..........................................................................................................................................234
D. LIQUIDATION ...........................................................................................................................................235
VII. INTELLECTUAL PROPERTY ............................................................................................................................ 239
A. INTELLECTUAL PROPERTY RIGHTS IN GENERAL ............................................................................................... 240

1. INTELLECTUAL PROPERTY RIGHTS ..................................................................................................................240
2. DIFFERENCES BETWEEN COPYRIGHT, TRADEMARKS, AND PATENTS .............................................................240
3. TECHNOLOGY TRANSFER ARRANGEMENT .....................................................................................................241
B. PATENTS ........................................................................................................................................................ 241
1. PATENTABLE INVENTION ...............................................................................................................................241
A. NOVELTY..................................................................................................................................................241
B. INVENTIVE STEP.......................................................................................................................................241
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C. INDUSTRIAL APPLICABILITY .....................................................................................................................242

2. NON-PATENTABLE INVENTIONS .....................................................................................................................242
3. OWNERSHIP OF A PATENT..............................................................................................................................243
4. GROUNDS FOR CANCELLATION OF A PATENT ................................................................................................243
5. REMEDY OF THE TRUE AND ACTUAL INVENTOR .............................................................................................243
6. RIGHTS CONFERRED BY A PATENT ..................................................................................................................244
7. LIMITATIONS OF PATENT RIGHTS ...................................................................................................................244
A. PRIOR USER .............................................................................................................................................245
B. USE BY THE GOVERNMENT .....................................................................................................................245
8. PATENT INFRINGEMENT.................................................................................................................................245
A. TESTS IN PATENT INFRINGEMENT ...........................................................................................................245
B. CIVIL AND CRIMINAL ACTION ..................................................................................................................246
C. PRESCRIPTIVE PERIOD .............................................................................................................................247
D. DEFENSES IN ACTION FOR INFRINGEMENT ............................................................................................247
9. LICENSING ......................................................................................................................................................247
A. VOLUNTARY LICENSING ..........................................................................................................................247
B. COMPULSORY LICENSING ........................................................................................................................249
10. ASSIGNMENT AND TRANSMISSION OF RIGHTS ............................................................................................250
C. TRADEMARKS ................................................................................................................................................ 251
1. DEFINITIONS OF MARKS, COLLECTIVE MARKS, AND TRADE NAMES ..............................................................251
2. ACQUISITION OF OWNERSHIP OF A MARK .....................................................................................................251
3. ACQUISITION OF OWNERSHIP OF TRADE NAME ............................................................................................252
4. NON-REGISTRABLE MARKS ............................................................................................................................253
5. PRIOR USE OF MARK AS REQUIREMENT .........................................................................................................253
6. TESTS TO DETERMINE CONFUSING SIMILARITY BETWEEN MARKS ................................................................254
7. WELL-KNOWN MARKS....................................................................................................................................254
8. RIGHTS CONFERRED BY REGISTRATION..........................................................................................................256
9. USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO REGISTERED MARK ......................................................256
10. INFRINGEMENT AND REMEDIES...................................................................................................................256
A. TRADEMARK INFRINGEMENT..................................................................................................................256
B. DAMAGES ................................................................................................................................................258
C. DAMAGES; REQUIREMENT OF NOTICE ...................................................................................................258
D. PENALTIES ...............................................................................................................................................258
11. UNFAIR COMPETITION .................................................................................................................................258
12. REGISTRATION OF MARKS UNDER THE MADRID PROTOCOL .......................................................................259
A. COVERAGE ...............................................................................................................................................259
B. RIGHTS CONFERRED ................................................................................................................................259
C. REQUIREMENTS FOR REGISTRATION ......................................................................................................260
D. TERM OF PROTECTION ............................................................................................................................260
D. COPYRIGHT .................................................................................................................................................... 261
1. BASIC PRINCIPLES ...........................................................................................................................................261
2. COPYRIGHTABLE WORKS................................................................................................................................261
A. ORIGINAL LITERARY OR ARTISTIC WORKS ...............................................................................................261
B. DERIVATIVE WORKS ................................................................................................................................262
3. NON-COPYRIGHTABLE WORKS .......................................................................................................................262
4. RIGHTS OF COPYRIGHT OWNER .....................................................................................................................263
5. RULES ON OWNERSHIP OF COPYRIGHT ..........................................................................................................264
6. LIMITATIONS ON COPYRIGHT .........................................................................................................................265
A. FAIR USE ..................................................................................................................................................265
7. COPYRIGHT INFRINGEMENT ..........................................................................................................................266
A. REMEDIES ................................................................................................................................................267
B. CRIMINAL PENALTIES ..............................................................................................................................267
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VIII. SPECIAL LAWS............................................................................................................................................. 270
A. SECURED TRANSACTIONS .............................................................................................................................. 271

1. PERSONAL PROPERTY SECURITIES ACT...........................................................................................................271
A. DEFINITIONS AND SCOPE ........................................................................................................................271
B. ASSET-SPECIFIC RULES .............................................................................................................................272
C. PERFECTION OF SECURITY INTERESTS .....................................................................................................273
D. REGISTRATION ........................................................................................................................................274
E. PRIORITY OF SECURITY INTERESTS ..........................................................................................................278
F. TANGIBLE ASSETS; INTANGIBLE ASSETS ..................................................................................................278
G. ENFORCEMENT OF SECURITY INTERESTS ................................................................................................279
H. PRIOR INTEREST AND THE TRANSITIONAL PERIOD .................................................................................282
2. REAL ESTATE MORTGAGE LAW ......................................................................................................................283
A. DEFINITION AND CHARACTERISTICS .......................................................................................................283
B. ESSENTIAL REQUISITES ............................................................................................................................292
3. GUARANTY .....................................................................................................................................................297
A. NATURE AND EXTENT OF GUARANTY .....................................................................................................297
B. EFFECTS OF GUARANTY ...........................................................................................................................306
C. EXTINGUISHMENT OF GUARANTY...........................................................................................................306
D. LEGAL AND JUDICIAL BONDS ..................................................................................................................308
4. SURETY ...........................................................................................................................................................309
A. CONCEPT .................................................................................................................................................309
B. FORM OF SURETY ....................................................................................................................................309
C. OBLIGATIONS SECURED ...........................................................................................................................309
D. SURETY DISTINGUISHED FROM STANDBY LETTER OF CREDIT ................................................................309
E. SURETY DISTINGUISHED FROM GUARANTY ............................................................................................310
F. SURETY DISTINGUISHED FROM JOINT AND SOLIDARY OBLIGATIONS .....................................................310
5. LETTERS OF CREDIT.........................................................................................................................................311
A. DEFINITION AND PURPOSE .....................................................................................................................311
B. KINDS OF LETTERS OF CREDIT .................................................................................................................313
C. RULE OF STRICT COMPLIANCE ................................................................................................................315
D. INDEPENDENCE PRINCIPLE .....................................................................................................................316
B. TRUTH IN LENDING ACT .................................................................................................................................. 317
1. PURPOSE ........................................................................................................................................................317
2.OBLIGATION OF CREDITORS TO PERSON TO WHOM CREDIT IS EXTENDED .....................................................317
3. COVERED AND EXCLUDED TRANSACTIONS ....................................................................................................318
4. CONSEQUENCES OF NON-COMPLIANCE WITH OBLIGATION .........................................................................318
C. ANTI-MONEY LAUNDERING ACT ..................................................................................................................... 319
1. POLICY ............................................................................................................................................................319
2. COVERED INSTITUTIONS AND OBLIGATIONS .................................................................................................319
3. COVERED AND SUSPICIOUS TRANSACTIONS ..................................................................................................321
4. MONEY LAUNDERING; HOW COMMITTED; UNLAWFUL PRACTICES OR PREDICATE CRIMES .........................322
5. ANTI-MONEY LAUNDERING COUNCIL; FUNCTIONS .......................................................................................323
6. SAFE HARBOR PROVISION ..............................................................................................................................324
7. APPLICATION FOR FREEZE ORDERS ................................................................................................................324
8. AUTHORITY TO INQUIRE INTO BANK DEPOSITS ..............................................................................................326
D. FOREIGN INVESTMENTS ACT .......................................................................................................................... 329
1. POLICY OF THE LAW........................................................................................................................................329
2. DEFINITION OF TERMS ...................................................................................................................................329
A. FOREIGN INVESTMENT ............................................................................................................................329
B. DOING BUSINESS IN THE PHILIPPINES .....................................................................................................333
C. EXPORT ENTERPRISE ...............................................................................................................................335
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D. DOMESTIC MARKET ENTERPRISE ............................................................................................................335

3. REGISTRATION OF INVESTMENTS OF NON-PHILIPPINE NATIONALS ..............................................................336
4. FOREIGN INVESTMENTS IN EXPORT ENTERPRISES .........................................................................................337
5. FOREIGN INVESTMENTS IN DOMESTIC MARKET ENTERPRISES ......................................................................337
6. FOREIGN INVESTMENT NEGATIVE LIST ..........................................................................................................338
E. INSOLVENCY LAWS ......................................................................................................................................... 339
1. CONCURRENCE AND PREFERENCE OF CREDITS ..............................................................................................339
A. MEANING OF CONCURRENCE AND PREFERENCE ...................................................................................339
B. EXEMPT PROPERTIES ...............................................................................................................................339
C. CLASSIFICATION OF CREDITS ...................................................................................................................340
D. ORDER OF PREFERENCE OF CREDITS.......................................................................................................341
2. FINANCIAL REHABILITATION AND INSOLVENCY ACT OF 2010 ........................................................................342
A. DEFINITION OF INSOLVENCY ...................................................................................................................343
B. SUSPENSION OF PAYMENTS ....................................................................................................................343
C. REHABILITATION ......................................................................................................................................345
D. LIQUIDATION ...........................................................................................................................................358
F. DATA PRIVACY ACT OF 2012 ........................................................................................................................... 367
1. DEFINITIONS AND SCOPE ...............................................................................................................................367
2. EXTRATERRITORIAL APPLICATION ..................................................................................................................370
3. PROCESSING OF PERSONAL INFORMATION ...................................................................................................371
A. GENERAL PRINCIPLES ..............................................................................................................................371
B. SENSITIVE AND PRIVILEGED INFORMATION ...........................................................................................372
C. SUBCONTRACTING ..................................................................................................................................373
D. RULE ON PRIVILEGED COMMUNICATION ...............................................................................................373
4. RIGHTS OF THE DATA SUBJECT; EXCEPTIONS/NON-APPLICABILITY................................................................373
5. DUTIES AND RESPONSIBILITIES OF PERSONAL INFORMATION CONTROLLER.................................................375
5 PILLARS OF COMPLIANCE OF THE NATIONAL PRIVACY COMMISSION .............................................................377
G. PHILIPPINE COMPETITION ACT ....................................................................................................................... 378
1. DEFINITION AND SCOPE OF APPLICATION ......................................................................................................378
2. POWERS AND FUNCTIONS OF THE PHILIPPINE COMPETITION COMMISSION ................................................379
3. JURISDICTION AND ENFORCEMENT ...............................................................................................................380
4. DETERMINING THE RELEVANT MARKET .........................................................................................................382
5. DETERMINING CONTROL OR DOMINANCE OF MARKET .................................................................................383
6. PROHIBITED ACTS ...........................................................................................................................................384
A. PROHIBITED MERGERS AND ACQUISITIONS ...........................................................................................384
B. ANTI-COMPETITIVE AGREEMENTS ..........................................................................................................387
C. ABUSE OF DOMINANT POSITION ............................................................................................................389
7. FORBEARANCE BY THE PCC ............................................................................................................................393
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INSURANCE
Commercial Law
ATENEO CENTRAL
I. INSURANCE I. CLAIMS SETTLEMENT AND

SUBROGATION
1. Notice and proof of loss
TOPIC OUTLINE UNDER THE SYLLABUS 2. Guidelines on Claim Settlement
a. Unfair claims settlement;
I. INSURANCE sanctions
b. Prescription of action
A. CONCEPT OF INSURANCE c. Subrogation
B. ELEMENTS OF AN INSURANCE J. BUSINESS OF INSURANCE;

CONTRACT REQUIREMENTS
C. CHARACTERISTICS AND NATURE K. INSURANCE COMMISSIONER AND

OF INSURANCE CONTRACTS ITS POWER
D. CLASSES
1. Marine
2. Fire
3. Casualty
4. Suretyship
5. Life
6. Microinsurance
7. Compulsory motor vehicle liability
insurance
8. Compulsory insurance coverage
for agency-hired workers
E. VARIABLE CONTRACTS
F. INSURABLE INTEREST
1. In life/health
2. In property
3. Double insurance and over
insurance
4. Multiple or several interests on
same property
G. PERFECTION OF THE CONTRACT

OF INSURANCE
1. Offer and acceptance /
consensuality
a. Delay in acceptance
b. Delivery of the policy
2. Premium payment
3. Non-default options in life
insurance
4. Reinstatement of a lapsed policy
of life insurance
5. Refund of premiums
H. RESCISSION OF INSURANCE
CONTRACTS
1. Concealment
2. Misrepresentation/omissions
3. Breach of warranties
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A. CONCEPT OF INSURANCE not as merely incidental to any other

legitimate business or activity of the
surety;
Governing Laws 2. Doing any kind of business including a
1. P.D. No. 612, as amended by R.A. No. reinsurance business, specifically
10607 (hereinafter Insurance Code); recognized as constituting the doing of
2. Special Laws, such as R.A. No. 1161 an insurance business within the
(Social Security Act) meaning of this Code;
3. Civil Code, for matters not expressly 3. Doing or proposing to do any business in
provided for in #1 and #2 substance equivalent to any of the
foregoing in a manner designed to evade
Contract of Insurance the provisions of this Code. (Insurance
1. An agreement; Code, Sec. 2[b])
2. Whereby one undertakes for a
consideration; Contract of Suretyship
3. To indemnify another against loss, A contract of suretyship is also considered an
damage or liability insurance contract, if made by a surety who is
4. Arising from an unknown or contingent doing insurance business. (P.D. No. 612, as
event. (Insurance Code, Sec. 2[a]). amended by R.A. No. 10607 [hereinafter
Insurance Code], Sec. 2[a]).
Note:
A contingent event is one that is not certain to Suretyship is an agreement whereby a party
take place. called the “surety” guarantees the performance
by another party called the “principal obligor” of
An unknown past event is one which had already an obligation or undertaking in favor of a third
happened, but one is unaware if it happened or party called the “obligee.”
not. It includes official recognizances, stipulations,
bonds or undertakings issued by any company by
A past event may be a designated event only in virtue of and under the provisions of Act No. 536,
cases where it has happened already but the as amended by Act No. 2206. (Insurance Code,
parties do not know about it, e.g., prior loss of a Sec. 177)
ship at sea (applicable only to marine insurance).
(De Leon, The Insurance Code of the Philippines Protection and Indemnity Club – Doing
Annotated [2014]) Insurance Business
A protection and indemnity club is an association
Consideration Required in Insurance composed of shipowners generally formed for the
An insurance business consists in undertaking, specific purpose of providing insurance cover
for a consideration, to indemnify another against against third-party liabilities of its members. It is a
loss, damage or liability arising from an unknown mutual insurance association. (Steamship Mutual
or contingent event. v. Sulpicio Lines, G.R. No. 196072, 2017)
The fact that no profit is derived from the making

of insurance contracts, agreements or B. ELEMENTS OF AN INSURANCE
transactions or that no separate or direct CONTRACT
consideration is received therefor, shall not be
deemed conclusive to show that the making
thereof does not constitute the doing or
transacting of an insurance business. (Insurance REQUISITES
Code, Sec. 2[b]) Requisites of Ordinary Contracts:
a. Consent
Doing or Transacting an Insurance Business b. Subject-matter
1. Making or proposing to make, as insurer c. Cause
any insurance contract; Making, or
proposing to make, as surety, any
contract of suretyship as a vocation and
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Additional Requisites for Insurance Contract: Contracts for Personal Service Distinguished
(IRADP) from Contracts of Insurance
a. The insured must possess an interest of Contracts a law firm enters into with clients
some kind susceptible of pecuniary whereby in consideration of periodical payments,
estimation, known as insurable interest; the law firm promises to represent such clients in
b. The insured is subject to a risk of loss all suits for or against them are not insurance
through the destruction or impairment of contracts but are contracts for personal services;
that interest by the happening of
designated perils; A contract by which a corporation, in
c. The insurer assumes the risk of loss; consideration of a stipulated amount, agrees at its
d. Such assumption is part of a general own expense to defend a physician against all
scheme to distribute actual losses suits for damages for malpractice is one of
among a large group of persons bearing insurance, and the corporation will be deemed as
somewhat similar risks; engaged in the business of insurance since the
e. As consideration for the insurer’s purpose of the contract is to indemnify against
promise, the insured makes a ratable loss and damage. (Philippine Health Care
contribution called premium, to a general Providers v. CIR, G.R. No. 167330, 2009)
insurance fund.
PARTIES TO AN INSURANCE CONTRACT
Note: The presence of these five elements are
what separate Insurance from other contracts, a. Insurer
and which makes Insurance a “risk-distributing The party who assumes or accepts the risk of loss
device” (De Leon, The Insurance Code and undertakes for a consideration to indemnify
Annotated, 2014) the insured or to pay him a certain sum on the
happening of a specified contingency or event;
Risk-distributing device
A contract of insurance is primarily a risk- An insurer may be:
distributing device, a mechanism by which all 1. A foreign or domestic company or
members of a group exposed to a particular risk corporation; or
contribute premiums to an insurer. From these 2. A partnership or an association
contributory funds are paid whatever losses occur
due to exposure to the peril insured against. Insurance Corporations
The term insurer or insurance company shall
Test to Determine Whether a Contract is an include all partnerships, associations,
Insurance Contract cooperatives or corporations, including
It depends on the nature of the promise, the act government-owned or -controlled corporations or
required to be performed, and the exact nature of entities, engaged as principals in the insurance
the agreement in the light of the occurrence, business, excepting mutual benefit associations.
contingency or circumstances under which the Unless the context otherwise requires, the term
performance becomes requisite. It is not by what shall also include professional reinsurers defined
it is called (White Gold Marine Services v. Pioneer in Section 288. Domestic company shall include
Insurance, G.R. No. 154514, 2005) companies formed, organized or existing under
the laws of the Philippines. Foreign company
Principal Objects and Purpose Test when used without limitation shall include
Whether the assumption of risk and companies formed, organized, or existing under
indemnification of loss (which are elements of an any laws other than those of the Philippines.
insurance business) are the principal object and (Insurance Code, Sec. 190)
purpose of the organization or whether they are
merely incidental to its business. If these are the An Insurance Corporation must have:
principal objectives, the business is that of 1. Sufficient Capital and assets required
insurance. But if they are merely incidental and under the Insurance Code and pertinent
service is the principal purpose, then the regulations issued by the Commission;
business is not insurance. (Philippine Health and
Care Providers v. CIR, G.R. No. 167330, 2009) 2. A Certificate of Authority to operate
issued by the Insurance Commission
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which should be renewable every 3

years. (New Insurance Code, Sec. 193) Note: There are only two parties to a contract of
insurance, the insured and the insurer. The
b. Insured beneficiary is NOT a party to the contract unless
The person in whose favor the contract is he is the party to be insured.
operative and who is indemnified against or is to
receive a sum upon the happening of a specified Also Note: LGBTQ+ members have the right to
event. designate their domestic partners as
beneficiaries. An individual who has secured a life
Requisites in Order that a Person May Be insurance policy on his or her own life may
Insured Under a Contract of Insurance: (CIP) designate any person as beneficiary provided
(Insurance Code, Sec. 3) that such designation does not fall under the
1. He must be competent to enter into a enumerations provided in Article 739 of the Civil
contract; Code. (Insurance Commission, Legal Opinion
2. He must possess an insurable interest No. 2020-02, dated March 04, 2020)
in the subject of the insurance; and
3. He must not be a public enemy (citizen SUBJECT MATTER
or subject of a country with whom the
Philippines is at war) (Insurance Code, Risks or Perils That May be Insured
Sec. 7) a. Any contingent or unknown event,
whether past or future, which may
Effect of War on Existing Insurance Contracts damnify (cause damage to) a person
having an insurable interest; or
1. Property Insurance b. Any contingent or unknown event,
An insurance policy ceases to become valid and whether past or future, which may create
enforceable as soon as the insured becomes a a liability against the person insured
public enemy. (Insurance Code, Sec. 3)
However, premium paid by the insured (public Past Events – Marine Insurance
enemy) shall be returned by the insurer (Filipinas A past event which may be insured against is
Compania de Seguros v. Christern Huenefield & peculiar to Marine Insurance. A person insured by
Co., G.R. No. L-2294, 1951) a contract of marine insurance is presumed to
have knowledge, at the time of insuring, of a prior
2. Life Insurance loss, if the information might possibly have
The contract is abrogated but the insured is reached him in the usual mode of transmission
entitled to the case or reserve value of the policy and at the usual rate of communication.
(if any), which is the excess of the premiums paid (Insurance Code, Sec. 111)
over the actual risk carried during the years when
the policy had been in force (Constantino v. Asia Contingent Liability
Life Insurance, G.R. No. L-1669, 1950) Example: Reinsurance
Note: Where the loss occurs after the end of the Note: Sec. 4 does not authorize an insurance for
war, the contract is not revived. or against the drawing of any lottery, or for or
against any chance or ticket in a lottery drawing a
Rule on Married Persons prize. (Insurance Code, Sec. 4)
The consent of the spouse is not necessary for
the validity of an insurance policy taken out by a Elements of a Lottery
married person on his or her life or that or his or a. Consideration;
her children (Insurance Code, Sec. 3, ¶ 2) or that b. Prizes; and
of her husband (Insurance Code, Sec. 10) c. Chance
[A married woman] may also take out insurance

on her paraphernal or separate property, or on
property given to her by her husband (Harding v.
Commercial Union Assurance, G.R. No. L-12707,
1918)
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Insurance Contract vs. Gambling Contract

Provided: They are not contrary to law, morals,
INSURANCE GAMBLING good customs, public order, or public policy.
CONTRACT CONTRACT
Aleatory
The parties seek to The parties It is an aleatory but not a wagering contract.
distribute possible contemplate gain
loss by reason of through mere By an aleatory contract, one of the parties or both
mischance. chance. reciprocally bind themselves to give or to do
something in consideration of what the other shall
The insurer seeks to The gambler courts give or do upon the happening of an event which
avoid misfortune. fortune. is uncertain, or which is to occur at an
indeterminate time. The insurer’s liability depends
The contract tends to The contract tends to
upon the happening of an uncertain event which
equalize fortune. increase the
is to occur at an indeterminate time.
inequality of fortune.
Unilateral
What one insures Whatever one
A contract of insurance is executed as to the
against is not at the person wins from a
insured after the payment of the premium.
expense of another wager is lost by the
insured person. other wagering party.
It is executory as to the insurer since it is not
executed until payment for a loss.
The purchase of As soon as a party
insurance does not makes a wager, he
Personal
create a new, and creates a risk of loss
Each party to it, in entering into the insurance
therefore, non- to himself where no
contract, takes into account the character, credit
existing risk of loss to such risk existed
and conduct of the other.
the purchaser. The previously.
purchaser faces an
Conditional
already existing risk
The insurer’s liability is based on the happening
of economic loss
of the event insured against.
(“insurable interest”).
In both cases, one party promises to pay a Contract of Indemnity

given sum to the other upon the occurrence General Rule: Indemnity is the basis of all
of a given future event, the promise being property insurance. The insured who has
conditioned upon the payment of, or insurable interest over a property is only
agreement to pay, a stipulated amount by the entitled to recover the amount of actual loss
other party to the contract. In either case, one sustained and the burden is upon him to
party may receive more, or much more, than establish the amount of such loss.
he paid or agreed to pay.
Exception: life and accident insurance
where measure of indemnity is the amount
fixed in the policy.
C. CHARACTERISTICS AND NATURE OF
Uberrimae Fides Contract
INSURANCE CONTRACTS The contract of insurance is one of perfect good
faith not for the insured alone, but equally so for
the insurer (Qua Chee Gan v. Law Union Rock,
Consensual G.R. No. L-4611, 1955).
Perfected by the meeting of the minds of the
parties (Civil Code, Art. 1315) Construction of Insurance Contract –
Contract of Adhesion
Voluntary Insurance contracts are contracts of adhesion the
It is not compulsory and the parties may terms of which must be interpreted and enforced
incorporate such terms and conditions as they stringently against the insurer which prepared the
may deem convenient which will be binding. contract.
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Agreement whereby a party called the surety

Limitations of liability on the part of the insurer or guarantees the performance by another party
health care provider must be construed in such a called the principal or obligor of an obligation
way as to preclude it from evading its obligations. or undertaking in favor of a third party called
Accordingly, they should be scrutinized by the the obligee. It includes official recognizances,
courts with extreme jealousy and care and with a stipulations, bonds or undertakings issued by
jaundiced eye. (Blue Cross Health Care v. any company by virtue of and under the
Olivares, G.R. No. 169737, 2008) provisions of Act No. 536, as amended by Act
No. 2206 (Insurance Code, Sec. 177)
The terms in an insurance policy which are
ambiguous, equivocal, or uncertain are to be 5. LIFE (Insurance Code, Secs. 50, 181-186,
construed strictly and most strongly against the 233-237)
Insurance on human lives and insurance
insurer, and liberally in favor of the insured so as
appertaining thereto or connected therewith
to effect the dominant purpose of indemnity or (Insurance Code, Sec. 181)
payment to the insured (Calanoc v. CA, G.R. No.
L-8218, 1955) 6. MICROINSURANCE
Microinsurance is a financial product or
D. CLASSES OF INSURANCE service that meets the risk protection
needs of the poor where:
a. The amount of contributions, premiums,
fees or charges, computed on a daily
1. MARINE (Insurance Code, Secs. 101-168)
basis, does not exceed 7.5% of the
An agreement to indemnify against injury to a
current daily minimum wage rate for
ship, cargo, or profits involved in a certain
nonagricultural workers in Metro Manila;
voyage or for a specific vessel during a fixed
and
period.
b. The maximum sum of guaranteed
benefits is not more than 1,000 times of
However, the Insurance Code does not limit
the current daily minimum wage rate for
marine insurance to risks of navigation.
nonagricultural workers in Metro Manila.
(Insurance Code, Sec. 101)
7. COMPULSORY MOTOR VEHICLE
2. FIRE (Insurance Code, Secs. 169-175)
LIABILITY INSURANCE (Insurance Code,
Insurance against loss by fire, lightning,
Secs. 386-402)
windstorm, tornado or earthquake and other
Contract of insurance against passenger and
allied risks, when such risks are covered by
third-party liability for death or bodily injuries
extension to fire insurance policies or under
and damage to property arising from motor
separate policies (Insurance Code, Sec. 169)
vehicle accidents (Insurance Code, Sec. 386
[f])
3. CASUALTY (Insurance Code, Sec. 176)
Insurance covering loss or liability arising
8. COMPULSORY INSURANCE COVERAGE
from accident or mishap, excluding certain
FOR AGENCY-HIRED WORKERS
types of loss which by law or custom are
Each migrant worker deployed by a
considered as falling exclusively within the
recruitment/manning agency shall be
scope of other types of insurance such as fire
covered by a compulsory insurance policy
or marine. It includes, but is not limited to,
which shall be secured at no cost to the said
employer’s liability insurance, motor vehicle
worker. (Migrant Workers and Overseas
liability insurance, plate glass insurance,
Filipinos Act of 1995, as Amended)
burglary and theft insurance, personal
accident and health insurance as written by
Compulsory insurance coverage for agency-
non-life insurance companies, and other
hired Filipino workers under R.A 10022 shall
substantially similar kinds of insurance
be without cost to the worker. This will cover
accidental death, natural death,
compassionate visit, medical evacuation,
4. SURETYSHIP (Insurance Code, Secs. 177-
medical repatriation and repatriation of mortal
180)
remains.
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E. VARIABLE CONTRACTS c. Any person under a legal obligation to

him for the payment of money, or
respecting property or services, of which
Variable Contract death or illness might delay or prevent
Any policy or contract on either a group or the performance; and
individual basis issued by an insurance company
providing for benefits or other contractual Note: A creditor may insure his debtor’s
payments or values thereunder to vary so as to life for the purpose of protecting his debt,
reflect investment results of any segregated but only to the extent of the amount of the
portfolio of investment. debt and the cost of carrying the
insurance on the debtor’s life.
d. Any person upon whose life any estate or

F. INSURABLE INTEREST interest vested in him depends.
Interest which the law requires the owner of an Life Insurance v. Civil Donation
insurance policy to have in the thing or person
LIFE INSURANCE CIVIL DONATION
insured.
This is also founded An act of liberality
General Rule: It is pecuniary in nature.
on liberality, as the whereby a person
beneficiary will disposes gratuitously
A person is deemed to have an insurable interest
receive the proceeds a thing or right in
in the subject matter insured where he has a
of the said insurance. favor of another who
relation or connection with or concern in it that he
accepts it.
will derive pecuniary benefit or advantage from its
preservation and will suffer pecuniary loss or
damage from its destruction, termination or injury As a consequence, the proscription in Civil Code,
by the happening of the event insured against. Art. 739 should equally operate in life insurance
(Lalican v. Insular Life Insurance Co, G.R. No. contracts (Insular Life v. Ebrado, G.R. No. L-
183526, 2009) 44059, 1977)
Exception: Life Insurance Beneficiary

Person who is named or designated in a contract
The expectation of benefit from the continued life of life, health, or accident insurance as the one
of that person need not necessarily be of who is to receive the benefits which become
pecuniary nature. payable, according to the terms of the contract,
upon the death of the insured (44 Am. Jur. 2d.
1. IN LIFE/HEALTH 639 cited in de Leon, 2010, p. 96).
a. Himself, of his spouse and of his children; Designation of Beneficiary

General rule: When one insures his own life, he
If a person will insure the life of another may designate any person as the beneficiary,
payable to himself, he must have an whether or not the beneficiary has an insurable
insurable interest in the life of the person interest in the life of the insured.
whose life he is insuring.
Exceptions: Persons specified in Article 739 of
b. Any person on whom he depends wholly the Civil Code cannot be designated:
or in party for education or support, or in a. Those made between persons who were
whom he has pecuniary interest; guilty of adultery or concubinage
(conviction is not a condition precedent);
Note: Persons obliged to support each b. Those made between persons found
other: See Family Code, Art. 195 guilty of the same criminal offense, in
consideration thereof;
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c. Those made to a public officer or his wife, Right of Insured to Change Beneficiary in Life
descendants or ascendants by reason of Insurance
his office. General Rule: The insured shall have the right to
change the beneficiary he designated in the
In order for Article 739 to apply, it is not required policy. (Insurance Code, Sec. 11)
that there be a previous conviction for adultery
or concubinage, due to the wording of Exception: If the insured expressly waived his
“preponderance of evidence” (Insular Life v. right to change the beneficiary, this makes the
Ebrado, G.R. No. L-44059, 1977) latter an irrevocable beneficiary. But despite the
waiver, he can still change the beneficiary,
Note: LGBTQ+ members have the right to provided that he obtains the beneficiary’s
designate their domestic partners as consent. (Insurance Code, Sec. 11)
beneficiaries. An individual who has secured a life
insurance policy on his or her own life may Forfeiture by Beneficiary of Interest in
designate any person as beneficiary provided Insurance Policy
that such designation does not fall under the The interest of a beneficiary in a life insurance
enumerations provided in Article 739 of the Civil policy shall be forfeited when the beneficiary is
Code. (Insurance Commission, Legal Opinion the principal, accomplice, or accessory in willfully
No. 2020-02, dated March 04, 2020) bringing about the death of the insured; in which
event, the share forfeited shall be paid as follows:
When is the estate entitled to the proceeds of
the insurance? 1. To the other beneficiaries if not
1. Where the insured has not designated disqualified;
any beneficiary; or 2. If no other beneficiaries, in accordance
2. When the designated beneficiary is with the policy contract; (e.g. to the
disqualified by law to receive the contingent or substitute of beneficiaries)
proceeds (Heirs of Maramag v. 3. If the policy contract is silent, to the estate
Maramag, G.R. No. 181132, 2009) of the insured. (Insurance Code, Sec. 12)
Notes: 2. IN PROPERTY
1. The designation is revocable unless the
right to revoke is expressly waived in the Coverage of Insurable Interest in Property
policy. 1. Property itself;
2. If the insured or beneficiary is a minor, 2. Any relation thereto; or
and the amount involved does not 3. Liability in respect thereof (Insurance
exceed P50,000.00, the father, or in his Code, Sec. 13)
absence or incapacity, the mother may
exercise the minor’s rights under the It may consist of:
policy, without the need of a court 1. An existing interest;
authority or a bond. 2. An inchoate interest founded on an
3. If the premiums are paid out of the existing interest; or
conjugal funds, the proceeds are 3. An expectancy, coupled with an existing
considered conjugal. interest in that out of which the
expectancy arises
If the beneficiary is other than the
insured’s estate, the source of Measure of Insurable Interest in Property
premiums (either from The extent to which the insured might be
paraphernal or conjugal funds) damnified by loss or injury thereof.
would not be relevant (BPI v.
Posadas, G.R. No. L-34583, In general, a person has an insurable interest in
1931). the property, if he derives pecuniary benefit or
advantage from its preservation or would suffer
pecuniary loss, damage or prejudice by its
destruction whether he has or has no title in, or
lien upon, or possession of the property. Hence,
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pecuniary interest over the property is always Exceptions

necessary.
Sec. EXCEPTION
Existence of insurable interest is a matter of
public policy. Hence, the principle of estoppel 20 Life, health, and accident insurance.
cannot be invoked.
21 A change of interest in the thing
insured after the occurrence of an
Insurable Interest in Life v. Property injury which results in a loss.
LIFE PROPERTY
22 A change of interest in one or more
Basis of several things, separately insured
by one policy.
May be based on Based on pecuniary
pecuniary interest, interest. 23 A change of interest by will or
affinity, or succession on the death of the
consanguinity. insured.
When Interest Must Exist 24 A transfer of interest by one of

several partners, joint owners, or
In life insurance Must exist when the owners in common, who are jointly
(save that effected by insurance takes effect insured, to the others.
creditor on life of and when the loss
debtor), it is enough occurs, but need not 57 When a policy is so framed that it will
that insurable exist in the meantime. inure to the benefit of whomsoever,
interest exists at the during the continuance of the risk,
time the policy takes may become the owner of the
effect and need not interest insured.
exist at the time of
the loss. Note: When there is an express prohibition
against alienation in the policy, in case of
Amount of Insurable Interest
alienation, the contract of insurance is not
merely suspended but is avoided. (Civil Code,
General Rule: No Limited to the actual
Art. 1306)
limit. value of
Exception: If damage/injury/loss.
Change of Interest That Suspends an
insurable interest is
Insurance Contract
based on creditor-
The change of interest contemplated by law is an
debtor relationship,
absolute transfer of the insured’s entire interest in
only to the extent of
the property insured to one not previously
the credit or debt.
interested or insured. In the following cases, the
policy is not suspended: (ML2R2)
Change in Interest of Thing
General rule: A change in interest in the thing a. Execution of a Mortgage
insured without a change in insurance does not b. Lease of the insured property
transfer the policy but suspends it until the c. Vendor who has a Lien on the property
interest in the thing and the interest in the sold until the purchase price is paid or the
insurance are vested in the same person. conditions of the sale are performed
d. Judgment debtor whose property has
been sold on execution (Right to
redeem)
e. Mortgagor whose property has been
foreclosed (Right of redemption)
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Extent of Insurable Interest in a Mortgage the debt of the mortgagor to the extent of the
Situation amount paid to the mortgagee.
Interest of the Mortgagor and the Mortgagee in
the mortgaged property is separate and distinct Standard or Union Mortgage Clause
from the other. In case both of them take out If a fire insurance policy contains this, the acts of
separate insurance policies on the same the mortgagor do not affect the mortgagee. It
property, or one policy covering their respective makes a separate and distinct contract of
interests, there is no double insurance. insurance on the interest of the mortgagee.
Mortgagor, as owner, may insure the property Open or Loss-Payable Mortgage Clause
mortgaged to the full value of such property. It is a contract which provides that the payment of
loss to the mortgagee, if any, will be according to
Mortgagee can insure the same only to the extent his interest as it may appear in the contract.
of the amount of his credit. Under such clause, the acts of the mortgagor will
affect the mortgagee.
Insurance by Mortgagor for the Benefit of
Mortgagee, or Policy Assigned to the 3. DOUBLE INSURANCE AND OVER
Mortgagee: INSURANCE
The insurance is still deemed to be upon the
interest of the mortgagor who does not cease to Double insurance exists where the same person
be a party to the original contract. is insured by several insurers separately in
respect to the same subject and interest.
Any act of the mortgagor, prior to the loss, which
would otherwise avoid the insurance, will have Note: It is not prohibited by law.
the same effects, although the property is in the But it may be contractually prohibited by a
hands of the mortgagee. provision in an insurance policy.
Any act, which under the contract of insurance is Over insurance exists when the amount of the
to be performed by the mortgagor, may be insurance is beyond the value of the insured’s
performed by the mortgagee with the same effect insurable interest.
as if it has been performed by the mortgagor.
When there is double insurance and over
Upon the occurrence of the loss, the mortgagee insurance results, the insured can claim in case
is entitled to recover to the extent of his credit and of loss only up to the agreed valuation or up to the
the balance, if any, is payable to the mortgagor full insurable value from any, some or all insurers,
since such policy is for the benefit of both the without prejudice to the insurers ratably
mortgagor and mortgagee. apportioning the payments. Insured can also
recover before or after the loss, from both
Upon recovery of the mortgagee to the extent of insurers the excess premium he has paid.
his credit from the insurer, the mortgagor is
released from his indebtedness. Requisites of Double Insurance:
a. The person injured is the same;
Insurance by Mortgagee of His Own Interest b. There are two or more insurers insuring
The mortgagee may collect from the insurer upon separately;
the occurrence of the loss to the extent of his c. The subject matter is the same;
credit. d. The interest insured is also the same;
e. The risk or peril insured against is
Unless otherwise stated in the policy, the likewise the same.
mortgagor has no right to collect the balance of
the proceeds of the policy after payment of the
Double Insurance v. Over Insurance
interest of the mortgagee.
DOUBLE INSURANCE OVER INSURANCE
The insurer, upon payment to the mortgagee-
insured, becomes subrogated to the rights of the There may be no Amount of insurance
mortgagee against the mortgagor and may collect over insurance as is beyond the value
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when the sum total of of the insured’s insurer’s risk.

the amounts of the insurable interest.
policies issued does Insured has to give Consent of original
not exceed the his consent. insured, not
insurable interest of necessary.
the insured.
Several insurers May have only one The reinsurance contracts were correctly issued
involved. insurer involved. in favor of Plaridel. By its nature, reinsurance
contracts are issued in favor of the direct insurer
because the subject of such contracts is the direct
Reinsurance insurer’s risk, in this case, Plaridel’s contingent
One by which an insurer procures a third person liability to MSAPL, and not the risk assumed
to insure him against loss or liability by reason of under the original policy. With or without
such original insurance. In every reinsurance reinsurance, the obligation of the surety to the
contract, the original contract of insurance and party against whom writ of attachment is issued
the contract of reinsurance are separate and remains the same (Communication and
distinct and covered by separate policies. Information Systems Corporation v. Mark
Sensing Australia, G.R. No. 192159, 2016).
Insurance vs. Reinsurance
4. MULTIPLE OR SEVERAL INTERESTS ON
INSURANCE POLICY REINSURANCE
SAME PROPERTY
Written document Any contract by
embodying the terms which an insurer Effects of insurance when the mortgagor effects
and stipulations of procures a 3rd insurance in his own name and provides that the
the contract of person to insure him loss be payable to the mortgagee:
insurance between against loss or a. The contract is deemed to be upon the
the insured and liability by reason of interest of the mortgagor; hence he does
insurer. an original insurance. NOT cease to be a party to the contract;
b. Any action of the mortgagor prior to the
Formal written The original contract loss which would otherwise avoid the
instrument of insurance and the insurance affects the mortgagee even if
evidencing the contract of the property is in the hands of the
contract of reinsurance are mortgagee;
insurance. covered by separate c. Any act which under the contract of
policies. insurance is to be performed by the
mortgagor, may be performed by the
mortgagee;
Reinsurance v. Double Insurance d. In case of loss, the mortgagee is entitled
DOUBLE INSURANCE REINSURANCE
to the proceeds to the extent of his credit;
and
Involves the same Insurance of different e. Upon recovery by the mortgagee to the
interest. interests. extent of his credit, the debt is
extinguished.
Insurer remains in Insurer becomes an
such capacity. insured in relation to In case it is the mortgagee who effects the
insurer. insurance in behalf of the mortgagor, the same
rules apply.
Insured in the 1st Original insured has
contract is a party in no interest in If an insurer assents to the transfer of an
interest in the 2nd reinsurance contract. insurance from a mortgagor to a mortgagee, and,
contract. at the time of his assent, imposes further
obligations on the assignee, making a new
Subject of insurance Subject of insurance contract with him, the acts of the mortgagor
is property. is the original cannot affect the rights of said assignee.
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G. PERFECTION OF THE CONTRACT OF FORM OF THE CONTRACT

INSURANCE
Form NOT REQUIRED to perfect a contract of
insurance
Consensual Nature of Contract
The policy is the formal written instrument
A contract of insurance must be assented to by
evidencing the contract of insurance entered into
both parties, either in person or through their
between the insured and the insurer. No form is
agents and so long as an application for
required to perfect (i.e., to give rise to rights and
insurance has not been either accepted or
obligations) a contract of insurance although an
rejected, it is merely a proposal or an offer to
insurer is potentially exposed to sanctions if the
make a contract. (Perez v. CA, G.R. No. 112329,
following are not complied with:
2000)
Form of Insurance Contracts
Also, according to Enriquez v. Sun Life
1. No policy, certificate or contract of
Assurance (G.R. No. L-15895, 1920):
insurance shall be issued or delivered
(1) Submission of application, even with premium
within the Philippines unless in the form
payment is a mere offer on the part of the
previously approved by the
applicant, and does not bind the insurer;
Commissioner; and
2. No application form shall be used with,
(2) An insurance contract is also not perfected
and no rider, clause, warranty or
where the applicant dies before the approval of
endorsement shall be attached to,
his application or it does not appear that the
printed or stamped upon such policy,
acceptance of the application ever came to the
certificate or contract unless the form of
knowledge of the applicant;
such application, rider, clause, warranty
or endorsement has been approved by
(3) An acceptance made by letter shall not bind
the Commissioner. (Insurance Code,
the person making the offer except from the time
Sec. 232)
it came to his knowledge.
Cover Note
1. OFFER AND ACCEPTANCE / It is a contract for temporary insurance for a
CONSENSUALITY reasonable time until the policy or policies can be
written or issued by the insurer.
a. Delay in acceptance
Also called: Binding Receipt or Slip, Interim,
A contract of insurance, like other contracts, must Temporary or Provisional Policy
be assented to by the parties either in person, or
by their agents. Under the law, assent or consent Rules on Cover Notes:
is manifested by the meeting of the offer and the a. Insurance companies doing business in
acceptance upon the thing and the cause which the Philippines may issue cover notes to
are to constitute the contract. If an application has bind insurance temporarily, pending the
not been either accepted or rejected, there is no issuance of the policy.
contract yet as it is merely and offer or proposal b. A cover note shall be deemed to be a
(Insurance, de Leon, p.176). contract of insurance within the meaning
of Section 1(1) of the Code.
b. Delivery of the policy c. No cover note shall be issued or renewed
unless in the form previously approved
The delivery of a policy is not, however, a by the Insurance Commission.
prerequisite to a valid contract of insurance. The d. A cover note shall be valid and binding
contract may be completed prior to delivery of the for a period not exceeding sixty (60) days
policy or even without delivery of the policy from the date of its issuance, whether or
depending on the intention of the parties not the premium therefor has been paid,
(Insurance, de Leon, p.180). but such cover note may be cancelled by
either party upon at least seven (7) days’
notice to the other party.
e. If a cover note is not so cancelled, a
policy of insurance shall, within sixty (60)
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days after the issuance of such cover Rider

note, be issued in lieu thereof. Such Attachment to an insurance policy that modifies
policy shall include within its terms the the conditions of the policy by expanding or
identical insurance bond under the cover restricting its benefits or excluding certain
note and the premium therefor. conditions from the coverage.
f. Cover notes may be extended or
renewed beyond such sixty (60) days Formal requirements of riders
with the written approval of the Riders, together with other attachments to the
Commissioner if he determines that such policy, like clause, warranty or endorsements, are
extension is not contrary to and is not for not binding on the insured unless:
the purpose of violating any provisions of 1. The descriptive title or name thereof is
this Code. The Commissioner may mentioned and written on the blank
promulgate rules and regulations spaces provided in the policy and;
governing such extensions for the 2. Countersigned by the insured or owner.
purpose of preventing such violations
and may by such rules and regulations Exception: No need to countersign if the rider
dispense with the requirement of written or other attachment is applied for by the
approval by him in the case of extension insured or owner of the policy
in compliance with such rules and
regulations. (Insurance Code, Sec. 52) A rider containing an “Automatic Increase
g. Insurance companies may impose on Clause” – one that increases the coverage
cover notes a deposit premium subject to the attainment of a certain age of the
equivalent to at least 25% of the insured – is not a separate contract. It is part of
estimated premium of the intended the original policy which is in the nature of a
insurance coverage but in no case less conditional obligation (Commissioner of Internal
than P500.00. (Ins. Cir. Letter, Jan. Revenue v. Lincoln Philippine Life Insurance
17,1980.) (De Leon, The Insurance Code Company, G.R. No. 119176, March 19, 2001).
of the Philippines Annotated [2014])
Note: If there is inconsistency between the policy
The fact that no separate premium was paid on and the rider, the rider prevails, it being a more
the cover note before the loss insured against deliberate expression of the agreement of the
occurred, does not militate against its binding parties.
effect as an insurance contract. By their nature,
cover notes do not contain particulars that would Formal Requirements of a Policy
serve as basis for the computation of the a. In printed form which may contain blank
premiums and consequently, no separate spaces;
premiums are intended or required to be paid b. Any word, phrase, clause, mark, sign,
therefor (Pacific Timber Export Corp. v. CA, G.R. symbol, signature, number or word
No. L-38613, 1982) necessary to complete the contract of
insurance shall be written in the blank
Insurance Policy spaces provided therein. (Insurance
A written document issued by the insurer to the Code, Sec. 50)
insured, embodying the terms and conditions of
their contract of insurance. Contents of an Insurance Policy
a. The parties between whom the contract
The policy is not necessary for the perfection of is made;
the contract. The Policy is only the formal written b. The amount to be insured except in the
instrument evidencing the contract. It is required, cases of open or running policies;
however, that all policies issued or delivered must c. The premium, or if the insurance is of a
be in the form previously approved by the character where the exact premium is
Insurance Commission. only determinable upon the termination
of the contract, a statement of the basis
The BEST EVIDENCE that a contract has been and rates upon which the final premium
entered into between the insurer and the insured is to be determined;
is the DELIVERY of the policy by the insurer to d. The property or life insured;
the insured.
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e. The interest of the insured in property An insurer is entitled to payment of the premium
insured, if he is not the absolute owner as soon as the thing insured is exposed to the
thereof; peril insured against.
f. The risks insured against; and
g. The period during which the insurance is Effect of Non-Payment of Premium
to continue. (Insurance Code, Sec. 51)
General Rule:
Kinds of Policies Non-payment of first premium - prevents the
a. Open or Unvalued Policy contract from becoming binding notwithstanding
Value of thing insured is not agreed upon, but the acceptance of the application or the issuance
left to be ascertained in case of loss;(ex. of the policy.
Marine and Fire Insurances) (Insurance
Code, Sec. 60) But non-payment of the balance of the premium
due does not produce the cancellation of the
In an open policy, the value of the property contract. (Phil. Phoenix Surety & Insurance v.
insured is not agreed upon, although the Woodworks, G.R. No. L-22684, Aug. 31, 1967).
parties may agree on the maximum amount
of recovery or limit to the liability of the Subsequent premiums - does not affect the
insurer. In case of loss, this amount must be validity of the contracts unless, by express
considered, by agreement of the insurer and stipulation, it is provided that the policy shall in
the insured, the actual value of the property that event be suspended or shall lapse.
in the absence of evidence of greater or
lesser value. (Dev’t Ins. Corp. v. IAC, G.R. Exceptions to General Rule as to Payment of
No. L-71360, 1986). Premiums:
a. In case of life and industrial life whenever
b. Valued Policy the grace period provision applies.
Definite valuation is agreed upon by both
parties, and written on the face of the policy; Individual Life or Endowment
(ex. Marine and Fire Insurances) (Insurance Insurance and Group Life Insurance
Code, Sec. 51) Grace period of either thirty (30) days or
one (1) month within which the payment
c. Running Policy of any premium after the first may be
Also called Floating, Adjustable, Blanket or made
Declaration Policy; Contemplates successive
insurances and which provides that the Industrial Life Insurance
subject of the policy may from time to time be Grace period is four (4) weeks, and
defined. (Insurance Code, Sec. 62) where premiums are payable monthly,
either thirty (30) days or one (1) month.
Void Stipulations in an Insurance Contract
a. Stipulations for the payment of loss b. Where there is an acknowledgement in
whether the person insured has or has the contract or policy of insurance that
not any interest in the property insured; the premium had already been paid.
or (Insurance Code, Sec. 79)
b. The policy shall be received as proof of
such interest, or c. There is an agreement allowing the
c. Policies executed by way of gaming or insured to pay the premium in
wagering. installments and partial payment has
been made at the time of loss (Makati
2. PREMIUM PAYMENT Tuscany Condominium v. Court of
Appeals, G.R. No. 95546, 1992)
Premium
Premium is the consideration paid to an insurer Cf. Where the policy provides for
for undertaking to indemnify the insured against a payment in premium in full before the
specified peril. “policy shall be deemed effective, valid,
and binding upon the company” – the
partial payment is merely treated as a
Page 15 of 393
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deposit and does not make the policy

binding. (Sps. Tibay v. CA, G.R. No. Cash Surrender Value
119655, 1996) An amount to be paid to the insured upon
surrender of the policy contract.
d. Where a credit term was agreed upon like
the agreement in where the insurer Alternatives to Cash Surrender Value
granted a 60-90-day credit term for the
payment of the premiums despite full a. Extended Insurance/Term Insurance
awareness of Section 77 (UCPB General Where insurance is "extended," the insured is
Insurance, Inc. v. Masagana Telemart, given the right, upon default, after the payment of
G.R. No. 137172, 1999) at least three full annual premiums (see Sec.
227[f].), to have the policy continued in force from
e. Where the parties are barred by the date of default for a time either stated or equal
estoppel. (Jose Marques, et al. vs. Far to the amount as the net value of the policy taken
East Bank and Trust Company, et al. / as a single premium, will purchase. In case of
Far East Bank and Trust Company, et al. death of the insured within the extended term, he
vs. Jose Marques, et al. G.R. No. may recover the face value of the policy.
171379/G.R. No. 171419, 2011). Extended insurance is sometimes called "term
insurance," "temporary insurance," or "paid-up
Given the provisions of the Insurance Code, extended insurance." (De Leon, The Insurance
which is a special law, the applicable rate of Code of the Philippines Annotated [2014])
interest shall be that imposed in a loan or
forbearance of money as imposed by the BSP. b. Paid-up Insurance
The unpaid amount due from insurer is a Where insurance is "paid-up," the insured is given
forbearance of money. So, the proper rate applies the right, upon default, after the payment of at
(Stronghold Insurance Co., Inc. v. Pamana Island least three annual premiums (Ibid.) to have the
Resort Hotel and Marina Club, Inc., G.R. No. policy continued in force from the date of default
174838, 2016). for the whole period of the insurance without
further payment of premiums. In case of death of
Authority of Agent to Receive Premium the insured, he may recover only the "paid-up"
Where an insurer authorizes an insurance agent value of the policy, usually less than the "paid-up"
or broker to deliver a policy to the insured, it is premiums, under the same conditions as the
deemed to have authorized said agent to receive original policy. Technically, the term "paid-up"
the premium in its behalf. insurance is often referred to as "reduced paid-
up" insurance. (De Leon, The Insurance Code of
The insurer is also bound by its agent’s the Philippines Annotated [2014])
acknowledgement of receipt of payment of
premium (American Home Assurance Co. v. c. Automatic Premium Loan
Chua, G.R. No. 130421,1999). This provision protects against the unintentional
lapse of the contract by advancing, in the form of
3. NON-DEFAULT OPTIONS IN LIFE policy loan, the unpaid amount of a premium due.
INSURANCE The automatic premium loan is advantageous to
the policy owner because it helps to continue the
Options to a Policy-holder contract and all its features in full force and effect.
The options available to a policyholder in case of Conditions:
non-payment of premium after three full annual 1. In the event of default in premium
premiums have been paid are: payment, the Premium Loan provision
a. Received the cash surrender value shall only apply if requested in writing by
b. Apply such value as the premium for an the policyholder either in the application
extended insurance or at any time before the expiration of the
c. Apply such value as the premium for a grace period.
paid-up insurance 2. The moment there is default in premium
d. Secure from such value an automatic payment and no option has been elected
premium loan before the expiration of the either in the application or within the time
grace period specified in the policy, one of the paid-up
options specified therein shall
Page 16 of 393
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automatically take effect. (De Leon, The June 22, 1999. An insurance contract is a
Insurance Code of the Philippines contract of adhesion which must be construed
Annotated [2014]) liberally in favor of the insured and strictly against
the insurer in order to safeguard the latter’s
4. REINSTATEMENT OF A LAPSED interest (The Insular Life Assurance Company v.
POLICY OF LIFE INSURANCE Paz Khu, G.R. No. 195176, 2016).
A provision that the policyholder shall be entitled 5. REFUND OF PREMIUMS

to have the policy reinstated at any time within
three years from the date of default of premium Instances for Refund
payment unless the cash surrender value has The insured is entitled to return of premiums paid
been duly paid, or the extension period has when:
expired, upon production of evidence of a. The thing insured was never exposed to
insurability satisfactory to the company and upon the risks insured against;
payment of all overdue premiums and any b. Contract is voidable due to the fraud or
indebtedness to the company upon said policy, misrepresentation of insurer;
with interest rate not exceeding that which would c. Insurer never incurred liability;
have been applicable to said premiums and d. The insurance is for a definite period and
indebtedness in the policy years prior to the insured surrenders his policy before
reinstatement. the termination thereof (pre-termination);
e. Contract is voidable because of the
Requisites for Reinstatement of Lapsed Life existence of facts of which the insured
Insurance Policy was ignorant without his fault;
a. Application shall be made within three f. There is over-insurance (but only a
years from the date of lapse; ratable return of premium); and
b. There should be a production of evidence g. rescission is granted due to the insurer’s
of the good health of the insured: breach of contract.
c. If the rate of premium depends upon the
age of the Beneficiary, there should Payment of Interest on Refund of Premium:
likewise be a production of evidence of Sections 243 and 244 of the Insurance Code
his or her good health; explicitly provide for payment of interest when
d. There should be presented such other there is unjustified refusal or withholding of
evidence of insurability at the date of payment of claim by the insurer. Article 2209 of
application for reinstatement; the Civil Code likewise provides for payment of
e. There should be no change which has interest when the debtor is in delay. However, in
taken place in such good health and cases where the refusal to refund insurance
insurability subsequent to the date of premiums is because the insurer wants to rescind
such application and before the policy is the insurance contract on account of
reinstated; and concealment, the insurance company did not
f. All overdue premiums and other unreasonably deny or withhold the insurance
indebtedness in respect of the policy, proceeds (Sun Life v. Tan Kit, G.R. No. 183272,
together with interest at six per cent, 2014).
compounded annually, should first be
paid. (Andres v. Crown Life Insurance Premium Necessary for Suretyship
Co., G.R. No. L-10874, 1958) General rule: Premium is also necessary in order
for the contract of suretyship or bond to be
Insular Life’s argument was that the two-year binding.
contestability period of the reinstated insurance
policy had not lapsed inasmuch as the insurance Exception: Where the obligee has accepted the
policy was reinstated only on December 27, bond, it is binding even if the premium has not
1999. The Court notes that the reinstatement was been paid subject to the right of the insurer to
conditioned upon the payment of additional recover the premium from its principal (Philippine
premium not only prospectively, that is, to cover Pryce Assurance Corporation v. CA, G.R. No.
the remainder of the annual period of coverage, 107062, 1994).
but also retroactively, that is for the period starting
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Note:
The official receipts in question serve as proof of Requisites of Concealment (KDNA)
payment of the premium for one year on each a. A party knows the fact which he neglects
surety bond. It does not, however, automatically to communicate or disclose to the other;
mean that the surety bond is effective for only one b. Such party concealing is duty bound to
(1) year. In fact, the effectivity of the bond is not disclose such fact to the other;
wholly dependent on the payment of premium c. Such party concealing makes no
(Country Bankers Insurance Corporation v. warranty of the fact concealed; and
Antonio Lagman, G.R. No. 165487, 2011). d. The other party has not the means of
ascertaining the fact concealed.
H. RESCISSION OF INSURANCE Proof of Fraud in Concealment

General Rule: Fraud need not be proven in order
CONTRACTS
to prove concealment.
Good faith is not a defense. (Saturnino vs Phil.

Primary Concerns of the Insurer American Life Insurance, G. R. No. L-16163,
a. Correct estimation of risk which enables 1963)
insurer to determine if he will approve the
policy application and if so, at what Proof of fraudulent intent is unnecessary for the
premium rate; rescission of an insurance contract on account of
b. Delimitation of the risk; concealment. It is because in insurance
c. Control of risk to guard against increase contracts, concealing material facts is inherently
in risk; fraudulent: "if a material fact is actually known to
d. Determine if loss occurs and if so, the the [insured], its concealment must of itself
amount thereof. necessarily be a fraud." When one knows a
material fact and conceals it, "it is difficult to see
Devices of Insurer in Ascertaining and how the inference of a fraudulent intent or
Controlling Risks intentional concealment can be avoided.” Thus, a
a. Concealment concealment, regardless of actual intent to
b. Representations defraud, "is equivalent to a false representation."
c. Warranties (Insular Life vs Heirs of Alvarez, G.R. No.
Statements or promises by the insured, 207526)
whether expressed, implied, affirmative
or promissory, set forth in the policy itself Exception: When the concealment is made by
or incorporated in it by proper reference, the insured in relation to the falsity of a warranty,
the untruth or non-fulfilment of which in the non-disclosure must be intentional and
any respect, and without reference to fraudulent in order that the contract may be
whether the insurer was in fact rescinded. (Insurance Code, Sec. 29)
prejudiced by such untruth or non-
fulfilment renders the policy voidable by Effect of Concealment
the insurer. General Rule: Concealment, whether intentional
d. Conditions or not, entitles the injured party to rescind a
e. Exceptions contract of insurance, (Insurance Code, Sec. 27)
Stipulations excluding certain specified even if the death or loss is due to a cause not
risks that otherwise would be included related to the concealed matter. (Sunlife v. CA,
under the general language describing G.R. No. 105135, 1995)
the risks assumed.
Exceptions:
1. CONCEALMENT a. Incontestability Clause (Insurance Code,
Secs. 48 and 233[b])
A neglect to communicate that which a party b. Concealment made after the contract has
knows and ought to communicate (Insurance become effective;
Code, Sec. 26) c. Waiver or estoppel;
d. In marine insurance, in situations where
concealment does not vitiate the entire
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contract, but merely exonerates the otherwise material. (Insurance Code,

insurer from a loss resulting from the risk Sec. 30)
concealed (Insurance Code, Sec. 112)
Disclosure of Insurable Interest
Instances When Concealment Made by an General rule: The insured is not required to
Agent Procuring Insurance Binds Principal communicate the nature (or kind) or the amount
a. Where it was the duty of the agent to of his insurable interest in the life or property
acquire and communicate information of insured to the insurer.
the facts in question;
b. Where it was possible for the agent, in Exceptions:
the exercise of reasonable diligence, to a. When the insurer makes inquiry from the
have made the communication before insured of the nature or amount of the
the making of the insurance contract. latter’s insurable interest, whether in life
or property insurance;
Failure on the part of the insured to disclose such b. Insurance policy must specify the interest
facts known to his agent, or wholly due to the fault of the insured in the property insured, if
of the agent, will avoid the policy, despite the he is not the absolute owner thereof.
good faith of the insured.
Waiver of Disclosure of Material Facts
Rules on Disclosure of Information a. By the terms of the insurance (express
waiver); or
Items to disclose to the other, in good faith, b. By the neglect to make inquiry as to such
even without inquiry facts, where they are distinctly implied in
 Party concealing must have knowledge other facts which information is
of the facts concealed; communicated (implied waiver). (Sec.
 Facts concealed must be material to the 33, Insurance Code)
risk;
 Party is duty bound to disclose such fact No duty to disclose opinions
to the other; Neither party is bound to communicate his mere
 Party concealing makes no warranty as opinion, speculation, intention or expectation
to the facts concealed; even upon inquiry, because such opinion would
 Other party has no other means of add nothing to the appraisal of the application.
ascertaining the facts concealed. (Insurance Code, Sec. 35)
Items to disclose upon inquiry Materiality

General Rule: Neither party to the insurance Materiality is to be determined not by the event,
contract is bound to communicate information on but solely by the probable and reasonable
the following matters influence of the facts upon the party to whom the
communication is due:
Exception: Except in answer to the inquiries a. In forming his estimate of the
of the other: disadvantages of the proposed
a. Those of which the other knows; contract; or
b. That which, in the exercise of ordinary b. In making his inquiries. (Insurance
care, the other ought to know and of Code, Sec. 31)
which the former has no reason to
suppose his ignorance, i.e. political Test of Materiality
situation, general usages of trade; Was the insurer misled or deceived into entering
c. Those of which the other waives a contract obligation or in fixing the premium of
communication; insurance by a withholding of material information
d. Those which prove or tend to prove the or facts within the assured’s knowledge or
existence of the risk excluded by a presumed knowledge? (Argente v. West Coast
warranty and which are not otherwise Life, G.R. No. L-24899, 1928)
material; and
e. Those which relate to a risk excepted It is sufficient that his non-disclosure misled the
from the policy and which are not insurer in forming his estimates of the risks of the
proposed insurance policy or in making inquiries
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(Sunlife Assurance Company v. CA, G.R. No. his part to mislead the insurer. (Ng Zee v. Asian
105135, 1995). Crusader, G.R. No. L-30685, 1983)
The materiality of the existence of other 2. MISREPRESENTATION/OMISSIONS

insurance contracts against fire upon the same
property insured, when its disclosure is one of the Definition
conditions specified in the fire insurance policy, is It is a factual statement made by the insured at
not open to doubt (Union Mfg. v. Phil. Guaranty, the time of, or prior to, the issuance of the policy,
G.R. No. L-27932, October 30, 1972) to give information to the insurer and otherwise
induce him to enter into the insurance contract.
Materiality in Medical Examinations
A representation cannot qualify an express
General rule: non-disclosure is concealment provision in a contract of insurance but it may
qualify an implied warranty. (Insurance Code,
In non-medical insurance (which does away with Sec. 40)
the usual medical examination before the policy
is issued), the waiver by said insurance company Form
makes the previous health conditions of the Oral or written. (Insurance Code, Sec. 36)
insured more material (Saturnino v. Phil.
American Life Ins., G.R. No. L-16163, 1963) When made
It may be made orally or in writing. It may be
Where the applicant concealed the fact that he made at the time of, or before, the issuance of the
had pneumonia, diabetes or syphilis, the policy is policy. (Insurance Code, Sec. 37)
avoided although the cause of the death (e.g.,
plane crash) be totally unconnected with the It may be altered or withdrawn before the
material fact concealed or misrepresented. insurance is effected, but not afterwards.
The withholding by the applicant, father of one-
year-old insured, of the fact that his daughter was Requisites for Misrepresentations (UWiM)
typically a mongoloid child, of which he was fully 1. The insured stated a fact which is untrue;
aware, as such a congenital physical defect could 2. Such fact was stated with knowledge that
never be ensconced nor disguised, in supplying it is untrue and with intent to deceive or
essential data for the insurance application form which he states positively as true without
which fact is material to the contract, constitutes knowing it to be true and which has a
fraudulent concealment (Great Pacific v. CA, tendency to mislead;
G.R. No. L-31845, 1979) 3. Such fact in either case is material to the
risk.
Exception: Imprecise description of information
is not concealment. Misrepresentation as Affirmative Defense
Misrepresentation is an affirmative defense. To
Where the insured lacked sufficient medical avoid liability, the insurer has the duty to establish
knowledge as to enable him to distinguish such a defense by satisfactory and convincing
between “peptic ulcer” and “tumor” the insured evidence. (Ng Gan Zee v. Asian Crusader, G.R.
cannot claim that he was deceived into entering No. L-30685, 1983)
into the contract.
The fraudulent intent on the part of the insured
In the absence of evidence that the insured had must be established to entitle the insurer to
sufficient medical knowledge as to enable him to rescind the contract. Misrepresentation as a
distinguish between "peptic ulcer" and a "tumor," defense of the insurer to avoid liability is an
his statement that said tumor was "associated affirmative defense and the duty to establish
with peptic ulcer of the stomach" should be such defense by satisfactory and convincing
construed as an expression made in good faith of evidence rests upon the insurer. (Manulife
his belief as to the nature of his ailment and Philippines v. Ybanez, G.R. No. 204736, 2016)
operation. Such statement must be presumed to
have been made by him without knowledge of its
incorrectness and without any deliberate intent on
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Kinds of Representation:
inducing the insurer
1. Affirmative - an affirmation of a fact
to enter into the
existing when the contracts begins; or
insurance contract.
2. Promissory - a statement by the insured
concerning what is to happen during the
Passive form of the Active form of the
term of the insurance.
act. act.
Effect of Expressions of Opinion or
Usually occurs prior Maybe made at the
Expectation on Insurance Policy
to making of the time of the insurance
A representation of the expectation, intention,
insurance contract. of the contract.
belief, opinion or judgment of the insured,
although false, WILL NOT AVOID a policy of In cases of rescission In cases of rescission
insurance if there is no actual fraud in inducing due to concealment, due to
the acceptance of the risk, or its acceptance at proof of fraudulent misrepresentation,
a lower rate of premium (Philam Health Systems intent not necessary proof of fraudulent
v. CA, G.R. No. 125678, 2002); intent necessary
However, in a marine insurance, information of
the belief or expectation of a third person, in The Insurance Code dispenses with proof of
reference to a material fact, is material. fraudulent intent in cases of rescission due to
(Insurance Code, Sec. 110) concealment, but not so in cases of rescission
due to false representations. Concealment of
Adoption of Misrepresentation material facts is fraudulent in and of itself. (The
An insured who signed the pension plan Insular Life Assurance Co., Ltd. v. Heirs of
application, adopted as his own the written Alvarez, G.R. Nos. 207526 & 210156, 2018)
representations and declarations embodied in it
(Ma. Lourdes S. Florendo vs. Philam Plans, Inc., 3. BREACH OF WARRANTIES
Perla Abcede, et al., G.R. No. 186983, 2012).
Warranty
Effect of Misrepresentation A statement or promise set forth in the policy or
If there is misrepresentation, the injured party is by reference incorporated therein, the untruth or
entitled to rescind from the time when the nonfulfillment of which in any respect, and without
representation becomes false. (Insurance Code, reference to whether insurer was in fact
Sec. 45) prejudiced by such untruth or non-fulfillment,
renders the policy VOIDABLE by the insurer.
The injured party can rescind the contract
when: Kinds of Warranties
a. The representation fails to correspond a. Express – An agreement contained in
with the facts (Insurance Code, Sec. 44); the policy or clearly incorporated therein
and as part thereof whereby the insured
b. It is false in a material point (Insurance stipulates that certain facts relating to the
Code, Sec. 45) risk are or shall be true or certain acts
relating to the same subjects have been
Note: The materiality of a representation is or shall be done.
determined by the same rules as the b. Implied – Warranties that are deemed
materiality of concealment. (Insurance Code, included in the contract, although not
Sec. 46) expressly mentioned. They are found
usually in marine insurance.
Concealment vs. Misrepresentation c. Affirmative – Asserts the existence of a
CONCEALMENT MISREPRESENTATION fact or condition at the time it is made;
d. Promissory – The insured stipulates that
The insured The insured makes certain facts or conditions shall exist or
withholds information erroneous thin shall be done or omitted.
of material facts from statements of facts
the insurer. with the intent of
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Warranty v. Reproduction
Other Insurance Clause – This is a clause in the
WARRANTY REPRESENTATION policy that provides that the policy shall be void if
the insured procures additional insurance without
Part of the contract. Collateral the consent of the insurer. The purpose is to
inducement. prevent over-insurance and thus to avert the
possibility of a perpetration of fraud. It is a
Written on the policy Need not be written.
warranty that entitles the insurer to rescind in
or in a valid rider or
case of breach.
attachment. (except
for implied
The “other insurance clause” may be subject to
warranties)
waiver but the waiver must either be express or if
it is to be implied from conduct mainly, said
Generally, Should be
conduct must be clearly indicative of a clear intent
conclusively established to be
to waive such right. There must be clear showing
presumed to be material.
that the insurer knew about the violation of the
material.
clause (General Insurance and Surety Corp. v.
Ng Hua, G.R. No 14373, 1960).
Falsity or non- Falsity renders the
fulfillment operates policy voidable or
EXERCISE OF THE RIGHT TO RESCIND
as a breach of rescissible on the
contract. ground of fraud.
Time to Exercise the Right to Rescind
Facts warranted Requires only to be a. Non-Life Policy – Prior to the
must be strictly substantially true. commencement of an action on the
complied with. contract.
b. Life Policy – Before the incontestability
clause sets in.
Where express warranty must be contained
a. The policy itself; or Requisites of Incontestability Clause:
b. In another instrument signed by the a. The insurance is a life insurance policy.
insured and referred to in the policy as b. It is payable on the death of the insured.
making a part of it. c. It has been in force during the lifetime of
the insured for at least 2 years from its
Effect of Breach of Warranty date of issue or of its last reinstatement.
General Rule: The violation of a material
warranty or other material provision of the policy Note: The period of 2 years may be shortened
gives the insurer the right to rescind the insurance but it cannot be extended by stipulation.
policy (Insurance Code, Sec. 74)
When incontestability clause sets in
Note: A policy may declare that a violation of Whichever is earlier, between:
specified provisions thereof shall avoid it. a. Within 2 years from the date of issuance
Otherwise, the breach of an immaterial provision or its last reinstatement; or
does not avoid the policy. (Insurance Code, Sec. b. Upon the insurer’s death (Sun Life v.
75) Sibya, G.R. No. 211212, 2016)
Exception: The below instances of warranties After the two-year period lapses, or when the
relating to the future insured dies within the period, the insurer must
a. Loss occurs before the time of make good on the policy, even though the policy
performance of the warranty; was obtained by fraud, concealment, or
b. The performance becomes unlawful; misrepresentation (Sun Life v. Sibya, G.R. No.
c. Performance becomes impossible. 211212, 2016).
Defenses Not Barred by Incontestability
Note: Waiver or estoppel may also prevent the Clause:
insurer from being discharged from liability a. Person taking the insurance lacked
(Pioneer v. Yap, G.R. No. L-36232, 1974) insurable interest as required by law;
Page 22 of 393
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b. Cause of the death of the insured is e. Physical changes in the property insured
excepted risk; making it uninsurable; and
c. Premiums have not been paid; f. Determination by the Insurance
d. Conditions of the policy relating to Commissioner that the policy would
military or naval service have been violate the Insurance Code. (Sec. 64,
violated; Insurance Code)
e. The fraud is of a particularly vicious type,
wherein: Requisites for Cancellation by Insurer (Other
i. The policy was taken in Than Life Insurance Contracts)
furtherance of a scheme to a. Prior notice of cancellation to insured;
murder the insured; b. Notice must be based on the occurrence
ii. The insured instituted another after effective date of the policy of one or
person for the medical more of the grounds mentioned;
examination; and, c. Notice must be in writing, mailed or
iii. The beneficiary feloniously killed delivered to the insured at the address
the insured; shown in the policy; and
f. Beneficiary failed to furnish proof of d. Notice must state the grounds relied
death or to comply with any condition upon and upon request of insured, to
imposed by the policy after the loss has furnish facts on which cancellation is
happened; or, based.
g. Action was not brought within the time
specified. Prior Notice is required to prevent the
cancellation of the policy, without allowing the
Insurer is Liable if: insured ample opportunity to negotiate for other
a. Loss, the proximate cause of which is the insurance in its stead for his own protection
peril insured against; (Saura Import & Export v. Phil. International
b. Loss, the immediate cause of which is the Surety, G.R. No. L-15184, 1963).
peril insured against except where
proximate cause is an excepted peril; Renewal of Non-Life Insurance
c. Loss through the negligence of insured The insured shall be entitled to renew the policy
except where there was gross upon payment of the premium due on the
negligence amount to willful act; and effective date of the renewal. Policy written:
d. Loss caused by efforts to rescue the thing  Term of less than one (1) year -
from peril insured against – if during the considered as if written for a term of one
course of rescue, the thing is exposed to (1) year
a peril not insured against, which  Term longer than one (1) year or any
permanently deprives the insured of its policy with no fixed expiration date -
possession, in whole or in part. considered as if written for successive
policy periods or terms of one (1) year
Insurer is Not Liable if:
a. Loss by insured’s willful act or gross Exception: The insurer at least forty-five (45)
negligence; days in advance of the end of the policy period
b. Loss due to connivance of the insured; mails or delivers to the named insured at the
c. Loss where the excepted peril is the address shown in the policy notice of its intention
proximate cause. not to renew the policy or to condition its renewal
upon reduction of limits or elimination of
CANCELLATION OF NON-LIFE INSURANCE coverages (Insurance Code, Sec. 66)
Grounds for Cancellation of a Non-Life Policy

by the Insurer
a. Non-payment of premium;
b. Conviction of a crime out of acts
increasing the hazard insured against;
c. Fraud or material misrepresentation;
d. Willful or reckless acts or omissions
increasing the risk insured against;
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I. CLAIMS SETTLEMENT AND Mandatory Requirement of Notice of Loss and

SUBROGATION Proof of Loss
The requirement of the notice of loss and
obligation to file a proof of loss are conditions with
which the insured MUST comply before there is
1. NOTICE AND PROOF OF LOSS any liability on the part of the insurer.
When Insurer is Liable for Loss When to Give Notice of Loss
a. Unless otherwise provided by the policy, Without unnecessary delay or within a
an insurer is liable for a loss of which a reasonable time.
peril insured against was the proximate
cause, although a peril not contemplated A requirement of the policy that notice of loss be
by the contract may have been a remote given immediately or forthwith requires the giving
cause of the loss (Insurance Code, Sec. of notice within a reasonable time. (Bachrach v.
86) Britain Am. Assur. Co., G.R. No. L-5715, 1910)
b. The thing insured is rescued from a peril
insured against that would otherwise Form of Notice or Proof of Loss
have caused a loss, if, in the course of In case of loss upon fire insurance, the law
such rescue, the thing is exposed to a requires written notice. (Insurance Code, Sec. 90)
peril not insured against, which
permanently deprives the insured of its For other kinds of insurance, absent any
possession, in whole or in part; or where stipulation in the policy, notice or proof may be
a loss is caused by efforts to rescue the given orally or in writing.
thing insured from a peril insured against
(Insurance Code, Sec. 87) When defects in a notice of loss are waived
c. The proximate cause of which is the peril All defects in a notice of loss, or in preliminary
insured against proof thereof, which the insured might remedy,
a. Immediate cause of which is the peril and which the insurer omits to specify to him,
insured against except where proximate without unnecessary delay, as grounds of
cause is an excepted peril; objection, are waived. (Insurance Code, Sec. 92)
b. Loss through the negligence of insured
except where there was gross When Delay in the Presentation of Notice or
negligence amount to willful act; and Proof of Loss is Deemed Waived
c. Loss caused by efforts to rescue the thing Delay in the presentation to an insurer of notice
from peril insured against – if during the or proof of loss is waived if caused by any act of
course of rescue, the thing is exposed to him, or if he omits to take objection promptly and
a peril not insured against, which specifically upon that ground. (Insurance Code,
permanently deprives the insured of its Sec. 93)
possession, in whole or in part.
Payment of Proceeds
When Insurer is Not Liable for Loss
a. Loss of which the peril insured against Life Insurance
was only a remote cause. (Insurance The proceeds shall be paid immediately upon the
Code, Sec. 86) maturity of the policy (survival benefits) if there is
b. Loss caused by the willful act or through such a maturity date.
the connivance of the insured; but he is
not exonerated by the negligence of the If the policy matures by the death of the insured,
insured, or of the insurance agents or within sixty (60) days after presentation of the
others (Insurance Code, Sec. 89) claim and filing of the proof of the death of the
c. Loss by insured’s willful act or gross insured.
negligence;
d. Loss due to connivance of the insured; Property Insurance
e. Loss where the excepted peril is the Proceeds shall be paid within thirty (30) days after
proximate cause. proof of loss is received by the insurer and
ascertainment of the loss or damage is made
either by agreement or by arbitration.
Page 24 of 393
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filed by the insured within the period stipulated.

If no ascertainment is made within 60 days after (Sun Insurance v. CA, G.R. No. 8974, 1991)
receipt of proof of loss, the loss shall be paid
within 90 days. Time to Commence Actions
If there is a stipulation in the policy: The
2. GUIDELINES ON CLAIM SETTLEMENT stipulation in the policy, if not contrary to Sec. 63,
will prevail. (Teal Motor v. Orient Insurance, G.R.
a. Unfair claims settlement; sanctions No. 39797, 1934)
Any of the following acts by an insurance If there is no express stipulation in the policy
company, if committed without just cause and As the policy is a written contract, the action
performed with such frequency as to indicate a prescribes in 10 years. (Civil Code, Art. 1144)
general business practice, shall constitute unfair
claim settlement practice. It shall be considered Limitation to Period to File Claim
sufficient cause for the suspension or revocation A condition, stipulation, or agreement in any
of the company's certificate of authority: policy of insurance, limiting the time for
1. Knowingly misrepresenting to claimants’ commencing an action thereunder to a period of
pertinent facts or policy provisions less than one year from the time when the cause
relating to coverage at issue; of action accrues, is void. (Insurance Code, Sec.
2. Failing to acknowledge with reasonable 63)
promptness pertinent communications
with respect to claims arising under its Note: In Industrial life insurance, the period
policies; cannot be less than 6 years after the cause of
3. Failing to adopt and implement action accrues. (Insurance Code, Sec. 231[d])
reasonable standards for the prompt
investigation of claims arising under its When does the insured’s cause of action
policies; begin to run?
4. Not attempting in good faith to effectuate The prescriptive period for an insured’s action for
prompt, fair and equitable settlement of indemnity should be reckoned from the “final
claims submitted in which liability has rejection” of the claim (H.H. Hollero Construction
become reasonable clear; or v. GSIS, G.R. No. 152334, 2014).
5. Compelling policyholders to institute suits
to recover amounts due under its policies Rationale: Before such final rejection, there is no
by offering without justifiable reason real necessity for bringing suit (Eagle Star v. Chia
substantially less than the amounts Yu, G.R. No. L-5915, 1955).
ultimately recovered in suits brought by
them. Action or suit must be brought in proper cases,
with Commission or the courts within one year
b. Prescription of action from the denial of the claim, otherwise, the
claimant’s right of action shall prescribe
Nature of Condition for Filing Claim (Jacqueline Jimenez Vda. De Gabriel v. CA, G.R.
The condition contained in the insurance policy No. 103883, 1996).
that claims must be presented within one year
after rejection is not merely a procedural Compulsory Third Party Liability Insurance
requirement. The condition is an important The claim must be filed within 6 months from the
matter, essential to a prompt settlement of claims date of accident, otherwise, the claim shall be
against insurance companies, as it demands that deemed waived. Action or suit for recovery of
insurance suits be brought by the insured while damage due to loss or injury must be brought, in
the evidence as to the origin and cause of proper cases, with the Commissioner or the
destruction have not yet disappeared. courts within one (1) year from denial of the claim,
otherwise, the claimant’s right of action shall
It is in the nature of a condition precedent to the prescribe. (Insurance Code, Sec. 397)
liability of the insurer, or in other terms, a
resolutory cause, the purpose of which is to c. Subrogation
terminate all liabilities in case the action is not
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Legal Basis of Subrogation The presentation of the marine insurance policy

If the plaintiff's property has been insured, and he is not necessary for the exercise of the insurer’s
has received indemnity from the insurance right to subrogation. It accrues upon payment of
company for the injury or loss arising out of the insurance claim (Asian Terminals, Inc. v. Malayan
wrong or breach of contract complained of, the Insurance, G.R. No. 171406, 2011).
insurance company shall be subrogated to the
rights of the insured against the wrongdoer or the The subrogation receipt, by itself, is sufficient to
person who has violated the contract. If the establish not only the relationship of insurer and
amount paid by the insurance company does not the assured shipper of the lost cargo, but also the
fully cover the injury or loss, the aggrieved party amount paid to settle the insurance claim. The
shall be entitled to recover the deficiency from the right of subrogation accrues simply upon
person causing the loss or injury (Civil Code, Art. payment by the insurance company of the
2207) insurance claim. (Asian Terminals, Inc. v.
Malayan Insurance, G.R. No. 171406, 2011).
Definition
Subrogation: Substitution of one person in place As subrogee of the rights and interest of the
of another with reference to a lawful claim or right, consignee, R&B Insurance has the right to seek
so that he who is substituted succeeds to the reimbursement from either Loadmasters or
rights of the other in relation to a debt or claim, Glodel or both for breach of contract and/or tort
including its remedies and securities (LSC v. (Loadmasters Customs Services, Inc. v. Glodel
Chubb, G.R. No. 147724, 2004) Brokerage Corporation and R & B Insurance
Corporation, G.R. No. 179446, 2011).
The right of subrogation has its roots in equity. It
is designed to promote and to accomplish justice Effect of Subrogation on Prescriptive Period
and is the mode which equity adopts to compel to Sue the Person Causing the Loss or Injury
the ultimate payment of a debt by one who in
justice and good conscience ought to pay. The insurer acquires a fresh 10-year period
(Delsan Transport v. CA, G.R. No. 127897, 2001) arising from law. (Vector Shipping v. AHAC, G.R.
No. 159213, 2013)
Subrogation only applies to property
insurance However, the Court must heretofore abandon
If the plaintiff’s property is insured… (Civil Code, the ruling in Vector that an insurer may file an
Art. 2207) action against the tortfeasor within ten (10) years
from the time the insurer indemnifies the insured.
Note: Subrogation also applies in reinsurance. A Following the principles of subrogation, the
reinsurer, on payment of a loss, acquires the insurer only steps into the shoes of the insured
same rights by subrogation as in similar cases and therefore, for purposes of prescription,
where the original insurer pays a loss. (Pioneer inherits only the remaining period within which
Insurance Co v. CA, G.R. Nos. 84197 & 84157, the insured may file an action against the
1989) wrongdoer. (Henson vs UCPB General, G.R. No.
223134, August 14, 2019)
When subrogation occurs
1. If the plaintiff's property has been Guidelines relative to the application of
insured, and Vector and Henson vis-à-vis the prescriptive
2. He has received indemnity from the period in cases where the insurer is
insurance company for the injury or loss subrogated to the rights of the insured
arising out of the wrong or breach of against the wrongdoer based on a quasi-
contract complained of (Civil Code, Art. delict
2207) 1. Actions that have already been filed and
are currently pending before the courts at
It is not dependent upon, nor does it grow out of, the time of the finality of Henson, the
any privity of contract or upon written assignment rules on prescription prevailing at the
of claim. It accrues simply upon payment by the time the action is filed would apply.
insurance company of the insurance claim. Hence:
(Delsan Transport v. CA, G.R. No. 127897, 2001)
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a. For cases filed by the subrogee- lawfully lay claim against the person causing the
insurer during the applicability of loss (Rizal Surety v. Manila Railroad, G.R. No. L-
the Vector ruling (August 15, 24043, 1968)
2013 up to finality of Henson –
August 14, 2019 is the date of Cases When There is No Right of
promulgation) the prescriptive Subrogation:
a. The insured by his own act releases the
period is 10 years from the time
wrongdoer/third person liable for the loss;
of payment by the insurer to the
b. Where the insurer pays the insured for a
insured. loss or risk not covered by the policy;
b. For cases filed by the subrogee- c. In life insurance;
insurer prior to the applicability d. For recovery of loss in excess of
of the Vector ruling (before insurance coverage. (Malayan Insurance
August 15, 2013), the v. CA, G.R. No. 81026, 1990)
prescriptive period is 4 years
from the time the tort is J. BUSINESS OF INSURANCE;
committed against the insured. REQUIREMENTS
2. Actions that have not yet been filed at the
time of the finality of this Decision:
a. Where the tort was committed What is an insurer or an insurance company?
and the consequent loss/injury The term insurer or insurance company shall
against the insured occurred include all partnerships, associations,
prior to the finality of Henson, cooperatives or corporations, including
the subrogee-insurer has a government-owned or -controlled corporations or
period not exceeding 4 years entities, engaged as principals in the insurance
from the time of finality of business, excepting mutual benefit associations.
Henson to file the action against Unless the context otherwise requires, the term
the wrongdoer. shall also include professional reinsurers defined
in Section 288. (Insurance Code, Sec. 190.)
i. Provided, that in all
instances, the total
What are the requirements to transact any
period shall not insurance business in the Philippines?
exceed 10 years from 1. Must possess the capital and assets
the time the insurer is required of an insurance corporation
subrogated to the rights doing the same kind of business in the
of the insured. PH and invested in the same manner;
b. Where the tort was committed 2. Must obtain a certificate of authority from
and the consequent loss/injury the commissioner.
against the insured occurred 3. Pay the fees prescribed under the Code.
only upon or after the finality
of this Decision, the Vector Can a Commissioner refuse to issue a
certificate of authority to any insurance
doctrine is not applicable.
company?
Prescriptive period is 4 years
YES. In these instances:
from the time the tort is 1. If in his judgment, such refusal will best
committed against the insured. promote the interest of the people of this
(Henson vs UCPB General, G.R. country.
No. 223134, August 14, 2019) a. That the grant of such authority
appears to be justified in the light
of local economic requirements;
Right of insurer to recover from 3rd party is b. The direction and administration,
limited to the amount recoverable from the as well as the integrity and
latter by the insured responsibility of the organizers
The insurer cannot recover in full the amount it and administrators, the financial
paid to the insured if it is greater than that to which organization and the amount of
the insured could
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capital, reasonably assure the of registered enterprises, to the actual

safety of the interests of the market value of not less than the amount
policyholders and the public. herein required:
2. If the name of the company is that of any a. At least 50% of such securities
other known company transacting a shall consist of bonds or other
similar business in the Philippines or a instruments of debt of the
name so similar as to be calculated to Government of the Philippines,
mislead the public. its political subdivisions and
3. When the insurance company is instrumentalities, or of GOCCs
transacting in the Philippines both the and entities, including the BSP.
business of life and non-life insurance b. Provided, further, that the total
concurrently; unless specifically investment of a foreign
authorized by the Commissioner. insurance company in any
4. If the insurance company has equity in an registered enterprise shall not
adjustment company or the adjustment exceed 20% of the net worth of
company has equity in an insurance the foreign insurance company
company. (Insurance Code, Sec. 193) nor 20% of the capital of the
registered enterprise, unless
What is the required paid-up capital for a new previously authorized in writing
domestic life or non-life insurance company? by the Commissioner.
It must possess a paid-up capital equal to at least 4. The Commissioner may, as a pre-
P1 billion. However, a domestic insurance licensing requirement of a new branch
company already doing business in the office of a foreign insurance company, in
Philippines shall have a net worth by 30 June addition to the required asset or net
2013 of P250 million; worth, require the company to have an
By 31 December 2016, an additional additional surplus fund in an amount to
P300 million in net worth; be determined by the Insurance
By 31 December 2022, an additional Commission. (Insurance Code, Sec. 197)
P400 million in net worth.
NOTE: The Secretary of Finance, upon K. INSURANCE COMMISSIONER AND ITS

recommendation of the Commissioner, increase
POWERS
such minimum paid-up capital stock or cash
assets requirement under such terms and
conditions as he may impose, to an amount which Faithful execution of insurance laws
in his opinion would reasonably assure the safety It is the duty of the Commissioner to see that all
of the public. laws relating to insurance, insurance companies
and other insurance matters, mutual benefit
What are the requirements for a foreign associations, and trusts for charitable uses are
insurance company to transact business in faithfully executed.
the Philippines?
1. Comply with Sec. 196 of the Insurance Regulation of the industry
Code. Must designate a resident agent To ensure the efficient regulation of the insurance
on whom notice, summons, and other industry in accordance with global best practices
legal processes may be served. And that and to protect the insuring public.
if ever the company left the country, such
summons, or other legal processes may Note: Except as otherwise specified, decisions
be served on the Insurance made by the Commissioner shall be appealable
Commissioner. to the Secretary of Finance.
2. Must possess unimpaired capital or
assets and reserve of not less than P1 Sole and exclusive authority to regulate the
billion. issuance and sale of variable contracts
3. Deposit with the Commissioner securities provide for the licensing of persons selling such
satisfactory to the Commissioner contracts, and to issue such reasonable rules and
consisting of good securities of the regulations governing the same.
Philippines, including new issues of stock
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1. ADMINISTRATIVE POWERS determined by appropriate rules and

regulations
Rule-making power 12. Investigate not oftener than once a year
The Commissioner may issue such rulings, from the last date of examination to
instructions, circulars, orders and decisions as determine whether an institution is
may be deemed necessary to secure the conducting its business on a safe and
enforcement of the provisions of this Code, sound basis: Provided, That, the
deficiencies/irregularities found by or
Powers and functions of the Commissioner discovered by an audit shall be
1. Formulate policies and immediately addressed;
recommendations on issues 13. Inquire into the solvency and liquidity
concerning the insurance industry and of the institutions under its supervision
propose legislation and amendments and enforce prompt corrective action;
thereto; 14. To retain and utilize, in addition to its
2. Approve, reject, suspend or revoke annual budget, all fees, charges and
licenses or certificates of registration other income derived from the
3. Impose sanctions regulation of insurance companies
4. Prepare, approve, amend or repeal and other supervised persons or entities;
rules, regulations and orders, and 15. To fix and assess fees, charges and
issue opinions and provide guidance on penalties as the Commissioner may find
and supervise compliance with such reasonable in the exercise of regulation;
rules, regulations and orders; and
5. Enlist the aid and support of, and/or 16. Exercise such other powers as may be
deputize any and all enforcement provided by law as well as those which
agencies of the government in the may be implied from, or which are
implementation of its powers and necessary or incidental to the express
functions; powers granted the Commission to
6. Issue cease and desist orders to achieve the objectives and purposes of
prevent fraud or injury to the insuring this Code. (Insurance Code, Sec. 437)
public;
7. Punish for contempt of the Power to impose fines
Commissioner, both direct and indirect, The Insurance Commissioner is hereby
in accordance with the Rules of Court; authorized, at his discretion, to impose upon
8. Compel the officers of any registered insurance companies, and/or their agents, for any
insurance corporation or association to willful failure or refusal to comply with this Code,
call meetings of stockholders or or any order of the Insurance Commissioner, or
members thereof under its supervision; any commission or irregularities, and/or
9. Issue subpoena duces tecum and conducting business in an unsafe or unsound
summon witnesses to appear in any manner, the following:
proceeding of the Commission and, in a. Fines not less than Five thousand pesos
appropriate cases, order the (P5,000.00) and not more than Two
examination, search and seizure of all hundred thousand pesos (P200,000.00);
documents, papers, files and records, tax and
returns, and books of accounts of any b. Suspension, or after due hearing,
entity or person under investigation as removal of directors and/or officers
may be necessary for the proper and/or Agents. (Insurance Code, Sec.
disposition of the cases before it, subject 438)
to the provisions of existing laws;
10. Suspend or revoke, after proper notice 2. ADJUDICATORY POWERS
and hearing, the license or certificate
of authority of any entity or person The Insurance Commissioner has concurrent
under its regulation, upon any of the jurisdiction with the regular courts to adjudicate,
grounds provided by law; hear and decide claims or complaints for which
11. Conduct an examination to determine an insurer may be answerable under any kind of
compliance with laws and regulations if policy or contract of insurance where the amount
the circumstances so warrant as of the loss, damage or liability excluding interest,
Page 29 of 393
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costs and attorney’s fees, does not exceed in any When the commissioner may revoke or
single claim P5,000,000. (Insurance Code, Sec. suspend the license of an insurer:
439) a. If insurance contract is in unsound
condition
Note: b. If it has failed to comply with the
1. The power of the Commissioner does not provisions of law or regulations obligatory
cover the relationship between the upon it
insurance company and its c. Its conditions or methods of business is
agents/brokers but is limited to such as to render its proceedings
adjudicating claims and complaints filed hazardous to the public or to its policy
by the insured against the insurance holders
company. d. That its paid up capital stock, or its
2. The filing of a complaint with the available cash assets, or its security
Commissioner shall preclude the civil deposits, as the case may be, is impaired
courts from taking cognizance of a suit or deficient
involving the same subject matter. e. That the margin of solvency required of
each company is deficient
Power to conduct investigation
The Commissioner may authorize any officer or Note:
group of officers under him to conduct In order for a claim for deposit insurance with
investigation, inquiry and/or hearing and decide PDIC to prosper, the law requires that a
claims and he may issue rules governing the corresponding deposit be placed in the insured
conduct of adjudication and resolution of cases. bank; and a deposit as defined under Section 3(f)
The Rules of Court shall have suppletory of R.A. No. 3591 may be constituted only if money
application. or the equivalent of money is received by a bank.
Appeal When the evidence shows that the certificates of

Any decision, order or ruling rendered by the time deposit were issued in consideration of
Commissioner after a hearing shall have the checks received by the issuing bank, which
force and effect of a judgment. Any party may checks bounced, then the issuing bank received
appeal from a final order, ruling or decision of the no money therefore, no deposit therefore came
Commissioner by filing with the Commissioner into existence, and therefore PDIC cannot be
within thirty (30) days from receipt of copy of such held liable for value of the certificates of time
order, ruling or decision a notice of appeal to the deposit (PDIC v. CA, G.R. No. 118917, 1997).
Court of Appeals in the manner provided for in the
Rules of Court for appeals from the Regional Trial SPECIAL CLASSES OF INSURANCE
Court to the Court of Appeals.
1. MARINE INSURANCE
Power to administer oath
For the purpose of any proceeding under this Scope of Marine Insurance
section, the Commissioner, or any officer thereof 1. Insurance Against Loss or Damage
designated by him is empowered to administer a. Vessels, craft, aircraft, vehicles, goods,
oaths and affirmation, subpoena witnesses, freights, cargoes, merchandise, effects,
compel their attendance, take evidence, and disbursements, profits, moneys,
require the production of any books, papers, securities, choses in action, instruments
documents, or contracts or other records which of debts, valuable papers, bottomry, and
are relevant or material to the inquiry. respondentia interests and all other kinds
of property and interests therein, in
Alternative dispute resolution respect to, appertaining to or in
In order to promote party autonomy in the connection with any and all risks or perils
resolution of cases, the Commissioner shall of navigation, transit or transportation, or
establish a system for resolving cases through while being assembled, packed, crated,
the use of alternative dispute resolution. baled, compressed or similarly prepared
(Insurance Code, Sec. 439) for shipment or while awaiting shipment,
or during any delays, storage,
transshipment, or reshipment incident
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thereto, including war risks, marine wind, water, and salt conditions. (Cathay
builder's risks, and all personal property Insurance v. CA, G.R. No. 76415, 1987)
floater risks;
b. Person or property in connection with or Exception: Unless perils of the ship are covered
appertaining to a marine, inland marine, by an ALL-RISK POLICY.
transit or transportation insurance,
including liability for loss of or damage Note: The perils of the sea must be the proximate
arising out of or in connection with the cause of the loss in order that the insurer may be
construction, repair, operation, held liable.
maintenance or use of the subject matter
of such insurance (but not including life Perils of the Sea v. Perils of the Ship
insurance or surety bonds nor insurance PERILS OF THE PERILS OF THE
against loss by reason of bodily injury to SEA SHIP
any person arising out of ownership, Covered by marine Not covered by
maintenance, or use of automobiles); insurance marine insurance
c. Precious stones, jewels, jewelry, Accidents peculiar to Damage or losses
precious metals, whether in course of the sea which do not resulting from:
transportation or otherwise; and happen by
d. Bridges, tunnels and other intervention of man 1. Natural and
instrumentalities of transportation and nor are to be inevitable action
communication (excluding buildings, their prevented by human of the sea
furniture and furnishings, fixed contents prudence. Casualties 2. Ordinary wear
and supplies held in storage); piers, due to the: and tear of a ship,
wharves, docks and slips, and other aids 1. Unusual or
to navigation and transportation, violence; or 3. Negligent failure
including dry docks and marine railways, 2. Extraordinary of the ship owner
dams and appurtenant facilities for the action of wind to provide the
control of waterways. and wave; or vessel with
3. Other proper equipment
2. Marine Protection and Indemnity Insurance extraordinary to convey the
a. Insurance against, or against legal causes cargo under
liability of the insured for loss, damage, or connected with ordinary
expense incident to ownership, navigation conditions
operation, chartering, maintenance, use,
repair, or construction of any vessel, craft All-Risks Policy
or instrumentality in use of ocean or It is insurance against all causes of conceivable
inland waterways, including liability of the loss or damage.
insured for personal injury, illness or
death or for loss of or damage to the Except:
property of another person. 1. As otherwise excluded in the policy; or
2. Due to fraud or intentional misconduct on the
Risk Insured Against part of the insured (Choa Tek Seng v. CA,
General Rule: It is only PERILS OF THE SEA G.R. No. 84507, 1990)
which may be insured against
Barratry
The insurer does undertake to insure against Willful misconduct on the part of the master or
perils of the ship. The purpose of a marine crew in pursuance of some unlawful or fraudulent
insurance is to secure an indemnity against purpose without the consent of owners, and to the
accidents which may happen and against events prejudice of owner’s interest. This may be
which must happen. (La Razon Social Go Taico expressly covered by the policy. When so
Hermanos v. Union Insurance Society of Canton, covered, proof of willful and intentional act is
G.R. No. 13983, 1919) necessary. No honest error or judgment or mere
negligence, unless criminally gross, can be
Rusting of steel pipes in the course of the voyage barratry. (Roque v. IAC, G.R. No. L-66935, 1985)
is a peril of the sea in view of the effects of the
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Insurable Interest in Marine Insurance Charter Party Contract

A contract by virtue of which the owner or the
1. Shipowner agent of a vessel binds himself to transport
merchandise or persons for a fixed price. It has
Over the VALUE OF THE VESSEL, (even if also been defined as a contract by virtue of which
chartered and the charterer agreed to pay the the owner or the agent of the vessel lets the
shipowner the value of the vessel in case of loss, vessel or some principal part thereof for the
however, the shipowner can recover only the transportation of goods or persons from one port
amount not recoverable from the charterer). to another.
However, if the ship is hypothecated by a Different Types of Charter Parties:
bottomry loan, the insurable interest is only up to 1. Contracts of Affreightment – use of
the excess of the value of the vessel over the loan shipping space on vessels leased by the
(Insurance Code, Sec. 103) shipowner in part or as a whole, to carry
goods for others
Over EXPECTED FREIGHTAGE. (Insurance a. Time Charter – vessel is leased
Code, Sec. 105) for a fixed period of time
b. Voyage Charter – vessel is
Note: Freightage may be derived from: leased for a single voyage
a. The chartering of the ship; 2. Charter by Demise or Bareboat
b. Its employment for the carriage of his Charter – the whole vessel is leased to
own goods; and the charterer with a transfer to him of its
c. Its employment for the carriage of the entire command and possession and
good of others (Insurance Code, Sec. consequent control over its navigation
104) including the master and crew
2. Shipper/Cargo Owner Concealment in Marine Insurance

To constitute concealment, it is sufficient that the
Over the CARGO AND EXPECTED PROFITS. insured is in possession of the material fact
(Insurance Code, Sec. 107) concealed although he may not be aware of it.
3. Charterer Each party in a marine insurance contract is

bound to communicate the following:
Over the VESSEL up to the extent of the amount
he is liable to the shipowner, if the ship is lost or 1. All facts within his knowledge which are
damaged during the voyage. (Insurance Code, material to the contract and as to which
Sec. 108) he makes no warranty, and which the
other has not the means of ascertaining.
Over his EXPECTED PROFITS OR 2. All the information which he possesses,
FREIGHTAGE if he accepts cargoes from other material to the risk
persons for a fee. (Insurance Code, Sec. 105)
Exceptions:
Over his OWN CARGO OR CLIENT’S CARGO. a. Those which the other knows;
b. Those which, in the exercise of
Bottomry, Respondentia, and Charter Party ordinary care, the other ought to
know, and of which the former
Loan on Bottomry or Respondentia has no reason to suppose him
A loan in which under any condition whatsoever, ignorant;
the repayment of the sum loaned, and of the c. Those of which the other waives
premium stipulated, depends upon the safe communication;
arrival in port of the goods on which it is made or d. Those which prove or tend to
of the price they may receive in case of accident. prove the existence of a risk
It is a loan on bottomry when the security is a excluded by a warranty, and
vessel, and respondentia when the security is which are not otherwise material;
cargo. and
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e. Those which relate to a risk Representation in Marine Insurance

excepted from the policy and If a representation by a person insured by a
which are not otherwise material contract of marine insurance, is intentionally false
in any material respect, or in respect of any fact
3. State the exact and whole truth in relation on which the character and nature of the risk
to all matters that he represents, or upon depends, the insurer may rescind the entire
inquiry discloses or assumes to disclose contract. The eventual falsity of a representation
(Insurance Code, Sec. 109) as to expectation does not, in the absence of
fraud, avoid a contract of marine insurance.
In marine insurance, there are instances when (Insurance Code, Secs. 113 and 114)
matters, although concealed, will not vitiate the
contract but merely exonerates the insurer from
the loss resulting from the risk concealed: Implied Warranties in Marine Insurance
1. National character of the insured; a. That the ship is seaworthy at the
2. Liability of insured thing to capture (or) inception of the insurance (Sec. 115);
and detention; b. That the ship will not deviate from agreed
3. Liability to seizure from breach of foreign voyage unless deviation is proper (Secs.
laws of trade; 125-127);
4. Want of necessary documents; and c. That the ship will not engage in an illegal
5. Use of false or simulated papers. venture;
(Insurance Code, Secs. 109-112) d. Warranty of possession of documents of
neutrality; that the ship will carry the
Concealment in Marine Insurance vs. Other requisite documents of nationality or
Property Insurance neutrality of the ship or cargo where such
nationality or neutrality is expressly
MARINE OTHER PROPERTY warranted (Sec. 122);
INSURANCE INSURANCE e. Presence of insurable interest.
Information of Third Persons Seaworthiness
Seaworthiness relates to the vessel’s ACTUAL
The information of The information or
CONDITION at the time of the commencement of
the belief or belief of a third party
the voyage. The issuance of the certificate neither
expectation of third is not material and
negates the presumption of unseaworthiness
persons in reference need not be
triggered by an unexplained sinking or
to a material fact is communicated
establishes seaworthiness. (Delsan Transport
material and must be unless it proceeds
Lines v. CA, G.R. No. 127897, 2001)
communicated from an agent of the
(Insurance Code, insured whose duty
Test of Seaworthiness
Sec. 110) is to give information.
Whether or not the ship is reasonably fit to
(Insurance Code,
perform the service and to encounter the ordinary
Sec. 43)
perils of the voyage (Insurance Code, Sec. 117)
Effect of Concealment
Note: The implied warranty of seaworthiness also
The concealment of Concealment of a applies to a cargo owner.
any fact in relation to material fact will
any of the matters vitiate the entire Since the law provides for an implied warranty of
stated in Sec. 112 contract, whether or seaworthiness in every contract of ordinary
does not vitiate the not the loss results marine insurance, it becomes the obligation of a
entire contract but from the risk cargo owner to look for a reliable common carrier
merely exonerates concealed. which keeps its vessels in seaworthy condition.
the insurer from a risk The shipper of cargo may have no control over
resulting from the fact the vessel but he has full control in the choice of
concealed. the common carrier that will transport his goods.
Or the cargo owner may enter into a contract of
insurance which specifically provides that the
insurer answers not only for the perils of the sea
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but also provides for coverage of perils of the Deviation

ship. (Roque v. IAC, G.R. No. L-66935, 1985) Departure of vessel from course of voyage, or an
unreasonable delay in pursuing voyage, or the
When A Ship Should Be Seaworthy: commencement of an entirely different voyage.
General Rule: Implied warranty of seaworthiness (Insurance Code, Sec. 125)
is complied with if the ship be seaworthy at the
time of the commencement of the risk Instances of Deviation Table
Exceptions: SEC. DEVIATION

1. Time Policy – When the insurance is
made for a specified length of time, the - Departure from the agreed voyage
implied warranty is not complied with
unless the vessel is seaworthy at the 123 Departure from the course of sailing
commencement of every voyage it fixed by mercantile usage between
undertakes during that time; (Insurance the places of beginning and ending
Code, Sec. 117[a]) specified in the policy
2. Cargo Policy – When the insurance is 124 Departure from the most natural,
direct, and advantageous route
upon the cargo which, by the terms of the
between the places specified if the
policy, description of the voyage, or
course of sailing is not fixed by
established custom of trade, is to be
mercantile usage
transshipped at an intermediate port, at
the commencement of each particular
125 Unreasonable delay in pursuing the
voyage; (Insurance Code, Sec. 117[b])
voyage
3. Voyage Policy – Where different 125 The commencement of an entirely
portions of the voyage are contemplated, different voyage
at the commencement of each portion;
Kinds of Deviations
4. When the ship was seaworthy at the 1. Proper Deviations
commencement of the voyage but a. If due to circumstances outside the
becomes unseaworthy during the voyage control of the master or ship owner;
to which an insurance related, b. If done to comply with a warranty or to
unreasonable delay in repairing the avoid a peril, whether or not the peril is
defect exonerates the insurer on ship or insured against;
shipowner’s interest from liability from c. If made in good faith, and upon
any loss arising therefrom. (Insurance reasonable ground of belief in its
Code, Sec. 120) necessity to avoid a peril;
d. If made in good faith, for the purpose of
Coverage of the Warranty of Seaworthiness saving human life or relieving another
1. Condition of the structure of the ship distressed vessel. (Insurance Code, Sec.
itself, but requires that it be properly 125)
laden, and provided with a competent
master Effect in case of loss or injury: Insurer is
2. Sufficient number of competent officers still liable, as if there was no deviation.
and seamen
3. Requisite appurtenances and equipment, 2. Improper Deviations
such as ballasts, cables and anchors, Every deviation not specified in the last
cordage and sails, food, water, fuel and section is improper. (Insurance Code, Sec.
lights, and other necessary or proper 127)
stores and implements for the voyage.
(Insurance Code, Sec. 118) Effect in case of loss or injury: Insurer is
not liable (Insurance Code, Sec. 128)
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Kinds of Losses in Marine Insurance 3. Partial Loss (Insurance Code, Sec. 130)
1. Actual Total Loss
a. Total Destruction; Abandonment
b. Irretrievable loss by sinking or by being The act of the insured by which, after a
broken up; constructive total loss, he may declares the
c. Damage rendering the thing valueless for relinquishment to the insurer of his interest in the
the purpose held; or thing insured. (Insurance Code, Sec. 140)
d. Total Effective deprivation of owner of
possession of thing insured at the port of Requisites of Abandonment
destination. (Insurance Code, Sec. 132)
SEC. REQUISITE
Note: Complete physical destruction of the
140 There must be an actual
subject matter is not essential to constitute an
relinquishment by the person
actual total loss. Such a loss may exist where the
insured of his interest in the thing
form and specie of the thing is destroyed,
insured
although the materials of which it consisted still
exist as where the cargo by the process of 141 There must be a constructive total
decomposition or other chemical agency no loss
longer remains the same kind of thing as before
(Pan Malayan Insurance Corp v. CA, G.R. No. 142 The abandonment be neither partial
95070, 1991) nor conditional
2. Constructive Total Loss 143 It must be made within a reasonable
a. Actual loss or more than three-fourths time after receipt of reliable
(3/4) of the value of the object; information of the loss
b. Damage reducing value by more than
three-fourths (3/4) of the value of the 144 It must be factual
vessel and of cargo; and
c. Expenses of shipment exceed three- 145 It must be made by giving notice
fourths (3/4) of value of cargo. (Insurance thereof to the insurer which may be
Code, Sec. 141) done orally or in writing
In case of constructive total loss, insured 146 The notice of abandonment must be
may: explicit and must specify the
1. Abandon the goods or vessel to the particular cause of the
insurer and claim for whole insured value abandonment
(Insurance Code, Sec. 141); or
2. He may, without abandoning vessel, Abandonment where the insurance is
claim for partial actual loss (Insurance divisible or indivisible
Code, Sec. 157). In a case, the policy in question showed that the
subject matter insured was the entire shipment of
The word “may” in Section 141 is intended to grant 2,000 cubic meters of logs.
the insured the option or direction to make the
choice. This option or discretion is expressed as a
SC held that the fact that the logs were loaded in
right in Section 133. (Keppel Cebu Shipyard v.
two different barges did not make the contract of
Pioneer Ins. & Surety, G.R. Nos. 180880-81,
insurance several and divisible as to the items
2009)
insured because the logs on the two barges were
not separately valued or separately insured, for
Effect of Total Loss
only one premium was paid for the entire
Underwriter is liable for the whole amount
shipment making only one cause or
insured.
consideration. The logs having been insured as
one inseparable unit, the totality of the shipment
of logs should be the basis for the existence of
constructive total loss (Oriental Assurance Corp
v. CA, G.R. No. 94052, 1991)
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Effects of Abandonment Exception: When a thing has been hypothecated

1. Transfer of Interest by bottomry or respondentia, before its insurance,
An abandonment is equivalent to a transfer by the and without the knowledge of the person actually
insured of his interest to the insurer, with all the procuring the insurance, he may show the real
chances of recovery and indemnity. (Insurance value (Insurance Code, Sec. 158)
Code, Sec. 148)
2. Open Policy
2. Transfer of Agency
Upon an abandonment, acts done in good faith The following rules shall apply in estimating a
by those who were agents of the insured in loss:
respect to the thing insured, subsequent to the 1. Value of the ship – value at the beginning
loss, are at the risk of the insurer, and for his of the risk;
benefit. (Insurance Code, Sec. 150) 2. Value of the cargo – actual cost when
laden on board, or market value at the time
Acceptance of Abandonment and place of lading;
It is not necessary if abandonment is properly 3. Value of freightage – gross freightage
made. exclusive of primage; and
4. Cost of insurance – in each case, to be
Effects of Acceptance added to the estimated value (Insurance
1. Insurer admits the existence of the loss; Code, Sec. 163)
2. Insurer admits the sufficiency of the
abandonment; Loss of Profits Separately Insured
3. Abandonment becomes irrevocable, (Value of property lost / Value of whole property
unless the upon which it was made prove insured) * amount of insurance = Amount of
to be unfounded; recovery
4. Freightage earned previous to the loss
belongs to the insurer of said freightage; Presumption of Loss of Profits
and When profits are valued and insured by a contract
5. Freightage subsequently earned belongs of marine insurance, a loss of them is
to the insurer of the ship (Insurance conclusively presumed from a loss of the property
Code, Secs. 153-155) out of which they are expected to arise, and the
valuation fixes their amount. (Insurance Code,
Rights of Insurer Who Pays Partial Loss as Sec. 162)
Actual Total Loss
If a marine insurer pays for a loss as if it were an Average
actual total loss, he is entitled to whatever may Any extraordinary or accidental expense incurred
remain of the thing insured, or its proceeds or during the voyage for the preservation of the
salvage, as if there had been a formal vessel, cargo, or both; and all damages to the
abandonment (Insurance Code, Sec. 149) vessel and cargo from the time it is loaded and
the voyage commenced, until it ends and the
Insurer’s Liability for Refusal of cargo is unloaded.
Abandonment
If an insurer refuses to accept a valid Kinds of Averages: Gross v. Particular
abandonment, he is liable as upon an actual total
loss, deducting from the amount any proceeds of GROSS / SIMPLE/PARTICUL
the thing insured which may have come to the GENERAL AR AVERAGE
hands of the insured. (Insurance Code, Sec. 156) AVERAGE
Measure of Indemnity These damages and Includes all damages

expenses are and expenses
1. Valued Policy deliberately caused caused to the vessel
by the master of the or to her cargo which
The parties are bond by the valuation if the vessel or upon his have not inured to the
insured had some interest at risk and there is no authority, in order to common benefit and
fraud (Insurance Code, Sec. 158) save the vessel, her profit of all the
Page 36 of 393
ATENEO CENTRAL
cargo, or both at the persons interested in

same time from a the vessel and her When a person insured by a contract of marine
insurance has a demand against others for
real and known risk. cargo the owners are
contribution, he may claim the whole loss from the
not entitled to receive
insurer, subrogating him to his own right to
contribution from
contribution. But no such claim can be made upon
other owners
concerned in the the insurer after the separation of the interests
venture. liable to contribution, nor when the insured,
having the right and opportunity to enforce
Must be borne These are suffered contribution from others, has neglected or waived
equally by all of the by and borne alone the exercise of that right. (Insurance Code, Sec.
interests concerned by the owner of the 167)
in the venture in cargo or of the
proportion to the vessel, as the case Freightage Benefit
value of the property may be. Which is to accrue to the owner of the vessel from
saved. its use in the voyage contemplated or the benefit
derived from the employment of the ship.
Requisites to Claim General Average Right to Freightage:

1. There must be a common danger. This a. Freightage earned before loss - Belongs
means, that both the ship and the cargo, to the insurer of freightage
after has been loaded, are subject to the b. Freightage earned after loss - Belongs to
same danger, whether during the insurer of ship
voyage, or in the port of loading or
unloading; that the danger arises from Co-Insurance
the accidents of the sea, dispositions of A form of insurance in which a person who
the authority, or faults of men, provided insures his property for less than the entire value
that the circumstances producing the is understood to be his own insurer for the
peril should be ascertained and imminent difference which exists between the true value of
or may rationally be said to be certain and the property and the amount of insurance. Also
imminent. This last requirement excludes applicable to Fire Insurance if stipulated.
measures undertaken against a distant
peril. When Co-Insurance Applies
2. For the common safety part of the vessel 1. Insurance taken is less than the actual
or of the cargo or both is sacrificed value of the thing insured; and
deliberately. 2. Loss is partial (Insurance Code, Sec.
3. From the expenses or damages caused 159)
follows the successful saving of the
vessel and cargo. “New for Old” Rule
4. Expenses or damages should have been In the case of a partial loss of ship or its
incurred or inflicted after taking proper equipment, the old materials are to be applied
legal steps and authority (Magsaysay v. towards payment for the new.
Agan, G.R. No. L-6393, 1955)
Unless otherwise stipulated in the policy, a
Right of the Insured in General Average marine insurer is liable for only 2/3 of the
Where it has been agreed that an insurance upon remaining cost of repairs after such deduction,
a particular thing, or class of things, shall be free except that anchors must be paid in full.
from particular average, a marine insurer is not (Insurance Code, Sec. 168)
liable for any particular average loss not depriving
the insured of the possession, at the port of 2. FIRE INSURANCE
destination, of the whole of such thing, or class of
things, even though it becomes entirely It is a contract of indemnity by which the insurer
worthless; but such insurer is liable for his for a consideration agrees to indemnify the
proportion of all general average loss assessed insured against loss of, or damage to, property by
upon the thing insured. (Insurance Code, Sec. fire. (Insurance Code, Sec. 169)
138)
Page 37 of 393
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May include loss by lightning, windstorm, tornado mportance of Distinction

or earthquake and other allied risks, when such 1. The rules on constructive total loss and
risks are covered by extension to fire insurance abandonment only apply in marine
policies or under separate policies. insurance; and
2. In case of partial loss of a thing insured
for less than its actual value, the insured
Nature of Fire in a marine policy is a co-insurer of the
Fire may not be considered a natural disaster or uninsured portion (Sec. 159), while the
calamity since it almost always arises from some insured may only become a co-insurer in
act of man or by human means. It cannot be an fire insurance if expressly agreed upon
act of God unless caused by lightning or a natural by the parties. (Sec. 174)
disaster or casualty not attributable to human
agency (Phil. Home Assurance Corp v. CA, G.R. Alteration
No. 106999. June 20, 1996) The use of condition of a thing insured from that
to which it is limited by the policy made without
Friendly Fire v. Hostile Fire the consent of the insurer, by means within the
FRIENDLY FIRE HOSTILE FIRE control of the insured, and increasing the risks,
So long as a fire burns When the fire occurs entitles the insurer to rescind a contract of fire
in a place where it outside of the usual insurance.
was intended to burn, confines or begins as
and ought to be, it is a friendly fire and Effect of an Alteration in the Use or Condition
merely an agency for becomes hostile by of a Thing Insured from that Limited by the
the accomplishment escaping from the Policy
of some purpose; not place where it ought The insurer may rescind a contract of fire
a hostile peril. to be to some place insurance, provided the following are present:
where it ought not to 1. The use or condition of the thing insured
be. is specially limited or stipulated in the
Insurer is liable. Insurer is not liable. policy;
2. Such use or condition is altered;
Fire Insurance Policy 3. The alteration is made without the
Instead of paying for actual loss or the valuation consent of the insurer;
stated on the face of the policy, the policy may 4. The alteration is made by means within
stipulate a: the control of the insured;
1. Co-insurance clause; or 5. The alteration increases the risk; and
2. Option to rebuild clause - the insurer is 6. There must be a violation of a material
given the option to reinstate or replace policy provision.
the building damaged or destroyed or
any part thereof, in the same condition as Alterations with DO NOT AVOID the policy
it was at the time of the loss. 1. Where risk of loss is not increased;
2. Where the insured property would be
Ocean Marine Policy vs. Fire Policy useless if questioned acts were
A policy of insurance on a vessel engaged in prohibited; or
navigation is a contract of ocean marine 3. A contract of fire insurance is not affected
insurance although it insures against fire risks by any act of the insured (which could
only. include alteration) subsequent to the
execution of the policy, which does not
However, where the hazard is fire alone and the violate its provisions, even though it
subject is an unfinished vessel, never afloat for a increases the risk and is the cause of the
voyage, the contract to insure is a fire risk, loss. (Insurance Code, Sec. 172)
especially in the absence of an express
agreement that it shall have the incidents of Even though the policy contains certain
marine policy, or where it insures materials in a provisions prohibiting specified articles from
shipyard for use in constructing vessels. being kept in the insured premises, the policy will
not be avoided by a violation of these provisions
I if the articles are necessary or ordinarily used in
the business conducted in the insured premises,
Page 38 of 393
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like benzine kept in a furniture factory for liability of the insured to the injured third person
purposes of operating or for cleaning machinery attaches. Prior payment by the insured to the
(Bachrach v. British American Assur. Co., G.R. injured third person is not necessary in order that
No. L-5715, 1910). the obligation of the insurer may arise. From the
moment that the insured became liable to the
Comparative Table: Alteration in Insurance third person, the insured acquired an interest in
Code – Sec. 171 vs. Sec. 77 the insurance contract, which interest may be
garnished like any other credit. (Perla Compania
SEC. 171 SEC. 77 de Seguros v. Ramolete, G.R. No. L-60887,
1991)
Alteration in the risk The insurer is given
or condition of the the right to insert Ts Right of the Injured Person to Sue Insurer of
thing insured which and Cs in the policy the Party at Fault
does not increase the which, if violated
risk will not affect a would avoid it. SCENARIO EFFECT
contract of fire
insurance. The contract 3rd persons, to
provides for whom the insured is
Applies if the policy is Applies if the policy indemnity against liable, CAN sue the
silent as to breach of stipulates that breach liability to 3rd insurer.
immaterial of an immaterial persons.
provisions. policy will void the
insurance. The contract is for 3rd persons
indemnity against CANNOT proceed
actual loss or against the insured.
3. CASUALTY INSURANCE payment.
It is an insurance covering loss or liability arising (Guingon v. Del Monte, G.R. No. L-22042, 1967)
from accident or mishap,
Note: The injured person may sue the insurer and
Excluding those falling under those types of the person at fault, notwithstanding the stipulation
insurance such as fire, suretyship, life or marine. against suing the insurer (“no-action” clause) in
the policy. (Guingon v. Del Monte, G.R. No. L-
Accident or Health Insurance 22042, 1967)
Insurance against specified perils which may
affect the person and/or property of the insured. Rules as to Death or Injury Resulting from
(ex. Personal Accident, Robbery/Theft Insurance) Accidental Means
Third Party Liability Insurance “Intentional”

Insurance against specified perils which may give Implies the exercise of the reasoning faculties,
rise to liability on the party of the insured for consciousness and volition
claims for injuries to or damage to property of
others. (ex. Motor Vehicle Liability, Professional Where the provision of the policy excludes
Liability, Product Liability) intentional injury, the intention of the person
inflicting is the controlling factory.
Where the contract is one of indemnity against
liability, it becomes operative as soon as the However, if the injuries suffered by the insured
liability of the person indemnified arises clearly resulted from the intentional act of a third
irrespective of whether or not he has suffered person, the insurer is relieved from liability as
actual loss (Republic Glass Corp v. Qua, G.R. No. stipulated (Biagtan v. The Insular Life Assurance
144413, 2004) Co. Ltd., G.R. No. 26194, 1972).
In a third-party liability insurance contract, the “Accidental”

insurer assumes the obligation of paying the That which happens by chance or fortuitously,
injured third party to whom the insured is liable. without intention or design, which is unexpected,
20 The insurer becomes liable as soon as the unusual and unforeseen (Sun Insurance v. CA,
G.R. No. 92383, 1992)
Page 39 of 393
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Generally, can only May be cancelled

The terms “accident” and “accidental” do not,
be cancelled with the unilaterally either by
without qualification, exclude events resulting in
consent of the the insured or by the
damage or loss due to fault, recklessness or
obligee or by the insurer on grounds
negligence of third parties. (Pan Malayan
Commissioner or by provided by law.
Insurance v. CA, G.R. No. 81026, 1990)
a court of competent (Sec. 64)
jurisdiction.
“No Fault”
The concept of accident is not necessarily
The obligee must The insurance
synonymous with “NO FAULT”. It may be utilized
accept before the contract does not
simply to distinguish intentional or malicious acts
suretyship becomes need the acceptance
from negligent or careless acts of man (Pan
valid and of any 3rd party.
Malayan Insurance Corp. v. CA, G.R. No. 81026,
enforceable.
1990).
4. SURETYSHIP It includes official recognizances, stipulations,

bonds or undertakings issued under Act 536, as
An agreement whereby one undertakes to amended.
answer, under specified terms and conditions, for
the debt, default or miscarriage of another in favor When does Suretyship arise?
of a third party. (Insurance Code, Sec. 177) Suretyship arises upon the solidary binding of a
person – deemed the surety – with the principal
Under Sec. 177, a suretyship is: debtor, for the purpose of fulfilling an obligation.
a. As a contract or agreement
b. Whereby a party, called the surety, Surety agreement as ancillary contract
guarantees Such undertaking makes a surety agreement an
c. The performance by another party, called ancillary contract as it presupposes the existence
the principal or obligor, of a principal contract.
d. Of an obligation or undertaking in favor of
a third party, called the obligee. Although the contract of a surety is in essence
secondary only to a valid principal obligation, the
Suretyship v. Property Insurance surety becomes liable for the debt or duty of
another although it possesses no direct or
SURETYSHIP PROPERTY personal interest over the obligations nor does it
INSURANCE receive any benefit therefrom.
Accessory contract Principal contract And notwithstanding the fact that the surety
contract is secondary to the principal obligation,
Parties: Parties:
the surety assumes liability as a regular party to
1. Surety 1. Insurer, and
the undertaking.
2. Principal 2. Insured
debtor/ obligor,
Liability of Surety
and
The extent of a surety’s liability is determined by
3. creditor/ obligee
the language of the suretyship contract or bond
itself. It cannot be extended by implication,
Credit transaction, Contract of
beyond the terms of the contract. Thus, to
where the surety indemnity.
determine whether petitioner is liable to
assumes primary
respondent under the surety bond, it becomes
liability.
necessary to examine the terms of the contract
itself (First Lepanto-Taisho Insurance
Surety is entitled to In subrogation, the
Corporation (now known as FLT Prime Insurance
reimbursement from 3rd party against
Corporation) vs. Chevron Philippines, Inc.
the principal and this whom the insurer
(formerly known as Caltex Philippines, Inc.), G.R.
guarantors for the may proceed is not a
No. 177839, 2012).
loss it may suffer party to the contract.
under the contract.
Page 40 of 393
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Nature of Liability of Surety 3. Where the obligee has accepted the

a. The liability of the sureties under a bond bond, it shall be valid and enforceable
is joint and several / solidary (Arts. notwithstanding that the premium has not
1207-1208, NCC) been paid (Philippine Pryce Assurance v.
b. The liability is limited to the amount of CA, G.R. No. 107062, 1994);
the bond (Republic v. CA, G.R. No. 4. If the contract of suretyship or bond is not
103073, 2001). accepted by, or filed with the obligee, the
c. The liability is contractual as it is surety shall collect only a reasonable
determined strictly by the terms of the amount;
contract of suretyship in relation to the 5. If the non-acceptance of the bond be due
principal contract between the obligor to the fault or negligence of the surety, no
and the obligee (Zenith Insurance Corp v. service fee, stamps, or taxes imposed
CA, G.R. No. L-57957, Dec. 29, 1982.). shall be collected by the surety; and
6. In the case of a continuing bond (for a
Note: In Suretyship, the obligee accepts the term longer than one year or with no fixed
surety’s solidary undertaking to pay if the obligor expiration date), the obligor shall pay the
does not pay. Such acceptance, however, does subsequent annual premium as it falls
not change in any material way the obligee’s due until the contract is cancelled
relationship with the principal obligor. Neither (Insurance Code, Sec. 179)
does it make the surety an active party to the
principal obligee-obligor relationship. Note: Where a contract of surety is terminated
under its terms, the liability of the principal for
Thus, the acceptance does not give the surety the premiums after such termination ceases
right to intervene in the principal contract. (Asset notwithstanding the pendency of a lawsuit to
Builders Corporation vs. Stronghold Insurance enforce a liability that accrued during its
Co., Inc., G.R. No. 187116, 2010). stipulated lifetime (Capital Insurance & Surety Co
v. Ronquillo Trading, G.R. No. L-36488, 1983).
Continuing Suretyship
By executing such an agreement, the principal Suretyship v. Guaranty
places itself in a position to enter into the
GUARANTY SURETY
projected series of transactions with its creditor;
with such suretyship agreement, there would be
Promise to answer for the debt, default, or
no need to execute a separate surety contract or
miscarriage of another.
bond for each financing or credit accommodation
extended to the principal debtor. A continuing
Insurer of the Insurer of the debt -
suretyship covers current and future loans,
debtor’s solvency - obligates himself to
provided that, with respect to future loan
bound to pay when pay when the
transactions, they are within the description or
the principal is principal does not
contemplation of the contract of guaranty
unable to pay. pay.
(Aniceto G. Saludo, Jr. v. Security Bank
Corporation, G.R. No. 184041, 2010).
Undertaking that the Undertaking that the
debtor shall pay. debt shall be paid.
Rules on Payment of Premium
The premium is the consideration for furnishing
Liable based on an Liable as a regular
the bond or the guaranty and the obligation to pay
independent party to the
the same subsists for as long as the liability of the
agreement to pay if undertaking.
surety shall exist. (Reparations Commission v.
the primary debtor
Universal Deep-Sea Fishing Corporation, A.M.
fails to do so.
No. 219091-96, 1978)
1. The premium becomes a debt as soon as Guaranty is a Surety is charged as
the contract of suretyship or bond is collateral an original promisor
perfected and delivered to the obligor undertaking. and debtor from the
(Insurance Code, Sec. 78) beginning.
2. The contract of suretyship or bonding
shall not be valid and binding unless and Secondarily or Primary, although a
until the premium therefor has been paid;
Page 41 of 393
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Life Insurance vs. Fire and Marine Insurance

subsidiarily liable. surety is secondary
to a valid principal LIFE INSURANCE FIRE AND
obligation. MARINE
Guarantor contracts INSURANCE
to pay if, by use of Surety undertakes
due diligence, the directly the payment Not a contract of Contracts of
principal cannot pay w/o reference to indemnity (save that indemnity
the debt. principal’s solvency. effected by a
creditor on the life of
Not bound to take Ordinarily held to the debtor), but of
notice of the non- know every default of investment
performance of the his principal.
principal. Always regarded as May be open or
a valued policy valued
Discharged by the Usually not
mere indulgence of discharged by the May be transferred The transferee or
the creditor or mere indulgence of or assigned to any assignee must have
principal. the creditor or person, even if he an insurable
principal. has no insurable interest in the thing
Usually not liable interest insured
unless notified of the
principal’s default. Unless expressly Such consent, in
required, the the absence of
Art. 2080 is Surety cannot claim consent of the waiver by the
applicable to release from his insurer is not insurer, is essential
guarantors. obligation. essential to the in the assignment of
validity of the a fire or marine
Statute of Frauds Statute of Frauds assignment of a life policy
applies - special does not apply - policy
promise. suretyship is an
original promise. Save that effected The insurable
by a creditor on life interest in the
5. LIFE INSURANCE of debtor, insurable property insured
interest in the life or must exist not only
Scope health of the person when the insurance
a. Insurance on human life insured need not takes effect but also
b. Insurance appertaining thereto or exist after the when the loss
connected therewith may be payable: insurance takes occurs
i. On the death of the insured; effect or when the
ii. On his surviving a specified loss occurs
period (endowment/annuities);
The contingency The contingency
and
that is contemplated insured against may
iii. Otherwise, contingently on the
(i.e., death) is a or may not occur
continuance or cessation of life
certain event, the
(endowment/annuities)
only uncertainty
being the time when
Note: Life insurance policies are always
it will take place
VALUED policies.
Page 42 of 393
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Unless written only Liability is uncertain if the words “industrial” policy are printed upon
for a term, the because the the policy as part of the descriptive matter.
liability of the insurer happening of the
Kinds of Life Insurance
to make payment is peril insured against
a. Whole Life or Ordinary Policies
certain, the only is uncertain. The
The insured agrees to pay annual, semi-
uncertain element amount insured
being when such may not have to be annual or quarterly premiums while he lives.
payment must be paid. The insurer agrees to pay the face value of the
policy upon the death of the insured.
made. The amount
insured will have to
b. Limited Payment Life Policies
be paid sooner or
A whole life or ordinary policy where premiums
later.
are paid only for a specified period of years.
Although it may be It may be cancelled
terminated by the by either party and c. Term Policy
insured, cannot be is usually for a term Insured pays only once and insurer’s liability
cancelled by the of one (1) year arises only upon the death of the insured
insurer, and, within the agreed term as period. If the latter
therefore, is usually survives the period, the contract terminates
a long-term contract and the insurer is not liable.
d. Endowment Policy
The "loss" to the The reverse is Insurer agrees to pay a certain sum to the
beneficiary caused generally true of the insured if the latter outlives a designated
by the death of the loss of property period; if he dies before that time, the
insured can seldom proceeds are paid to the beneficiary
be measured
accurately in terms e. Life Annuity
of cash value Debtor binds (the insurer) himself to pay an
annual pension or income during the life of
one or more persons in consideration of a
The beneficiary is The insured is
capital consisting of money or other property,
under no obligation required to submit
whose ownership is transferred to him with the
to prove actual proof of his actual
burden of income.
financial loss as a pecuniary loss as a
result of the death of condition precedent
Variable Contract
the insured in order to collecting the
Any policy or contract on either a group or
to collect the insurance
individual basis issued by an insurance company
insurance
providing for benefits or other contractual
payments or values thereunder to vary so as to
Classification of Life Insurance reflect investment results of any segregated
a. Individual Life portfolio of investment.
Insurance on human lives and insurance
appertaining thereto or connected therewith; Rules on Transferability of Life Insurance
Contracts
b. Group Life A policy of insurance upon life or health may pass
A blanket policy covering a number of by transfer, will or succession to any person,
individuals whether he has an insurable interest or not, and
such person may recover upon it whatever the
c. Industrial Life insured might have recovered. (Insurance Code,
A form of life insurance under which the Sec. 184)
premiums are payable either monthly or
oftener, if the face amount of insurance All life insurance policies are declared by law to
provided in any policy is not more than five be assignable regardless of whether the assignee
hundred times that of the current statutory has an insurable interest in the life of the insured
minimum daily wage in the City of Manila and
Page 43 of 393
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or not (Sun Life Assur. Co. of Canada v. Ingersoll, Exceptions:

G.R. No. 16475, 1921) a. Accidental killing;
b. Self-defense; and
Necessity of Beneficiary’s Consent to c. Insanity of the beneficiary at the time he
Assignment killed the insured
The consent of the beneficiary depends if there is
a waiver of the right to change the beneficiary 6. COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE (CMVLI)
See discussion on Parties to An Insurance
Contract (B) A protection coverage that will answer for legal
liability for losses and damages for bodily injuries
Liability of Insurer in Case of Death or Suicide and/or property damage that may be sustained by
another arising from the use and operation of a
1. Suicide motor vehicle by its owner.
The insurer is LIABLE in the following cases:
a. Suicide was committed after the policy It is unlawful for any land transportation operator
has been in force for a period of two or owner of a motor vehicle to operate the same
years from the date of its issue or its last in public highways unless there is an insurance or
reinstatement; guaranty to indemnify the death or bodily injury of
b. Suicide committed in a state of insanity a third party or passenger arising from the use
regardless of the date of the commission thereof. (Insurance Code, Sec. 387)
of the suicide; or
c. If committed after the lapse of a shorter Motor Vehicle
period in the policy (Insurance Code, Shall mean any vehicle propelled by any power
Sec. 183) other than muscular power using the public
highways (R.A. No. 4136, Sec. 3[a])
Note: Any stipulation extending the two-year
period is void. Exceptions: road rollers, trolley cars, street
sweepers, sprinklers, lawn mowers, bulldozers,
The insurer is NOT LIABLE in the following cases: graders, forklifts, amphibian trucks, and cranes if
a. The suicide is not by reason of insanity not used in public highways, vehicles which run
and is committed within the two-year only on rails or tracks, and tractors, trailers and
period; traction engines of all kinds used exclusively for
b. The suicide is by reason of insanity but is agricultural purposes.
not among the risks assumed by the
insurer regardless of the date of Scope of Coverage Required
commission; and
c. The insurer can show that the policy was Owners of Operators of
obtained with the intention to commit private motor land transportation
suicide even in the absence of any vehicles
suicide exclusion in the policy.
Comprehensive Comprehensive
2. Killing by the Beneficiary against 3rd party against 3rd party
liability for death or liability for death or
General Rule: The interest of a beneficiary in a bodily injuries bodily injuries
life insurance policy shall be forfeited when the
beneficiary is the principal, accomplice, or In case a private The insurer may
accessory in willfully bringing about the death of motor vehicle is being extend additional
the insured. In such a case, the share forfeited used to transport other risks at its
shall pass on to the other beneficiaries, unless passengers for option
otherwise disqualified. In the absence of other compensation, such
beneficiaries, the proceeds shall be paid in coverage shall, in
accordance with the policy contract. If the policy addition, include
contract is silent, the proceeds shall be paid to the passenger liability
estate of the insured. (Insurance Code, Sec. 12)
Page 44 of 393
ATENEO CENTRAL
Rules of Comprehensive Third-Party Liability 1. Passenger

Insurance (CTPL): Any fare paying person being transported and
Registration of any vehicle will not be made or conveyed in and by a motor vehicle for
renewed without complying with the requirements transportation of passengers for
compensation, including persons expressly
The protection may be complied with using any of authorized by law or by the vehicle’s operator
the following: or his agents to ride without fare. (Insurance
a. Insurance policy Code, Sec. 386[b]]
b. Surety bond
c. Cash bond 2. Third Party
Any person other than a passenger as defined
The purpose of CTPL is to give immediate in this section and shall also exclude a
financial assistance to victims of motor vehicle member of the household, or a member of the
accidents and/or their dependents, especially if family within the second degree of
they are poor regardless of the financial capability consanguinity or affinity, of a motor vehicle
of motor vehicle owners or operators responsible owner or land transportation operator, as
for the accident. (First Integrated Bonding and likewise defined herein, or his employee in
Ins. Co., Inc. v. Hernando, G.R. No. 51221, respect of death, bodily injury, or damage to
1991). property arising out of and in the course of
employment (Insurance Code, Sec. 386[c])
“No Fault” Clause
The injured third party or passenger or heirs of Proper Insurer to Claim From
the deceased is given the option to file a claim for In the case of an occupant of a vehicle, claim shall
death or injury without the necessity of proving lie against the insurer of the vehicle in which the
fault or negligence of any kind. occupant is riding, mounting or dismounting from.
If not an occupant, claim shall lie against the
Conditions for application of no-fault clause: insurer of the directly offending vehicle.
a. The claim must be for death or bodily
injuries only (property damage/liability The claimant is not free to choose from which
not included). insurer he will claim the "no-fault indemnity" as
b. The total indemnity in respect of any the law, by using the word "shall," makes it
person shall not be less than fifteen mandatory that the claim be made against the
thousand pesos (P15,000). insurer of such vehicle. That said vehicle might
c. The following proofs of loss, when not be the one that caused the accident is of no
submitted under oath, shall be sufficient moment since the law itself provides that the party
evidence to substantiate the claim: paying the claim may recover against the owner
i. Police report of accident; and of the vehicle responsible for the accident. (Perla
ii. Death certificate and evidence Compania de Seguros v. Ancheta, G.R. No. L-
sufficient to establish the proper 49699 August 8, 1988)
payee; or,
iii. Medical report and evidence or Note: In all cases, the right of the party paying the
medical or hospital disbursement claim to recover against the owner of the vehicle
in respect of which refund is responsible for the accident shall be maintained.
claimed. (Insurance Code, Sec. 391)
d. Claim may be made against one motor
vehicle only; Periods in Claims Settlement
i. Against the insurer of the vehicle Notice of Claim: must be presented within six (6)
where one is a passenger months from the date of the accident
ii. in any other case, the offending
vehicle Otherwise the claim is deemed waived.
Claimant Bringing an Action or Suit: The action must be

The claimant or victim may be a “passenger” or a filed in court of the Insurance Commission within
“third party” (Insurance Code, Sec. 391) one (1) year from denial of the claim.
Page 45 of 393
ATENEO CENTRAL
Prescription starts to run from the denial of the vehicle by order of a court of law or by
claim by the Insurance Company (Summit reason of any enactment or regulation in
Guaranty and Insurance Co. v. Arnaldo, G.R. No. that behalf
L-48546, 1988)
Note: If the claimant was able to present a
Payment of Claims driver’s license, the same is presumed to be
If there is an agreement, the insurance company genuine. The license will still be sustained in the
shall forthwith ascertain the truth and extent of the absence of proof that it was not validly issued
claim and make payment within five (5) working (CCC Insurance Corporation v. CA, G.R. No.
days after reaching an agreement. 26167, 1970).
If no agreement is reached, the insurance A driver (not the insured himself) who holds an
company shall pay only the no-fault indemnity expired driver’s license is not an authorized driver
without prejudice to the claimant from pursuing (Gutierrez v. Capital Insurance Co., G.R. No.
his claim further, in which case, he shall not be 30892, 1984).
required or compelled by the insurance company
to execute any quit claim or document releasing Theft Clause
it from liability under the policy of insurance or The risks insured against in the policy may
surety bond issued. include theft. If there is such a provision and the
vehicle was unlawfully taken, the insurer is liable
Note: If the policy provides for indemnity against under the theft clause and the authorized driver
liability, the insurer can be sued directly by a third clause does not apply. The insured can recover
person. But, if the policy provides for even if the thief has no driver’s license. (Peria
“reimbursement after actual payment by the Compania de Seguros v. CA, G.R. No. 96452,
insured”, or for the indemnity against loss, a third 1992)
person has no cause of action against the insurer
(Bonifacio Brothers v. Mora, G.R. No. 20853, ————- end of topic ————-
1967).
While insurer’s liability may be direct, it does not

mean that the insurer can be held solidarily liable
with the insured. The insurer’s liability is based on
contract; that of the insured is based on torts.
Furthermore, the insurer’s liability is limited to the
amount of the insurance coverage (Pan Malayan
Insurance Corp. v. CA, G.R. No. 81026, 1990).
Authorized Driver Clause

A stipulation in a motor vehicle insurance which
provides that the driver, other than the insured
owner, must be duly licensed to drive the motor
vehicle otherwise the insurer is excused from
liability. The clause means that the insurer
indemnifies the insured owner against loss or
damage to the car but limits the use of the insured
vehicle to the insured himself or any person who
drove on his order or with his permission.
Authorized driver refers to:

1. The insured;
2. Any person driving on the insured’s order
or with his permission, provided that the
person driving is permitted in accordance
with the licensing, or other laws or
regulations to drive the motor vehicle and
is not disqualified from driving such motor
Page 46 of 393
PRE-NEED
Commercial Law
ATENEO CENTRAL
II. PRE-NEED A. DEFINITION
TOPIC OUTLINE UNDER THE SYLLABUS

1. PRE-NEED PLANS
A. DEFINITION
1. Pre-need plans "Pre-need plans" are contracts, agreements,
2. Pre-need company deeds or plans for the benefit of the planholders
which provide for the performance of future
B. REGISTRATION OF PRE-NEED service/s, payment of monetary considerations or
PLANS delivery of other benefits at the time of actual
need or agreed maturity date, as specified
C. LICENSING OF SALES COUNSELOR therein, in exchange for cash or installment
AND GENERAL AGENT amounts with or without interest or insurance
coverage and includes life, pension, education,
D. DEFAULT AND TERMINATION interment and other plans, instruments contracts
or deeds as may in the future he determined by
E. CLAIMS SETTLEMENT the Commission. (Pre-need Code, sec 4 (b))
Under Sec. 4, pre-need plans are:

1. contracts, agreements, deeds or plans
for the benefit of the planholders
2. for the performance of future service/s,
payment of monetary considerations or
delivery of other benefits at the time of
actual need or agreed maturity date
3. in exchange for cash or installment
amounts with or without interest or
insurance coverage
2. PRE-NEED COMPANY
"Pre-need company" refers to any corporation

registered with the Commission and
authorized/licensed to sell or offer to sell pre-
need plans. ((Pre-need Code, sec 4 (c))
The term "pre-need company" also refers to

schools, memorial chapels, banks, nonbank
financial institutions and other entities which have
also been authorized/licensed to sell or offer to
sell pre-need plans insofar as their pre-need
activities or business are concerned.
B. REGISTRATION OF PRE-NEED PLANS
Registration of Pre-need Contracts/Plans

Within a period of 45 days after the grant of a
license to do business as a pre-need company,
and for every pre-need plan which the pre-need
company intends to offer for sale to the public, the
pre-need company shall file with the Commission
a registration statement for the sale of pre-need
Page 47 of 393
ATENEO CENTRAL
plans pursuant to this Code. (Pre-need Code, sec 3. Solicited, sold or attempted to solicit or
14) sell a pre-need plan by means of false or
misleading representation and other
Documentary Requirements fraudulent means;
1. Duly accomplished Registration 4. Terminated for cause from another pre-
Statements; need company;
2. Board resolution authorizing the 5. Willfully allowing the use of one's license
registration of applicant’s pre-need plans; by a non-licensed or barred individual;
3. Opinion of independent counsel on the and
legality of the issue; 6. Analogous circumstances.
4. Audited financial statements; 7. Grounds under Section 11
5. Viability study with certification, under a. Conviction of crime involving a
oath, of pre-need actuary accredited by pre-need plan or other financial
the Commission; product
6. Copy of the proposed pre-need plan; and b. Conviction of an offense
7. Sample of sales materials involving moral turpitude or fraud
or embezzlement, theft or estafa
Note: It must contain appropriate risk factors as c. Enjoined, by reason of any
may be determined by the Insurance misconduct, from acting as a
Commission. director, officer, employee
occupying any fiduciary position
d. Violation of the Pre-need Code,
C. LICENSING OF SALES COUNSELOR Insurance Code, Securities
Regulation Code or any other
AND GENERAL AGENT
related laws
Sales counselor General agent
"Sales counselors" refers to natural persons who If the issuer should contract the services of a
are engaged in the sale of, or offer to sell, or general agent to undertake the sales of its plans,
counsel of prospective planholders for the such general agent shall be required to be
purpose of selling, whether or not on commission licensed as such with the Commission, in
basis, pre-need plans upon the authority of the accordance with the requirements imposed by
pre-need company. (Pre-need Code, sec. 4(h)) the Commission.
Qualifications
1. of good moral character and must not
have been convicted of any crime D. DEFAULT AND TERMINATION
involving moral turpitude;
2. undergone a training program approved Grace period
by the Commission and such fact has The pre-need company must provide in all
been certified under oath by a duly contracts issued to planholders a grace period of
authorized representative of a pre-need at least sixty (60) days within which to pay
company; and accrued installments, counted from the due date
3. has passed a written examination of the first unpaid installment.
administered by the. Commission or by
an independent organization under the Default
supervision of the Commission. Nonpayment of a plan within the grace period
shall render the plan a lapsed plan.
Grounds for the denial, suspension,
revocation of license Payment beyond the grace period
1. Material misrepresentation relating to: General Rule: Any payment by the planholder
a. Application requirements after the grace period shall be reimbursed
b. Terms and conditions of pre- Exception: the planholder duly reinstates the
need plans plan.
2. Obtained or attempted to obtain a license
by fraud or misrepresentation;
Page 48 of 393
ATENEO CENTRAL
Reinstatement 2. Failing to acknowledge with reasonable

The planholder shall be allowed a period of not promptness pertinent communications
less than two (2) years from the lapse of the grace with respect to claims arising under its
period or a longer period as provided in the plan;
contract within which to reinstate his plan. Note: 3. Failing to adopt and implement
No cancellation of plans shall be made by the reasonable standards for the prompt
issuer during such period when reinstatement investigation of claims arising under its
may be effected. plan;
4. Failing to provide prompt, fair and
Notice Requirement equitable settlement of claims submitted
Within thirty (30) days from the expiration of the in which liability has become reasonably
grace period and within thirty (30) days from the clear; or
expiration of the reinstatement period, which is 5. Compelling planholders to institute suits
two (2) years from the lapse of the grace period, or recover amounts due under its plan by
the pre-need company shall give written notice to offering, without justifiable reason,
the planholder that his plan will be cancelled if not substantially less than the amounts
reinstated within two (2) years. ultimately recovered in suits brought by
them.
Failure to give either of the required notices shall
preclude the pre-need company from treating the Note: Any violation of this section shall be
plans as cancelled. considered sufficient cause for the suspension or
revocation of the company's certificate of
Termination of Pre-need plans authority.
Section 24. Termination of Pre-need Plans. - A
planholder may terminate his pre-need plan at Payment of Plan Proceeds
any time by giving written notice to the issuer.
1. Scheduled benefit plans
Termination values
A pre-need plan shall contain a schedule of In the case of scheduled benefit plans, the
termination values to which the planholder is proceeds of the plan shall be paid immediately
entitled to upon termination. upon maturity of the contract, unless such
proceeds are made payable in installments or as
The termination value of the pre-need plan shall an annuity, in which case the installments or
be predetermined by the actuary of the pre-need annuities shall be paid as they become due.
company upon application for registration of the
pre-need plans with the Commission and shall be Refusal or failure to pay the claim within fifteen
disclosed in the contract. (15) days from maturity or due date will entitle the
beneficiary to collect interest on the proceeds of
the plan for the duration of the delay at the rate
E. CLAIMS SETTLEMENT twice the legal interest unless such failure or
refusal to pay is based on the ground that the
claim is fraudulent: Provided, That the planholder
has duly complied with the documentary
No pre-need company shall refuse, without just
requirements of the pre-need company.
cause, to pay or settle claims arising under
coverages provided by its plans nor shall any
2. Contingent benefit plans
such company engage in unfair claim settlement
practices.
In the case of contingent benefit plans, the
benefits shall be paid by the pre-need company
Unfair Claims Settlement Practices
thirty (30) days upon submission of all necessary
Any of the following acts by a pre-need company,
documents.
if committed without just cause, shall constitute
unfair claims settlement practices:
Recovery of Investment
1. Knowingly misrepresenting to claimants
The planholder may institute the necessary legal
pertinent facts or plan provisions relating
action in court to recover his/her investment in the
to coverages at issue;
Page 49 of 393
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pre-need company thirty (30) days upon

submission of all necessary documents.
However, in case the insolvency or bankruptcy is
a mere cover - up for fraud or illegality, the
planholder may institute the legal action directly
against the officers and/or controlling owners of
the said pre-need company.
Consequences of Delay or Default

The pre-need company shall be liable to pay
damages, consisting of actual damages,
attorney’s fees and legal interest, to be computed
from the date the claim is made until it is fully
satisfied: Provided, That the failure to pay any
such claim within the time prescribed shall be
considered prima facie evidence of unreasonable
delay in payment.
Distribution of Profits
A pre-need company may declare dividends:
Provided, That the following shall remain
unimpaired, as certified under oath by the
president and the treasurer with respect to items
(a) and (b); and in the case of item (c), by the trust
officer:
(a) One hundred percent (100%) of the
capital stock;
(b) An amount sufficient to pay all net losses
reported, or in the course of settlement,
and all liabilities for expenses and taxes;
and
(c) Trust fund.
Note: Any dividend declared shall be reported to

the Commission within thirty (30) days after such
declaration.
Note: Section 30 of R.A. No. 9829 expressly

stipulates that the trust fund is to be used at all
times for the sole benefit of the planholders, and
cannot ever be applied to satisfy the claims of the
creditors of the company. (Securities and
Exchange Commission v. College Assurance
Plan Philippines, Inc., G.R. No. 202052, [March
7, 2018])
————- end of topic ————-
Page 50 of 393
TRANSPORTATION
LAW
Commercial Law
ATENEO CENTRAL
III. TRANSPORTATION LAW D. BILL OF LADING

1. Three-fold character
2. Delivery of goods
a. Period for delivery
b. Delivery without surrender of
III. TRANSPORTATION LAW
bill of lading
A. COMMON CARRIERS
c. Refusal of consignee to
1. Diligence required of common carriers
deliver
2. Liabilities of common carriers
3. Period for filing claims
3. Classification of transport network
4. Period for filing actions
vehicle services and transport network
5. Effects of stipulations
companies
E. MARITIME COMMERCE
B. VIGILANCE OVER GOODS
1. Charter parties
1. Exempting causes
a. Bareboat/demise charter
a. Requirement of absence of
b. Time charter
negligence
c. Voyage/trip charter
b. Absence of delay
2. Liability of shipowners and shipping
c. Due diligence to prevent or
agents
lessen the loss
a. Liability for acts of captain
2. Contributory negligence
b. Exceptions to limited liability
3. Duration of liability
3. Accidents and damages in maritime
a. Delivery of goods to common
commerce
carrier
a. General average
b. Actual or constructive delivery
b. Collisions and allisions
c. Temporary loading or storage
4. Carriage of Goods by Sea Act
4. Stipulation for limitation of liability
a. Application
a. Void stipulations
b. Notice of loss or damage
b. Limitation of liability to a fixed
c. Period of prescription
amount
d. Limitation of liability
c. Limitation of liability in
absence of declaration of
F. PUBLIC SERVICE ACT
greater value
1. Definition of public utility
5. Liability for baggage of persons
a. Checked-in baggage 2. Necessity for certificate of public
b. Baggage in possession of convenience
passengers a. Requisites
i. Citizenship
C. SAFETY OF PASSENGERS ii. Promotion of public
1. Void stipulations interests
2. Duration of liability iii. Financial capability
a. Waiting for carrier or boarding b. Prior operator rule
of carrier i. Meaning
b. Arrival at destination ii. Exceptions
3. Liability for acts of others iii. Ruinous
c. Employees competition
d. Other passengers and 3. Fixing of rate
strangers a. Rate of return
4. Liability for delay in the b. Exclusion of income tax as
commencement of voyage expense
5. Liability for defects in equipment and 4. Unlawful arrangements
facilities a. Boundary system
6. Extent of liability for damages b. Kabit system
Page 52 of 393
ATENEO CENTRAL
5. Approval of sale, encumbrance, or A. COMMON CARRIERS

lease of property
G. THE WARSAW CONVENTION Contract of Transportation

1. Applicability Natural or juridical persons bind themselves to
2. Limitation of liability transport persons, goods, or both for
a. Liability to passengers compensation offering their services to the public.
b. Liability for checked
passengers
Elements of a Common Carrier:
c. Liability for hand-carried
1. Persons, corporations, firms, or associations;
baggage
2. Engaged in the business of carrying or
3. Willful misconduct
transporting passengers or goods or both;
3. By land, water, or air;
4. For compensation; and
5. Offering their services to the public. (Civil
Code, Art. 1732)
Tests to Determine Whether the Entity is a

Common Carrier
1. It must be engaged in the business of
carrying goods for others as a public
employment and must hold itself out as ready
to engage in the transportation of goods
generally as a business and not as a casual
occupation;
2. It must undertake to carry goods of the kind
that to which its business is confined;
3. It must undertake to carry by the method by
which his business is conducted, and over its
established roads;
4. The transportation must be for hire. (First
Philippine Industrial Corporation v. CA, 360
Phil. 852)
The “true” test for a common carrier is not the

quantity or extent of the business actually
transacted, or the number and character of the
conveyances used in the activity, but whether the
undertaking is part of an activity engaged in by
the carrier that he has held out to the general
public as his business or occupation. (Sps.
Pereña v. Sps. Zarate, 693 Phil. 373)
Parties to the Contract of Transportation
Carriage of Passengers
a) Carrier: Party who binds himself to
transport persons, goods, or both. It may
be a common carrier or a private carrier.
b) Passenger: One who travels in a public
conveyance by virtue of an express or
Page 53 of 393
ATENEO CENTRAL
implied contract with the common carrier, to the public as ready to act for all who may desire
paying fare or what is the equivalent his/her/its services, either gratuitously or for hire.
thereof (Sps. Pereña v. Sps. Zarate, 693 Phil. 373)
Carriage of Goods Common Carriers v. Private Carriers

a) Shipper: Person who delivers the goods COMMON PRIVATE
to the carrier for transportation and pays CARRIERS CARRIERS
the consideration, or on whose behalf the Holds himself / herself Engage with
payment is made / itself for all people particular individuals
b) Carrier: (see earlier discussion) indiscriminately or groups only
c) Consignee: Party who receives the Governed by the Civil Governed by the Civil
goods or cargo. The consignee and the Code provisions Code provisions on
shipper may be the same. related to common obligations and
carriers, the Public contracts
Doctrinal Pronouncements Related to the Service Act, Code of
Determination of Common Carriers Commerce, and other
 The Civil Code does not distinguish between special laws
one whose principal activity is the carrying of regarding
goods and one who does such carrying of transportation.
goods only as an ancillary activity. (A.F. Required to exercise Only required to
Sanchez Brokerage Inc. v. CA, 488 Phil. 430) extraordinary exercise ordinary
 The Civil Code does not distinguish between diligence diligence
a person or enterprise offering transportation Common carriers are No presumption of
services on a regular or scheduled basis and presumed to be at fault or negligence is
one offering such service on an unscheduled fault or negligent in present for private
basis. (De Guzman v. CA, 250 Phil. 613) cases of losses of the carriers.
 The Civil Code does not distinguish between effects of the
a carrier offering its services to the general passengers or injuries
population and one who offers its services caused to passengers
only from a narrow segment of the general (Sps. Pereña v. Sps. Zarate, 693 Phil. 373)
population (Id.)
 A Certificate of Public Convenience is not a 1. DILIGENCE REQUIRED OF COMMON
requisite to incur liability under the Civil Code CARRIERS
provisions governing common carriers. (Id.)
 The Civil Code makes no distinction as to the Extraordinary Diligence or Responsibility of
means of transportation as long as it is done Common Carriers Regarding Passengers and
through land, water, or air. (First Philippine Goods
Industrial Corporation v. CA, 360 Phil. 852) Common carriers are required to exercise
 A carrier will be considered a common carrier extraordinary diligence both over the goods and
regardless of whether it owns the vehicle it over the safety of the passengers they are
used or has to actually hire one as long as the transporting, according to all the circumstances of
entity holds itself out to the public for each case. (Civil Code, Art. 1733)
transport of goods as a business. (Torres-
Madrid Brokerage, Inc. v. FEB Mitsui Marine The Common Carrier Is Not an Insurer of
Insurance Co., 789 Phil. 413) Absolute Safety
The common carrier is not required to exercise all
Private carriers are persons or entities who the care, skill, or diligence the human mind can
undertake to transport goods or persons from one conceive nor does it free the passenger from all
place or another by special agreement in a possible risks. (Japan Airlines v. CA, G.R. No.
particular instance only, without making the 118664, 1998)
activity a vocation or without holding himself out
Page 54 of 393
ATENEO CENTRAL
2. LIABILITIES OF COMMON CARRIERS

Transportation Network Vehicle Services
General Rule: Common carriers are liable for: (TNVS)
1. The loss, destruction, or deterioration of the Refers to TNC-accredited private vehicle owner
goods they are transporting using the internet-based technology application
 Exceptions: or digital platform technology transporting
a) Natural disaster or calamity; passengers from one point to another for
b) Act of the public enemy in war, compensation. (DOTr Order 2018-013, Sec. 2)
whether international or civil;
c) Act or omission of the shipper or TNVSs are expressly considered to be common
owner of goods carriers. Furthermore, TNVSs cannot operate as
d) The character of the goods or common carriers outside of or independent from
defects in the packaging or in the the use of internet-based technology of the TNC
containers; or TNCs to which they are accredited. (DOTr
e) Order or act of a competent Order 2018-013, Sec. 2)
public authority. (Civil Code, Art.
1734) Example: Grab and Angkas are examples of a
2. Deaths and injuries caused to passengers. TNC, while a Grab driver and Angkas rider are
(Civil Code, Art. 1756) examples of TNVS.
Disputable Presumption of Fault or

Negligence on Common Carriers B. VIGILANCE OVER GOODS
Common carriers are presumed to be or
negligent if the goods transported by them are
lost, destroyed, or deteriorated. This also applies General Rule: Common Carriers are responsible
to deaths and injuries caused to passengers. for the loss, destruction, or deterioration of the
(Civil Code, Art. 1735 & Art. 1756) goods they are transporting. (Civil Code, Art.
1734)
To overcome this presumption, the common
carrier must prove that he exercised Mere proof of delivery of goods in good order to
extraordinary diligence in transporting the goods the common carrier and the arrival of the same
and/or passengers. goods in bad order at their destination constitutes
prima facie case of fault or negligence against the
In order to prove the exercise of extraordinary carrier. (Belgian Overseas Chartering and
diligence, the carrier must do more than merely Shipping N.V. v. The Philippine First Insurance
showing the possibility that some other party Co., Inc., 432 Phil. 567)
could be responsible for the damage. (Calvo v.
UCPB General Insurance, Co., Inc., 429 Phil. 1. EXEMPTING CAUSES
244)
Common carriers are responsible for the loss,
3. CLASSIFICATION OF TRANSPORT destruction, or deterioration of the goods,
NETWORK VEHICLE SERVICES AND UNLESS the same is due to any of the following
TRANSPORT NETWORK COMPANIES causes ONLY:
(1) Flood, storm, earthquake, lightning, or other
Transport Network Companies (TNCs) natural disaster or calamity;
Persons or entities that provide pre-arranged (2) Act of the public enemy in war, whether
transportation services for compensation, using international or civil;
an internet-based technology application or (3) Act or omission of the shipper or owner of
digital platform technology to connect passengers the goods;
with drivers using their personal vehicles. (DOTr (4) The character of the goods or defects in
Order 2018-013, Sec. 1)
the packing or in the containers;
Page 55 of 393
ATENEO CENTRAL
(5) Order or act of competent public authority. A tire blow-out is not considered a fortuitous
(Civil Code, Art. 1734) event, as there are human factors involved in the
situation (Yobido v. CA, G.R. No. 113003, 1997)
NOTE: The list of exemptions is an exclusive list.
High jacking is not an exempting cause under Art.
(1) Flood, Storm, Earthquake, Lightning, or 1734. However, common carriers are not held
Other Natural Disaster or Calamity liable for the acts or events which cannot be
foreseen or are inevitable, provided that they
Conditions Required: exercised extraordinary diligence (De Guzman v.
1. Natural disaster was the proximate and CA, G.R. No. L-47822, 1988)
only cause
2. Common carrier must have exercised (2) Act of the Public Enemy In War, Whether
due diligence to prevent or minimize the International or Civil
loss before, during, and after the
occurrence of the natural disaster (Civil Conditions Required:
Code, Art. 1739) 1. Act was the proximate and only cause;
3. Common carrier not in delay. (Civil Code, 2. Common carrier must have exercised
Art. 1740) due diligence to prevent or minimize loss
before, during, and after the act; and
Requisites for Caso Fortuito (Force 3. Common carrier not in delay (Civil Code,
Majeure): Art. 1740)
1. The event must be independent of
human will; (3) Act or Omission of the Shipper or Owner
2. The occurrence must render it impossible of the Goods
for the debtor to fulfill its obligation in a
normal manner; Conditions Required:
3. The debtor must not have participated or 1. If proximate cause, exempting
aggravated the injury to the creditor; and 2. If contributory negligence, mitigating
4. The event must have been 3. Immediate protest by the carrier;
unforeseeable, or if it could be foreseen, otherwise, carrier may be in estoppel
unavoidable.
When the private respondent did furnish the
Fire cannot be considered as a natural disaster or common carrier with an inaccurate weight of the
calamity that exempts common carriers from payloader, the common carrier is nonetheless
liability. Fire will only exempt carriers if it was liable, for the damage caused to the machinery
caused by lightning or by other natural disaster or could have been avoided by the exercise of
calamity (Eastern Shipping Lines, Inc v. reasonable skill and attention on its part in
Intermediate Appellate Court, 234 Phil. 455) overseeing the unloading of such a heavy
equipment. It was the duty of its Chief Officer to
Heavy seas and rain are not causes for carriers determine the weight of heavy cargoes before
to be exempted from liability. Rather, those are accepting them (Compania Maritima v. CA, G.R.
normal occurrences that a vessel would No. 31379, 1997)
encounter (Eastern Shipping Lines, Inc v.
Intermediate Appellate Court, 234 Phil. 455) (4) The Character of the Goods or Defects in
the Packing or In The Containers
Mechanical defects are not within the ambit of a
natural disaster or fortuitous events. (Necesito v. Conditions Required:
Paras, 104 Phil. 75) 1. Exercise of due diligence to forestall or
prevent loss; and
2. Immediate protest by the carrier if the
problem with the goods or the packing or
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containers is visible; otherwise, carrier Act or omission of If owner or shipper is

may be in estoppel the shipper or owner the proximate cause,
of the goods exempting
This particular exempting cause only refers to
cases when goods are lost or damaged while in If there is contributory
transit as a result of: negligence, mitigating
a) Natural decay of perishable goods;
b) Fermentation or evaporation of substances Immediate protest by
liable therefor; carrier; else: estoppel
c) Necessary and natural wear and tear of The character of the Exercise of due
goods in transport; goods or defects in diligence to forestall
d) Defects in the packages; or the packing or in the or prevent loss
e) Natural propensities of animals. (Belgian containers
Overseas Chartering and Shipping N.V. v. Immediate protest by
Philippine First Insurance Co., Inc., 432 Phil. carrier; else: estoppel
567) Order or act of Said public authority
competent public had the power to
If the improper packaging is known to the carrier authority issue the order
or his/her/its employees or the improper
packaging is apparent under ordinary observation a. Requirement of absence of negligence
but nevertheless accepts it without protest, Art.
1734, paragraph 4 will not relieve the carrier from In order to avail the defense of natural disasters,
any liability (Calvo v. UCPB General Insurance it must be shown that the natural disaster must
Co., Inc., 429 Phil. 244) have been the proximate and only cause of the
loss, destruction, or deterioration. (Civil Code,
(5) Order or Act of Competent Public Authority Art. 1739). This defense cannot be availed then if
the carrier is negligent.
Condition Required:
1. Said public authority had the power to b. Absence of delay
issue the order. (Civil Code, Art. 1740)
A common carrier is still liable, even though the
Similar conditions: the order was lawful; or the loss, destruction, or deterioration of the goods
order was issued under legal processes of was caused by a natural disaster, when it incurs
authority. (Ganzon v. CA, 244 Phil. 644) delay in the transportation of goods. (Civil Code,
Art. 1740)
Summary Table: Art. 1734 and Defenses
CONDITIONS
DEFENSES c. Due diligence to prevent or lessen the
REQUIRED
losses
Flood, storm, Proximate and only
earthquake, lightning, cause;
Common carriers are required to exercise due
or other natural
diligence to prevent or minimize the loss,
disaster or calamity
destruction, or deterioration of the goods in the
Act of the public Exercise of diligence
following exempting causes:
enemy in war, to prevent or minimize
1. Natural disasters
whether international loss; and
2. Acts of public enemy in war
or civil
3. Character of the goods or defects in the
No delay
packaging or in the containers
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2. CONTRIBUTORY NEGLIGENCE constructive delivery. After all, the issuance of

a bill of lading is prima facie evidence of the
If the shipper/owner contributed to the loss, receipt of the goods by the carrier (Saludo v. CA,
destruction, or deterioration of the goods caused G.R. No. 95536)
proximately by the common carrier, the carrier’s
liability shall be equitably reduced. (Civil Code, c. Temporary unloading or storage
Art. 1741)
General Rule: Common carriers are still required
3. DURATION OF LIABILITY to exercise extraordinary diligence over the
goods, even if the goods are temporary unloaded
Common carriers are required to exercise or stored in transit.
extraordinary diligence over the goods to be
transported: Exception: Common carriers are not required to
 From the time the goods are unconditionally exercise extraordinary diligence anymore if the
placed in the possession of and received by shipper/owner has made use of their right of
carrier until the goods are delivered, actually stoppage in transitu. (Civil Code, Art. 1737)
or constructively, to the consignee or to the
person who has a right to receive them and a Stoppage In Transitu
reasonable time is given to remove the Right of an unpaid seller to stop delivery and
goods. (Civil Code, Art. 1736; Nedlloyd B.V. regain possession of the goods while they
Rotterdam v. Glow Laks, G.R. No. 156330, are in transit to the buyer who has been
2014) declared bankrupt/insolvent.
 Even when the goods are temporarily
unloaded or stored in transit, unless the 4. STIPULATION FOR LIMITATION OF
shipper used right of stoppage in transit. LIABILITY
 Even during the time of the storage at the
warehouse of the common carrier at place of Degree less than extraordinary diligence
destination, until consignee is advised of the The Common carrier and the shipper/owner can
goods’ arrival and has had opportunity to stipulate in limiting the carrier’s liability for the
remove or dispose them. loss, destruction, or deterioration of the goods to
be transported to a degree less than
a. Delivery of goods to common carrier extraordinary diligence. This stipulation is valid if
it is:
The fact that only a portion of the goods had been 1. In writing, signed by the shipper or
delivered and loaded to the carrier does not owner;
impair the contract of carriage, as the goods still 2. Supported by a valuable consideration
remained in the custody and control of the carrier. other than the service rendered by the
(Ganzon v. CA, 244 Phil. 664) carrier; and
3. Reasonable, just, and not contrary to
b. Actual or constructive delivery public policy (Civil Code, Art. 1744)
Actual delivery is when possession has been Other Stipulations Limiting Liability of
turned over to the consignee or to his duly Common Carrier
authorized agent and a reasonable time is given A stipulation limiting the common carrier’s liability:
to him to remove the goods (Westwind Shipping a) May be annulled by the shipper/owner if the
Corporation v. UCPB General Insurance Co., carrier refused to carry the goods, unless the
Inc., 722 Phil. 38) shipper/owner agreed to such stipulation
(Civil Code, Art. 1746)
Delivery of the bill of lading to the consignee or b) Cannot be availed of if the common carrier,
any person who has a right to receive the goods without just cause, delays the transportation
under the bill of lading can be considered as a of the goods or changes the stipulated or
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usual route in cases of loss, destruction, or (7) That the common carrier is not responsible
deterioration of the goods. (Civil Code, Art. for the loss, destruction, or deterioration of
1747) goods on account of the defective condition
c) For delay on account of strikes or riots is of the car, vehicle, ship, airplane or other
valid. (Civil Code, Art. 1748) equipment used in the contract of carriage.
d) To the value of the goods appearing in the bill (Civil Code, Art. 1745)
of lading is valid, unless the shipper/owner
declares a greater value. (Civil Code, Art. b. Limitation of liability to a fixed amount
1749)
A contract can fix the sum that may be recovered
Determination if stipulation is within public by the shipper/owner in case of loss, destruction,
policy or deterioration of the goods. It must be:
The fact that the common carrier has no 1. Reasonable and just under the
competitor along the line or route, or a part circumstances; and
thereof, to which the contract refers shall be taken 2. Fairly and freely agreed upon. (Civil
into consideration on the question of whether a Code, Art. 1750)
stipulation limiting the common carrier's liability is
reasonable, just and in consonance with public c. Limitation of liability in absence of
policy. (Civil Code, Art. 1751) declaration of greater value
NOTE: Presumption of negligence against the General Rule: A stipulation limiting the carrier’s
carrier in cases of loss, destruction, or liability to the value of the goods appearing in the
deterioration of the goods is still present despite bill of lading is valid.
stipulations limiting liability. (Civil Code, Art.
1752.) Exception: Unless the shipper/owner declares a
greater value. (Civil Code, Art. 1749)
a. Void Stipulations
5. LIABILITY FOR BAGGAGE OF PERSONS
The following are void stipulations in a contract of
carriage for being unreasonable, unjust, and a. Checked-in baggage
contrary to public policy:
(1) That the goods are transported at the risk of Checked-in baggage is considered “goods” and
the owner or shipper; the passenger is considered the
(2) That the common carrier will not be liable for shipper/consignee. Thus, extraordinary
any loss, destruction, or deterioration of the diligence is required. (Civil Code, Art. 1754)
goods;
(3) That the common carrier need not observe b. Baggage in possession of passengers
any diligence in the custody of the goods;
(4) That the common carrier shall exercise a
Hand-carried baggage are considered items of
degree of diligence less than that of a good
necessary deposit. Common carriers shall be
father of a family, or of a man of ordinary
treated as depositaries. Thus, only ordinary
prudence in the vigilance over the movables
diligence is required. (Civil Code, Art. 1754)
transported;
(5) That the common carrier shall not be
Inspection Duties
responsible for the acts or omission of his or
General Rule: Carrier may only inquire into the
its employees;
nature of the passenger’s baggage, but not
(6) That the common carrier's liability for acts
search nor inspect its contents Inquiry may be
committed by thieves, or of robbers who do
made as to the nature of passengers’ baggage,
not act with grave or irresistible threat,
but beyond this, constitutional boundaries are
violence or force, is dispensed with or
already in danger of being transgressed (Nocum
diminished;
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v. Laguna Tayabas, G.R. No. L-23733, October Presumption of negligence applies so long as:
31, 1969). 1. A contract exists between the passenger
and the common carrier; and
Exception: Airline companies are required to 2. The injury or death took place during the
inspect each and every cargo brought into the existence of the contract (Sulpicio Lines,
aircraft (R.A. No. 6235, Sec. 8) Inc. v. Sesante, G.R. No. 172682)
Hand-Carried Baggage v. Checked-in Defenses available to common carriers

Baggage 1. Proof that they exercised extraordinary
HAND- CHECK-IN diligence; or
CARRIED 2. Proof that the injury or death was caused by
Applicable Civil Code, Civil Code, a fortuitous event. (Sanico v. Colapino, G.R.
Rule Arts. 1998, Arts. 1733- No. 209969)
2000-2003 1753
Legal Necessary Goods In order for a common carrier to be absolved of
Nature of deposit liability for accidents caused by fortuitous events,
Baggage the common carrier must still prove that it is not
Diligence Ordinary Extraordinary negligent in causing the injuries resulting from the
Required diligence diligence accident (Bachelor Express v. CA, 266 Phil. 233)
The presumption of negligence will not apply if the

injury of the passenger was not caused by any
C. SAFETY OF PASSENGERS defect in the means or method of transport or to
the negligent or willful acts of the common
carrier’s employees. (G.V. Florida Transport, Inc.
Common Carriers are bound to carry passengers v. Heirs of Battung, G.R. No. 208802)
as far as human care and foresight can provide,
using the utmost diligence of very cautious
persons, with a due regard for all the
1. VOID STIPULATIONS
circumstances. (Civil Code, Art. 1755)
General Rule: A common carrier’s liability cannot
be dispensed with or lessened by stipulation,
Despite the requirement of the exercise of the
posting of notices, statements on tickets, or
highest degree of diligence, common carriers
otherwise. A reduced fare also cannot justify
should not be considered as insurers of the limited liability. (Civil Code, Art. 1757 & 1760)
absolute safety of the passengers (Pilapil v. CA,
259 Phil. 1031)
Exception: If the carriage is gratuitous or for free,
a stipulation limiting liability is valid.
Passenger
One who travels in a public conveyance by virtue Exception to the Exception: The stipulation
of an express or implied contract with the
limiting liability does not cover a carrier’s willful
common carrier paying fare or what is equivalent acts or gross negligence. (Civil Code, Art. 1758)
thereof. (Jesusa Vda. De Nueca v. Manila
Railroad Company, G.R. No. 31731-R, 1968)
NOTE: Moral damages may be recovered in an
action for breach of contract of carriage when
Presumption of Negligence
death results. Even if the passenger does not die,
Common Carriers are presumed to be negligent the passenger can recover moral damages if the
in cases of death or injuries to passengers, unless
carrier is guilty of fraud or bad faith. However,
they prove extraordinary diligence. (Civil Code,
only the passenger is entitled to moral damages
Art. 1756)
not anyone else.
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2. DURATION OF LIABILITY For passengers of ships, the SC has ruled that a

reasonable time to leave and pick up baggage is
The duty to exercise extraordinary diligence an hour after arrival (Id.)
commences when the passenger places himself
in the care and control of the common carrier who
accepts him/her as a passenger 3. LIABILITY FOR ACTS OF OTHERS
NOTE: Do not confuse perfection of the contract a. Employees

of carriage with the commencement of the duty to
exercise extraordinary diligence. The contract of Common carriers are liable for the death or
carriage may be perfected in January while the injuries to passengers through its employees’
duty to exercise extraordinary diligence may only negligence or willful acts. This liability exists even
start or commence in March. if the employees may have acted beyond the
scope of their authority or in violation of their
a. Waiting for carrier or boarding of carrier orders of the common carriers. (Civil Code, Art.
1759)
A public vehicle, once it stops, is in effect making
a continuous offer to prospective passengers. A Common carrier’s liability to the acts or
Hence, it becomes the duty of the drivers and negligence of its employees will be extinguished
conductors to do no act which would have the if it is able to show diligence of a good father of a
family in the selection and supervision of its
effect of increasing the peril to a passenger while
he/she was attempting to board the vehicle. employees. (Civil Code, Art. 1759)
(Dangwa Transportation Co., Inc. v. CA, 278 Phil.
629) Art. 1759 of the Civil Code does not establish a
presumption of negligence similar to Art. 1756.
It is the duty of common carriers to stop their Instead, it makes the common carrier explicitly
conveyances at a reasonable length of time in liable for deaths and injuries caused by the fault
order to afford the passengers an opportunity to or negligence of the carrier’s employees.
(Sulpicio Lines, Inc. v. CA, G.R. No. 172682)
board and enter. Carriers become liable for
injuries suffered by boarding passengers
resulting from the starting up or jerking of the b. Other passengers and strangers
vehicle while boarding. (Id.)
Common Carriers are responsible for injuries to
b. Arrival at destination passengers caused by other passengers or
strangers if the carrier’s employees could have
prevented or stopped the act causing the injury
The duty to exercise extraordinary diligence
through the exercise of the diligence of a good
terminates, when the passenger alights from the
father of a family. (Civil Code, Art. 1763)
vehicle at the place of destination and has
reasonable opportunity to leave the common
Common carriers should be given sufficient
carrier’s premises. (Aboitiz Shipping Corporation
leeway in assuming that the passengers they
v. CA, 258-A Phil. 665)
take in will not bring in anything that would prove
dangerous to himself/herself or to other
All persons who remain on the premises a
passengers unless there is something that will
reasonable time after leaving the conveyance are
require a more stringent search. (Nocum v.
deemed passengers. What constitutes as a
Laguna Tayabas Bus Company, 140 Phil. 459)
“reasonable time” is to determined from all the
circumstances, which includes a reasonable time
to see after his/her baggage and prepare for
his/her departure. (Id.)
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4. LIABILITY FOR DELAYS IN THE Rule on Moral Damages

COMMENCEMENT OF VOYAGE General Rule: Moral damages are not
recoverable in actions for damages predicated on
If the departure of a vessel is delayed, the a breach of contract of carriage.
passengers have the right to:
1. Remain on board; and Exceptions: Moral Damages may be awarded in
2. Be furnished with food for the account of the a breach of contract caused by the common
vessel. (Code of Commerce, Art. 698) carrier where:
1. There is death of a passenger (Civil
These rights will not be present if the delay is due Code, Art. 1764) or
to an accidental cause or force majeure. (Code 2. The carrier was guilty of fraud or bad faith
of Commerce, Art. 698) even if there is no death. (Sulpicio Lines,
Inc. v. Curso, G.R. No. 157009)
If the delay exceeds ten days, the passengers
are entitled to:
1. The return of the passage, should the D. BILL OF LADING
passengers request it; and
2. Demand indemnity for losses and damages,
if the delay is caused exclusively by the A Bill of Lading is a written acknowledgment of
captain or agent. (Code of Commerce, Art. the receipt of the goods and an agreement to
698) transport and deliver them at a specified place to
a person named or on his/her order. It is signed
5. LIABILITY FOR DEFECTS IN by the captain and shipper, and furnished to the
EQUIPMENT AND FACILITIES consignee (Saludo, Jr. v. CA)
The carrier will be liable for the accident if the NOTE: It is not indispensable to the creation of a
cause of the accident is a mechanical defect of contract of carriage. The contract itself arises
the conveyance or the fault of the equipment from the moment the goods are delivered by the
which was easily discoverable if the vehicle had shipper to the carrier and the carrier agrees to
been subjected to more thorough or rigid carry them.
inspections. (La Mallorca v. De Jesus, 123 Phil.
857) The bill of lading must state:
(1) The name, registry, and tonnage of the
6. EXTENT OF LIABILITY FOR DAMAGES vessel;
(2) The name of the captain and the captain’s
Damages can be awarded in cases of injuries domicile;
suffered by or deaths of passengers in (3) The port of loading and unloading;
accordance to the provisions of the Civil Code on (4) The name of the shipper;
Damages. (Civil Code, Art. 1764) (5) The name of the consignee, if the bill of lading
is issued to order;
Kinds of Damages (6) The quantity, quality, number of packages,
(1) Actual or Compensatory Damages and marks of the merchandise; and
(2) Moral Damages (7) The freight and the primage stipulated (Code
(3) Exemplary Damages of Commerce, Art. 706)
(4) Nominal Damages
(5) Temperate Damages 1. THREE-FOLD CHARACTER
(6) Liquidated Damages
(7) Attorney’s Fees A bill of lading serves three purposes:
1. It is receipt of the goods shipped;
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The issuance of a bill of lading carries the

presumption that the goods were delivered to b. Delivery without surrender of bill of
the carrier issuing the bill and is prima facie lading
evidence of the receipt of the goods by the
carrier (Saludo v. CA, G.R. No. 95536) The surrender of the bill of the original bill of
lading is not a condition precedent for a common
2. It is a contract between the parties; and carrier to be discharged of its contractual
obligation.
The acceptance of a paper containing the
terms of a proposed contract generally If the surrender is not possible,
constitutes an acceptance of the contract and acknowledgment of delivery by singing the
all of its terms and conditions of which the delivery receipt suffices. (Republic of the
acceptor has actual or constructive notice. Philippines v. Lorenzo Shipping Corporation, 491
(Keng Hua Paper Products, Co., Inc. v. CA, Phil. 151)
349 Phil. 925)
c. Refusal of consignee to take delivery
3. It is a symbolic representation of the
goods, i.e., it is a document of title Instances When Consignee Can Refuse to
Accept the Goods
In the charter of the entire vessel, the bill of a. Only a PART of the goods are delivered and
lading issued by the master to the charterer it cannot make use of the goods without the
is in fact a receipt and document of title, not a others (Code of Commerce, Art. 363)
contract. (Home Insurance v. American
b. If the goods are DAMAGED and thus
Steamship Agencies, Inc., 131 Phil. 552)
rendered useless for the purposes of sale or
consumption. In this instance, the consignee
2. DELIVERY OF GOODS may leave the goods to the carrier and
demand payment for the goods at its current
Common carriers are obliged to deliver the goods market price (Code of Commerce, Art. 365)
in the same condition which they were at the time c. When there is DELAY on account of the fault
of their receipt, without any detriment or
of the carrier. This is considered to be an
impairment. (Code of Commerce, Art. 363) abandonment. In this case, the carrier shall
satisfy the total value of the goods as if the
This obligation will not apply if the goods
goods were lost or misplaced. (Code of
suffered damage or impairment: Commerce, Art. 371)
1. Due to accidents;
2. Due to force majeure; or
3. By virtue of the nature or defect of the
3. PERIOD FOR FILING CLAIMS
goods (Code of Commerce, Art. 363 &
The period of filing of claims will depend on
Code of Commerce, Art. 361)
whether the damage or average can be
determined from the exterior of the packaging:
a. Period of delivery  If the damage CAN BE ASCERTAINED
from the exterior of the packaging –
The period of delivery will depend on what is Claims should be filed upon the receipt of the
provided on the bill of lading. package;
 No fixed period – First shipment of the same  If the damage CANNOT BE ASCERTAINED
or similar goods which the carrier may make from the exterior of the packaging –
to the point of delivery. (Code of Commerce, Claims should be filed within twenty-four (24)
Art. 358) hours following the receipt of the goods.
 Stipulated period – Within the period
provided in the bill of lading. (Code of
Commerce, Art. 370)
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No claims shall be admitted against the Common was agreed upon, the carrier must select the
carrier with regard to the condition of the goods shortest, least expensive, and practically
after the lapse of these periods. (Code of passable route. (Id.)
Commerce, Art. 366)
Change in the Consignment of Goods
Claims are conditions precedent to the accrual The shipper may change the consignment of the
of a right of action to recover damages. (Southern goods delivered to the common carrier as long as
Lines, Inc. v. CA, 114 Phil. 198) the place of delivery is not changed. The change
is considered a novation. The carrier shall comply
4. PERIOD FOR FILING ACTIONS with this change, provided that the bill of lading be
returned to the carrier at the time of the making
Actions relating to the delivery of cargo or to the the change of the consignee. (Code of
indemnity for delays and damages suffered by Commerce, Art. 360)
the goods transported prescribe after one (1)
year. All expenses arising from the change of
consignment shall be shouldered by the shipper.
The prescriptive period will be counted from: (Code of Commerce, Art. 360)
1. The day of delivery of the cargo at the place
of its destination; or
2. From the day on which it should be delivered E. MARITIME COMMERCE
according to the conditions of its
transportation. (Code of Commerce, Art. 952)
1. CHARTER PARTIES
Claim vs. Suit
CLAIM File a CLAIM against the carrier: A Charter Party is a contract by virtue of which
 Upon receipt of the goods; or the owner or the agent of a vessel binds himself
 Within 24 hours following the to transport merchandise or persons at a fixed
receipt of the merchandise price. (San Miguel Corporation v. Heirs of Inguito,
SUIT The CLAIM is a condition precedent 433 Phil. 428)
to the filing of a SUIT.
A Charter Party may either be:
The consignee shall file a SUIT 1. Bareboat or demise charters; or
within 1 year from either: 2. Contracts of affreightment, which includes
 Delivery of the goods; or time charters and voyage charters. (San
 Denial of the claim Miguel Corporation v. Heirs of Inguito, 433
Phil. 428)
5. EFFECTS OF STIPULATIONS
a. Bareboat/demise charter
Change of Route
General Rule: Common carriers cannot change Under a Bareboat/Demise Charter, the charterer
the agreed route to which the transportation is to mans the vessel with his own people and
be made. (Code of Commerce, Art. 359) becomes, in effect, the owner of the ship for the
voyage or service stipulated, subject to the
Exception: When the carrier is obliged to change liability for damages caused by negligence. (San
its route due to force majeure. If the transportation Miguel Corporation v. Heirs of Inguito, 433 Phil.
costs increase in such an instance, the carrier 428)
shall be reimbursed for the increase. (Id.)
NOTE: If the carrier changes its route without just

cause, the carrier shall be liable to pay damages
suffered by the goods for any cause. If no route
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General Categories or Kinds of Charter Party d. Supercargo — the person specially

DEMISE / CONTRACT OF employed by the owner of cargo to take
BAREBOAT AFFREIGHTMENT charge of and sell to the best advantage
The charterer mans The owner of a vessel merchandise which has been shipped, and to
the vessel with its leases the whole or purchase returning cargoes and to receive
own people, and is part of its space to freight
considered the owner haul goods for
pro hac vice (for this another. a. Liability for acts of captain
occasion only).
The ship owner and ship agent shall be civilly
Owner completely Owner retains liable for the:
and exclusively possession, 1. Acts of the captain; and
relinquishing command, and 2. The obligations contracted by the captain to
possession, navigation of the ship. repair, equip, and provision the vessel,
command, and provided the creditor proves that the amount
navigation to the claimed was invested therein. (Code of
charterer. Commerce, Art. 586)
Charterer is liable for Shipowner is liable for
damages damages The ship agent shall also be civilly liable for the
Carrier is converted Carrier remains as indemnities in favor of third persons which arose
to private carrier – common carrier – from the conduct of the captain in the care of the
ordinary diligence extraordinary goods. However, the agent may exempt himself
diligence from this liability by abandoning the vessel with
all her equipment and the freight he may have
b. Time charter earned during the voyage. (Code of Commerce,
Art. 587)
The leased vessel is leased to the charterer for a
fixed period of time. (San Miguel Corporation v. When Ship Owner/Ship Agent is NOT Liable
Heirs of Inguito, 433 Phil. 428) The ship owner and ship agent shall NOT be
liable for obligations contracted by the captain
c. Voyage/trip charter which exceeds the powers and privileges granted
to the latter. However, the owner and agent will
The ship is leased for a single voyage. (San be again liable if the amounts claimed were used
Miguel Corporation v. Heirs of Inguito, 433 Phil. for the benefit of the vessel. (Code of Commerce,
428) Art. 588)
2. LIABILITY OF SHIPOWNERS AND b. Exceptions to limited liability

SHIPPING AGENTS
Limited Liability Rule
Persons Participating in Maritime Commerce General Rule: The liability of the ship owner is
a. Ship owner and/or ship agent – the ship limited to the value of the vessel, its equipment,
agent is the person entrusted with the and freight. The rule is “no vessel, no liability.”
provisioning of a vessel or who represents (Code of Commerce, Art. 837)
her in the port in which she may be found
b. Captain or Master — the person in charge of Exceptions:
the vessel and navigates it. The captain also 1. The injury or death is due either to the fault of
acts as the general agent of the ship owner. the shipowner or to the concurring negligence
c. Other officers of the vessel (i.e. sailing of the shipowner and captain
mate, second mate, third mate, marine 2. The vessel is insured
engineer)
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3. Workmen’s Compensation Cases (Chua Yek

Hong v. Intermediate Appellate Court, 248 This shall be borne by the owner of the goods
Phil. 422) which gave rise to the expense or suffered
the damage. (Code of Commerce, Art. 810)
Who Can Exercise the Right of Abandonment
General Rule: Only the ship owner and the ship 2. General or Gross Average – The expenses
agent can make an abandonment. and damages which are deliberately caused
in order to save the vessel, her cargo, or
Exception: in cases of co-ownership of a vessel, both at the same time, from a real known
a co-owner may exempt himself from liability by risk. (Code of Commerce, Art. 811)
the abandonment of the part of the vessel
belonging to him. This shall be borne by all persons having an
interest in the vessel and cargo at the time of
Abandonment may be done to avoid liability the occurrence of the average. (Code of
in the following cases: Commerce, Art. 812)
a. For civil liability to third persons arising from
the conduct of the captain in the vigilance To incur the expenses and cause of damages
over the goods which the vessel carried; as general/gross average, there must be:
b. For the proportionate contribution of co- 1) A resolution of the captain, adopted after
owners of the vessel to a common fund for deliberation with the sailing mate and
the results of the acts of the captain referred other officers of the vessel; and
to in Art. 587 of the Code of Commerce; and 2) A hearing with the persons interested in
c. For the civil liability incurred by the ship the cargo who may be present. (Code of
owner in case of collision. Commerce, Art. 813)
3. ACCIDENTS AND DAMAGES IN b. Collisions and allisions

MARITIME COMMERCE
Collisions – The impact of two or more vessels,
a. General Average both of which are moving.
Averages are: Allisions – The impact between a moving vessel

1. All extraordinary or accidental expenses against a stationary object.
which may be incurred during the navigation
for the preservation of the vessel or cargo, or Zones of Collision and the Doctrine of Error in
both; or Extremis:
2. All damage or deterioration the vessel may 1. First Zone – All the time up to the moment
suffer from the time she puts to sea from the the risk of collision begins;
port of departure until she casts anchor in the 2. Second Zone – All the time from the moment
port of destination, and those suffered by the the risk of collision begins up to the moment
merchandise from the time it is loaded in the the collision becomes a practical certainty;
port of shipment until it is unloaded in the port and
of consignment. (Code of Commerce, Art. 3. Third Zone – All the time when the collision
806) is certain up to the point of impact. (A. Urrutia
Co v. Baco River Plantation Co., 26 Phil. 632)
Averages shall either be:
1. Simple or Particular Average – The Doctrine of Error in Extremis
expenses and damages caused to the vessel A sudden movement by a faultless vessel during
or to her cargo which have not redounded to the third zone of collision with another vessel
the benefit of all persons interested in the which is at fault during the second zone of
vessel and her cargo. (Code of Commerce, collision will not make the faultless vessel
Art. 809) responsible for any fault due to the sudden
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movement. (A. Urrutia Co v. Baco River account of the owners, the part of the wreck which
Plantation Co., 26 Phil. 632) may be saved belonging to them in the same
proportion. (Code of Commerce, Art. 840)
Rules Governing Collisions
(1) If a vessel collides with another through the Exception: If the wreck or stranding should arise
fault, negligence, or lack of skill of the through the malice, negligence, or lack of skill of
captain, sailing mate, or any other member of the captain, or because the vessel put to sea
the crew, the owner of the vessel at fault shall insufficiently repaired and prepared, the owner or
be liable for the suffered losses and damages the freighters may demand indemnity of the
after appraisal (Code of Commerce, Art. 826) captain for the damages caused to the vessel or
(2) If both colliding vessels are at fault, each cargo by the accident. (Code of Commerce, Art.
vessel shall be liable for its own damages. 841)
Moreover, both vessels shall be solidarily
liable to the damages suffered by their Maritime Protest
cargoes. (Code of Commerce, Art. 827) It is a written statement under oath, made by the
(3) If it cannot be determined which of the two master of a vessel, after the occurrence of an
vessels are at fault, it will be considered as if accident or disaster in which the vessel or cargo
both vessels are at fault. Therefore, both is lost or injured, with respect to the
vessels shall be liable for their own damages circumstances attending such occurrence.
but solidarily liable for the damages suffered
by their cargoes. This is also called as the It is intended to show that the loss or damage
Doctrine of Inscrutable Fault. (Code of resulted from a peril of the sea, or some other
Commerce, Art. 828) cause for which neither master nor owner was
(4) If a vessel is forced to collide with another by responsible, and concludes with a protest against
reason of accident or force majeure, each any liability of the owner for such loss or damage.
vessel shall be liable for their own damage.
(Code of Commerce, Art. 830) It is a condition precedent or prerequisite to
(5) If a vessel is forced to collide with another by recovery of damages arising from collisions and
a third vessel, the owner of the third vessel other maritime accidents (Code of Commerce,
shall indemnify all losses and damages Art. 835)
caused. The captain of the third vessel will
then be liable to the owner of the third vessel.  Made By Whom: Captain
(Code of Commerce, Artlcle 832)  When Made: Within 24 hours from the time
(6) If a storm or force majeure forces a properly the collision took place (Code of Commerce,
anchored and moored vessel to collide with Art. 835); Upon arrival at the place of
other vessels in her immediate vicinity, the destination, the captain shall ratify the protest
damages caused shall be considered as a within 24 hours.
simple/particular average. (Code of  Before Whom Made: Competent authority at
Commerce, Art. 832) the point of collision or at the first port of
arrival, if in the Philippines and to the
Shipwreck Philippine consul, if the collision took place
It covers all types of loss/wreck of a vessel at sea abroad (Code of Commerce, Art. 835)
either by being swallowed up by the waves or by
running against another vessel or thing at sea or Maritime Protest is Required In The Following
at the coast and the vessel is rendered incapable Cases:
of navigation. a. Collision;
b. Arrival under stress
Liability in Shipwrecks c. Shipwreck; and
General Rule: The losses and deteriorations d. In case the vessel has gone through a
suffered by a vessel and her cargo by reason of hurricane or when the captain believes
shipwreck or stranding shall be individually for the that the cargo has suffered damages.
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Salvor takes Tower has no

Maritime Protest shall also be done if the vessel possession and may possessory lien; only
having been wrecked, the captain is saved alone retain possession an action for recovery
or with part of the crew, in which case, the captain until of sum of money
shall appear before the nearest authority and he is paid
make a sworn statement of the facts. Court has power to Court has no power to
reduce the amount of change amount in
Salvage - it is the compensation allowed to remuneration if towage even if
persons by whose voluntary assistance a ship at unconscionable unconscionable
sea or her cargo or both have been saved in
whole or in part from an impending peril, or such 4. CARRIAGE OF GOODS BY SEA ACT
property recovered from actual peril or loss.
a. Application
In case of shipwreck, derelict or recapture; a
service which one person renders to the owner of The COGSA is the applicable law for all contracts
a ship or goods by his own labor, preserving the of carriage by sea to and from the Philippines in
goods or ship which the owner or those entrusted foreign trade. (COGSA, Sec. 1 & Cua v. Wallem
with the care of them either abandoned in distress Philippines Shipping, Inc., 690 Phil. 491)
at sea or are unable to protect and secure.
However, it may also apply to domestic trade
Derelict provided there is a Paramount Clause in the
It is a ship or cargo which is abandoned and contract.
deserted at sea by those who are in charge of it,
without any hope of recovering it, or without any Paramount Clause - a stipulation or clause
intention of returning to it. either on the bill of lading or charter party
stipulating the laws that the parties agreed to
Elements of a Valid Salvage be used of that particular transport.
1. A marine peril
2. Service voluntarily rendered when not Responsibility of the Carrier under the
required as an existing duty or from COGSA
special contract The responsibility of the carrier begins when the
3. Success, in whole or in part, or that the goods are brought to the carrier and crosses one
services rendered contributed to such side of the vessel (portside). It ceases only when
success (Barrios vs. Go Thong, G.R. No. the goods cross the other side (starboard side).
L-17192, 1963) This is also known as the “tackle to tackle” rule.
Contract of Towage Requisites of Contracts Covered by COGSA

A contract to render service whereby a vessel e. Contracts for the carriage of goods
pulls or tows another from one place to another f. By sea
for compensation. It is not a contract of carriage g. To and from Philippine ports
or transportation. Only the owner of the towing h. In foreign trade
vessel can ask for compensation.
Shipper’s Guaranty upon Delivery of the
Salvage v. Towage Goods to Carrier for Shipment
SALVAGE TOWAGE The shipper guarantees at the time of shipment
Crew of salvaging Crew of the towing the accuracy of the marks, number, quantity and
ship is entitled to ship does not have weight of the goods. The shipper shall indemnify
salvage, and can look any interest or rights the carrier against all losses, damages and
to the salvaged vessel with the remuneration expenses arising from errors or inaccuracies.
for its share pursuant to the
contract
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The carrier shall be bound before and at the In such instances, the Civil Code rules on
beginning of the voyage, to exercise due prescription shall apply.
diligence to:
1. Make the ship seaworthy c. Period of prescription
2. Properly man, equip, and supply the ship
3. Make the holds, refrigerating and cooling Actions must be brought within one (1) year after:
chambers, and all other parts of the ship 1. Delivery of the goods; or
in which goods are carried, fit and safe 2. The date when the goods should have been
for reception, carriage and, preservation. delivered. (COGSA, Sec. 3[6])
b. Notice of loss or damage Failure to file within the prescriptive period will
discharge the common carrier and the vessel
When there is loss or damage of the goods, there from liability. (COGSA, Sec. 3[6])
must be a written notice that provides:
1. The general nature of such loss or However, the shipper shall not lose the right to
damage initiate an action against the carrier or the vessel
2. Given to the carrier or his agent if no notice of loss or damage is given. (COGSA,
3. At the port of discharge or at the time of Sec. 3[6])
the removal of the goods.
When The One-Year Period In COGSA Is
If the loss or damage is not apparent, the notice Interrupted:
must be given within 3 days from delivery. The a. When an action is filed in court; (Universal
notice of loss or damage may be endorsed upon Shipping Lines v. IAC, G.R. No. 74125,
the receipt for the goods given by the person 1990); and
taking delivery thereof. b. When there is a contrary agreement between
the parties. (Stevens v. Norddeuscher, G.R.
The notice or writing need not be given if the No. L-17730, 1962)
state of the goods at the time of their receipt has
been the subject of Joint Survey Inspection. d. Limitation of liability
(COGSA, Sec. 3(6))
Carriers and vessels shall be liable for any loss or
Under COGSA, the filing of a notice of claim is damage in connection with the transportation of
NOT a condition precedent to filing a suit goods. However, such liability is limited to:
(UCPB v. Aboitiz Shipping G.R. No. 168433, 1. Maximum of $500 per package or, if not
2009) shipped in packages, per customary freight
unit (e.g. metric ton).
“Loss” contemplates merely a situation where 2. Carriers and vessels will be subject to greater
no delivery at all was made by the shipper of the liability if the nature and value of goods are
goods because the same had perished, gone out declared by shipper and inserted in bill of
of commerce, or disappeared in much a way that lading; declaration is prima facie evidence
their existence is unknown or they cannot be and not conclusive on carrier.
recovered. 3. Shipper and carrier may agree on another
It does not include a situation where: maximum amount, but not more than amount
 There was indeed delivery — but delivery of damage actually sustained. The fixed
to the wrong person, or a misdelivery maximum amount must also not be less than
(Ang. V. American Steamship, G.R. No. $500 per package/per customary freight unit.
L-22491, 1967) (COGSA, Sec. 6 [5])
 Damage arising from delay or late
delivery (Mitsui O.S.K. Lines v. CA, G.R.
No. 119571, 1998).
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F. PUBLIC SERVICE ACT Repormang Samahan ng mga Tsuper v. City of

Mandaluyong, G.R. No. 218593, [June 15, 2020])
1. DEFINITION OF PUBLIC UTILITY No public utility or public service shall

operate in the Philippines without securing a
The term “public utility” includes: Certificate of Public Convenience/Certificate
1. Every individual, co-partnership, association, of Public Convenience and Necessity. (Public
corporation, or joint-stock company, whether Service Act, Sec. 15)
domestic or foreign, their lessees, trustees, or
receivers appointed by any court whatsoever, A certificate of public convenience does not vest
or any municipality province or other property rights to its holder to conduct business
department of the Government of the along the route covered in it. It is a mere license
Philippines; or privilege. (Bagong Repormang Samahan ng
2. That may own, operate, manage, or control in mga Tsuper v. City of Mandaluyong, G.R. No.
the Philippines, for hire or compensation, any 218593, 2020)
common carrier, railroad, street railway,
traction railway, subway, freight, and/or This privilege is subject to compliance with local
passenger motor vehicles, with or without traffic regulations because the Land
fixed route, freight or any other car service, Transportation Franchising and Regulatory
express service, steamboat or steamship Board's (LTFRB) authority to issue such
line, ferries, small water craft; certificates is only supplemental to the right of
3. Engaged in the business of transportation of local governments to control and regulate traffic
passengers or cargo, shipyard, marine in their localities. (Id.)
railway, marine repair shop, public
warehouse, wharf, dock not under the a. Requisites
jurisdiction of the Insular Collector of
Customs, ice, refrigeration, canal, irrigation, Before a certificate to operate a public service or
pipe line, gas, electric, light, heat, power, utility may be granted, the applicant must comply
water, oil, sewer, telephone, wire or wireless with three requisites:
telegraph system, plant or equipment, and 1. The applicant must be a citizen of the
broadcasting stations; Philippines, or a corporation, co-partnership,
4. Whether the owner or operator be an association, joint stock company constituted
individual, co-partnership, association, and organized under the laws of the
corporation, or joint-stock company, either Philippines 60% at least of the stock or paid-
domestic or foreign, or a trustee or receiver up capital of which entirely belongs to citizens
appointed by any court whatsoever, or any of the Philippines;
municipality, province, or department of the 2. The applicant must be financially applicable
Government of the Philippines, or any other of undertaking the proposed service and
entities. (Public Service Act, Sec. 14) meeting the responsibilities incident to its
operation; and
What constitutes as public utility is not the 3. The applicant must prove that the operation
ownership thereof but their use or service to the of the public service will promote the public
public. (Tatad v. Garcia, 313 Phil. 296) interest in a proper and suitable manner.
(Vda. de Lat v. Public Service Commission,
2. NECESSITY FOR CERTIFICATE OF 241 Phil. 973)
PUBLIC CONVENIENCE
i. Citizenship
Certificate of Public Convenience
It is a permit authorizing operations of land Certificates of Public Convenience/Certificates of
transportation services for public use. (Bagong Public Convenience and Necessity will be
granted only to:
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1. Citizens of the Philippines; or 1. The Certificate of Public Convenience

2. Corporations, co-partnerships, associations, granted to the new operator is a maiden
or joint stock companies constituted and certificate (Mandbusco, Inc. v. Francisco, 143
organized under the laws of the Philippines, Phil 372)
60% of which is owned by Filipinos. (Public 2. The old operator does not offer to meet the
Service Act, Sec. 16 [a]) increase in traffic (Isidro v. Ocampo, 105 Phil.
911)
While the Public Service Act initially allowed 3. The old operator violated the law, in this case
American citizens and juridical entities to be by operating despite the expiration of its
granted with certificates of public convenience, franchise (Buenaflor v. Camarines Sur
this is essentially removed by Art. XII, Sec. 11 of Industry Corporation, 108 Phil. 472)
the 1987 Constitution. The constitutional 4. If the application of the rule results in a
provision states that no franchise, certificate, or monopoly (Raymundo Transportation Co.,
any other form for the authorization for the Inc. v. Cervo, 91 Phil. 313)
operation of a public utility shall be granted except
to citizens of the Philippines or corporations or iii. Ruinous competition
associations organized under the laws of the
Philippines at least 60% of whose capital is An opposition for an application for Certificate of
owned by Philippine citizens. (1987 Constitution, Public Convenience based on ruinous
Art. XII, Sec. 11) competition must show that that the opposing
party would be deprive of fair profits on the capital
ii. Promotion of public interests invested in its business. It must be shown that the
business would not have sufficient gains to pay a
Public necessity is the primary consideration for fair rate of interest on its capital investment. (Halili
the authorization of the operation of public v. Daplas, 121 Phil. 789)
services and the issuance of certificates of public
convenience. (In re: Gregorio, 77 Phil. 906) Ruinous Competition, When Not Applicable
The argument of ruinous competition is not
iii. Financial capability applicable in the following instances:
1. When public necessity requires that a new
The commission shall have the power, without operator be allowed to put an additional
previous hearing, to require any public service to service. (Raymundo Transportation Co., Inc.
furnish annual reports of finances and operations. v. Cervo, 91 Phil. 313)
(Public Service Act, Sec. 17 [h]) 2. The opponent only showed a mere possibility
of reduction in the earnings of a business
b. Prior operator rule (Raymundo Transportation, Co., Inc. v.
Tanchingco, 97 Phil. 105)
i. Meaning
3. FIXING OF RATE
The Prior Operator Rule provides that a public
utility operator should be afforded with an a. Rate of return
opportunity to improve its equipment and service
before allowing a new operator to serve in the The rate of return is a judgment percentage which
same territory it covers. (Mandbusco, Inc. v. provides a fair return on the public utility for the
Francisco, 143 Phil 372) use of its property and service to the public. This
is fixed by administrative and judicial
ii. Exceptions pronouncements. (Republic of the Philippines v.
Manila Electric Company, 440 Phil. 389)
The invocation of the Prior Operator Rule is not
applicable in the following instances:
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The jurisprudentially-provided rate of return for motor vehicles to operate them under his/her
public utilities is 12% (Republic of the Philippines license. It is void contrary to public policy. (Lim v.
v. Manila Electric Company, 440 Phil. 389) CA, 424 Phil. 457)
b. Exclusion of income tax as expense It is a Void Contract for violating Public Policy
Hence, courts cannot grant affirmative relief to
Income tax is not included in the computation of the parties of such arrangement under the
the operating expenses of a public utility. It is principle of in pari delicto. (Lita Enterprises v.
inconsistent with the nature of operating Intermediate Appellate Court, 214 Phil. 63)
expenses (Republic of the Philippines v. Manila
Electric Company, 440 Phil. 389) The purpose of the law in enjoining the Kabit
System is to identify the person upon whom the
Income tax is imposed on an individual or entity responsibility may be fixed in cases of accidents,
as a tax on the privilege of earning income. By its with the end view of protecting the riding public.
nature, income tax payments of a public utility are The policy then loses its application if the public,
not expenses which are incurred in connection at large is not deceived or involved; e.g. when the
with the production of profit. (Republic of the participants of a Kabit System arrangement are
Philippines v. Manila Electric Company, 440 Phil. not being held liable for damages by the public
389) arising from the operation of the public vehicle.
(Lim v. CA, 424 Phil. 457)
4. UNLAWFUL ARRANGEMENTS
5. APPROVAL OF SALE, ENCUMBRANCE
a. Boundary system OR LEASE OF PROPERTY
Under the Boundary System, a driver is engaged The Land Transportation and Traffic Code
to drive an operator’s vehicular unit. On each trip, provides for the compulsory registration of motor
the driver is required to remit to the operator a vehicles to the Land Transportation Office.
minimum amount – the “boundary”. Whatever the Furthermore, the same law requires all
driver earns in excess of the minimum amount mortgages, attachments, and all other
shall be the driver’s income (Paguio Transport encumbrances to be recorded to the LTO in order
Corporation v. National Labor Relations to be valid against third parties. (Land
Commission, 356 Phil. 158) Transportation and Traffic Code, Sec.s 5 [a] & 5
[e])
Relationship of Operator and Driver
The relationship between the driver and the Registered Owner as Primarily Liable
operator operating under the boundary system is Case law provides that the registered owner of
considered to be an employer-employee the vehicle should primarily be responsible to the
relationship. (Doce v. Workmen’s Compensation public or to third persons for injuries caused while
Commission, 104 Phil. 946) the vehicle is being driven on the highway or
streets. (Erezo v. Jepte, 102 Phil. 103)
Owners and operators of public vehicles who
operate under the Boundary System cannot A sale or lease that is not registered does not
argue that they are only mere lessors in order for bind third persons who are aggrieved in tortuous
them to be exempted from liability caused by their incidents, for third persons only need to rely on
drivers. (Sps. Hernandez v. Sps. Dolor, 479 Phil. the public registration of a motor vehicle as
593) conclusive evidence of ownership. (PCI Leasing
b. Kabit system and Finance, Inc. v. UCPB General Insurance
Co., Inc., 579 Phil. 418)
The Kabit System is an arrangement where a
person who is granted a certificate of public
convenience allows other persons who own
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G. THE WARSAW CONVENTION

Reason: The principal, in issuing a ticket with
several trips to be performed by various carriers,
1. APPLICABILITY guarantees the performance of the successive
carriers (i.e. they have a space for him and will
The Warsaw Convention applies to all transport him on a particular segment of the trip).
international transportation of persons, baggage, (Lufthansa German Airlines v. CA, GR No.
or goods performed by aircraft for hire. It applies 83612, 1994)
equally to gratuitous carriage by aircraft
performed by an air transport undertaking. Remedy: The remedy of the principal is to file a
(Warsaw Convention, Art. 1[1]) third-party complaint or cross-claim against the
guilty carrier. (China Airlines v. Chiok, GR No.
“International Transportation By Air” 152122, 2003)
Under the Warsaw Convention, “international
transportation by air” shall mean any 2. LIMITATION OF LIABILITY
transportation in which the place of departure and
place of destination are either: Quick Summary:
1. Within the territories of two Contracting a. For each passenger – limited to 250,000
Parties, regardless of whether or not there be francs
a break in the carriage or transshipment; or b. For goods and checked-in baggage –
2. Within the territory of a single Contracting limited to 250 francs per kilogram
Party, if there is an agreed stopping place c. For hand carry – limited to 5,000 francs
within a territory subject to the sovereignty, per passenger (Warsaw Convention, Art.
mandate, or authority of another power, even 22)
though that power is not a party to the
Convention. (Warsaw Convention, Art. 1[2]) Any stipulation in the contract relieving the carrier
of liability or fixing a lower limit of liability shall be
Carriage to Be Performed by Several null and void. (Warsaw Convention, Art. 23)
Successive Air Carriers
Transportation to be performed by several The nullity of the stipulation will not render the
successive air carriers shall be deemed to be one entire contract of transportation null and void.
undivided transportation if it has been regarded Only the stipulation which removed or lowered
by the parties as a single operation, whether it the carrier’s liability shall be considered void.
has been agreed upon under one contract or a (Warsaw Convention, Art. 23)
series of contracts. (Warsaw Convention, Art.
1[3]) a. Liability of passengers
Moreover, such transportation will not lose its The carrier’s liability for each passenger shall be
international character merely due to one contract limited to 250,000 francs. If the liability of the
being performed within the territory subject to the carrier is awarded in the form of periodical
sovereignty of the same Contracting Party. (Id.) payments, the equivalent value of said payment
shall not exceed 250,000 francs. (Warsaw
Carrier Who Issued Ticket Deemed Principal Convention, Art. 22[1])
The carrier issuing the passenger’s ticket is
considered the principal party and other carriers The carrier and the passenger may agree to a
merely subcontractors or agents. higher limit of liability by special contract.
(Warsaw Convention, Art. 22[1])
Hence, the principal may be liable for damages
even when the breach of contract had occurred
not on its own flight but on that of another airline.
(British Airways v. CA, GR No. 121824, 1998)
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b. Liability for checked baggage

When 2-Year Period Does Not Apply
The liability of the carrier for each checked If the cause of action is based on the Civil Code
baggage and goods shall be limited to 250 francs such as 4 years if the action is based on tort or
per kilogram. (Warsaw Convention, Art. 22[2]) quasi-delict (United Airlines v. Uy, G.R. No.
127768, 1999)
The carrier can be subjected to a higher value of
liability if the consignor, at the time when the Where the plaintiff was forestalled from filing an
package was handed to the carrier: action because of the defendant-airline’s delaying
1. A special declaration of the value at delivery; tactics (United Airlines v. Uy, G.R. No. 127768,
and 1999)
2. Paid a supplementary sum, if the case
requires. (Warsaw Convention, Art. 22[2]) Notice Requirement
 Damage to baggage: within 3 days from
If the consignor made a declaration of value, the receipt
carrier’s liability will be liable to pay a sum not  Damage to goods: within 7 days from receipt
exceeding the declared sum, unless the carrier  Delay: within 21 days from receipt
proves that the declared value is greater than the
actual value of the baggage or goods. (Warsaw Source: The Montreal Convention, Art.
Convention, Art. 22[2]) 31(2), to wit:
c. Liability for hand-carried baggage “In the case of damage, the person entitled to
delivery must complain to the carrier forthwith
The carrier’s liability for hand-carried baggage after the discovery of the damage, and, at the
shall be limited to 5,000 francs per passenger. latest, within seven days from the date of
(Warsaw Convention, Art. 22[3]) receipt in the case of checked baggage and
fourteen days from the date of receipt in the
Instances When a Common Carrier Cannot case of cargo. In the case of delay, the
Avail of the Limitation complaint must be made at the latest within
a. Willful misconduct twenty-one days from the date on which the
b. Default amounting to willful misconduct baggage or cargo have been placed at his or
c. Accepting passengers without ticket her disposal.”
d. Accepting goods without airway bill or
baggage without baggage check This is an amendment to Art. 26(2) of the
Warsaw Convention, which states that notice
3. WILLFUL MISCONDUCT should be done within 14 days from the delay.
The carrier is not entitled to limited liability under NOTE: The notice requirement constitutes a
the Warsaw Convention if the damage was condition precedent. Failure to comply with a
caused by the carrier’s willful misconduct or any condition precedent constitutes failure to state a
default on its part which is considered by the cause of action as a ground for a motion to
courts as willful misconduct. (Warsaw dismiss. (Federal Express Corp. v. American
Convention, Art. 25[1]) Home Insurance Co., GR No. 150094, 2004)
Extinguishment of Right to Damages --------- end of topic ---------

The right to damages shall be extinguished if an
action is not brought within 2 years counted
from date of arrival at the place of destination or
from date on which the aircraft ought to have
arrived or from date on which the transportation
stopped. (Warsaw, Art. 29)
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BUSINESS
ORGANIZATIONS
Commercial Law
ATENEO CENTRAL
IV. BUSINESS ORGANIZATIONS d. Classification of shares

i Preferred shares
versus common shares
ii Scope of voting rights
subject to classification
IV. BUSINESS ORGANIZATIONS
iii Founder's shares
iv Redeemable shares
A. PARTNERSHIPS
v Treasury shares
1. General provisions
6. Incorporation and organization
a. Definition
a. Promoter
b. Elements
i Liability of promoter
c. Characteristics
ii Liability of
d. Rules to determine existence
corporation for
e. Partnership term
promoter's contracts
f. Partnership by estoppel
b. Subscription contract
g. Partnership as distinguished
c. Pre-incorporation subscription
from joint venture
agreements
h. Professional partnership
d. Consideration for stocks
i. Management
e. Articles of Incorporation
2. Rights and obligations of partnership
i Contents
and partners
ii Non-amendable
a. Rights and obligations of the
items
partnership
e. Corporate name; limitations
b. Obligations of partners
on use of corporate name
among themselves
f. Registration, incorporation,
c. Obligations of partners to
and commencement of
third persons
corporate existence
3. Dissolution and winding up
g. Election of directors or
4. Limited Partnership
trustees
h. Adoption of by-laws
B. CORPORATIONS
i Contents of by-laws
1. Definition of corporation
ii Binding effects
2. Classes of corporations
iii Amendments
3. Nationality of corporations
i. Effects of non-use of
a. Control test
corporate charter
b. Grandfather rule Legislative
7. Corporate powers
power
a. General powers; theory of
4. Corporate juridical personality
general capacity
a. Doctrine of separate juridical
b. Specific powers; theory of
personality
specific capacity
i. Liability for tort and
c. Power to extend or shorten
crimes
corporate term
ii. Recovery of damages
d. Power to increase or
b. Doctrine of piercing the
decrease capital stock or
corporate veil
incur, create, increase bonded
c. Grounds for application of
indebtedness
doctrine
e. Power to deny pre-emptive
i Test in determining
rights
applicability
f. Power to sell or dispose
5. Capital structure
corporate assets
a. Number and qualifications of
g. Power to acquire own shares
incorporators
h. Power to invest corporate
b. Subscription requirements
funds in another corporation
c. Corporate term
or business
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i. Power to declare dividends i Regular or special

j. Power to enter into ii Notice of meetings
management contract iii Place and time of
k. Limitations meetings
i Ultra vires acts iv Quorum
• (a) Applicability v Minutes and agenda
of ultra vires of meetings
doctrine 9. Board of directors and trustees
• (b) a. Repository of corporate
Consequences powers
of ultra vires acts b. Tenure, qualifications and
l. Doctrine of individuality of disqualifications of directors
subscription c. Requirement of independent
m. Doctrine of equality of shares directors
n. Trust fund doctrine d. Elections
o. How exercised i Cumulative voting
i By the shareholders ii Quorum
ii By the board of e. Removal
directors f. Filling of vacancies
iii By the officers g. Compensation
8. Stockholders and members h. Disloyalty
a. Fundamental rights of a i. Business judgment rule
stockholder j. Solidary liabilities for
b. Participation in management damages
i Proxy k. Personal liabilities
ii Voting trust l. Responsibility for crimes
iii Cases when m. Special fact doctrine
stockholders' action n. Inside information
is required o. Contracts
• (a) By a majority i By self-dealing
vote directors with the
• (b) By a two- corporation
thirds vote ii Between
• (c) By corporations with
cumulative interlocking directors
voting p. Executive and other special
iv Manner of voting committees
c. Proprietary rights i Creation
i Right to dividends ii Limitations on its
ii Appraisal right powers
• (a) When q. Meetings
available i Regular or special
• (b) Manner of • (a) When and
exercise of right where
iii Right to inspect • (b) Notice
iv Preemptive right • (c) Attendance in
v Right to vote meetings
vi Right to dividends ii Who presides
d. Remedial rights iii Quorum
i Individual suit iv Rule on abstention
ii Representative suit 10. Capital affairs
iii Derivative suit a. Certificate of stock
e. Obligations of a stockholder i Nature of the
f. Meetings certificate
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ii Uncertificated shares i Records to be kept

iii Negotiability; at principal office
requirements for ii Right to inspect
valid transfer of corporate records
stocks iii Effect of refusal to
iv Issuance inspect corporate
• (a) Full payment records
• (b) Payment pro- 11. Dissolution and liquidation
rata a. Modes of dissolution
v Stock and transfer i Voluntary dissolution
book • (a) Where no
• (a) Contents creditors are
• (b) Who may affected
make valid • (b) Where
entries creditors are
• (c) Stock affected
transfer agent • (c) By shortening
vi Lost or destroyed of corporate
certificates term
vii Situs of the shares of • (d) Withdrawal of
stock dissolution
b. Watered stocks ii Involuntary
i Definition dissolution
ii Liability of directors b. Methods of liquidation
for watered stocks i By the corporation
iii Trust fund doctrine itself
for liability for ii Conveyance to a
watered stocks trustee within a
c. Payment of balance of three-year period
subscription iii By management
i Call by board of committee or
directors rehabilitation receiver
ii Notice requirement iv Liquidation after
d. Sale of delinquent shares three years
i Effect of delinquency 12. Other corporations
ii Call by resolution of a. Close corporations
the board of directors i Characteristics of a
iii Notice of sale close corporation
iv Auction sale ii Validity of restrictions
e. Alienation of shares on transfer of shares
i Allowable restrictions iii Issuance or transfer
on the sale of shares of stock in breach of
ii Sale of partially paid qualifying conditions
shares iv When board meeting
iii Sale of a portion of is unnecessary or
shares not fully paid improperly held
iv Sale of all of shares v Preemptive right
not fully paid vi Amendment of
v Sale of fully paid articles of
shares incorporation
vi Requisites of a valid vii Deadlocks
transfer b. Non-stock corporations
vii Involuntary dealings i Definition
f. Corporate books and records ii Purposes
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iii Treatment of profits vi Grounds for

iv Plan and distribution revocation of license
of assets upon 13. Merger and consolidation
dissolution a. Definition and concept
c. Educational corporations b. Distinguish: constituent and
d. Religious corporations consolidated corporation
i Corporation sole; c. Plan of merger or
nationality consolidation
ii Religious societies d. Articles of merger or
e. One person corporations consolidation
i Excepted e. Procedure
corporations f. Effectivity
ii Capital stock g. Limitations
requirement h. Effects
iii Articles of 14. Investigations, offenses, and
incorporation and by- penalties
laws a. Authority of Commissioner
iv Corporate name i Investigation and
v Corporate structure prosecution of
and officers offenses
vi Nominee ii Administration of
vii Minutes and records oath and issuance of
viii Liability subpoena
ix Conversion of iii Cease and desist
corporation to one power
person corporations iv Contempt
and vice-versa b. Sanctions for violations
f. Foreign corporations i Administrative
i Bases of authority sanctions
over foreign ii Prohibited Acts
corporations iii Penalties
• (a) Consent iv Who are liable
• (b) Doctrine of c. Authority of the Securities and
"doing business" Exchange Commission
ii Necessity of a
license to do
business
• (a) Requisites
for issuance of a
license
• (b) Resident
agent
• (c) Amendment
of license
iii Personality to sue
iv Suability of foreign
corporations
v Instances when
unlicensed foreign
corporations may be
allowed to sue
(isolated
transactions)
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A. PARTNERSHIPS 3. This does not mean that there could be no

contractual relations amongst the parties;
there is only no partnership or association
1. GENERAL PROVISIONS with distinct legal personality.
A. Definition C. Characteristics
Partnership Defined Characteristics of a Partnership

1. Essentially contractual in nature (Arts. 1767,
Partnership is a contract whereby two or more 1784)
persons bind themselves to contribute money, 2. Separate juridical personality (Art. 1768)
property, or industry to a common fund, with the 3. Delectus personae (Arts. 1804, 1813)
intention of dividing the profits among 4. Mutual Agency (Art. 1803)
5. Personal liability of partners for partnership
themselves. Two or more persons may also form
debts (Arts. 1816, 1817)
a partnership for the exercise of a profession (Art.
1767) D. Rules to determine existence
B. Elements General Rule
Persons who are not partners as between
Elements of a Partnership (ACD)
themselves, cannot be partners as to third
1. Meeting of minds (Agreement)
persons (Art. 1769[1])
2. To Contribute money, property, or industry to
a common fund; and
3. Intent to Divide profits (and losses) among the Exception
contracting parties (Jarantilla, Jr. v. Jarantilla, Partnership by estoppel (Art. 1825) [see Section
G.R. No. 154468, 2010) (f) below]
Essential Features of Partnership Other rules to determine whether a

(VaLeCLO) partnership exists (Art. 1769)
1. There must be a Valid contract. The following, alone, do not establish a
2. The parties must have Legal capacity to partnership:
enter into the contract. (a) Co-ownership or co-possession
3. There must be a mutual Contribution of
(b) Sharing of gross returns, whether or not
money, property or industry to a common
fund. (Art. 1767) the persons sharing them have a joint or
4. There must be a Lawful object. (Art. 1770) common right or interest in any property
5. The purpose or primary purpose must be to from which the returns are derived
Obtain profits and divide the same among (c) Receipt by a person of a share of the
the parties. (Art. 1767) profits of a business is prima facie
evidence that he is a partner in the
Additional Requirement for Juridical business, unless such were received in
Personality payment as:
1. It is also required that the articles of 1. Debt by installments or otherwise;
partnership must not be kept secret among 2. Wages or rent;
the members; otherwise, the association shall 3. Annuity;
have no legal personality and shall be 4. Interest on loan;
governed by the provisions on Co-ownership. 5. Consideration for sale of goodwill of
(Art. 1775) business or other property by
2. "Kept secret among the members" where installments or otherwise
secrecy is directed not to third persons but to
some of the partners. (Art. 1775)
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A partnership must have a lawful object or

purpose and must be established for the common Use of the term “partner” does not necessarily
benefit or interest of the partners. (Art. 1770) show existence of partnership. Non-use of the
terms “partnership” or “partners” are not
Effects of an Unlawful Partnership conclusive as to non-existence or partnership
(a) Void ab initio such that it never existed in but entitled to weight.
the eyes of the law (Art. 1409[1])
(b) Profits shall be confiscated in favor of the
E. Partnership term
government (Art. 1770) Partnership at will
(c) Instruments or tools and proceeds of the
crime shall also be forfeited in favor of the One in which no fixed term is specified and is not
government (Art. 1770; Revised Penal formed for a particular undertaking or venture
Code, Art. 45) which may be terminated anytime by mutual
(d) The contributions of the partners shall not agreement.
be confiscated unless they fall under (c)
(Arts. 1411 and 1412) Partnership with a fixed term
One in which the partners agree to themselves
Judicial decree is not necessary to dissolve an the term of which the partnership is to subsist.
unlawful partnership.
Common Types of Partnership
That there is no legally constituted partnership 1. Universal v. Particular Partnership
does not mean that there are no contractual or (a) Universal Partnership
legal relations among the parties.
1. Universal Partnership of All
Present Property (Art. 1779)
Effect of Partial Illegality
Comprises the following:
Where a part of the business of a partnership is
legal and a part illegal, an account of that which - Property which belonged to each
is legal may be had. of the partners at the time of the
constitution of the partnership
Where, without the knowledge or participation of - Profits which they may acquire
the partners, the firm's profits in a lawful business from all property contributed
have been increased by wrongful acts, the
innocent partners are not precluded as against
2. Universal Partnership of Profits
the guilty partners from recovering their share of
the profits. Comprises all that the partners may
acquire by their industry or work
Formation of Partnership during the existence of the
partnership (Art. 1780).
a. How Partnership is Formed
General Rule: No special form is required for
the validity of a contract. (Art. 1356) But persons who are prohibited from
giving donations or advantage to
b. Burden of Proof and Presumption each other cannot enter into a
The existence of a partnership must be universal partnership (Art. 1782).
proven, not presumed. Persons acting as - Those made between persons
partners are presumed to have entered into a who were guilty of adultery or
contract of partnership. The burden of proof is concubinage at the time of the
shifted to the party denying its existence. donation;
- Those made between persons
An extant partnership is presumed to exist
found guilty of the same criminal
until proven terminated.
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offense, in consideration thereof; Elements to establish liability as a partner on

and the ground of estoppel:
- Those made to a public officer or 1. Defendant represented himself as partner or
his wife, descendants and represented by others as such;
ascendants, by reason of his 2. Not denied or refuted by defendant;
office. (Art. 739) 3. Plaintiff relied on such representation; and
4. Statement of defendant not refuted.
(b) Particular Partnership (Art. 1783) LIABILITIES IN ESTOPPEL

A particular partnership has for its objects: When all the A partnership act or
a. Determinate things members of an obligation results,
b. Their use or fruits existing partnership therefore the
c. Specific undertaking consent to the partnership is liable
d. Exercise of profession or vocation representation
Other cases It is the joint act or
obligation of the person
2. General v. Limited Partnership acting and persons
(a) General Partnership consenting to the
Consists of general partners who are representation. Person
liable pro rata and subsidiarily and who represented
himself & all those who
sometimes solidarily with their separate
made representation
property for partnership debts liable pro-rata/ jointly
(b) Limited Partnership G. Partnership as distinguished from joint

venture
One formed by two or more persons
having as members one or more general The observation that a joint venture is for a single
partners and one or more limited partners, transaction while a partnership entails a
the latter not being personally liable for continuing business is not entirely accurate in
the obligations of the partnership. Philippine law. A partnership may be universal or
particular and a particular partnership has for its
F. Partnership by estoppel object a specific undertaking (Roque, Jr. v.
Partnership by estoppel, defined COMELEC, G.R. No. 188456, 2009).
Either by words or conduct, a person does any of Generally understood to mean an organization
the following: formed for some temporary purpose, a joint
venture is likened to a particular partnership or
1. Directly represents himself to anyone as a one which “has for its object determinate things,
partner in an existing partnership or in a non- their use or fruits, or a specific undertaking, or the
existing partnership exercise of a profession or vocation. (Realubit v.
2. Indirectly represents himself by consenting to Jaso, G.R. No. 178782, 2011)
another representing him as a partner in an
existing partnership or in a non-existing
Particular Partnership
partnership
In a joint account, the participating merchants can
When a person has been thus represented to be transact business under their own name, and can
a partner in an existing partnership, or with one or be individually liable therefor. A partnership
more persons who are not actually partners, he is generally relates to a continuing business of
an agent of the persons consenting to such various transactions of a certain kind. (Heirs of
representation in order to bind them to the same Tan Eng Kee v. CA, G.R. No. 126881, 2000)
extent and in the same manner as though he
were a partner in fact (Art. 1825).
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Joint Venture partnership, association or corporation for

A joint venture is a form of partnership, and the practice of architecture;
thus, to be governed by the laws on partnership. 2. Registered and licensed architects shall
(Marsman Drysdale Land, Inc. v. Philippine compose at least seventy-five percent (75%)
Geoanalytics, G.R. No. 183374, 2010) of the owners, shareholders, members
incorporators, directors, executive officers,
As a rule, corporations are prohibited from as the case may be;
entering into partnership agreements; 3. Individual members of such firm, partnership
consequently, corporations can enter into joint association or corporation shall be
venture agreements with other corporations or responsible for their individual and collective
partnerships for certain transactions in order to acts as an entity and as provided by law;
form “pseudo partnerships.” A joint venture 4. Such firm, partnership, association or
agreement between and among corporations corporation shall be registered with the
may be seen as similar to partnerships since the Securities and Exchange Commission and
elements of partnership are present. (Narra Board.
Nickel Mining and Dev’t Corp. v. Redmont
Consolidated Mines Corp., G.R. No. 195580, Other Classifications of Partnership
2014) a. As to Legality of Existence
1. De jure partnership- one which has
Note: Section 35(h) of the Revised Corporation complied with all the legal requirements
Code now expressly allows corporations to form for its establishment
partnerships with both natural and juridical 2. De facto- one which has failed to comply
persons. with all the legal requirements for its
establishment
A verbal agreement to form a joint venture
company is valid and binding. The failure to b. As to purpose
reduce the agreement to writing does not affect 1. Commercial or trading partnership-
its validity or enforceability as there is no law or one formed for the transaction of
regulation which provides that an agreement to business
incorporate must be in writing. (Fong v. Dueñas, 2. Professional or non-trading
G.R. No. 185592, 2015) partnership- one formed for the exercise
of a profession
H. Professional partnership
I. Management
General professional partnership
A general professional partnership exists when POWERS OF THE PARTNER/S APPOINTED
two or more persons may also form a partnership AS MANAGER
for the exercise of a profession (Art. 1767 [2]). Partner is Power of Vote of
appointed managing partners
manager in partner is representing
The Architecture Act of 2004 (R.A. No. 9266)
the Articles of irrevocable controlling
1. This law states that a firm, firm, company, partnership without interest is
partnership, corporation or association may (Art. 1800) just/lawful necessary to
be registered or licensed as such for the cause; revoke power
practice of architecture under the following Revocable (Art. 1800)
conditions: Only Filipino citizens properly only when in
registered and licensed as architects under bad faith (Art.
1800)
this Act may, among themselves, or together
with allied technical professionals, form and
obtain registration as a firm, company,
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Partner is Power is ? 2. RIGHTS AND OBLIGATIONS OF

appointed revocable PARTNERSHIP AND PARTNERS
manager after any time for
constitution any just or A. Rights and obligations of the
of partnership lawful cause partnership
(Art. 1800) by the vote of
the partners All partners, including industrial ones, shall be
(Art. 1800) liable pro rata with all their property and after all
Two or more Each may In case of
the partnership assets have been exhausted, for
persons execute all opposition,
entrusted acts of decision of the contracts which may be entered into in the
with administratio majority shall name and for the account of the partnership,
management n (Art. 1801) prevail; In under its signature and by a person authorized to
of case of tie, act for the partnership. However, any partner may
partnership decision of enter into a separate obligation to perform a
without partners partnership contract. (Art. 1816)
specification owning
of duties/ controlling Note: Except limited liability partners
stipulation interest shall
that each prevail (Art.
Any stipulation against personal liability of
shall not act 1801)
w/o the partners for partnership debts is void, except as
other's among them. (Art. 1817)
consent (Art.
1801) Partners are liable solidarily with the partnership
Stipulated Concurrence Absence or for everything chargeable to the partnership when
that none of of all disability of caused by the wrongful act or omission of any
the managing necessary for any one partner acting in the ordinary course of business
partners shall the validity of cannot be of the partnership or with authority from the other
act w/o the acts (Art. alleged partners and for partner's act or misapplication of
consent of 1802) unless there properties. (Art. 1824)
others (Art. is imminent
1802) danger of
grave or A newly admitted partner into an existing
irreparable partnership is liable for all the obligations of the
injury to partnership arising before his admission but out
partnership of partnership property shares. (Art. 1826)
(Art. 1802)
Manner of All partners If refusal of Partnership creditors are preferred to those of
management are agents of partner is each of the partners as regards the partnership
not agreed the manifestly property. (Art. 1827)
upon (Art. partnership prejudicial to
1803) Unanimous interest of
Upon dissolution of the partnership, the partners
consent partnership,
required for court's shall contribute the amounts necessary to satisfy
alteration of intervention the partnership liabilities. (Art. 1839(4), (7))
immovable may be
property (Art. sought (Art. A partner’s obligation for partnership liabilities is
1803(1)) 1803(2)) subsidiary in nature - they shall only be liable with
their property after all partnership properties have
been exhausted. (Co-Pitco v. Yulo, G.R. No. L-
3146, 1907)
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B. Obligations of partners among (c) Industry

themselves May concur with any or both of the first two or in
the absence of any one or both of them; manual
Obligation to Contribute to the Common Fund and/or intellectual in consideration of share in the
profits; hence, as generally, partners are not
1. What May Be Contributed entitled to charge each other. (Marsh’s Appeal,
Contribution must be in equal shares unless 69 Pa. St. 30)
otherwise stipulated. (Art. 1790)
Every partner is bound to work to the extent of his
ability for the benefit of the whole, without regard
(a) Money to the services of his co-partners, and without
Failure to contribute promised money makes the comparison of value; for services to the firm
promissory-partner liable for the amount cannot, from their very nature, be estimated and
promised including the interest due and damages equalized by compensation of differences.
arising from the time he should have complied (Beatty v. Wray, 7 Harris 519)
with his or her undertaking. (Art. 1786, Par. 1)
But: A partner who has agreed to render special
If there is fraud or misrepresentation, action for service to the partnership, for the performance of
rescission may be filed, and the party entitled to which he is qualified, and which is one of the
rescind, without prejudice to any other right, has inducements for the other members to enter the
the right to: partnership, was found liable civilly to account for
1. Lien on, or right of retention over, the surplus the value of such service upon a finding that he
of partnership property after satisfying wrongfully refused to perform such service.
partnership liabilities to third persons (for any
sum paid by the injured partner for the But then again: Specific performance not
purchase of an interest in the partnership and available due to constitutional prohibition against
for any capital or advances contributed by the involuntary servitude.
latter)
2. Stand in place of creditors of the partnership A limited partner is not allowed to contribute
for any payments made by the injured partner services, only “cash or other property” (Art. 1845);
in respect of partnership liabilities, after all otherwise, he is considered an “industrial and
liabilities to third persons have been satisfied general partner” and thus, not exempted from
3. Indemnity by the guilty partner against all personal liability.
partnership debts and liabilities (Art. 1838);
relate to Art. 1831: with or without fraud or 2. When Immovables or Real Rights
misrepresentation, injured partner may seek Contributed
judicial dissolution
General Rule: Failure to comply with the
(b) Property
requirement of appearance in public instrument
May include intangible or incorporeal (e.g. credit). and SEC Registration will not affect the liability of
(Lim Tong Lim v. Phil. Fishing Gear, G.R. No. the partnership and the members thereof to third
136448, 1999) persons. (Art. 1772, [2])
Liable for fruits from the time property should Exception: When immovable property or real
have been delivered without need of demand; rights are contributed.
also include obligation to preserve the promised
property with the diligence of a good father of a Public instrument plus inventory made and
family pending delivery. (Art. 1786 [1] and [2]) signed by the parties and attached to the public
instrument is required for the benefit of third
persons. (Arts.1771 and 1773)
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EFFECT OF ABSENCE OF
REQUIREMENTS UNDER ARTICLES 1771 In the event that there is a failure to contribute
AND 1773 property promised:
No Public Instrument,  Partners become ipso jure a debtor of the
Void
No Inventory partnership even in the absence of any
With Public Instrument, demand (Art. 1169[1])
Void
No Inventory
 Remedy of the other partner is not rescission
No Public Instrument,
Void but specific performance with damages from
With Inventory
With Public Instrument, defaulting partner (Art. 1788)
Valid
With Inventory
In the event that there is a failure to contribute
Note: Partnerships void under Art.1773, in money promised:
relation to Art. 1771 may still be considered either  To contribute on the date fixed the amount he
de facto or estoppel partnerships vis-à-vis third has undertaken to contribute to the
persons; may even be treated as an ordinary partnership
contract from which rights and obligations may  To reimburse any amount he may have taken
validly arise, although not exactly a partnership from the partnership coffers and converted to
under the Civil Code. (Torres v. CA, G.R. No. his own use
134559, 1999)  To pay for the agreed or legal interest, if he
fails to pay his contribution on time or in case
Failure to prepare an inventory of the he takes any amount from the common fund
immovable property contributed, in spite of Art. and converts it to his own use
1773 declaring the partnership void would not  To indemnify the partnership for the damages
render the partnership void when: caused to it by delay in the contribution or
1. No third party is involved (since Art. 1773 was conversion of any sum for his personal
intended for the protection of 3rd parties); benefit (Art. 1788)
2. Partners have made a claim on the
partnership agreement. A partner who promises to contribute to
partnership becomes a promissory debtor of the
3. Consequence of Failure to Contribute partnership, including liability for interests and
damages caused for failure to pay, and which
amounts may be deducted upon dissolution of the
Each partner has the obligation:
1. To contribute at the beginning of the partnership from his share in the profits and net
assets. (Rojas v. Maglana, G.R. No. 30616,
partnership or at the stipulated time the
December 10, 1990)
money, property or industry which he may
have promised to contribute. (Art. 1786)
2. To answer for eviction in case the partnership 4. Obligations with respect to Contribution to
is deprived of the determinate property Partnership Capital
contributed (Art. 1786)
3. To answer to the partnership for the fruits of Partners must contribute equal shares to the
the property the contribution of which he capital of the partnership unless there is
delayed, from the date they should have been stipulation to contrary. (Art. 1790)
contributed up to the time of actual delivery
(Art. 1786) Capitalist partners must contribute additional
4. To preserve said property with the diligence capital in case of imminent loss to the business of
of a good father of a family pending delivery the partnership and there is no stipulation
to partnership (Art. 1163) otherwise; refusal to do so shall create an
5. To indemnify partnership for any damage obligation on his part to sell his interest to the
caused to it by the retention of the same or by other partners. (Art. 1790)
the delay in its contribution (Arts.1788, 1170)
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A. Requisites: c. He may be ousted form the partnership,

1. There is an imminent loss of the business of especially if there was a warning. (Art. 1808)
the partnership
2. The majority of the capitalist partners are of INDUSTRIAL CAPITALIST
the opinion that an additional contribution to PARTNER PARTNER
the common fund would save the business Cannot engage in Cannot engage in
3. The capitalist partner refuses deliberately to business (w/n same business (with same
contribute (not due to financial inability) line of business with kind of business with
4. There is no agreement to the contrary the partnership) the partnership) for
unless partnership his own account,
B. Fiduciary Duty expressly permits him unless there is a
A partnership is a fiduciary relation—one entered to do so. (Art. 1789) stipulation to the
into and to be maintained on the basis of trust and contrary. (Art. 1808)
confidence. With that, a partner must observe the
utmost good faith, fairness, and integrity in his As a rule, an industrial partner may not engage in
dealings with the others: any business during the existence of the
i. He cannot directly or indirectly use partnership, unless the capitalist partners
partnership assets for his own benefit; expressly permit him to do so (Art. 1789). The
ii. He cannot carry on a business of the reason is that his industry must be given only to
partnership for his private advantage; the partnership. This is true even if the business
iii. He cannot, in conducting the business of the
is not competitive. (Albano Civil Law Reviewer, p.
partnership, take any profit clandestinely;
iv. He cannot obtain for himself that which he 822, 2008 ed.)
should have obtained for the partnership
(e.g. business opportunity) When a partner engages in a separate business
v. He cannot carry on another business in enterprise that is competitive with that of the
competition with the partnership; and partnership, the other partner’s withdrawal
vi. He cannot avail himself of knowledge or becomes thereby justified and for which the latter
information, which may be properly regarded
cannot be held for damages. (Rojas v. Maglana,
as the property of the partnership.
G.R. No 30616, 1990)
1. Prohibition to Engage in Competitive
Business 2. Managing Partner who Collects Debt from
Third Party
If an industrial partner engages in any Obligation of a managing partner who collects

business debt from person who also owed the partnership
a. He can be excluded from the partnership; or (Art. 1792):
b. The capitalist partners can avail of the benefit a. Apply sum collected to 2 credits in proportion
he obtained from the business; or to their amounts.
c. The capitalist partners have the right to file an b. If he received it for the account of
action for damages against the industrial partnership, the whole sum shall be applied
partner, in either case. (Art. 1789) to partnership credit.
Requisites:
If the capitalist partner engages in a business
(which competes with the business of the 1. There exist at least two debts, one where the
partnership) collecting partner is creditor and the other,
where the partnership is the creditor
a. He may be required to bring to the common
2. Both debts are demandable
fund the profits he derived from the other
3. The partner who collects is authorized to
business; or
manage and actually manages the
b. He shall personally bear the losses; or
partnership
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C. Rules for Distribution of Profits and Losses

3. Partner who Receives Share of Partnership (Art. 1797)
Credit PROFITS LOSSES
With According to According to
Obligation of partner who receives share of agreement agreement agreement
partnership credit: Without Share of If sharing of
agreement capitalist profits is
partner is in stipulated -
Obliged to bring to the partnership capital what he
proportion to apply to
has received even though he may have given his capital sharing of
receipt for his share only (Art. 1793) contribution losses
Requisites: Share of
If no profit
industrial
1. A partner has received in whole or in part, his sharing
partner is not
share of the partnership credit stipulated:
fixed - as may
2. The other partners have not collected their losses shall
be just and
shares be borne
equitable
according to
3. The partnership debtor has become insolvent under the
capital
circumstances
contribution
BEARING THE RISK OF LOSS OF THINGS
CONTRIBUTED (Art. 1795)
Specific and Risk is borne by Purely
determinate things partner industrial
which are not fungible partner not
where only the use is liable for
contributed losses
Specific and Risk is borne by
determinate things the partnership NOTE: A stipulation which excludes one or more
ownership of which is partners from any share in the profits and losses
transferred to the is void. (Art. 1799)
partnership
Fungible things Risk is borne by D. Other Rights and Obligations of Partners
(consumable) partnership
Things contributed to Risk is borne by Every partnership shall operate under a firm
be sold partnership name. Persons who include their names in the
Things brought and Risk is borne by partnership name even if they are not members
appraised in the partnership shall be liable as partners. (Art. 1815)
inventory
Specific and Risk is borne by i. Right to associate another person with him
determinate things partner in his share without consent of other partners
which are not fungible
(sub-partnership) (Art. 1804)
where only the use is
ii. Right to inspect and copy partnership books
contributed
at any reasonable hour (Art. 1805)
iii. Right to a formal account as to partnership
affairs (even during existence of
partnership): (Art. 1809)
a. If he is wrongfully excluded from
partnership business or possession of
its property by his copartners
b. If right exists under the terms of any
agreement
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c. As provided by Art. 1807, whenever Partners and the partnership are solidarily liable
other circumstances render it just and to third persons for the partner's tort or breach of
reasonable trust. (Art. 1824)
iii. Duty to render on demand true and full
information affecting partnership to any Liability of incoming partner is limited to:
partner or legal representative of any 1. His share in the partnership property for
deceased partner or of any partner under existing obligations
legal disability (Civil Code, Art. 1806) 2. His separate property for subsequent
iv. Duty to account to the partnership as obligations (Art. 1826)
fiduciary (Art. 1807)
Creditors of partnership preferred in
E. Responsibility of Partnership to Partners partnership property & may attach partner's share
i. To refund the amounts disbursed by partner in partnership assets. (Art. 1827)
in behalf of the partnership plus
corresponding interest from the time the Power of Partner as an Agent of the
expenses are made (loans and advances Partnership (Art. 1818)
made by a partner to the partnership aside ACTS EFFECT
from capital contribution) Acts for carrying on in Every partner is an
ii. To answer for obligations partner may have the usual way the agent and may
contracted in good faith in the interest of the business of the execute acts with
partnership business partnership binding effect even if
iii. To answer for risks in consequence of its he has no authority
management Except: when 3rd
person has
C. Obligations of partners to third persons knowledge of lack of
authority
All partners shall be liable for contractual Act which is not Does not bind
apparently for the partnership unless
obligations of the partnership with their property,
after all partnership assets have been exhausted: carrying of business authorized by other
in the usual way partners
i. Pro rata
ii. Subsidiary (Art. 1816).
Acts of strict dominion
Admission or representation made by any partner or ownership:
concerning partnership affairs within scope of his a. Assign
authority is evidence against the partnership. (Art. partnership
1820) property in trust
for creditors
b. Dispose of good-
General rule: Notice to partner of any matter
will of business
relating to partnership affairs operate as notice to c. Do an act which
partnership. would make it
impossible to
Exception: Except in case of fraud. carry on ordinary
 Knowledge of partner acting in the particular business of
matter, acquired while a partner partnership
 Knowledge of the partner acting in the d. Confess a
particular matter then present to his mind judgment
e. Enter into
 Knowledge of any other partner who
compromise
reasonably could and should have concerning a
communicated it to the acting partner partnership claim
(Art.1821) or liability
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f. Submit Title in name of all Conveyance will pass

partnership claim partners, title
or liability to Conveyance in name
arbitration of all partners
g. Renounce claim
of partnership
Acts in contravention Partnership is not 3. DISSOLUTION AND WINDING UP
of a restriction on liable to 3rd persons
authority having actual or Dissolution is the change in the relation of the
presumptive partners caused by any partner ceasing to be
knowledge of the associated in the carrying on of the business;
restrictions
partnership is not terminated but continues until
the winding up of partnership affairs is completed.
Effects of Conveyance of Real Property
(Art. 1828)
Belonging to Partnership (Art. 1819)
TITLE EFFECT
Winding up is the process of settling the
Title in partnership Conveyance passes
name, Conveyance in title but partnership business or partnership affairs after dissolution,
partnership name can recover if: which includes the paying of previous obligations,
1. Conveyance was collecting of assets previously demandable. (Idos
not in the usual v. Court of Appeals, G.R. No. 110782, 1998)
way of business,
or Termination is that point when all partnership
2. Buyer had affairs are completely wound up and finally
knowledge of lack settled. It signifies the end of the partnership life.
of authority
(Idos v. Court of Appeals, G.R. No. 110782, 1998)
Title in partnership Conveyance does not
name, Conveyance in pass title but only A. Causes of Dissolution (Art. 1830)
partner's name equitable interest,
unless: i. Without violation of the agreement between
1. Conveyance was
the partners
not in the usual
way of business, a. By the termination of the definite term/
or particular undertaking specified in the
2. Buyer had agreement
knowledge of lack b. By the express will of any partner, who
of authority must act in good faith, when no definite
Title in name of 1 or Conveyance passes term or particular undertaking is
more partners, title but partnership specified
Conveyance in name can recover if: c. By the express will of all the partners
if partner/partners in 1. Conveyance was who have not assigned their interests to
whose name title not in the usual
be charged for their separate debts,
stands way of business,
either before or after the termination of
or
2. Buyer had any specified term or particular
knowledge of lack undertaking
of authority d. By the bona fide expulsion of any
Title in name of Conveyance will only partner from the business in
1/more/all partners or pass equitable accordance with power conferred by
3rd person in trust for interest the agreement
partnership, ii. In contravention of the agreement between
Conveyance the partners, where the circumstances do
executed in not permit a dissolution under any other
partnership name if in
provision of Article 1830, by the express will
name of partners
of any partner at any time
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iii. By any event which makes it unlawful for right, to dissolve the partnership (Ortega v. Court
business to be carried on/for the members to of Appeals, G.R. 109248, July 3, 1995).
carry it on for the partnership
iv. Loss of specific thing promised by partner B. Effects of Dissolution
before its delivery
v. Death of any partner 1. Authority of Partner to Bind Partnership
vi. Insolvency of a partner/partnership General rule: Authority of partners to bind
vii. Civil interdiction of any partner partnership is terminated. (Art. 1832)
viii. Decree of court under Art. 1831.
Exceptions:
If a partnership has no fixed term, then it is a 1. To wind up partnership affairs
partnership at will and can be dissolved by the 2. Complete transactions not finished (Art. 1834)
will of any partner. However, such partner must
be in good faith, otherwise, he will be liable for 2. Qualifications
damages. Among partners, mutual agency arises
and the doctrine of delectus personae allows (a) With respect to Partners (Art. 1833)
them to have the power, but not necessarily the
right, to dissolve the partnership (Ortega v. Court Authority of partners to bind partnership by new
of Appeals, G.R. 109248, 1995). contract is immediately terminated when
dissolution is not due to act, death, or
Grounds for dissolution by decree of court insolvency (ADI) of a partner.
(Art. 1831):
i. Partner declared insane in any judicial If due to ADI, partners are liable as if partnership
proceeding or shown to be of unsound mind not dissolved, when the following concur:
ii. Incapacity of partner to perform his part of a. If cause is act of partner, acting partner
the partnership contract must have knowledge of such
iii. Partner guilty of conduct prejudicial to dissolution; and
business of partnership b. If cause is death or insolvency, acting
iv. Willful or persistent breach of partnership partner must have knowledge/ notice.
agreement or conduct which makes it
reasonably impracticable to carry on (b) With respect to Persons not Partners (Art.
partnership with him 1834)
v. Business can only be carried on at a loss
vi. Other circumstances which render Partner continues to bind partnership even
dissolution equitable after dissolution in following cases:
vii. Upon application by purchaser of partner's i. Transactions in connection to winding up
interest: partnership affairs/completing unfinished
a. After termination of specified transactions
term/particular undertaking ii. Transactions which would bind partnership if
b. Anytime if partnership at will when not dissolved, when the other party/obligee:
interest was assigned/charging order
issued Situation 1
1. Had extended credit to partnership prior
If a partnership has no fixed term, then it is a to dissolution; and
partnership at will and can be dissolved by the will 2. Had no knowledge/notice of dissolution
of any partner. However, such partner must be in
good faith, otherwise, he will be liable for Situation 2
damages. Among partners, mutual agency arises 1. Did not extend credit to partnership;
and the doctrine of delectus personae allows 2. Had known partnership prior to
them to have the power, but not necessarily the dissolution; and
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3. Had no knowledge/notice of
dissolution/fact of dissolution not 2. Rights of Partner where Dissolution in
advertised in a newspaper of general Contravention of Agreement (Art. 1837)
circulation in the place where partnership
is regularly carried on (a) Partner who did not cause dissolution
wrongfully
3. Post Dissolution (Art. 1834) a. Apply partnership property to discharge
Partner cannot bind the partnership anymore liabilities of partnership
after dissolution: b. Apply surplus, if any to pay in cash the net
i. Where dissolution is due to unlawfulness to amount owed to partners
carry on with business (except: winding up of c. Indemnity for damages caused by partner
partnership affairs) guilty of wrongful dissolution
ii. Where partner has become insolvent d. Continue business in same name during
iii. Where partner unauthorized to wind up agreed term
partnership affairs, except by transaction e. Possess partnership property if business is
with one who: continued
Situation 1 (b) Partner who wrongly caused dissolution

1. Had extended credit to partnership prior
to dissolution, and 1. If business not continued by others
2. Had no knowledge/notice of dissolution; a. Apply partnership property to discharge
or liabilities of partnership
b. Receive in cash his share of surplus less
Situation 2 damages caused by his wrongful dissolution
1. Did not extend credit to partnership prior
to dissolution 2. If business continued by others
2. Had known partnership prior to a. Have the value of his interest at time of
dissolution dissolution ascertained and paid in
3. Had no knowledge/notice of cash/secured by bond
dissolution/fact of dissolution not b. Be released from all existing/future
advertised in a newspaper of general partnership liabilities
circulation in the place where partnership
is regularly carried on 3. Rights of Injured Partner where Partnership
Contract is Rescinded on Ground of
C. Rights of Partners upon Dissolution Fraud/Misrepresentation by One Party (Art.
1838)
General rule: Dissolution does not discharge
a. Right to lien on surplus of partnership
existing liability of partner
property after satisfying partnership liabilities
b. Right to subrogation in place of creditors after
Exceptions: Except by agreement.
payment of partnership liabilities
i. Between the partner and himself
c. Right of indemnification by guilty partner
ii. Between the person/partnership continuing
against all partnership debts & liabilities
the business
iii. Between partnership creditors (Art. 1835)
4. Settlement of Accounts between Partners
Assets of the partnership
1. Rights of Partner where Dissolution not in
1. Partnership property (including goodwill)
Contravention of Agreement (Art. 1837)
2. Contributions of the partners (Art. 1839 [1])
a. Apply partnership property to discharge
liabilities of partnership
Order of Application of Assets
b. Apply surplus, if any to pay in cash the net
1. Partnership creditors
amount owed to partners
2. Partners as creditors
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3. Partners as investors—return of capital partner, his legal representative or his assignee,

contribution upon cause shown, may obtain winding up by the
4. Partners as investors—share of profits if any court (Primelink Properties and Development
(Art. 1839 [2]) Corp. v. Lazatin-Magat, G.R. No. 167379, 2006).
The partners will contribute the amount A partner’s share cannot be returned without first
necessary to satisfy the liabilities based on the dissolving and liquidating the business for the
rules for distribution of profits and losses in Art. partnership’s outside creditors have preference
1797 (Art. 1839 [4]). Even the individual property over the enterprise’s assets. The firm’s property
of a deceased partner shall be liable for such cannot be diminished to their prejudice.
contributions (Art. 1839 [7]). (Magdusa v. Albaran, G.R. No. L-17526, 1962)
D. When Business of Dissolved Due to its separate juridical personality from the
Partnership is Continued individual partners, it is thus the partnership –
having been the recipient of the capital
Effects: contributions – which must refund the equity of
1. Creditors of old partnership are also creditors retiring partners. Such duty does not pertain to
of the new partnership, which continues the partners who managed the business. The amount
business of the old one w/o liquidation of the to be refunded consistent with the partnership
partnership affairs (Art.1840) being a separate and distinct entity, must
necessarily be limited to the firm’s total
2. Creditors have an equitable lien on the resources. It can only pay out what it has for its
consideration paid to the retiring /deceased total assets. But this is subject to the priority
partner by the purchaser when enjoyed by outside creditors. “After all the (said)
retiring/deceased partner sold his interest w/o creditors have been paid, whatever is left of the
final settlement with creditors (Art. 1840) partnership assets becomes available for the
payment of partners’ shares. (Villareal v.
The retired or deceased partner or his legal Ramirez, G.R. No. 144214, 2003)
representatives may
a. Have the value of his interest
4. LIMITED PARTNERSHIP
ascertained as of the date of dissolution
b. May receive as ordinary creditor the A. Characteristics of Limited Partnership
value of his share in the dissolved
partnership with interest or profits i. Formed by compliance with statutory
attributable to use of his right, at his requirements (Art. 1843)
option (Art. 1841) ii. One or more general partners control the
business (Art. 1843)
E. Persons Authorized to Wind Up iii. One or more general partners and one or
more limited partners. (Art. 1843) Limited
partners contribute cash or other property,
i. Partners designated by the agreement
but not services (Art. 1845) and share in the
ii. In absence of agreement, all partners who profits but do not participate in the
have not wrongfully dissolved the management of the business (Art. 1848) and
partnership are not personally liable for partnership
iii. Legal representative of last surviving partner obligations beyond their capital contributions
(Art. 1836) iv. May ask for the return of their capital
contributions under conditions prescribed by
Unless otherwise agreed, the partners who have law (Art. 1857)
not wrongfully dissolved the partnership or the v. Partnership debts are paid out of common
legal representative of the last surviving partner, fund and the individual properties of general
partners (Art. 1857)
not insolvent, has the right to wind up the
partnership affairs, provided, however, that any
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B. General Partnership v. Limited Certificate must be filed with the SEC.

Partnership i. To validly form a limited partnership, all that
is required is substantial compliance in
GENERAL LIMITED good faith with all the requirements under
Personally liable for Liability extends only Art. 1844 as enumerated above.
partnership to his capital ii. If no substantial compliance, then the firm
obligations (Art. 1816) contributions ( Art. becomes a general partnership as far as
1843) third persons are concerned (but as amongst
When manner of No participation in the partners, still limited) (Jo Chung Cang v.
management not management (Art. Pacific Commercial Co., 45 Phil 142)
agreed upon, all 1848)
general partners have D. Consent/Ratification of All Limited
an equal right in the Partners Needed
management of the
business (Art. 1803) i. Any act in contravention of the certificate
Contribute cash, Contribute cash or ii. Any act which would make it impossible to
property or industry property only, not carry on the ordinary business of the
(Art. 1767) industry (Art. 1845) partnership
Proper party to Not proper party to iii. Confess judgment against partnership
proceedings by/ proceedings by/ iv. Possess partnership property/assign rights
against partnership against partnership in specific partnership property other than for
(Art. 1866) (Art. 1866) partnership purposes
Interest not Interest is freely v. Admit person as general partner
assignable w/o assignable (Art. 1859) vi. Admit person as limited partner - unless
consent of other authorized in certificate
partners (Art. 1804) vii. Continue business with partnership property
on death, retirement, civil interdiction,
Name may appear in Name must appear in
firm name (Art. 1815) firm name (Art. 1846) insanity, or insolvency of gen partner unless
authorized in certificate (Art.1850)
Prohibition against No prohibition against
engaging in business engaging in business E. Specific Rights of Limited Partners
(Art. 1789, Art. 1808)
Retirement, death, Does not have same i. Right to have partnership books kept at
insolvency, insanity of effect; rights principal place of business
general partner transferred to legal ii. Right to inspect/copy books at reasonable
dissolves partnership representative (Art. hour
(Art. 1830) 1861) iii. Right to have on demand true and full info of
all things affecting partnership
iv. Right to have formal account of partnership
C. Requirements for Formation of Limited affairs whenever circumstances render it just
Partnership and reasonable
v. Right to ask for dissolution and winding up
Certificate of articles, of the limited partnership by decree of court
must state the following matters: vi. Right to receive share of profits/other
1. Name of partnership plus the word "Limited" compensation by way of income
2. Character of business vii. Right to receive return of contributions
3. Location of principal place of business provided the partnership assets are in
4. Name/place of residence of members excess of all its liabilities (Art. 1851)
5. Term for partnership is to exist
6. Amount of cash/value of property contributed F. Requisites for Return of Contribution of
7. Additional contributions Limited Partner
8. Time agreed upon to return contribution of
limited partner 1. All liabilities of partnership have been paid/if
9. Sharing of profits/other compensation (Art. not yet paid, at least sufficient to cover them
1844) 2. Consent of all members has been obtained
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3. Certificate is cancelled/amended as to set Note: Any person who suffers loss by reliance on
forth withdrawal /reduction of contribution false statement in certificate may hold liable for
(Art. 1857) damages any party to the certificate who knew
the statement to be false at the time the latter
G. Liabilities of A Limited Partner signed the certificate or came to know such falsity
subsequently but within sufficient time before
1. To the Partnership reliance to enable such party to cancel or amend
a. For the difference between his contribution as the certificate or file the proper petition for such
actually made and that stated in the purpose (under Art. 1865). (Art. 1847; Walraven
certificate as having been made, and v. Ramsay, 55 N.W.d 853, 1952)
b. For any unpaid contribution which he agreed
in the certificate to make in the future time A general partner’s DIIC (Death, Insolvency,
(Art. 1858) Insanity, or Civil interdiction) dissolves the
partnership unless the business is continued by
2. As a Trustee for the Partnership the surviving general partners under a right stated
in the certificate or with their common (i.e. all)
a. For the specific property stated in the consent (Civil Code, Art. 1860). Still, even if
certificate as contributed by him but which he allowed under the certificate or consented to by
had not contributed; all, there must be an amendment further to Arts.
b. For the specific property of the partnership 1864 and 1865. Otherwise, limited partners will
which had been wrongfully returned to him; not be able to avail of the protection of the law as
and regards liability. The partnership will be
c. Money or other property wrongfully paid or considered general. (Lowe v. Arizona Power &
conveyed to him on account of his Light Co., 427 P. d. 366, 1967)
contribution. (Art. 1858)
A limited partner shall not become liable as a
H. Dissolution of Limited Partnership general partner, unless in addition to the exercise
of his rights and powers as a limited one, he takes
1. Priority in Distribution of Assets
part in the control (and management) of the
a. Those due to creditors, including limited business (Art. 1848; Holzman v. Escamilla, 195
partners P. d. 833, 1948)
b. Those due to limited partners in respect of
their share in profits/compensation A person may be general and limited at the
c. Those due to limited partners of return of same time provided it is stated in the certificate.
capital contributed He shall have all the powers, rights, and
d. Those due to general partner other than restrictions of a general partner; but with respect
capital and profits to his capital contribution, his right against the
e. Those due to general partner in respect to other members of the firm would be that of a
profits limited partner (Art. 1853).
f. Those due to general partner for return of
capital contributed (Art. 1863) General rule: A limited partner may also loan
money to and transact other business with the
I. Amendment of Certificate of Partnership firm.
Instances when Certificate of Partnership may Exceptions: Except that he cannot:
be amended 1. Receive or hold as collateral any partnership
1. In case any of the ten enumerated changes property; or
and circumstances in Art. 1864, par. 2 are 2. Receive from a general partner or from the
present. firm any payment, conveyance, release if at
2. It must be signed and sworn to by all the that time assets of the firm are not sufficient
members including the new members if some to discharge liabilities to outside creditors.
are added; in case of substitution, the
assigning limited partner must also sign. Any violation would be fraud on such creditors
3. The cancellation or amendment must be (Art. 1854).
recorded in the SEC.(Art.1864)
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Note: The remedy of a general partner who B. CORPORATION

suffers from or faces interference from his
partners is dissolution. (Weil v. Diversified
Properties, 319 F. Supp., 1970) CORPORATION LAW
Republic Act No. 11232 – Revised Corporation
Liability of a Limited Partner Whose Surname Code
Appears in the Partnership Name
GENERAL PRINCIPLES
General Rule: A limited partner whose surname
1. DEFINITION OF CORPORATION
appears in the partnership name is liable as a
general partner to the partnership creditors who
An artificial being created by operation of law,
extended credit without actual knowledge that he
having the right of succession and the powers,
is not a general partner.
attributes and properties expressly authorized by
law or incident to its existence. (RCC,1 Sec. 2)
Exceptions:
i. If the surname is also the surname of a
Attributes of a Corporation (Sec. 2)
general partner; or
a. Artificial Being
ii. If prior to the time the partner became a
limited partner, the business has been b. Created by operation of law
carried under such name. c. Has right of succession – A corporation has
the capacity for continuous existence
despite changes in stockholders/members
--------- end of topic --------- d. Has only the powers, attributes, and
properties authorized by law or incident to its
existence.
Corporate Fiction
A corporation has a personality separate and

distinct from the persons composing it. (Civil
Code, Arts. 44-47; PNB v. Andrada Electric &
Engineering Co., G.R. No. 142936, 2002).
Corporation v. Partnership
CORPORATION PARTNERSHIP
Manner of Creation
Commences only By mere agreement
from the issuance of a
Certificate of
Incorporation by the
SEC, or, in proper
cases, passage of a
special law
Number of Organizers
Any person/s but not At least 2
more than fifteen
(15).2
Powers
1 For purposes of this part of the reviewer, unless 2Note- There is no 5 person minimum anymore for the
otherwise specified, all references refer to the Revised number of organizers (i.e., incorporators) of a
Corporation Code, Republic Act no. 11232. Corporation under the RCC. (see discussion at page
(hereinafter RCC) 15, Subheading 5.A)
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Restricted due to Subject to the to a special charter or through a general

limited powers agreement of partners enabling act such as the Corporation Code.
Authority of Those Who Compose It b. Public corporations - Formed or organized
Stockholders are not Mutual agency for the government of a portion of the state
agents of the between partners (e.g., barangay, municipality, city and
corporation in the province) Created for political purposes
absence of express connected with the public good in the
authority administration of the civil government
Transfers of Interest
Freely transferable Cannot be transferred Public Corporation v. Private Corporation
without the consent of without the consent of
PUBLIC PRIVATE
other stockholders the other partners
CORPORATION CORPORATION
(unless there is a
stipulation to the Government holds Government may
contrary) the controlling hold the controlling
Succession interest interest
Created under the
Existence continues Death of a partner
Corporation Code
even as persons who ends the partnership
compose it change Created by its charter
However, GOCCs
may also be created
Corporations as partners in a partnership
by special charter
Created for a public
Corporations have the power to enter into a
purpose
partnership, joint venture, merger, consolidation,
or any other commercial agreement with natural Exists primarily for
and juridical persons (Sec. 35(h)). the government of a Generally created for
portion of the state profit generation
Can a defective corporation result into a Subject to control and
partnership? (Two Views) supervision by the
State or its agency
No Partnership: When investors intended only to
invest in a corporate venture with no intention of Note:
participating in its corporate affairs, and the ● Ownership of the government of the majority
corporation was not formed, no partnership of the shares of a corporation does not by
relation is established by the failure to itself constitute such an entity as a public
incorporate, such investors cannot even be held corporation (National Coal Co., v. Collector of
liable for the contracts and transactions sued Internal Revenue, G.R. No. L-22619, 1994).
upon. (Pioneer Insurance v. CA, G.R. No. 84197, ● When the law vests corporate powers in a
1989) government instrumentality, it does not
necessarily become a corporation; a GOCC
Partnership Exists: However, when there was a must be organized as a stock or non-stock
clear intention to form a partnership venture corporation. (MIAA v. CA, G.R. No. 155650,
through a corporate vehicle (there was intention
2006)
to be active participants in the corporation’s
● Test to determine whether a corporation is
business), even those who did not directly
participate in the contract or transaction being public or private: If the corporation is
sued upon, but benefitted therefrom may be held created by the State as the latter’s own
liable as general partners. (Lim Tong Lim v. agency or instrumentality to help it in carrying
Philippine Fishing Gear, G.R. No. 136448, 1999) out its governmental functions, then that
corporation is considered public; otherwise it
2. CLASSES OF CORPORATIONS is private. (Philippine Society for the
Prevention of Cruelty to Animals v. COA,
In Relation To The State G.R. No. 169752, 2007)
a. Private corporations – Formed by private
persons alone, by or with the State pursuant
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a. Quasi-public corporation However, there is now formal administrative and

A species of private corporations created by statutory recognition of “government
special law and required to render public instrumentalities with corporate
service or supply public wants. (Id.) Usually powers/government corporate entities,” which
covers school districts, water districts and the
may not fall within the definition of stock and non-
like.
stock corporations, but are government
b. Government owned and controlled instrumentalities that are vested with corporate
corporations (GOCCs) powers. (LRTA v. Quezon City, G.R. No. 221626,
Created under a special law or charter, or any 2019)
agency organized as a stock or non-stock
corporation, vested with functions relating to Under the Constitution, the COA has audit
public needs whether governmental or jurisdiction over both GOCCs with original
proprietary in nature, and owned by the
charters (subject to COA pre-audit) and those
Government of the Republic of the
Philippines directly or through its without original charters (those organized under
instrumentalities either wholly or, where the Corporation Code—subject to post-audit).
applicable as in the case of stock (Alejandrino v. COA, G.R. No. 245400, 2019).
corporations, to the extent of at least a
majority of its outstanding capital stock (R.A. As to Place of Incorporation
No. 10149) a. Domestic – one incorporated under laws of
the Philippines
Note: A GOCC when organized under the b. Foreign – one formed, organized or existing
Corporation Code is still a private corporation. under any laws other than those of the
But being a GOCC makes it subject to laws and Philippines, and whose laws allow Filipino
provisions applicable to the Government or its
citizens and corporations to do business in its
entities and subject to the control of the
own country. (Sec. 140)
Government (Cervantes v. Auditor General, G.R.
No. L-4043, 1952).
As To Legal Status
The GOCC Governance Act (R.A. 10149), which a. De jure corporation
governs compensation and position classification ● Corporation organized in accordance
systems within the GOCC Sector, does not with requirements of law;
distinguish between chartered and non-chartered ● Every corporation is deemed to be a de
GOCCs, and its provisions apply equally to both. jure until proven otherwise
(GSIS Family Bank Employees Union v.
Villanueva, G.R. No. 210773, 2019). b. De facto corporation (Sec. 19)
● A corporation claiming in good faith to be
In order to qualify as a GOCC, one must be a corporation under the Corporation
organized either as a stock or non-stock Code but where there exists a flaw in its
corporation. Section 31 defines a stock incorporation or it falls short of the
corporation as one whose “capital stock is divided requirements provided by law.
into shares and ... authorized to distribute to the
● It is the result of an attempt to incorporate
holders of such shares dividends.” Although
under an existing law coupled with the
BCDA has an authorized capital of P100 Billion,
however, it is not divided into shares of stock; it exercise of corporate powers.
has no voting shares; and has no provision which ● A de facto corporation will incur the same
authorizes the distribution of dividends and obligations; have the same powers and
allotment of surplus and profits to BCDA’s rights as a de jure corporation.
stockholders. It cannot qualify also as a non-stock ● The due incorporation of any corporation
corporation because its primary purpose do not claiming in good faith to be a corporation
fall within the purposes enumerated under under the Corporation Code, and its right
Section 88. (BCDA v. CIR, G.R. No. 205925, 20 to exercise corporate powers, shall not
June 2018) be inquired into collaterally in any private
suit.
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● Under the Rules of Court Rule 66, inquiry b. Nonstock corporation (Secs. 86-87)
must be done by the Solicitor General in ● A corporation where no part of its income
a quo warranto proceeding where the is distributable as dividends to members,
main issue is the right to exist as a trustees or officers
corporation ● Any profit obtained as an incident to its
operations shall, whenever necessary or
Elements of a de facto corporation proper, be used for the furtherance of the
a. Valid law under which incorporated; purpose for which the corporation was
b. Attempt in good faith to incorporate or organized.
“colorable compliance;”
c. Assumption of corporate powers; and As To Control
d. Issuance of certificate of incorporation. a. Holding company – one that controls
(Arnold Hall v. Piccio, G.R. No. L-2598, 1950) another as a subsidiary or affiliate by the
power to elect its management; one which
Note: A corporation which has failed to file its by- holds shares in other companies for purposes
laws within the prescribed period does not ipso of control rather than for mere investment.
facto lose its powers as such (Sawadjaan v. CA, (SEC Opinion No. 15-15)
G.R. No. 141735, 2005). b. Affiliate company – one that is subject to
common control of a parent or holding
c. Corporation by estoppel (Sec. 20);
company and operated as part of a system.
All persons who assume to act as a corporation
(SEC Opinion No. 15-15)
knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities c. Parent and subsidiary companies – when
and damages incurred or arising as a result a corporation has a controlling financial
thereof interest in one or more corporations, the one
having control is known as the “parent
When such ostensible corporation is sued on any company” and the controlled corporations are
transaction entered by it as a corporation or on known as the “subsidiary companies”.
any tort committed by it as such, it shall not be
allowed to use its lack of corporate personality as As To Purpose of Incorporation
a defense. a. Municipal corporation
b. Religious corporation
Anyone who assumes an obligation to an c. Educational corporation
ostensible corporation as such cannot resist d. Charitable, Scientific or Vocational
performance thereof on the ground that there was corporation
in fact no corporation.
e. Business corporation
d. Corporation by prescription
As To Number of Members
The Roman Catholic Church is a corporation by
a. Aggregate - a corporation which consists of
prescription, with acknowledged juridical
personality inasmuch as it is an institution which many persons united to form a body politic
antedated by almost a thousand years any other and corporate (IEMELIF v. Lazaro, G.R. No.
personality in Europe (Barlin v Ramirez, G.R. No. 184088, 2010).
L-2832, 1906). b. Corporation sole – Formed by one person
who may be the chief archbishop, bishop,
As To Existence of Stocks minister, rabbi, or other presiding elder of any
a. Stock corporation religious denomination, sect or church. (Sec.
● Stock corporations are those which have 108)
capital stock divided into shares and are Purpose: created to administer and
authorized to distribute to the holders of manage the affairs, properties,
such shares, dividends, or allotments of temporalities of the church to which the
the surplus profits on the basis of the holder of the office belongs and also to
shares held. (Sec. 3) transmit the same to his successor in
office.
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c. Close Corporation- a corporation where:

a. stockholders of record shall not In order to determine the nationality of a
exceed twenty (20); corporation, the following steps should apply:
b. all the issued stock shall be
subject to one or more specified 1st Step: The nationality of a corporation is
restrictions on transfer permitted determined by the country under whose laws it is
by this Title; and incorporated (Place of Incorporation Test).
c. the corporation shall not list in
2nd Step: If the corporation is applying for a (2nd)
any stock exchange or make any
franchise for public utility and etc. which requires
public offering of its stocks of any
a certain percentage of control of stock, the Test
class. of Controlling Ownership would be applied.
Notwithstanding, a corporation shall not
be deemed a close corporation when at 3rd step: If there is doubt as to the domestic
least 2/3 of its voting stock is owned or control of the percentage of stock in a corporation
controlled by another corporation which with corporate stockholders, Grandfather test
is not a close corporation within the would be applied (Narra Nickel Mining and
meaning of this Code. (Sec. 95) Development Corp. v. Redmont Consolidated
d. One Person Corporation- a corporation with Mines Corp., G.R. No. 195580, 2014)
a single stockholder. Only a natural person,
trust, or an estate may form a One Person MAIN TESTS
Corporation. Banks and quasi-banks, pre- A. Place of Incorporation Test
need, trust, insurance, public and publicly- A corporation is a national of the country under
listed companies, and non-chartered whose laws it has been organized and registered
government-owned and -controlled
corporations may not incorporate as One B. Control Test
Person Corporations. A natural person who is In cases involving properties, business or
licensed to exercise a profession may not industries reserved for Filipinos, in addition to the
place of incorporation test, the nationality of a
organize as a One Person Corporation for the
corporation is determined by the nationality of the
purpose of exercising such profession except “controlling stockholders”.
as otherwise provided under special laws.
(Sec. 115) Absent any doubt, the Control Test shall be used
in determining the nationality of a corporation
3. NATIONALITY OF CORPORATIONS specially in cases where foreign ownership
restrictions apply. (SEC OGC Opinion No. 16-19)
Nationality of Corporation
Serves as a legal basis for subjecting the [T]here are two cases in determining the
enterprise or its activities to the laws, the nationality of the Investee Corporation. The first
economic and fiscal powers, and various social case is the ‘liberal rule’, later coined by the SEC
and financial policies of the state to which it is as the Control Test in its 30 May 1990 Opinion,
supposed to belong. and pertains to the portion in said Paragraph 7 of
the 1967 SEC Rules which states, ‘(s)hares
Tests: belonging to corporations or partnerships at least
1. Place of Incorporation 60% of the capital of which is owned by Filipino
2. Control Test citizens shall be considered as of Philippine
3. Grandfather Rule3 nationality.’ Under the liberal Control Test, there
4. War-time – in times of war, nationality of is no need to further trace the ownership of the
corporation is determined by the character or 60% (or more) Filipino stockholdings of the
citizenship of its controlling stockholders Investing Corporation since a corporation which
is at least 60% Filipino-owned is considered as
5. Investment Test
Filipino. (Narra Nickel Mining and Development
6. Place of Principal Business
3 Emphasis on no. 2 & 3 for they are expressly

indicated in the bar syllabus.
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Corp. v. Redmont Consolidated Mines Corp., Opinion No. 04-14 in reference to the Foreign
G.R. No. 195580, 2014). Investments Act)
The required percentage of Filipino Some instances wherein the control test
ownership shall be applied to both: applies:
a. The total number of outstanding shares of a. Exploitation of natural resources (> 60%)
stock entitled to vote in the election of ● Sec 2, Art XII, 1987 Constitution – policy
directors, and of the State is to ensure that the
b. The total number of outstanding shares of exploitation of natural resources or the
stock, whether or not entitled to vote in the pursuit of the activities deemed to be of
election of directors. (SEC Memorandum public or national interest are in the
Circular No. 8, s. 2013, Sec. 2) control of the Filipinos
● The State may directly undertake such
Mere legal title is not enough. Full beneficial activities, or it may enter into co-
ownership of 60 percent of the outstanding capital production, joint venture, or production
stocks, coupled with 60 percent of the voting sharing agreements with:
rights, is constitutionally required for the State's o Filipino citizens; or
grant of authority to operate a public utility. Thus, o Corporations or associations, at
voting rights of stocks which have been assigned
least 60% owned by such
or transferred to aliens cannot be considered held
citizens
by Philippine citizens or nationals (cannot give
proxies to vote). (Roy III v. Herbosa, et al., G.R. b. Public Utilities (> 60%)
No. 207246, 2016) ● Sec 11, Art XII, 1987 Constitution –
requires that only domestic corporations
The definition of “beneficial owner or beneficial with at least 60% of the capital stock
ownership in the SRC-IRR, which is in owned by Filipinos may own and operate
consonance with the concept of “full beneficial public utilities in the Philippines
ownership” in the FIA-IRR, is relevant in resolving ● The nationality test for public utilities
only the question of who is the beneficial owner applies not at the time of the grant of the
or has beneficial ownership of each “specific primary franchise that makes a
stock” of the public utility whose stocks are under corporation a juridical person, but at the
review. If the Filipino has the voting power of the grant of the secondary franchise that
“specific stock”, i.e., he can vote the stock or
authorizes the corporation to engage in a
direct another to vote for him, or the Filipino has
nationalized industry. (People v. Quasha,
the investment power over the “specific stock”,
i.e., he can dispose of that “specific stock” or G.R. No. L-6055, 1953)
direct another to vote or dispose it for him, then ● The Constitution requires a franchise for
such Filipino is the “beneficial owner” of that operating a public utility; however, it does
“specific stock.” Being considered Filipino, that not require a franchise before one can own
“specific stock” is then to be counted as part of the facilities needed to operate a public
the 60% Filipino ownership requirement under utility so long as it does not operate them to
the Constitution. The right to the dividends, jus
serve the public.(Tatad v. Garcia, Jr., G.R.
fruendi—a right emanating from ownership of that
“specific stock” necessary accrues to its Filipino No. 114222, 1995).
“beneficial owner.” (Roy III v. Herbosa, G.R. No. c. Mass Media (100%)
207246 (Resolution), 18 April 2017.) ● Sec 11, Art XVI, 1987 Constitution –
ownership of mass media shall be limited
General rule: The Control Test cannot overcome to the citizens of the Philippines, or to
the Place of Incorporation Test. corporations, cooperatives or
associations, wholly-owned and
Exception: A corporation organized abroad and managed by such citizens (100% Filipino
registered as doing business in the Philippines management of the entity)
under the Corporation Code, whose capital ● Cable Industry - CATV as “a form of mass
outstanding stock and entitled to vote is wholly
media which must, therefore, be owned
owned by Filipinos is a Philippine National. (SEC
and managed by Filipino citizens, or
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corporations, cooperatives or OTHER TESTS

associations, wholly-owned and
managed by Filipino citizens pursuant to A. War-Time Test
the mandate of the Constitution.” (DOJ
Opinion No. 95, series of 1999). In times of war, nationality of corporation is
d. Advertising Industry (> 70%) determined by the character or citizenship of its
● Sec 11, Art XVI, 1987 Constitution – only controlling stockholders
Filipino citizens or corporations or
B. Investment Test
associations at least 70% of the capital of
which is owned by such citizens shall be
“Philippine National”
allowed to engage in the advertising a. A corporation organized under Philippine
agency laws of which at least 60% of the outstanding
e. NEDA could advise Congress to set limitations capital stock entitled to vote is owned and
of stock ownership in Corporations vested with held by Filipino citizens; and
Public Interests (Sec. 176)
b. A corporation organized abroad and
C. Grandfather Rule registered as “doing business” in the
Where corporate shareholders are present (and Philippines under the Corporation Code of
when the Filipino-foreign equity ownership is in which 100% of the capital stock entitled to
doubt), the percentage of the Filipino equity in vote belong to Filipinos (R.A. No. 7042, Sec.
corporations is computed by attributing the 3[a], as amended or Foreign Investment Act
nationality of the second or subsequent tier of of 1991)
ownership to determine the nationality of the
corporate shareholder Double 60% Rule
Where a corporation and its non-Filipino
Example: MV Corporation and AC Corporation stockholders own stock in a SEC-registered
have equal interest in XYZ Company. MV enterprise, at least 60% of the outstanding capital
Corporation is 60% owned by Filipinos, while AC stock and entitled to vote of both corporations and
Corporation is 50% owned by Filipinos. By the at least 60% of the members of the Board of
grandfather rule, MV Corporation would have a Directors of both corporations must be Filipino
30% Filipino interest in XYZ Company (60% of citizens (R.A. No. 7042, Sec. 3[a], as amended)
50%), while AC Corporation would have a 25%
Filipino interest in XYZ Company (50% of 50%). C. Place of Principal Business Test
Hence, the total Filipino interest is only 55%. Residence of a corporation is the place where its
principal office is located, as stated in its Articles
The Control test is still the prevailing mode of of Incorporation.
determining whether or not a corporation is a
Filipino corporation within the ambit of the natural The place where the principal office of the
resources provisions of the Constitution. But corporation is to be located is one of the required
when in the mind of the court there is doubt based contents of the articles of incorporation to be filed
on attendant facts and circumstances, in the 60- with the SEC (Hyatt Elevators v. Goldstar, G.R.
40 Filipino equity ownership in the corporation, No. 161026, 2005).
then it may apply the grandfather rule (Narra
Nickel Mining and Development Corp. v. Applied to determine whether a state has
Redmont Consolidated Mines Corp., G.R. No. jurisdiction over the existence and legal character
195580, 2014). of a corporation, its capacity or powers, internal
organization, capital structure, the rights and
liabilities of directors, officers, and shareholders
The “grandfather rule” does not eschew, but in fact
towards each other and to creditors and third
supplements the “control test”, as the latter persons.
implements Filipinization provisions of the
Constitution. (Narra Nickel Mining and Development 4. CORPORATE JURIDICAL PERSONALITY
Corp. v. Redmont Consolidated Mines Corp., G.R.
No. 195580, 2015). General Rule: The Corporation has a separate
and distinct juridical personality from its directors,
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officers, trustees and shareholders (Doctrine of The failure of the corporate employer to comply
Separate Juridical Personality). with a legal duty, such as under the Labor Code
to grant separation pay to employees constitutes
Exception: When the corporation is used as a tort and its stockholder who was actively engaged
cloak for fraud, illegality, or in other certain in the management of the business should be
held personally liable (Naguiat v. NLRC, G.R. No.
circumstances, the courts may disregard the
116123, 1997).
separate and distinct personality of the
corporation and treat the corporation as a mere A corporation can be held liable for the tortious
collection of individuals undertaking business as acts of a corporate officer, in the absence of a
a group (Doctrine of Piercing the Veil of prior express direction from the BOD, if such was
Corporate Fiction). connected to the business of the corporation.
A. Doctrine of Separate Juridical The remedy of the corporation is to recover

Personality damages against the acting corporate officer
responsible for the tortious act.
A corporation is a juridical entity with a legal
personality separate and distinct from those b) On Crimes
acting for and on its behalf, and, in general, from General rule: Corporations cannot commit
the people comprising it; the obligations incurred felonies under the RPC for it is incapable of the
by the corporation, acting through its directors, requisite intent to commit these crimes.
officers and employees are its sole liabilities
(Santos v NLRC, G.R. No. 101699, 1996). It also cannot commit crimes that are punishable
under special laws because crimes are personal
While a share of stock represents a proportionate in nature requiring personal performance of overt
or aliquot interest in the property of the acts.
corporation, it does not vest the owner thereof
with any legal right or title to any of the corporate A corporation cannot be arrested and imprisoned;
property, his interest in such property being hence, cannot be penalized for a crime
equitable or beneficial in nature. Shareholders punishable by imprisonment.
are in no legal sense the owners of corporate
property, which is owned by the corporation as a Exceptions: If the crime is committed by a
distinct legal person (Magsaysay-Labrador v CA, corporation, the directors, officers, employees or
G.R. No. 58168, 1989). other officers thereof responsible for the offense
shall be charged and penalized for the crime,
Corporate Liability precisely because of the nature of the crime and
the penalty therefore. However, the corporation
i. Liability for Torts and Crimes may be charged and prosecuted for a crime if the
imposable penalty is fine (Ching v. Secretary of
a) On Torts Justice, G.R. No. 164317, 2006).
A corporation is civilly liable in the same manner
as natural persons for torts, because the rules When a law expressly provides that a corporation
governing the liability of a principal for a tort may be proceeded against criminally, the
committed by an agent are the same whether the responsible officer will be held personally liable
principal be a natural person or a corporation, and for the crimes committed by the corporation.
whether the agent be a natural or artificial person. However, such liability will only attach to the
That a principal is liable for every tort which he officer when the corporation is directly required by
expressly directs or authorizes, is just as true of a law to do an act in a given manner, and the same
corporation as a natural person (PNB v. CA, G.R. law makes the person who fails to perform the act
No. L-27155, 1978). in the prescribed manner expressly liable
criminally (Sia v. Court of Appeals, G.R. No.
A corporate officer who caused the tort act to be 108222, 1997). For example:
committed in the name of the corporation is also 1) Under the Anti-Money Laundering Act,
personally liable as a joint-tortfeasor. juridical persons are also defined as
offenders.
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2) The RCC provides situations where Note: The right against self-incrimination has no
corporations are liable for criminal application to juridical persons. (Bataan Shipyard
sanctions: v. PCGG, G.R. No. 75885, 1987)
a) SEC. 161. Violation of Duty to ● The right against self-incrimination refers
Maintain Records, to Allow their only to testimonial compulsion;
Inspection or Reproduction; ● A corporation cannot testify; and
b) SEC. 165. Fraudulent Conduct ● The State can freely open the books of
of Business; the corporation to ensure that it does not
c) SEC. 166. Acting as exceed its powers
Intermediaries for Graft and
Corrupt Practices; Implications of the Existence of the Corporate
d) SEC. 167. Engaging Veil or a Separate and Distinct Juridical
Personality
Intermediaries for Graft and
Corrupt Practices
a) Controlling interest of and/or dealings in
shareholdings
ii. Recovery of Moral Damages Ownership of a majority of capital stock and the
fact that majority of directors of a corporation are
General rule: A corporation cannot recover moral the directors of another corporation creates no
damages as it cannot suffer physical suffering employer-employee relationship with the latter’s
and mental anguish (Prime White Cement v IAC, employees (DBP v. NLRC, G.R. No. 86932,
G.R. No. L-68555, 1993). 1990; Francisco, et al. v. Mejia, G.R. No. 141617,
2001).
Exception: A corporation with a good reputation,
if besmirched, is allowed to recover moral The mere fact that a stockholder sells his shares
damages upon proof of existence of factual basis of stock in the corporation during the pendency of
of damage (actual injury) and its causal relation a collection case against the corporation, does
(Crystal v. BPI, G.R. No. 172428, 2008). not make such stockholder personally liable for
the corporate debt, since the disposing
The following Constitutional rights apply to a stockholder has no personal obligation to the
corporation: creditor, and it is the inherent right of the
stockholder to dispose of his shares of stock
a. Due process - The due process clause is anytime he so desires (Remo, Jr. v. IAC, G.R. No.
universal in its application to all persons L-67626, 1989).
without regard to any differences of race,
color, or nationality. Private corporations, Mere substantial identity of the incorporators of
likewise, are “persons” within the scope of the the two corporations does not necessarily imply
guaranty insofar as their property is fraud, nor warrant the piercing of the veil of
concerned.” (Smith Bell & Co. v. Natividad, corporate fiction. In the absence of clear and
G.R. No. 15574, 1919). convincing evidence to show that the corporate
b. Equal protection of the law (Smith Bell & personalities were used to perpetuate fraud, or
Co. v. Natividad, G.R. No. 15574, 1919) circumvent the law, the corporations are to be
c. Unreasonable searches and seizures - treated as distinct and separate from each other
(Laguio v. NLRC, G.R. No. 108936, 1996).
(Stonehill v. Diokno, G.R. No. L-19550,
1967). b) Transaction amongst the corporation and
stockholders
In organizing itself as a collective body, the
corporation waives no constitutional immunities The transfer of the corporate assets to the
applicable to it. Its property cannot be taken stockholder is not in the nature of a partition but
without compensation; can only be proceeded is a conveyance from one party to another
against by due process of law; and is protected (Stockholders of F. Guanzon and Sons, Inc. v.
against unlawful discrimination (Bache & Co. Register of Deeds of Manila, G.R. No. L-18216,
(Phil.), Inc. v. Ruiz, G.R. No. 32409, 1971, citing 1962).
Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.).
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Note: A corporation may not be made to answer shareholders in corporate property is purely
for acts or liabilities of its stockholders or those of inchoate (Saw v. CA, G.R. No. 90580, 1991).
the legal entities which it may be connected and
vice-versa (ARB Constructions Co., Inc. v. Court The interests of payees in promissory notes
of Appeals, G.R. No. 126554, 2000). cannot be off-set against the obligations between
the corporations to which they are stockholders
c) Pertaining to privileges enjoyed absent any allegation, much less, even a scintilla
The tax privileges enjoyed by a corporation do not of substantiation, that the parties interest in the
extend to its stockholders. A corporation has a corporation are so considerable as to merit a
personality distinct from that of its stockholders, declaration of unity of their civil personalities
enabling the taxing power to reach the latter when (CKH Industrial and Development Corp. v. CA,
they receive dividends from the corporation. It G.R. No. 111890, 1997).
must be considered as settled in this jurisdiction
that dividends of a domestic corporation which Even when the foreclosure on the assets of the
are paid and delivered in cash to foreign corporation was wrongful and done in bad faith,
corporations as stockholders are subject to the the stockholders of the corporation have no
payment of the income tax, the exemption clause standing to recover for themselves moral
to the charter [of the domestic corporation] damages. Otherwise, it would amount to the
notwithstanding. (Manila Gas Corporation. v. appropriation by, and the distribution to, such
Collector of Internal Revenue, G.R. No.L-42780, stockholders of part of the corporation’s assets
1936). before the dissolution of the corporation and the
liquidation of its debts and liabilities (APT v. CA,
d) Assumption as a corporate officer G.R. No. 121171, 1998).
Being an officer or stockholder of a corporation
does not by itself make one’s property also of the Where real properties included in the inventory of
corporation, and vice-versa, for they are separate the estate of a decedent are in the possession of
entities, and that shareholders are in no legal and are registered in the name of the
sense the owners of corporate property which is corporations, in the absence of any cogency to
owned by the corporation as a distinct legal shred the veil of corporate fiction, the
person (Good Earth Emporium, Inc. v. CA, G.R. presumption of conclusiveness of said titles in
No. 82797, 1991). favor of said corporations should stand
undisturbed (Lim v. CA, G.R. No. 124715, 2000).
The mere fact that one is president of the
corporation does not render the property he owns f) Third-parties to corporate acts
or possesses the property of the corporation, The fact that respondents are not stockholders of
since that president, as an individual, and the the disputed corporations does not make them
corporation, are separate entities (Cruz v. non-parties to the case. In this case, it is alleged
Dalisay, A.M. No. R-181-D, 1987). that the aforementioned corporations are mere
alter egos of the directors-petitioners, and that the
e) Properties, obligations and debts former acquired the properties sought to be
A corporation has no legal standing to file a suit reconveyed to FGSRC in violation of directors-
for recovery of certain parcels of land owned by petitioners’ fiduciary duty to FGSRC.
its members in their individual capacity, even
when the corporation is organized for the benefit The notion of corporate entity will be pierced or
of the members (Sulo ng Bayan v. Araneta, Inc., disregarded and the individuals composing it will
G.R. No. L-31061, 1976). be treated as identical if, as alleged in the present
case, the corporate entity is being used as a cloak
The corporate debt or credit is not the debt or or cover for fraud or illegality; as a justification for
credit of the stockholder nor is the stockholder’s a wrong; or as an alter ego, an adjunct, or a
debt or credit that of the corporation (Traders business conduit for the sole benefit of the
Royal Bank v. CA, G.R. No. L-78412, 1989). stockholders (Gochan v. Young, G.R. No.
131889, 2001).
Stockholders have no personality to intervene in
a collection case covering the loans of the
corporation on the ground that the interest of
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B. Doctrine of Piercing the Veil of pertaining to the corporation against

Corporate Fiction corporate officers or stockholders.
Under certain circumstances, the courts may Example cases:

disregard the separate and distinct personality of a) Where a stockholder, who has absolute
the corporation from its members or stockholders control over the affairs of the corporation,
and treat the corporation as a mere collection of entered into a contract with another
individuals or an aggregation of persons corporation through fraud and false
undertaking business as a group such as when representations, such stockholder shall be
the corporate legal entity is used as a cloak for liable solidarily with co-defendant corporation
fraud or illegality (Kukan Int’l v Reyes, G.R. No. even when the contract sued upon was
182729, 2010). entered into on behalf of the corporation
(NAMARCO v. Associated Finance Co.,G.R.
It is an equitable doctrine used as a last resort No. L-20886, 1967).
only when the objective is to hold the officers b) Piercing is allowed where the corporation is
and/or stockholders liable. Thus, in one case, it used as a means to appropriate a property by
cannot be applied in order to declare a fraud which property was later resold to the
foreclosure proceeding a nullity (Umali v. CA, GR controlling stockholders. (Heirs of Ramon
No. 89561, 1990). Durano, Sr. v. Uy, G.R no.136456, 2000).
c) Fraud and bad faith on the part of certain
Being merely an equitable remedy, employment corporate officers or stockholders may warrant
of the piercing doctrine can only be for the the piercing of the veil of corporate fiction so
“protection of the interests of innocent third that the said individual may not seek refuge
persons dealing with the corporate entity therein, but may be held individually and
which the law aims to protect by this doctrine” personally liable for his or her actions.
(Traders Royal Bank v. Court of Appeals, G.R. (Lafarge Cement Phils., Inc. v. Continental
No. 93397, 1997). Cement Corp., G.R. no. 155173, 2004)
Classification of piercing cases: For Alter-ego Cases:

a. Fraud piercing – when a corporate entity is ● The doctrine applies in this case even in the
used to commit fraud or justify a wrong or to absence of evil intent; it applies because of
defend a crime. the direct violation of a central corporate law
b. Alter-ego piercing – when a corporate principle of separating ownership from
entity is used to defeat public convenience management.
or is merely a farce since the corporation is ● The doctrine in such cases is based on
merely the alter ego, business conduit, or estoppel: if stockholders do not respect the
instrumentality of a person or another entity. separate entity, others cannot also be
c. Equity cases – when piercing the corporate expected to be bound by the separate
fiction is necessary to achieve justice or juridical entity.
equity. ● Piercing in alter ego cases may prevail even
when no monetary claims are sought to be
Note: The three cases may appear together in enforced against the stockholders or officers
one application (R.F. Sugay & Co. v. Reyes, G.R. of the corporation.
No. L-20451, 1964).
ii. Tests for Applicability of the Doctrine of
i. Grounds for application of the different Piercing the Veil of Corporate Fiction: (CUP)
types of piercing a. Control – not mere stock control but
Complete Domination – not only of
For Fraud Cases: finances, but of policy and business practice
1. There must have been fraud or an evil in respect to the transaction attacked and
motive in the affected transaction, and must have been such that the corporate
the mere proof of control of the corporation entity as to this transaction had at the time
by itself would not authorize piercing; and no separate mind, will or existence of its
2. The main action should seek for the own.
enforcement of pecuniary claims b. Such control must have been Used by the
defendant to commit a fraud or wrong to
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perpetuate the violation of a statutory or ● The parent corporation uses the property of
other positive legal breach of duty, or a the subsidiary as its own.
dishonest and an unjust act in contravention ● The directors or executives of the subsidiary
of the plaintiff’s legal right; and, do not act independently in the interest of the
c. The said control and breach of duty must subsidiary but take their orders from the
have Proximately caused the injury or parent corporation.
unjust loss complained of (Concept Builders ● The formal legal requirements of the
Inc. v. NLRC, 108734, 1996). subsidiary are not observed (Phil. National
Bank v. Ritratto Group, Inc., GR No. 142616,
These were expanded as three-pronged tests: 2001).
The first prong is the "instrumentality" or Note: Mere ownership by a single stockholder or
"control" test. This test requires that the by another corporation of all or substantially all of
subsidiary be completely under the control and the capital stock of the corporation does not justify
domination of the parent corporation or the application of the doctrine (Francisco v. Mejia,
shareholder. It seeks to establish whether the G.R. No. 141617, 2001).
corporation has no autonomy and the parent
corporation or shareholder "is operating the Example Cases:
business directly for itself or themselves." a) Where the stock of a corporation is owned by
one person whereby the corporation
The second prong is the "fraud" test. This test functions only for the benefit of such
requires that the conduct in using the corporation individual owner, the corporation and the
be unjust, fraudulent or wrongful. individual should be deemed the same
(Arnold v. Willets and Patterson, Ltd., G.R.
The third prong is the "harm" test. This test No. L-20214, 1923).
requires the plaintiff to show that the defendant’s b) When the corporation is merely an adjunct,
control, exerted in a fraudulent, illegal or business conduit or alter ego of another
otherwise unfair manner toward it, caused the corporation, the fiction of separate and
harm suffered (PNB v. Hydro Resources distinct corporation entities should be
Contractors Corporations, G.R. no. 167530, disregarded (Tan Boon Bee & Co. v.
2013). Jarencio, G.R. No. L-41337, 1988).
c) Employment of same workers; single place of
Factors to Consider in cases of Parent and business, etc. (La Campana Coffee Factory
Subsidiary corporations in Alter-ego Piercing: v. Kaisahan ng Manggagawa, G.R. No. L-
● The parent corporation owns all or most of 5677, 1953).
the capital of the subsidiary. d) Use of nominees (Marvel Building v. David,
● The parent and subsidiary corporations have G.R. No. L-508, 1951)
common directors or officers. e) Avoidance of tax. (Yutivo Sons Hardware v.
● The parent company finances the subsidiary. Court of Tax Appeals, G.R. No. L-13203,
● The parent company subscribed to all the 1961; Liddell& Co. v. Collector of Internal
capital stock of the subsidiary or otherwise Revenue, G.R. No. L-9687, 1961).
caused its incorporation. f) Mixing of bank deposit accounts. (Ramirez
● The subsidiary has grossly inadequate Telephone Corp. v. Bank of America, G.R.
capital. No. L-22614, 1969).
● The parent corporation pays the salaries and g) Where it appears that two business
other expenses or losses of the subsidiary. enterprises are owned, conducted, and
● The subsidiary has substantially no business controlled by the same parties, both law and
except with the parent corporation or no equity will, when necessary to protect the
assets except those conveyed to or by the rights of third persons, disregard the legal
parent corporation. fiction that two corporations are distinct
● The papers of the parent corporation or in the entities and treat them as identical (Sibagat
statements of its officers, the subsidiary is Timber Corp. v. Garcia, G.R. No. 98185,
described as a department or subdivision of 1992)
the parent corporation, or its business or h) Thinly-capitalized corporations (McConnel v.
financial responsibility is referred to as the Court of Appeals, G.R. No. L-10510, 1961).
parent corporation’s own.
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i) Parent-subsidiary relationship. (Koppel Union-PTGWO v. Calica, G.R. No. 96490,

(Phil.), Inc. v. Yatco, G.R. No. L-47673,1946; 1992).
Philippine Veterans Investment Development
Corporation v. CA, G.R. No. 85266, 1990) Note: However, piercing in alter ego cases
j) Affiliated companies (Guatson International may prevail even when no monetary claims
Travel and Tours, Inc. v. NLRC, G.R. No. are sought to be enforced against the
100322, 1994) stockholders or officers of the corporation.
(e.g. piercing for other purposes such as
Summary of Probative Factors (Philippine laborer’s rights)
National Bank vs. Ritratto Group, Inc., et al., G.R.
No. 142616, 2001; Concept Builders, Inc. v. (d) Piercing is forbidden when the personal
NLRC, G.R. No. 108734, 1996): Whether the obligations of an individual are sought to
separate personality of the corporation should be be enforced against the corporation
pierced depends on questions of facts, (Robledo v. NLRC, G.R. No. 110358, 1994).
appropriately pleaded. Mere allegation that a
corporation is the alter ego of the individual Note: As an exception to this rule, the
stockholders is insufficient. The presumption is Supreme Court allowed such piercing by
that the stockholders or officers and the applying the concept of “reverse piercing”.
corporation are distinct entities. The burden of In a traditional veil-piercing action, a court
proving otherwise is on the party seeking to have disregards the existence of the corporate
the court pierce the veil of corporate entity entity so a claimant can reach the assets of a
(Ramoso v. CA, G.R. No. 117416, 2000). corporate insider. In a reverse piercing
action, however, the plaintiff seeks to reach
For Equity Cases: the assets of a corporation to satisfy claims
These are cases, where there is no fraud or alter against a corporate insider."
ego circumstances that can warrant the piercing
of the corporate veil. This mainly used to render Reverse piercing has two (2) types:
justice in the situation at hand, or to brush aside 1. Outsider reverse - piercing occurs when
technical defenses. a party with a claim against an individual or
corporation attempts to be repaid with assets
For example: of a corporation owned or substantially
a) When used to confuse legitimate issues controlled by the defendant.
(Telephone Engineering and Service Co., 2. Insider reverse piercing - the controlling
Inc. V. WCC, G.R. No. L-28694, 1981). members will attempt to ignore the corporate
b) When used to raise issues relating only to fiction in order to take advantage of a benefit
technicalities (Emilio Cano Ent. v. CIR, G.R. available to the corporation, such as an
No. L-20502, 1965). interest in a lawsuit or protection of personal
assets. (International Academy of
The veil may not always be pierced, especially Management and Economics vs. Litton and
in the following circumstances: Company, G.R. No. 191525, 2017).
(a) Piercing is a remedy of last resort and is not (e) To disregard the separate juridical
available when other remedies are still personality of a corporation, the wrongdoing
available (Umali v. CA, G.R. No. 89561, must be clearly and convincingly
1990). established. It cannot be presumed (DBP vs.
(b) One cannot successfully invoke the piercing CA, G.R. No. 126200, 2001).
doctrine when it was proven that the act done (f) Piercing of the veil of corporate fiction is not
was contrary to the existing rules, which allowed when it is resorted to justify under
were well-known to the officers of the one a theory of co-ownership the continued
invoking it (Traders Royal Bank v. Court of use and possession by stockholders of
Appeals, G.R. No. 93397, 1997). corporate properties (Boyer-Roxas v. Court
(c) Piercing is forbidden unless the remedy of Appeals, G.R. No. 100866, 1992).
sought is to make the stockholder, officer (g) The piercing doctrine cannot be availed of in
or another corporation pecuniarily liable order to dislodge from the jurisdiction of
for corporate debts (Umali v. CA, G.R. No. the SEC the petition for suspension of
89561, 1990; Indophil Textile Mill Workers payments filed under Section 5(e) of Pres.
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Decree No. 902-A, on the ground that the They must:

petitioning individuals should be treated as a. Be a natural person, partnership,
the real petitioners to the exclusion of the association or corporation, singly or
petitioning corporate debtor (Union Bank v. jointly with others but not more than
CA, G.R. No. 131729, 1998). fifteen (15)5 ;
(h) Changing of the petitioner’s subsidiary i. may be composed of any
liabilities by converting them to guarantors of combination of natural person/s,
bad debts cannot be done by piercing the veil
SEC-registered partnership/s,
of corporate identity (Ramoso v. CA, G.R. No.
SEC-registered domestic
117416, 2000)
(i) Piercing doctrine is meant to prevent fraud, corporation/s or associations, and
and cannot be employed to perpetrate foreign corporation/s (SEC MC
fraud or a wrong (Araneta, Inc. v. Tuason, no. 16-19)
G.R. No. L-2886, 1952). b. If natural persons, be of Legal Age;
(j) Corporate persons are entitled to due c. Each owns or subscribes to at least
process protection. Thus, failure to implead one share for stock corporations and
a corporation in a suit for recovery of ill- be a member for non-stock
gotten wealth against its stockholders corporations.
cannot bind the corporation itself; Note: Natural persons who are licensed to
otherwise, its fundamental right to due practice a profession, and partnerships or
process will be violated. (COCOFED v. associations organized for the purpose of
Republic, G.R. No. 177857-58, 2016) practicing a profession, shall not be allowed to
(k) Mere ownership of all or nearly all of the organize as a corporation (for the practice of such
capital stocks of a corporation is not in itself a profession) unless otherwise provided under
sufficient reason for disregarding the fiction of special laws.(Sec. 10)
separate corporate personalities. The
probate court applied doctrine of piercing the Additional Guidelines issued by the SEC(SEC
corporate veil since Rosario had no other MC no. 16-19):
properties that comprise her estate other than 1) For Partnership as Incorporators:
her shares. Although the intention to protect ● Application for registration must be
the shares from dissipation is laudable, it is accompanied with an affidavit, executed
still an error to order tenants to remit
by all the partners, indicating that they
payments to the estate. Also, the court has
not acquired jurisdiction over Primrose and its authorized the partnership to be an
properties. Piercing applies to the incorporator and have designated one of
determination of liability not of the partners to sign the incorporation
jurisdiction. It is not available to confer documents.
jurisdiction over a party not impleaded in ● Partnerships under Dissolved or Expired
a case. (Mayor v. Tiu, G.R. No. 203770, status with the SEC shall not be
2016) authorized to become an incorporator.
2) For Domestic Corporations or Associations
5. CAPITAL STRUCTURE as Incorporators:
● Its investment in the new corporation must
A. Number and Qualifications of be approved by a majority of the board of
Incorporators directors or trustees ratified by the
stockholders representing at least two-
1) Incorporators4 – Incorporators are those thirds (⅔) of the outstanding capital stock,
stockholders or members mentioned in the or at least two-thirds (⅔) of the members
articles of incorporation as originally forming in cases of nonstock corporations.
and composing the corporation and who are ● A Directors'/Trustees' Certificate or a
signatories thereof (Sec. 5). Secretary's Certificate, indicating the
4 Note: Amendments were introduced by the RCC 5 A corporation with a single stockholder is considered
removing the qualifications to be natural persons, and either as an One Person Corporation or a Corporation
majority must be residents of the Philippines; Sole.
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necessary approvals, as well as the General Rule: A corporate term for a specific
authorized signatory to the incorporation period may be extended or shortened by
documents, shall be executed under oath amending the articles of incorporation.
and submitted by the applicant. Limitation: No extension may be made
● Domestic corporations under "delinquent", earlier than three (3) years prior to the
"suspended", "revoked" or "expired" original or subsequent expiry date(s)
status with the SEC shall not be
Exception: There are justifiable reasons for an
authorized to become an incorporator.
earlier extension as may be determined by the
3) For Foreign Corporations as incorporators: SEC.
● The application for registration must be
accompanied by a copy of a document Effects:
duly authenticated by a Philippine If extended:
Consulate or with an apostille affixed Such extension of the corporate term shall take
thereto, authorizing the foreign effect only on the day following the original or
corporation to invest in the corporation subsequent expiry date(s).
being formed and specifically naming the
designated signatory on behalf of the If not extended or expired:
foreign corporation. Upon expiration of the period fixed in the articles
of incorporation, in the absence of compliance
B. Minimum Capital Stock And with the legal requisites for the extension of the
period, the corporation ceases to exist and is
Subscription Requirements
dissolved ipso facto (PNB v. CFI Rizal, G.R. No.
63201, 1992)
Stock corporations shall not be required to have
a minimum capital stock, except as otherwise
Doctrine of Relations or Relating Back
specifically provided by special law (Sec 12). 6
Doctrine
C. Corporate Term (Sec. 11) Where the delay in affecting the amendment is
due to the neglect of the officer with whom the
New Rule: certificate is required to be filed, or to a wrongful
General rule: A corporation shall have perpetual refusal on his part to receive it, the same will be
existence, treated as having been filed before the expiry
Exception: Unless its articles of incorporation date. The doctrine does not apply where the delay
provide otherwise. is attributable to the corporation (Alhambra Cigar
v. SEC, G.R. No. L-23606, 1968)
For Corporations with certificates of
incorporation issued prior to the effectivity of Revival:
this Code, and which continue to exist shall have
perpetual existence, unless: If a corporation’s term has expired, it may apply
● upon a vote of its stockholders for a revival of its corporate existence,
representing a majority of its outstanding together with all the rights and privileges under its
certificate of incorporation and subject to all of its
capital stock
duties, debts and liabilities existing prior to its
● the corporation notifies the SEC that it revival. Upon approval by the SEC, the
elects to retain its specific corporate corporation shall be deemed revived and a
term pursuant to its articles of incorporation. certificate of revival of corporate existence shall
Any change in the corporate term under this be issued, giving it perpetual existence, unless
section is without prejudice to the appraisal right its application for revival provides otherwise.
of dissenting stockholders in accordance with the
provisions of this Code. Who may file for petition for revival of
corporate existence:
Extension:
6 The RCC completely removed sec. 13 of the old

corporation code which provided for the 25-25 rule
upon incorporation.
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1) Generally, a corporation whose term has a favorable recommendation of the

expired; appropriate government agency:
2) An Expired Corporation whose Certificate of 1) Banks,
Registration has been revoked for non-filing 2) Banking and quasi banking institutions,
of reports, 3) Preneed, Insurance and trust companies,
3) An Expired Corporation whose Certificate of 4) Non-stock savings and loan associations
Registration has been suspended (NSSLAs),
5) Pawnshops,
Note for 2) & 3): it shall file the proper Petition to
6) Corporations engaged in money service
Lift its Suspended Status, which may be
business, and
incorporated in its Petition to Revive, and must
settle the corresponding penalties thereof 7) Other financial intermediaries (Sec. 11)
4) An Expired Corporation whose corporate Required Vote to Initiate Revival:

name has already been validly re-used, and is
currently being used, by another existing The required number of votes for the Revival of
corporation duly registered with the SEC, an Expired Stock Corporation is at least a majority
provided that the former shall change its vote of the board of directors, and the vote of at
corporate name within thirty (30) days from the least majority of the outstanding capital stock. For
issuance of its Certificate of Revival of nonstock corporations, at least a majority vote of
Corporate Existence. (SEC Memo. Circ. no. the board of trustees, and the vote of at least
23-19) majority of the members. (SEC MC no. 23-19)
Who may not file? D. Classes of Shares of Stock (Sec. 6)
1) An Expired Corporation which has completed The classification of shares, their corresponding
the liquidation of its assets; rights, privileges, or restrictions, and their stated
2) A corporation whose Certificate of par value, if any, must be indicated in the articles
Registration has been revoked for reasons of incorporation.
other than non-filing of reports;
3) A corporation dissolved by virtue of Sections Doctrine of Equality of Shares
6(c) and 6(d) of SEC Reorganization Act; Each share shall be equal in all respects to every
4) An Expired Corporation which already other share, except as otherwise provided in the
articles of incorporation and in the certificate of
availed of re-registration or other
stock. (sec. 6)
memorandum circulars issued by the SEC
pertaining to re-registration, except when: i. Common and Preferred shares
a) The re-registered corporation has given - Common shares are also called
its consent to the Petitioner to use its ordinary shares and they share in profits
corporate name, and has undertaken to pro-rata
undergo voluntary dissolution - Preferred shares may be preferred (a)
immediately after the issuance of the as to dividends, or (b) as to distribution of
Petitioner's Certificate of Revival; or assets during liquidation, or (c) as to any
b) The re-registered corporation has given other manner stated in the Articles, not
its consent to the Petitioner to use its violative of the Corp Code. If authorized
corporate name, and has undertaken to by Articles, Board may fix terms. It is
change its corporate name immediately ALWAYS with a stated par value.
after the issuance of the Petitioner's
Certificate of Revival. (SEC Memo. ii. Par Value and No-Par Value
Circ. no. 23-19) ● Par value shares - with a pre-stated
amount or denomination
No application for revival of certificate of ● Non- par value - no pre-stated value
incorporation of following corporations shall be
approved by the SEC unless accompanied by
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Non-par value shares are deemed fully paid and or deny the right of members of any class, the
non-assessable so holders of such are not liable specific provision of Section 7 to founders’ share
to the corporation or its creditors. must prevail, and that the nonstock corporation
can lawfully suspend or define the voting rights of
The consideration received is treated as capital its members, but with respect to founders’ share,
and cannot be declared as dividends. the exclusive right to vote and be voted for of the
founders’ share should expire after five years
Because they are vested with public interest, from the approval of the SEC. (Forest Hills and
the following types of corporations may only Country Club, Inc. v. Kings Properties Corp., G.R.
issue par value shares: No. 212833, 2019).
a. Banks
b. Trust Companies b. Redeemable shares – Expressly
c. Insurance Companies provided in articles; may be
d. Public Utilities purchased/taken up upon expiration of
e. Building and Loan Associations. the period of said shares purchased
whether or not there are unrestricted
iii. Voting and Non- Voting Shares retained earnings; may be deprived of
● Voting share with complete voting rights voting rights.
● Non - voting shares are preferred or c. Treasury stocks – stocks previously
redeemable shares that have limited issued and fully paid for and reacquired
voting rights. by the corporation through lawful means
(purchase, donation, etc.); not entitled to
Non-Voting Shares Have Voting Rights In The vote and no dividends could be declared
Following Matters: thereon as corporations cannot declare
a. Amendment of Articles dividends to itself.
b. Adoption/ Amendment of By- Laws
c. Sale, lease, exchange, mortgage, pledge or Escrow shares – those held by a third person to
dispose of all or substantially all of corporate be released only upon the performance of a
property condition or the happening of a certain event
d. Incur, create, increase bonded indebtedness contained in the agreement.
e. Increase, decrease capital stock
f. Merger/ consolidation with another Preferred cumulative participating share of
corporation stock - Share entitling its holder to preference in
g. Investment of funds in another corporation the payment of dividends ahead of common
stockholders and to be paid the dividends due for
h. Dissolution of corporation
prior years and to participate further with common
stockholders in dividend declarations.
Other Classes of Shares: (Secs. 7, 8, 9)
a. Founder’s shares – Given rights and
Over-Issued Stock – Stock issued in excess of
privileges not enjoyed by owners of other authorized capital stock; null and void.
stocks; exclusive right to vote/be voted in
the election of directors shall not exceed 6. INCORPORATION AND ORGANIZATION
5 years.
Note: such exclusive right shall not be A. Promoter
allowed if its exercise will violate the
“Anti-Dummy Law”; the “Foreign A person who, acting alone or with others, takes
Investments Act of 1991”; and other initiative in founding and organizing the business
pertinent laws. or enterprise of the issuer and receives
consideration therefor. (Securities Regulation
Since Section 7 makes no distinction (and is Code, Sec. 3.10. [R.A. 8799])
found under General Provisions), then it must
mean that founders’ shares may be applied to i. Liability of a Promoter
both stock and nonstock corporations. Although General rule: Promoter is personally liable in the
[Section 88 of the Revised Corporation Code] event the corporation is not duly incorporated.
allows in a nonstock corporation to limit, broaden
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Exception: Investors who were not the “moving C. Pre-incorporation subscription (Sec. 60)
spirit” behind the organization of the corporation,
but who were merely convinced to invest in the
proposed corporate venture on the basis of the It is entered into before the incorporation and
feasibility study undertaken, are not liable irrevocable for a period of six (6) months from the
personally with the corporation for the cost of date of subscription unless:
such feasibility study.(Caram, Jr. v. CA, G.R. No. i. All other subscribers consent to the
L-48627, 1987) revocation, or
ii. The corporation failed to materialize after
ii. Liability of Corporation for Promoter’s 6 months or within the stipulated period.
Contracts It cannot be revoked after filing the Articles of
General Rule: Corporation is not bound to a Incorporation with the SEC.
contract made by a promoter before its
incorporation (Cagayan Fishing v. Sandiko, G.R. In contrast
No. L-43350, 1937) Post-incorporation subscription – entered into
after incorporation, such as for the unsubscribed
Exceptions: portion of the authorized capital stock and for the
a) Adopts or ratifies the contract; or purchase of increased capital stocks after an
b) Accepts its benefits with knowledge of the amendment of the article of incorporation.
terms thereof (Rizal Light v. Morong, G.R.
No. L-20993, 1968) D. Consideration for Stocks (Sec. 61)
Ratification is the key element in upholding the Stocks shall not be issued for a consideration less
validity and enforceability of promoter's contracts. than the par or issued price thereof.
Without ratification by a corporation after its due
incorporation, a contract entered into on behalf Consideration for issuance of stock may be by
of a corporation yet to be organized or still in the any or a combination of any two or more of the
process of incorporation is void as against the following:
corporation (Cagayan Fishing Development Co., a. Cash actually paid
Inc. v. Teodoro Sandiko, G.R. No. L-43350, b. Property (tangible or intangible) actually
1937). received and necessary or convenient for the
corporation’s use
Although a franchise may be treated as a c. Labor performed or service actually rendered
contract, to the corporation
1. The eventual incorporation of the applicant d. Debts incurred previously by the corporation
corporation after the grant of the franchise; (for subscriptions after incorporation)
and e. Amounts from unrestricted dividends (for
2. Its acceptance of the franchise as shown declaration of stock dividends)
by its action in prosecuting the application f. Outstanding shares exchanged in
filed with the SEC for the approval of said reclassification or conversion
franchise, g. Shares of stock in another corporation;
and/or
…not only perfected a contract between the
h. Other generally accepted forms of
respondent municipality and Morong Electric but
consideration.
cured the deficiency in the application of Morong
Electric (Rizal Light & Ice Co., v. Municipality of
Morong, Rizal, G.R. No. L-20993, 1968). Other Rules pertaining to consideration of
stocks
B. Subscription Contracts a. Where the consideration is other than actual
cash, or consists of intangible property such
Any contract for the acquisition of unissued stock as patents of copyrights, the valuation thereof
shall be deemed a subscription, notwithstanding shall initially be determined by the
the fact that the parties refer to it as a purchase incorporators or the board of directors,
or some other contract. (Sec. 59) subject to approval by the SEC.
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b. No issuance of shares on promissory notes not include a purpose which would change or
or future services. contradict its nature as such;
c. The same considerations under sec. 61 c. The place where the principal office of the
whenever applicable are to be used for bonds corporation is to be located, which must be
issued by the corporation. within the Philippines;
d. The issued price of no par value shares is the d. The term for which the corporation is to exist,
amount fixed: IF not elected the perpetual existence;
i. In the Articles e. The names, nationalities and residences of
ii. By the Board if authorized by its the incorporators;
Articles or By-Laws, or f. The number of directors or trustees, which
iii. if not so fixed, by the stockholders shall not more than fifteen (15);
representing the majority of the g. The names, nationalities and residences of
outstanding capital stock (Sec. 61) persons who shall act as directors or
trustees until the first regular directors or
Note: A special stipulation contained in a trustees are duly elected and qualified in
subscription to corporate stock which, if valid, accordance with the Corporation Code;
would lessen the capital of the company and h. If it be a stock corporation, the amount of its
relieve the subscriber from liability to be sued authorized capital stock in lawful money of
upon the subscription, is illegal (National the Philippines, the number of shares into
Exchange v. Dexter, G.R. No. L-27872, 1928).
which it is divided, and in case the share are
E. Articles of Incorporation par value shares, the par value of each, the
names, nationalities and residences of the
Nature and Function of Articles original subscribers, and the amount
The Articles of Incorporation is a basic contract subscribed and paid by each on his
document in Corporate Law which defines the subscription, and if some or all of the shares
charter of the corporation. Section 13 of the are without par value, such fact must be
Corporation Code provides that the Articles of stated;
Incorporation do not become binding as the i. If it be a non-stock corporation, the amount
charter of the corporation unless they have been of its capital, the names, nationalities and
filed with and registered with the SEC. residences of the contributors and the
amount contributed by each; and
Note: The Articles of Incorporation defines the
j. Such other matters as are not inconsistent
contractual relationships between the State and
the corporation, the stockholders and the State, with law and which the incorporators may
and between the corporation and its stockholders deem necessary and convenient.
(Lanuza v. CA, G.R. No. 131394, 2005).
An arbitration agreement may be provided in the
i. Contents (Sec. 13) articles of incorporation pursuant to Section 181
All corporations shall file with the SEC articles of of this Code.
incorporation in any of the official languages, duly
signed and acknowledged or authenticated, in Note: The articles of incorporation and
such form and manner as may be allowed by the applications for amendments thereto may be
SEC, containing substantially the following filed with the SEC in the form of an electronic
matters, except as otherwise prescribed by this document, in accordance with the SEC’s rules
Code or by special law: and regulations on electronic filing.
a. The name of the corporation;
b. The specific purpose or purposes for which Amendments
the corporation is being incorporated. Where
Requirement for Amending Articles of
a corporation has more than one stated
Incorporation (Sec. 15)
purpose, the articles of incorporation shall
a. A legitimate purpose for the amendment;
state which is the primary purpose and which
b. Majority vote of directors or trustees and the
is/are the secondary purpose or purposes:
vote or written assent of the stockholders
Provided, That a non-stock corporation may
representing at least two-thirds (2/3) of the
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outstanding capital stock, without prejudice to 3) Names of original subscribers to capital stock
the appraisal right of dissenting stockholders and subscribed and paid-up capital
if available, or if it be a non-stock corporation, 4) Treasurer-in-trust elected by original
two-thirds (2/3) of the members. subscribers
c. The original and amended articles together 5) Members who contributed to the initial capital
shall contain all provisions required by law to of non-stock corporation
be set out in the articles of incorporation. 6) Witnesses and acknowledgments
d. Indication in the articles, by underscoring, the
change or changes made. F. Corporate Name (Sec. 17)
e. A copy of amended articles duly certified
under oath by the corporate secretary and a A corporation’s right to use its corporate and trade
majority of the directors or trustees stating the name is a property right, it is a right in rem which
it may assert or protect against the whole world in
fact that said amendment or amendments
the same manner as it may protect its tangible
have been duly approved by the required property against trespass or conversion (Philips
vote of stockholders or members, as the case Export v. CA, G.R. No. 96161, 1992)
may be.
Statutory Limitations on Use of Corporate
When would take effect: Name (NPC)
a. The amendments shall take effect upon their No corporate name shall be allowed by the SEC
approval by the SEC or if:
b. From the date of filing with the said a. it is Not distinguishable from that
Commission, if not acted upon within six (6) already reserved or registered for the use
months from the date of filing for a cause not of another corporation,
attributable to the corporation. b. if such name is already Protected by
law, or
Grounds for Rejecting Incorporation or c. when its use is Contrary to existing law,
Amendment to Articles of Incorporation (Sec. rules and regulations.
16)
a. Not in prescribed form; Not Distinguishable
b. Illegal purpose;
c. False Treasurer’s affidavit; and A name is not distinguishable even if it contains
d. Non-compliance with required Filipino stock one or more of the following:
ownership. a) The word “corporation”, “company”,
“incorporated”, “limited”, “limited liability”,
The SEC shall give the corporation a reasonable or an abbreviation of one of such words;
time to correct or modify objectionable portions. and
b) Punctuations, articles, conjunctions,
Note: A favorable recommendation of the contractions, prepositions, abbreviations,
appropriate government agency to the effect that different tenses, spacing, or number of
such article or amendment is in accordance with the same word or phrase.
law is required in the following types of
corporation:
Effects if Statutory Limitations are Violated:
● Banks, banking and quasi-banking
a) SEC may summarily order the
institutions,
corporation to immediately cease and
● Preneed, insurance and trust companies,
desist from using such name and require
● Non-stock savings and loan associations
the corporation to register a new one.
(NSSLAS),
b) The SEC shall also cause the removal of
● Pawnshops, and
all visible signages, marks,
● Other financial intermediaries
advertisements, labels, prints and other
effects bearing such corporate name.
ii. Non-Amendable Items:
1) Names of incorporators
2) Names of incorporating directors/trustees
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c) Upon the approval of the new corporate of the partners gives its consent to the
name, the SEC shall issue a certificate of applied name.
incorporation under the amended name. d) A name that consists solely of special
Note: If the corporation fails to comply with the symbols, punctuation marks or
SEC’s order, the SEC may hold the corporation specially designed characters shall not
and its responsible directors or officers in be registered.
contempt and/or hold them administratively, e) The name of an internationally known
civilly and/or criminally liable under this Code and foreign corporation cannot be used by a
domestic corporation unless it is its
other applicable laws and/or revoke the
subsidiary and the parent corporation
registration of the corporation.(Sec. 17) has consented to such use.
f) A name written in a foreign language,
Other Limitations on the Use of Corporate even if registered in another country,
Name: shall not be registered if the name
a) The Corporate Name of the following entities violates good morals, public order or
shall include: public policy
i. For a Corporation- "Corporation" or g) The name of a local geographical unit,
"Incorporated," or the abbreviations site or location cannot be used as a
"Corp." or "Inc." corporate or partnership name unless it
ii. For One Person Corporations- is accompanied by a descriptive word
“OPC” or phrase.
iii. Partnerships- h) The name of a corporation or
1) General Partnerships - partnership that has been dissolved or
"Company" or "Co." whose registration has been revoked
2) limited partnership, the shall not be used by another
word "Limited" or "Ltd." corporation or partnership within five
3) Professional partnership (5) years from the approval of
- "Company," dissolution or five (5) years from the
"Associates," or date of revocation, unless its use has
"Partners," or other been allowed at the time of the
similar descriptions; dissolution or revocation by the
iv. For Foundations- “Foundation” stockholders, members or partners who
v. For engaging in microfinance represent a majority of the outstanding
activities - "Microfinance" or capital stock or membership of the
"Microfinancing" dissolved corporation or partnership, as
vi. Other words or phrases, authorized the case may be.
by law or other rules and i) A corporate or partnership name, which
regulations, to be used by specific was previously used but become the
subject of amendment, shall not be
corporations or partnerships re-registered or used by another
b) A term that describes the business of a corporation or partnership for a period
corporation in its name should refer to of three (3) years from the date of the
its primary purpose. If there are two approval of the adoption of the new
such terms, the first should refer to the corporate or partnership name. An
primary purpose and the second to earlier period may be allowed for the
the secondary purpose. registration or use of the former
c) If the name is similar to a registered corporate or partnership name provided
corporation or partnership, the applicant that the corporation or partnership,
shall add distinctive word/s to the which previously owned the used
proposed name to remove the similarity corporate or partnership name, gives its
from the registered name consent.
Note: This shall not be allowed if the j) Names of absorbed/constituent
corporation may not be used unless
registered name is coined or unique
it is the surviving corporation
unless the board of directors or majority
intending to use the said
absorbed/constituent corporate name,
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or that another corporation may use the holding that a corporation may be sued under the
names of absorbed/constituent name by which it makes itself known to its
corporation if consent of the surviving workers (Pison-Arceo Agricultural Development
corporation is obtained Corp. v. NLRC, G.R. No. 117890, 1997).
Doctrine of Secondary Meaning To determine the existence of confusing similarity

General Rule: A corporation whose corporate in corporate names, the test is whether the
name is a word or phrase which is generally similarity is such as to mislead a person,
descriptive or geographical cannot prevent using ordinary care and discrimination. In so
another corporation, which uses the same or doing, the court must examine the record as well
phrase as its corporate name, from using such. as the names themselves. Proof of actual
confusion need not be shown. It suffices that
Exception: A word or phrase originally incapable confusion is probably or likely to occur.
of exclusive appropriation with reference to an (Indian Chamber of Commerce Phils, Inc. v.
article on the market because geographically or Filipino Indian Chamber of Commerce in the
otherwise descriptive, might nevertheless have Philippines, Inc., G.R. No. 184008, 2016)
been used so long and so exclusively by one
producer with reference to his article that, in that G. Registration, Incorporation and
trade and to that branch of the purchasing public, Commencement of Corporate Existence
the word or phrase has come to mean that the (Sec. 18)
article was his product. (Lyceum v. CA, G.R. No.
101897, 1993) Registration
Change of Corporate Name A person or group of persons desiring to
A corporation may change its name by the incorporate shall submit the intended corporate
amendment of its articles of incorporation, but the name to the SEC for verification. If the SEC finds
same is not effective until approved by the SEC that the name is distinguishable from a name
(Philippine First Insurance Co. v. Hartigan, G.R. already reserved or registered for the use of
No. L-26370, 1970). another corporation, not protected by law and not
contrary to law, rules and regulations, the name
A change in the corporate name does not make a shall be reserved in favor of the
new corporation, and whether affected by special incorporators. The incorporators shall then
act or under a general law, has no effect on the submit their articles of incorporation and
identity of the corporation, or on its property, bylaws to the SEC.
rights, or liabilities (Republic Planters Bank v. CA,
G.R. No. 93073, 1992). Issuance of Certificate of Incorporation:
Other Doctrines: Corporate Name If the SEC finds that the submitted documents
Similarity in corporate names between two and information are fully compliant with the
corporations would cause confusion to the public requirements of this Code, other relevant laws,
especially when the purposes stated in their rules and regulations, the SEC shall issue the
charter are also the same type of business certificate of incorporation.
(Universal Mills Corp. v. Universal Textile Mills
Inc., G.R. No. L-28351, 1977). Commencement of Corporate Existence
A corporation has no right to intervene in a suit A private corporation organized under this Code
using a name other than its registered name; if a commences its corporate existence and juridical
corporation legally and truly wants to intervene, it personality from the date the SEC issues the
should have used its corporate name as the law certificate of incorporation under its official
requires and not another name which it had not seal and thereupon the incorporators,
registered (Laureano Investment & Development stockholders/ members and their successors
Corp. v. CA, G.R. No. 100468, 1997). shall constitute a body corporate under the name
stated in the articles of incorporation for the
There would be no denial of due process when a period of time mentioned therein, unless said
corporation is sued and judgment is rendered period is extended or the corporation is sooner
against it under its unregistered trade name, dissolved in accordance with law. (Sec. 18)
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H. Election of Directors or Trustees (Sec. Binding Effects

23)7 The by-laws of the corporation are its own private
laws that have the same effect as the laws of the
Manner of Election corporation. They are deemed written into the
● In any form; or charter. Thus, they become part of the
● By ballot when requested by any voting fundamental laws of the corporation which are
stockholder or member binding upon the corporation and its officers, and
● In stock corporations, voting may be in the litigating parties who are not part of the
corporation in accordance with their terms (Peña
person or by proxy
v. CA, G.R. No. 91478, 1991; Forest Hills Golf
Club v. Gardpro Inc., G.R. No. 164686, 2014).
Time to Determine Voting Right
● At the time fixed in by- laws Procedure on Adoption of By-Laws (Sec. 45)
● If by- laws are silent, at time of election a. After Incorporation:
i. Approval by the majority of outstanding
I. Adoption of By-Laws
shares/members
By-laws ii. By-laws must be signed by
Relatively permanent and continuing rules of stockholders/members voting for
action adopted by the corporation for its own them
government and of the individuals composing it iii. Kept in the principal office of the
and those having direction, management and corporation
control of its affairs, in whole or in part, in the iv. Subject to inspection by stockholders
management and control of its affairs and or members
activities. v. Certified copy signed by majority of
directors, countersigned by the
Regulations, ordinances, rules or laws adopted corporate secretary, filed w/ SEC and
by an association or corporation or the like for its attached to original Articles of
internal governance, including rules for routine
Incorporation
matters such as calling meetings and the like
b. Prior to Incorporation:
(San Miguel Corp. v. Mandaue Packing Products
Plants Union-FFW, G.R. No. 152356, 2005). i. such by-laws shall be approved and
signed by all the incorporators and
By-laws are intended merely for the protection of ii. submitted to the SEC, together with
the corporation, and prescribe regulation, not the articles of incorporation.
restrictions, they are always subject to the charter
of the corporation (Rural Bank of Salinas v. CA, Note: A certification of the appropriate
GR No. 96674, 1992). government agency to the effect that such bylaws
or amendments are in accordance with law is
Requisites of Valid By-Laws: required before he SEC shall accept for filing the
a. It must be consistent with the Corporation bylaws or any amendment thereto of the
Code, other pertinent laws and regulations. following:
b. It must be consistent with the Articles of 1) Bank,
Incorporation. 2) Banking institution,
c. It must be reasonable and not arbitrary or 3) Building and loan association,
oppressive. 4) Trust company,
d. It must not disturb vested rights, impair 5) Insurance company,
contract or property rights of stockholders or 6) Public utility,
members or create obligations unknown to 7) Educational institution, or
law. 8) Other special corporations governed by
special laws
7This will be discussed extensively under the heading

Board of Directors and Trustees (9.D).
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Failure to Adopt and Maintain the Bylaws Now of the corporation (Rural Bank of Salinas, Inc. v.
Specifically Criminally Punishable and CA, 1992; quoting from Thompson on
Subject to SEC’s Contempt Power (Sec. 161, Corporation Sec. 4137, cited in Fleischer v.
please see discussion below) Nolasco, G.R. No. L-23241, 1925).
Common Law Limitations on By-Laws ● By-law provisions cannot discriminate

among its stockholders or members
● By-laws cannot be contrary to law and
articles of incorporation i. Contents of by-laws (Sec. 46)
A private corporation may provide the following in
A by-law provision granting to a stockholder a its bylaws:
permanent representation in the Board of a) The time, place and manner of calling and
Directors is contrary to the Corporation Code conducting regular or special meetings of
requiring all members of the Board to be elected the directors or trustees;
by the stockholders or members. Even when the b) The time and manner of calling and
members of the association may have formally conducting regular or special meetings and
adopted the provision, their action would be of no mode of notifying the stockholders or
avail because no provision of the by-laws can be
members thereof;
adopted if it is contrary to law (Grace Christian
c) The required quorum in meetings of
High School v. CA, G.R. No. 108905 , 1997).
stockholders or members and the manner of
Although the right to amend by-laws lies solely in voting therein;
the discretion of the employer, this being in the d) The modes by which a stockholder,
exercise of management prerogative or business member, director, or trustee may attend
judgment, such right cannot impair the obligation meetings and cast their votes;
of existing contracts or rights or undermine the e) The form for proxies of stockholders and
right to security of tenure of a regular employee. members and the manner of voting them;
Otherwise, it would enable an employer to f) The directors’ or trustees’ qualifications,
remove any employee from employment by the duties and responsibilities, the guidelines for
simple expediency of amending its by-laws and setting the compensation of directors or
providing the position shall cease to exist upon trustees and officers, and the maximum
occurrence of a specified event (Salafranca v.
number of other board representations that
Philamlife (Pamplona) Village Homeowners
Association, Inc., G.R. No. 121791, 1998) an independent director or trustee may have
which shall, in no case, be more than the
By-laws that prohibit directors who have interests number prescribed by the SEC;
in competitor corporations are reasonable in g) The time for holding the annual election of
order to protect the interests of the company directors or trustees and the mode or
(Gokongwei v. SEC, G.R. No. L-45911, 1979) manner of giving notice thereof;
h) The manner of election or appointment and
● By-laws cannot be unreasonable or be the term of office of all officers other than
contrary to the nature of by-laws (GPI v. El directors or trustees;
Hogar Filipino, G.R. No. L-26649, 1927). i) The penalties for violation of the bylaws;
j) In the case of stock corporations, the
Authority granted to a corporation to regulate the manner of issuing stock certificates; and
transfer of its stock does not empower k) Such other matters as may be necessary for
corporation to restrict the right of a stockholder to the proper or convenient transaction of its
transfer his shares, but merely authorizes the
corporate affairs for the promotion of good
adoption of regulations as to the formalities and
governance and anti-graft and corruption
procedure to be followed in effecting transfer
(Thomson v. CA, G.R. No. 116631, 1998). measures.
By-laws are intended merely for the protection of Note: An arbitration agreement may be provided
the corporation, and prescribe regulation, not in the bylaws pursuant to Section 181 of this
restrictions; they are always subject to the charter Code.
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ii. Binding effect of by-laws: adopt new bylaws, duly certified under
● As to the corporation and its components oath by the corporate secretary and a
– Binding not only upon the corporation but majority of the directors or trustees.
also on its stockholder, members and those
having direction, management and control of The amended or new by-laws shall only be
its affairs. They have the force of contract effective upon the issuance by the SEC of a
between the members/stockholders. certification that the same is in accordance with
● As to third persons – Not binding unless this Code and other relevant laws.
there is actual knowledge. Third persons are
J. Effects Of Non-Use Of Corporate Charter
not even bound to investigate the content
because they are not bound to know the by- (Sec. 21)
laws which are merely provisions for the
a) If a corporation does not formally organize
government of a corporation and notice to
and commence its business within five
them will not be presumed (China Banking
(5) years from the date of its
Corp. v. CA, G.R. No. 118332 1997).
incorporation, its certificate of
incorporation shall be deemed revoked as
iii. Amendment or Revision (Sec. 47)
1) With stockholders or members approval of the day following the end of the five-year
- Majority vote of the members of the period.
b) If a corporation has commenced its
Board; and
- Majority of the outstanding capital business but subsequently becomes
inoperative for a period of at least five (5)
stock or majority of the members in
case of non- stock corporation, in a consecutive years, the SEC may, after due
meeting duly called for the purpose notice and hearing, place the corporation
under delinquent status.
2) The board may be delegated to have the
power to amend or repeal any by- laws or Delinquent Corporation:
adopt new by- laws, by a vote of: A Corporation placed by the SEC under
- 2/3 of the shareholders representing delinquency status after due notice and hearing,
the outstanding capital stock; or because it commenced its business but
- 2/3 of the members in a non- stock subsequently becomes inoperative for a period of
corporation. at least five (5) consecutive years.
Such power of the Board may be revoked by Effects of Delinquency Status:

majority vote of the outstanding capital stock or A delinquent corporation shall have a period of
majority of the members in a non- stock two (2) years to resume operations and comply
corporation with all requirements that the SEC shall
prescribe.
Note: The power to adopt the first original by- a) Upon compliance by the corporation, the
laws cannot be delegated to the board of directors SEC shall issue an order lifting the
or trustees; only the power to amend or repeal delinquent status.
any by- laws or adopt new by- laws that will b) Failure to comply with the requirements and
supplant the old by- laws can be validly resume operations within the period given
delegated. by the SEC shall cause the revocation of the
corporation’s certificate of incorporation.
Filing and Effectivity
Corporations under special regulatory
Whenever the bylaws are amended or new jurisdiction
bylaws are adopted, the corporation shall file with The SEC shall give reasonable notice to, and
the SEC coordinate with the appropriate regulatory agency
a) amended or new bylaws and, prior to the suspension or revocation of the
b) if applicable, the stockholders’ or certificate of incorporation of companies under
members’ resolution authorizing the their special regulatory jurisdiction.
delegation of the power to amend and/or
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7. CORPORATE POWERS k. Other powers essential or necessary to carry

out its purposes.
A. General Powers; Theory of General
Capacity B. Specific Powers: Theory of Specific
Capacity
The general capacity theory maintains that a
corporation is said to hold such powers as are not The specific capacity theory maintains that the
prohibited or withheld from it by general law. corporation cannot exercise powers except those
expressly/impliedly given.
a. Express powers – Those expressly
authorized by the Corporation Code and Specific Powers Granted by the RCC:
other laws, and its Articles of Incorporation or 1) Power to extend or shorten corporate
Charter term (Sec. 36)
b. Implied/necessary powers – Those that can 2) Power to increase or decrease capital
be inferred from or necessary for the exercise stock or incur, create, increase bonded
of the express powers or for the pursuit of its indebtedness (Sec. 37)
purposes as provided in the Charter. 3) Power to deny pre-emptive rights (Sec.
Examples are powers related to the same line 38)
of business (e.g. stevedoring services to 4) Power to sell or dispose corporate assets
unload coal to its pier for corporations (Sec. 39)
supplying electric power) 5) Power to acquire own shares (Sec. 40)
c. Incidental/inherent powers – Those that 6) Power to invest corporate funds in
are deemed to be within the capacity of another corporation or business (Sec.
corporate entities. These “necessarily flow” 41)
from the business and attach at the moment 7) Power to declare dividends (Sec. 42)
of creation without regard to express powers 8) Power to enter into management contract
or primary purpose. (Sec. 43)
General Express Powers under the C. Power to Extend or Shorten corporate

Corporation Code (Sec. 35) term (Sec. 36)
a. Sue and be sued in its corporate name;
b. Succession; There should be a written notice of
c. Adopt and use a corporate Seal; stockholders/members meeting stating:
d. Amend Articles of Incorporation ● Proposed action and time and place of
e. Adopt, amend or repeal By-laws; meeting
f. For stock corporations – Issue stocks to ● Addressed to each stockholder/ member
subscribers and to sell treasury stocks; for ● Deposited to the addressee in post office,
non-stock corporations – admit members; with postage prepaid or served
g. Purchase, receive, take, or grant, hold, personally;
convey, sell, lease, pledge, mortgage and Note: When allowed in the by-laws or done with
otherwise deal with real and personal the consent of the stockholder, sent
electronically in accordance with the rules and
property, pursuant to its lawful business;
regulations of the SEC on the use of electronic
h. Enter into Partnership, joint venture, merger,
data messages
consolidation, or any other commercial
agreement with natural and juridical persons; Vote needed:
i. Reasonable Donations for public welfare, ● Board majority (in board meeting) and
hospital, charitable, cultural, scientific, civil or ● Ratified by 2/3 of OCS or members in a
similar purposes (Prohibited: for partisan meeting – mere written assent is not
political activity); enough
j. Establish pension, retirement and other
Plans for the benefit of directors, trustees,
officers and employees; and
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Appraisal rights available to dissenting Note: No decrease of capital stock shall be

stockholders approved by the SEC if it will prejudice the rights
● In case of extension of term – right of of corporate creditors
appraisal exists
● In shortening of term – right of appraisal From and after the approval by the SEC and the
recognized in Sec 81(1) – amendment of issuance of its certificate of filing, capital stock
Articles to shorten or extend corporate shall stand increased or decreased as the
term certificate may declare
D. Power to Increase or Decrease Capital Incur, create, or increase bonded

indebtedness (non-stock)- There should be no
Stock or Incur, Create, Increase Bonded
incurring, creating or increasing any bonded
Indebtedness (Sec. 37) indebtedness unless :
● Approved by majority of the board
Power to increase or decrease capital stock - ● Approved by at least 2/3 of members in a
provided that in the case of an increase in capital meeting
stock, the 25-25 rule is complied with, as ● With notice of the proposal and meeting
approved by the SEC given to stockholders
● With prior approval of the SEC
There shall be no increase or decrease of capital Bonds issued by a corporation shall be registered
stock unless : with the SEC, which shall have the authority to
● Approved by majority of the board determine the sufficiency of the terms thereof.
● Approved by at least 2/3 of OCS in a
meeting E. Power to Deny Pre-Emptive Rights (Sec.
● With notice of the proposal and meeting 38)
given to stockholders- given personally
or through electronic means if allowed General rule: Stockholders have the pre-emptive
● With prior approval of the SEC right to subscribe to all issues or disposition of
o The application with the SEC shall be shares by the corporation of any class in
made within six (6) months from the proportion to their shareholdings
date of approval of the board of Unless:
directors and stockholders, which ● Denied by the Articles of Incorporation or
period may be extended for amendment thereto;
justifiable reasons. ● Shares are issued in compliance with
● Accompanied by a sworn statement of laws requiring minimum stock ownership
the treasurer showing that the 25-25 rule by the public
has been complied with ● Shares issued in good faith in exchange
for property for corporate purposes
25-25 Rule approved by 2/3 of the OCS
● Shares in payment of previously
The SEC shall not accept for filing any certificate contracted debts approved by 2/3 of
of increase of capital stock unless accompanied OCS
by a sworn statement of the treasurer of the
corporation lawfully holding office at the time of F. Power to Sell or Dispose Corporate
the filing of the certificate, showing that at least Assets (Sec. 39)
twenty-five percent (25%) of the increase in
capital stock has been subscribed and that at This Power is subject to the provisions of the
least twenty-five percent (25%) of the amount “Philippine Competition Act”, and other related
subscribed has been paid in actual cash to the laws.
corporation or that property, the valuation of
which is equal to twenty-five percent (25%) of the Votes Required:
subscription, has been transferred to the Power to Sell or Dispose Corporate Assets
corporation: (Not all or Substantially All)
Majority Vote by Board of Directors or Trustees

ONLY
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Power to Sell or Dispose All or Substantially ● If the proceeds of sale or disposition is

All Corporate Assets Including its Goodwill appropriated for the conduct of the
remaining business
Needs vote of:
1) Majority Vote by Board of Directors or G. Power to Acquire Own Shares (Sec. 40)
Trustees
2) 2/3 of OCS or members Requirements:
1) Corporation has unrestricted retained
Note: In nonstock corporations where there earnings in its books to cover the shares to
are no members with voting rights, the vote of be purchased or acquired,
at least a majority of the trustees in office will 2) It is for a legitimate corporate purpose or
be sufficient authorization for the corporation to purposes, including the following cases:
enter into any transaction authorized by this ● To eliminate fractional shares arising out
section. of stock dividends;
● To collect or compromise an
Sale of all or substantially all corporate indebtedness to the corporation, arising
assets: out of unpaid subscription, in a
delinquency sale, and to purchase
Net Asset Value Test- The determination of delinquent shares sold during said sale;
whether or not the sale involves all or ● To pay dissenting or withdrawing
substantially all of the corporation’s properties stockholders entitled to payment for their
and assets must be computed based on its net shares under the provisions of the
asset value, as shown in its latest financial Corporation Code.
statements.
Shares of stock which have been issued and fully
Incapacity Test- A sale or other disposition shall paid for, but subsequently reacquired by the
be deemed to cover substantially all the corporate issuing corporation through purchase,
property and assets if thereby the corporation redemption, donation, or some other lawful
would be rendered incapable of continuing means are Treasury Shares. Such shares may
the business or accomplishing the purpose again be disposed of for a reasonable price fixed
for which it was incorporated. (Sec. 39) by the board of directors (Sec. 9) subject to
stockholders’ preemptive rights.
Notice:
Written notice of stockholder/member meeting H. Power to Invest Corporate Funds in
proposing said action served personally at their another Corporation or For Non-Primary
places of residence and deposited to the Purpose (Sec. 41)
addressee in the post office with postage prepaid,
or when allowed by the by-laws or done with the Needs vote of:
consent of the stockholder, sent electronically ● Board majority in meeting
● 2/3 of OCS or members -
Dissenting stockholders have appraisal rights. Stockholders/members’ approval not
needed if investment in stock of other
After authorization or approval by the corporations is reasonably necessary to
stockholders/members, the Board may accomplish primary purpose
however, abandon proposed action without ● Written notice of proposed investment
prior authorization/approval of and time and place of meeting sent to
stockholders/members, subject to rights of 3rd stockholders
parties ● Dissenting stockholders have appraisal
rights
However, stockholders’/members’ authorization
not needed if Investment by a sugar central in the equity of a
● Disposition of property and assets is jute-bag manufacturing company used in packing
necessary in the usual and regular sugar, falls within the implied powers of the sugar
course of business, or central as part of its primary purpose (De La
Rama v. Ma-ao Sugar Central, G.R. No. L-17504,
1969)
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I. Power to Declare Dividends (Sec. 42) resources, where pertinent laws or regulations
will govern
Only Board action is needed (except stock
dividends where stockholder action is needed) A management contract is not an agency
● Cash dividends due on delinquent stock contract, and therefore is not revocable at will
should first be applied to unpaid balance (Nielson v. Lepanto, G.R. No. L-21601, 1968)
plus cost and expenses
● Stock dividends shall be withheld from This needs approval of:
delinquent stockholders until the unpaid 1. Board of Directors of both managing and
subscription is fully paid managed corporation
● Stock dividends need 2/3 vote of the 2. Majority of outstanding shares or
OCS members of both managed and
● Dividends are payable out of unrestricted managing corporation
retained earnings 3. But 2/3 vote of outstanding
● Stock corporations cannot retain surplus stock/members of managed corporation
profits more than 100% of paid-in capital necessary in the ff:
stock unless: o Where stockholders of both
- Needed for corporate expansion managing and managed
projects approved by the board corporation (the common
- Or prohibited by loan agreement stockholders) own or control
which prohibits declaration of more than 1/3 or the outstanding
dividends without financial stock of managing corporation
institution’s consent o Where majority of directors in
- Or needed under special both corporations are the same
circumstances
K. Limitations
● Unless otherwise provided in the articles
of incorporation, distribution of dividends i. Ultra Vires Acts
is done on a pro rata basis.
1. Applicability of Ultra Vires Doctrine
The power to declare dividends under [Sec. 42 of An act not within the express or implied, and
RCC] is with the Board of Directors, and can be incidental powers of the corporation.
declared only out of its unrestricted retained
earnings. Assuming that a corporate director was Types of Ultra Vires Cases
authorized by the Board to fix the monthly a. First type: Acts done beyond the powers of
dividends, dividends can be declared only out of the corporation as provided for in the law or
unrestricted retained earnings of a corporation, its articles of incorporation (Sec. 44)
which earnings cannot obviously be fixed and
b. Second type: Acts or contracts entered into
predetermined 5 years in advance. (Ongkingco v.
on behalf of the corporation by persons
Sugiyama, G.R. No. 217787, 2019).
without corporate authority, even though the
J. Power to Enter Into Management contract is within the powers of the
Contract (Sec. 43) corporation (Manila Metal Container Corp. v.
PNB, G.R. No. 166862, 2006) and
Where one corporation undertakes to manage all c. Third type: Acts or contracts, which are per
or substantially all of the business of another se illegal as being contrary to law.
corporation, whether the contract is called
“service contracts” or “operating agreement” 2. Consequences of Ultra Vires Acts
● Executed contract – Courts will generally
General Rule: Contract may not exceed 5 yrs per not set aside or interfere with such contracts;
term ● Executory contracts – No enforcement
even at the suit of either party (void and
Exception: Contracts relating to exploration, unenforceable);
development, exploitation or utilization of natural
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● Partly executed and partly executory – M. Doctrine of Equality of Shares

Principle against unjust enrichment shall
apply. Under the doctrine of equality of shares – all
stocks issued by the corporation are presumed
Ultra vires test: It is a question, therefore, in equal with the same privileges and liabilities,
each case, of the logical relation of the act to the provided that the Articles of Incorporation is silent
corporate purpose expressed in the charter. If on such differences (CIR vs. CA, G.R. No.
that act is one which is lawful in itself, and not 108576, 1999)
otherwise prohibited, is done for the purpose of
serving corporate ends, and is reasonably This is now indicated under Sec. 6 of the RCC
tributary to the promotion of those ends, in a
substantial, and not in a remote and fanciful, Each share shall be equal in all respects to every
sense, it may fairly be considered within charter other share, except as otherwise provided in the
powers. The test to be applied is whether the act articles of incorporation and in the certificate of
in question is in direct and immediate furtherance stock. (Sec. 6)
of the corporation’s business, fairly incident to the
express powers and reasonably necessary to N. Trust Fund Doctrine
their exercise. If so, the corporation has the power
to do it; otherwise, not. (University of Mindanao, The subscriptions to the capital stock of a
Inc. v. Bangko Sentral ng Pilipinas, G.R. 194964- corporation constitute a fund to which the
65, 2016) creditors have a right to look for satisfaction of
their claims and that the assignee in insolvency
L. Doctrine of Individuality of Subscription can maintain an action upon any unpaid stock
subscription in order to realize assets for the
No certificate of stock shall be issued to a payment of its debts. (Phil. Trust Co. v. Rivera,
subscriber until the full amount of the subscription G.R. No. L-19761, 1923)
together with interest and expenses (in case of
delinquent shares), if any is due, has been paid. [Hence,] there can be no distribution of assets
(Sec. 63) among the stockholders without first paying
corporate creditors; any disposition of corporate
The foregoing provision sets forth the Doctrine of funds to the prejudice of creditors is null and void.
Indivisibility/Individuality of Subscription. This (Boman Environmental Dev. Corp. v. Court of
doctrine espouses that the subscription contract Appeals, G.R. No. 77860, 1988). This is without
is one, entire, indivisible and whole contract prejudice to the ability of a corporation to effect
which cannot be divided into portions. It cannot distributions to its stockholders by way of
be divided into portions so that no stockholder dividends charged against unrestricted retained
shall be entitled to a certificate of stock until said earnings.
stockholder has paid the entire value of the
shares subscribed, including the interest and Coverage of the Trust Fund Doctrine
expenses. The Doctrine of Indivisibility of
Subscription is absolute since the above-quoted 1. In case of Solvency: The coverage of the
Section 64 speaks of no exception. trust fund doctrine is only up to the extent of
the “subscribed capital stock” of the
The purpose of the prohibition is to prevent the corporation. In this sense, the unrestricted
partial disposition of a subscription which is not retained earnings do not constitute part of the
fully paid, because if it is permitted, and the capital stock. Hence, the corporation is at
subscriber subsequently becomes delinquent in liberty to pay out assets to the stockholders
the payment of his subscription, the corporation by way of dividends up to the extent of the
may not be able to sell as many of his subscribed unrestricted retained earnings.
shares as would be necessary to cover the total
amount due from him, which is authorized under
2. In case of Insolvency: The trust fund
section [67]. (SEC OGC Opinion No. 16-05)
doctrine is not limited to reaching the
stockholders’ unpaid subscriptions. The
scope of the doctrine when the
corporation is insolvent encompasses not
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only the capital stock, but also other the members of the Board of Directors
property and assets generally regarded in of the managed corporation
equity as a trust fund for the payment of (7) Declaration of stock dividend
corporate debts. Thus, the Trust Fund
Doctrine extends to all assets (not just However, among the “powers of
subscribed capital stock) when a corporation corporations” only majority vote is needed in:
becomes insolvent. (Halley v. Printwell, G.R.
No. 157549, 2011) (1) Power to enter into management contracts,
except in instances mentioned in number (6)
3. Releasing Subscribers: where the of the preceding section
corporation released the subscribers to the
capital stock from their subscriptions without 2. By the Board of Directors
valuable consideration. (Ong yong v. Tiu, The Board of Directors is the main agency by
which all corporate powers and authority are
G.R. No.144476, 2003)
exercised
O. How Corporate Powers are Exercised
General rule: Majority vote of the Board is
needed in the following instances:
1. By the Shareholders
a. Extension or shortening of the corporate term
(Note: Generally, the vote requirement of the
shareholders or members are joined with a vote b. Increase or decrease of capital stock or the
of, or a ratification by, a majority of the Board of creation of bonded indebtedness
Directors) c. Sale or other disposition corporate assets
d. Sale or other dispositions of all or
Vote of stockholders representing 2/3 of the substantially all corporate assets (with 2/3
outstanding capital stock or 2/3 of members stockholders or members authorization, Sec
(as applicable) are needed in the following 39)
instances: e. Acquisition of its own shares
f. Investment of corporate funds in any
(1) Extension or shortening of corporate term corporation or business or for any purpose
(2) Increase or decrease of capital stock or the other than its primary purpose (with 2/3
creation of bonded indebtedness stockholders ratification, Sec. 41)
(3) Power to deny pre-emptive right, in these g. Declaration of cash, property, and stock
cases: dividends (if stock dividends, it must be joined
(a) Shares issued in good faith in exchange with 2/3 vote of shareholders, sec. 42)
for property for corporate purposes h. Entering into management contracts
(b) Shares in payment of previously (accompanied by the approval of the
contracted debts shareholders or members, Sec. 43)
(4) Sale of all or substantially all corporate assets
(5) Investing corporate funds in another 3. By the Officers
corporation or business or for any other
purpose other than its primary purpose The officers shall manage the corporation and
(6) Power to enter into management contracts in perform such duties as may be provided in the
the following instances: bylaws and/or as resolved by the board of
(a) where stockholders representing the directors. (Sec. 24)
same interest of both the managing and
the managed corporations own more Executive Committee (Sec. 34)
than one-third (1/3) of the total
General rule: The Executive Committee may act,
outstanding capital stock entitled to vote
by majority vote, on specific matters within the
of the managing corporation; or
competence of the board as delegated to it. Such
(b) where a majority of the members of the an Executive Committee may be established if
Board of Directors of the managing the bylaws so provide.
corporation also constitute a majority of
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Exception: Requisites for Valid Proxy

1. Acts where stockholders’ approval is also 1. The proxy shall be in writing;
needed 2. Signed by the stockholder or member; and
2. Filling vacancies within the Board of 3. Filed before the scheduled meeting with the
Directors corporate secretary (Sec. 57)
3. Amending, repealing or adopting by-laws
4. Amending or repealing resolutions of the Duration of Proxy
Board where the resolution by express General Rule: It shall be valid only for the
terms is not so amendable or repealable meeting for which it is intended.
by the Executive Committee
5. Distribution of cash dividends Exception: Unless otherwise provided in the
proxy
8. STOCKHOLDERS AND MEMBERS Note: No proxy shall be valid and effective for a
period longer than five (5) years at any one time.
A. Fundamental Rights of Stockholders
and Members The by-laws of the corporation may prescribe a
particular form for proxy and fix the deadline for
The following are important rights of its submission.
stockholders, which continue to exist even when
the shares have been sequestered: Generally, proxies, even those with irrevocable
a. Right to attend meetings and to vote terms, have always been considered as
b. Right to receive dividends revocable, unless coupled with an interest, and
c. Right to receive distributions upon liquidation their revocation may be by formal notice, orally,
of the corporation or by conduct as by the appearance of the
d. Right to inspect the books of the corporation stockholder or member giving the proxy, or the
e. Pre-emptive rights (Cojuangco, Jr. vs. Roxas, issuance of a subsequent proxy, or the sale of
G.R. No. 91925, 1991) shares.
B. Participation In Management Note: Proxies, who are not stockholders or

members, cannot be elected as a director or
i. Proxy – Section 57 of the Corporation Code trustee. (Lim v. Moldex Land, Inc., G.R. No.
206038, 2017)
provides that stockholders and members may
vote in person or by proxy in all meetings of
Proxy Disputes—Jurisdiction
stockholders or members. The regular courts now have the power to hear
and decide cases involving all matters and
ii. Voting Trust Agreements – A stockholder conduct of the elections of directors, including
confers upon a trustee the right to vote and validation of proxies. The power of SEC to
other rights pertaining to the shares for a regulate proxies remains only in instances when
period not exceeding 5 years at any one time. stockholders vote on matters other than the
(Sec. 58). election of directors (SEC v. CA, G.R. No.
187702/189014, 2014).
However, if the voting trust was a requirement for
a loan agreement, period may exceed 5 years but Requisites for Valid Voting Trust
shall automatically expire upon full payment of a. In writing and notarized
the loan. b. Specifying the terms and conditions
c. A certified copy must be filed with the
Pooling or voting agreements – two or more corporation and with the SEC. (Sec. 58)
stockholders agree that their shares shall be
voted as a unit. Usually concerned with the Duration
election of directors to gain control of the General Rule: Not exceeding 5 years
management.
Exception: If the voting trust was a requirement
for a loan agreement, period may exceed 5 years
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but shall automatically expire upon full payment non-voting shares are not entitled to vote
of the loan. except as other provided in the said section.
b. Preferred or redeemable shares may be
No voting trust must be used for the purposes of deprived of the right to vote unless otherwise
fraud. Stockholders who are defrauded by their provided.
trustees have a right to revoke the trust and c. Fractional shares of stock cannot be voted
recover damages from such trustee.
unless they constitute at least one full share.
d. Treasury shares have no voting rights as long
Voting Trust v. Proxy
as they remain in treasury.
VOTING TRUST PROXY
e. Holders of stock declared delinquent by the
Trustee votes as Proxy holder votes as
board for unpaid subscription have no voting
owner agent
rights.
Agreement must be Proxy need not be f. A transferee of stock if his stock transfer is
notarized notarized not registered in the stock and transfer book
Trustee acquires legal Proxy has no legal of the corporation and does not have a proxy
title to the shares of title to the shares of from or voting trust agreement with the
the transferring the principal transferor may not vote the
stockholder; only purchased/acquired shares.
beneficial title g. A stockholder who mortgages or pledges his
remains with the shares retains the right to vote unless he
stockholder gives authority for the creditor to vote.
Trustee may vote in Proxy must vote in
person or by proxy person iii. Cases When Stockholder’s Action is
unless the agreement Required
provides otherwise
Trustee is not limited Proxy can only act at 1. Concurrence of majority of the
to act at any particular a specified outstanding capital stock (by majority vote)
meeting stockholder’s meeting a. To enter into management
(if not continuing) contract if any of the two
Trustee can vote and Proxy can only vote in instances stated above are
exercise all the rights the absence of the absent;
of the stockholder owners of the stock b. To adopt, amend or repeal the
even when the latter by-laws.
is present 2. Concurrence of 2/3 of outstanding capital
Agreement must not Proxy cannot exceed stock (by 2/3 vote) (see similar enumeration
exceed 5 years at any 5 years at any one in the specific express powers of the
one time, except time corporation)
when the same is a. Extend or shorten corporate term;
made a condition of a b. Increase/Decrease Corporate Stock;
loan c. Incur, Create Bonded Indebtedness;
Voting right is Right to vote is d. Deny pre-emptive right;
divorced from the inherent or e. Sell, dispose, lease, encumber all or
ownership of stocks inseparable from the substantially all of corporate assets;
right to ownership of f. Investing another corporation, business
the stock other than the primary purpose;
Agreement is Revocable anytime, g. Declare stock dividends
irrevocable except if coupled with h. Enter into management contract if (1) a
interest stockholder or stockholders representing
the same interest of both the managing
Limitations on Right to Vote and the managed corporations own or
a. Where the Articles of Incorporation provides control more than 1/3 of the total
for classification of shares pursuant to Sec. 6, outstanding capital entitled to vote of the
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managing corporation; or (2) a majority of factors consistent with the basic right of corporate
the members of the board of directors of suffrage.
the managing corporation also constitute
a majority of the members of the board of C. Proprietary Rights
the managed corporation;
i. Right To Dividends
i. Amend the Articles of Incorporation
The right to dividends vests at the time of its
declaration by the Board of Directors.
3. By Cumulative Voting
a. See discussion on election of Although stock certificates grant the stockholder
directors the right to receive quarterly dividends of 1%,
cumulative and participating, the stockholders do
4. Without board resolution not become entitled to the payment thereof
a. 2/3 of outstanding capital stock – without necessity of a prior declaration of
delegate to the board the power dividends. (Republic Planters Bank v. Hon.
to amend the by-laws; Agana, Sr., G.R. No. 51765, 1997)
b. Majority of the outstanding
capital stock – revoke the power Stock Corporations are prohibited from retaining
of the board to amend the by- surplus profits in excess of 100% of their paid-in
laws which was previously capital stock, except:
delegated. 1. When justified by definite corporate
c. Removal of directors by a vote of expansion projects or programs approved by
the stockholders representing at the board of directors
least 2/3 of the outstanding 2. Corporation is prohibited under a loan
capital stock agreement from declaring dividends without
the creditor’s consent.
The term “outstanding capital stock (OCS),” 3. Under special circumstances such as when
means the total shares of stock issued under there is a need for special reserve for
binding subscription contracts to subscribers or probable contingencies
stockholders, whether fully or partially paid,
except treasury shares. (Sec. 173) Form of Dividends
1. Cash Dividends (revocable before
iv. Manner of Voting (sec. 57) announcement).
2. Property Dividends (revocable before
Stockholders and members may vote in person announcement).
or by proxy in all meetings of stockholders or 3. Stock Dividends, which requires, aside from
members. the declaration by the Board, the approval of
2/3 of the outstanding capital stock
Voting through remote communication or in
absentia; Requisites: (revocable before issuance).
1. Authorized in the by-laws or by a majority
of the board of directors Note: No dividends can be declared out of capital,
except liquidating dividends distributed at
2. Votes are received before the
dissolution.
corporation finishes the tally of votes.
ii. Right Of Appraisal
Effect: A stockholder or member who The right to withdraw from the corporation and
participates through remote communication or in demand payment of the fair value of his shares
absentia, shall be deemed present for purposes after dissenting from certain corporate acts
of quorum. involving fundamental changes in corporate
structure.
The corporation shall establish the appropriate
requirements and procedures for voting through 1. When available
remote communication and in absentia, taking a. Extension or shortening of corporate term;
into account the company’s scale, number of (Sec. 36)
shareholders or members, structure and other
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b. In case any amendment to the articles of automatically be restored to all his rights as
incorporation has the effect of changing or stockholder. (Sec. 82)
restricting the rights of any stockholders or
class of shares, or of authorizing preferences iii. Right To Inspect
in any respect superior to those of
outstanding shares of any class; (Sec. 80) What Records Can Be Inspected?
c. Investing of corporate funds for any purpose
other than the primary purpose; (Sec. 80) Corporate records, regardless of the form in
which they are stored, shall be open to inspection
d. Sell or dispose all or substantially all assets
by any director, trustee, stockholder or member
of corporation;(Sec. 80)
of the corporation in person or by a representative
e. Merger or consolidation.(Sec. 80) at reasonable hours on business days, and a
demand in writing may be made by such director,
2. Manner of exercise of right (Sec 81, RCC) trustee or stockholder at their expense, for copies
● A written demand on the corporation within of such records or excerpts from said records.
30 days after the vote was taken (failure to do (Sec. 73).
so means waiver);(Sec. 81)
● From the time of demand, all rights accruing Also, a corporation shall furnish a stockholder or
to such shares including voting and dividend member, within 10 days from receipt of their
rights shall be suspended except the right of written request, its most recent financial
such stockholder to receive payment of the statement (Sec. 74).
fair value of stockholder’s shares. (Sec. 82)
● Ten (10) days from demand, the dissenting The first three are the formulation of the old code.
stockholder must submit his certificates of Under the Revised Corporation Code, inspection
rights covers a’’ “corporate records, regardless of
stocks for notation that such certificates
the form in which they are stored” (see Sec. 73)
represent dissenting shares. (Sec. 85)
● The price to be paid is the fair value of the Stock and transfer book
shares on the date the vote was taken; (Sec. Record of:
81) 1. All stocks in the names of the stockholders
● The fair value shall be agreed upon by the alphabetically arranged;
corporation and the dissenting stockholders 2. The installment paid and unpaid on all stock
within 60 days from the date the vote was for which subscription has been made, and
taken. In case there is no agreement, the fair the date of payment of any installment;
value shall be determined by a majority of the 3. A statement of every alienation, sale or
3 distinguished persons one of whom shall be transfer of stock made; and
named by the stockholder another by the 4. Such other entries as the by-laws may
corporation and the third by the two who were prescribe.
chosen; (Sec. 81)
● The right of appraisal is extinguished when: Notes: Stock and Transfer Book
(Sec. 83) Section [73], while specific in the kinds of records
a. He withdraws the demand with that must be maintained, is not limiting, thus, the
the corporation’s consent; inspection right is applicable to the stock and
b. The proposed action is transfer book (Yujuico v. Quiambao, G.R. No.
abandoned; 180416, 2014)
c. The SEC disapproves of such
action where approval is The corporate secretary is the officer who is duly
authorized to make entries on the stock and
necessary
transfer book (Gokongwei v. SEC, GR No. 45911,
d. The SEC determines that such
1979).
dissenting stockholder is not
entitled to the appraisal right. All transfers of shares not entered in the stock
● If the dissenting stockholder is not paid within and transfer book of the corporation are invalid as
30 days from the award, he shall to attaching or execution creditors of the
assignors, as well as to the corporation and to
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subsequent purchasers in good faith and to all

persons interested, except the parties to such The purposes held to justify a demand for
transfers: “All transfers not so entered on the inspection are the following:
books of the corporation are absolutely void; not (1) To ascertain the financial condition of the
because they are without notice or fraudulent in company or the propriety of dividends;
law or fact, but because they are made so void by (2) the value of the shares of stock for sale or
statute (Uson vs. Diosomito, G.R. No. 42135, investment;
1935). (3) whether there has been mismanagement;
(4) in anticipation of shareholders' meetings to
The entries are considered prima facie evidence obtain a mailing list of shareholders to solicit
only and may be subject to proof to the contrary proxies or influence voting;
(Bitong v. CA, G.R. No. 123553, 1998). (5) to obtain information in aid of litigation with the
corporation or its officers as to corporate
The stock and transfer book of the corporation transactions.
cannot be used as the sole basis for determining
the quorum as it does not reflect the totality of The improper purposes which may warrant
shares which have been subscribed, and more so the denial of the right of inspection:
when the articles of incorporation show a (1) Obtaining of information as to business
significantly larger amount of shares issued and secrets or to aid a competitor;
outstanding as compared to that listed in the (2) to secure business "prospects" or investment
stock and transfer book (Lanuza v. Court of or advertising lists;
Appeals, G.R. No. 131394, 2005). (3) to find technical defects in corporate
transactions in order to bring "strike suits" for
Grounds for Not Allowing Inspection by a purposes of blackmail or extortion. (Terelay
Stockholder Investment and Development Corp. v. Yulo, G.R.
a. If the person demanding to examine the No. 160924, 2015)
records has improperly used any information
secured for prior examination, The Right to Inspect Corporate Records is
b. He is not acting in good faith, Subject to Confidentiality rules
c. A requesting party who is not a stockholder
or member of record, or is a competitor shall The inspecting or reproducing party shall remain
bound by confidentiality rules under prevailing
have no right to inspect or demand
laws, such as:
reproduction of corporate records. (Sec. 73)
1. Trade secrets or processes under
Republic Act No. 8293, or the
Competitor- competitor, director, officer,
“Intellectual Property Code of the
controlling stockholder or otherwise represents
the interests of a competitor shall have no right to Philippines”, as amended,
inspect or demand reproduction of corporate 2. Republic Act No. 10173, or the “Data
records. (Sec. 73) Privacy Act of 2012”,
3. Republic Act No. 8799, or “The Securities
In one case, the Supreme Court clarified that the Regulation Code”, and
right of inspection may only be exercised by a 4. the Rules of Court. (Sec. 73)
stockholder of record. As such, the corporation
may validly set up the defense in its refusal to Doctrinal Rulings on Right to Inspect
grant a claim of the right of inspection on the The demand for inspection should cover only
ground that the person is not a stockholder of reasonable hours on business days;
record. (Puno v. Puno Enterprises Inc., GR No.
177066, September 11, 2009) The stockholder, member, director or trustees
demanding the right is one who has not
In Terelay Investment and Development Corp. v. improperly used any information secured through
Yulo, the court ruled that although the corporation any previous examination of the records;
may deny a stockholder's request to inspect
corporate records, the corporation must show The demand must be accompanied with
that the purpose of the shareholder is improper statement of the purpose of the inspection, which
by way of defense. must show good faith or legitimate purpose.
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Illegitimate purposes include to obtain corporate demanding to examine and copy excerpts
secrets (formula), nuisance suit, or to embarrass from the corporation’s records and minutes
the company. (Africa v. PCGG, G.R. No. 83831, has improperly used any information secured
1992) through any prior examination of the records
or minutes of such corporation or of any other
If the corporation or its officers contest such corporation, or was not acting in good faith or
purpose or contend that there is evil motive
for a legitimate purpose in making his
behind the inspection, the burden of proof is with
demand, the contrary must be shown or
the corporation or such officer to show the same.
proved.
The RTC, and not the Sandiganbayan, has ● The person demanding to examine has
jurisdiction over a stockholder’s suit to enforce its improperly used any information secured
right to inspect under the Corporation Code through any prior examination of the records
where the case does not involve a sequestration- or minutes of such corporation or for any
related incident, but an intra-corporate other corporation; and
controversy (Abad v. PHILCOMSAT, G.R. No. ● The one requesting to inspect was not acting
200620, 2015) in good faith or for a legitimate purpose in
making his demand
A stockholder’s right to inspect corporate records
subsists during the period of liquidation (three Criminal sanctions under Sec. 170
year period for dissolution per Sec. 145). (Chua refer to discussion at the respective topic below
v. SEC, G.R. No. 216146, 2016)
iv. Pre-Emptive Right
Remedies If Right to Inspect is Denied The shareholders’ right to subscribe to all issues
or dispositions of shares of any class in proportion
Mandamus to his present stockholdings, the purpose being to
Refusal to allow stockholders (or members of a enable the shareholder to retain his proportionate
non-stock corporation) to examine books of the control in the corporation and to retain his equity
company is not a ground for appointing a receiver in the surplus.
(or creating a mgt. committee) since there are
other adequate remedies, such as mandamus. Instances When Preemptive Right Is Not
(Ao-as v. CA, G.R. No. 128464, 2006) Available
a. Shares to be issued to comply with laws
Damages requiring stock offering or minimum stock
ownership by the public;
Administrative Sanction (Sec. 158)
Requisites for Section [158] to Apply (Ang-Abaya b. Shares issued in good faith with approval of
v. Ang, G.R. no. 178511, 2008) the stockholders representing 2/3 of the
outstanding capital stock in exchange for
● A director, trustee, stockholder or member property needed for corporate purposes;
has made a prior demand in writing for a copy c. Shares issued in good faith with approval of
of excerpts from the corporations records or the stockholders representing 2/3 of the
minutes; outstanding capital stock issued in payment
● Any officer or agent of the concerned of previously contracted debts;
corporation shall refuse to allow the said d. In case the right is denied in the Articles of
director, trustee, stockholder or member of Incorporation;
the corporation to examine and copy said e. Waiver of the right by the stockholder;
excerpts; f. If the shares of a corporation are offered and
● If refusal is made per a resolution or order of not subscribed and purchased by the
the board of directors or trustees, the liability stockholders, and the shares are being
under this section for such action shall be offered again, there is no pre-emptive right
imposed upon the directors or trustees who with respect to the latter offer of shares
voted for refusal; (Benito v. SEC, G.R. No. L-56655, 1983)
● Where the officer or agent of the corporation
sets up the defense that the person
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Right of first refusal v. Right to Vote

The right of first refusal provides that a The right to vote is given to the shareholders but
stockholder who may wish to sell or assign his can be limited if stipulated in the Articles of
shares must first offer the shares to the Incorporation and the Certificate of Stock.
corporation or to the existing stockholders of the
corporation, under terms and conditions which However, holders of nonvoting shares shall
are reasonable; and that only when the nevertheless be entitled to vote on the following
corporation or the other stockholders do not or fail matters:
to exercise their option, is the offering stockholder a) Amendment of the articles of
at liberty to dispose of his shares to third parties. incorporation; (b)Adoption and
amendment of bylaws;
Pre-Emptive Right v. Right of First Refusal b) Sale, lease, exchange, mortgage,
PRE-EMPTIVE RIGHT OF FIRST pledge, or other disposition of all or
RIGHT REFUSAL substantially all of the corporate property;
Generally may be c) Incurring, creating, or increasing bonded
Arises only by virtue indebtedness;
exercised, subject to
of contractual d) Increase or decrease of authorized
limitations in
stipulations or by law capital stock;
Corporation Code e) Merger or consolidation of the
Covers unissued corporation with another corporation or
Covers shares
shares offered for other corporations;
already issued
subscriptions f) Investment of corporate funds in another
Can only be exercised corporation or business in accordance
May be exercised by by the owner and not with this Code; and
mere trustees or mere trustee or g) Dissolution of the corporation
conservators conservator, since it is
(Republic v. an act of ownership vi. Other Rights
Sandiganbayan, G.R. (Republic v. ● Right to issuance of stock certificate for
No. 107789, 2003) Sandiganbayan, G.R. fully paid shares - Under Section 64 of the
No. 107789, 2003) Corporation Code, no certificate of stock shall
Right claimed against be issued to a subscriber until the full amount
Right exercisable of his subscription together with interest and
the Corporation,
against the seller- expenses (in case of delinquent shares), if
where the stockholder
stockholder any is due, has been paid. A subscriber must
must pay
first totally pay his subscription before a
certificate of stock covering shares
Note:
A corporation has no power to prevent or restrain subscribed and paid for could be issued to
transfers of its shares, unless such power is him. But an unpaid subscription (not declared
expressly conferred in the Articles of delinquent) can be voted upon in corporate
Incorporation or the law. (Fleischer v. Botica meetings. Such delinquent shares are also
Nolasco Co., G.R. No. L-23241, 1925) entitled to dividends, subject to the rules set
forth in Section 43 of the Corporation Code
A provision in the by-laws granting the right of first on delinquent shares.
refusal (and therefore, restrains trade) is void and
does not bind third parties (Fleischer v. Botica Nevertheless, Section 64 does not prohibit the
Nolasco Co., G.R. No. L-23241, 1925) corporation from “dividing” the subscription of a
subscriber by considering portion thereof as fully
By-laws are intended merely for the protection of paid and issuing a corresponding certificate over
the corporation and prescribe relation, not the paid- up shares. Thus, in the absence of
restriction; they are always subject to the charter provisions in the by- laws to the contrary, a
of the corporation. (Rural Bank of Salinas v. CA, corporation may apply payments made by
G.R. No. 96674, 1992) subscribers on account of their subscriptions
either as:
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1. Full payment for the corresponding 3. To be valid against third parties, the transfer
number of shares, the par value of which must be recorded in the books of the
is covered by such payment; or corporation
2. Payment pro rata to each and all the
entire number of shares subscribed for Note: The delivery of the stock certificate duly
endorsed by the owner is the operative act of
Once an alternative is chosen, it must be applied transfer of shares from the lawful owner to the
uniformly to all stockholders similarly situated, new transferee. (Bitong v. Court of Appeals, G.R.
and therefore, it cannot be changed without the No. 123553, 1998)
consent of all stockholders who might be
affected. The delivery contemplated in Section [73],
however, pertains to the delivery of the
● Proportionate participation in the certificate of shares by the transferor to the
distribution of assets in liquidation transferee, that is, from the original stockholder
- Stockholders and stock corporation – named in the certificate to the person or entity the
Except by decrease of capital stock, and stockholder was transferring the shares to,
whether by sale or some other valid form of
as otherwise allowed by the Corporation
absolute conveyance of ownership. It does not
Code, no corporation shall distribute any
pertain to the surrender of the stock certificate to
of its assets or property to its the corporation. (Teng v. SEC, G.R. No. 184332,
stockholders except upon lawful 2016)
dissolution and after payment of all its
liabilities (Sec. 122) However: The surrender of the original certificate
of stock is necessary before the issuance of a
- Members and foundations – Upon new one so that the old certificate may be
dissolution of a non-stock corporation, all cancelled. A corporation is not bound and cannot
liabilities and obligations must first be be required to issue a new certificate unless the
paid, and assets received and held original certificate is produced and surrendered.
subject to limitations permitting their use (Teng v. SEC, G.R. No. 184332, 2016)
for specified eleemosynary purposes
shall be properly transferred or returned, A transfer of shares not recorded in the stock and
transfer book is non- existent as far as the
then the net assets remaining, if any,
corporation is concerned, and consequently, a
shall be distributed to the members, or petition for mandamus filed by a transferee,
any class or classes of members, to the compelling it to issue the corresponding
extent that the articles of incorporation or certificates in the name of the transferee would be
by- laws provide for a plan of distribution. without basis. It is only when the transfer has
Otherwise, a plan of distribution may be been recorded in the stock and transfer book that
adopted in the process of dissolution by: a corporation may rightfully regard the transferee
a. Majority vote of the Board of as one of its stockholders. From this time, the
Trustees consequent obligations on the part of the
b. Adopted by at least 2/3 of the corporation to recognize such right as it is
members having voting rights mandated by law to recognize arises (Ponce v.
(Secs. 94–95) Alsons Cement, G.R. No. 139802, 2002).
Note: In Andaya v. Rural Bank of Cabadbaran,

● Right to transfer of stocks in corporate
Inc., G.R. No. 188769, 2016, the Court ruled that
books; the registration of a transfer of shares of stock is
a ministerial duty on the part of the corporation.
Requirements for valid transfer of stocks Aggrieved parties may then resort to the remedy
1. There must be delivery of the stock of mandamus to compel corporations that
certificate; wrongfully or unjustifiably refuse to record the
2. The certificate must be endorsed by the transfer or to issue new certificates of stock. This
owner, or his attorney-in-fact, or other remedy is available even upon the instance of
persons legally authorized to make the a bona fide transferee who is able to establish
transfer; and
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a clear legal right to the registration of the Corporate Controversies, A.M. No. 01-2-04-
transfer. SC, 2001).
D. Remedial Rights As a general rule, corporate litigation must be

commenced by the corporation itself, with the
Suits by Stockholders/Members imprimatur of the board of directors, which,
i. Individual Suit – those brought by the pursuant to the law, wields the power to sue.
shareholder in his own name against the Therefore, since the derivative suit is a remedy of
corporation when a wrong is directly inflicted last resort, it must be shown that the board, to the
against him. detriment of the corporation and without a valid
ii. Representative/Class Suit – those brought business consideration, refuses to remedy a
by the stockholder on behalf of himself and all corporate wrong. A derivative suit may only be
other stockholders similarly situated when a instituted after such an omission. Simply put,
wrong is committed against a group of derivative suits take a back seat to board-
stockholders. sanctioned litigation whenever the corporation is
willing and able to sue in its own name. (Ago
iii. Derivative Suit – those brought by one or
Realty & Dev. Corp. v. Ago, G.R. No.s 210906 &
more stockholders/members in the name and
211203, 2019)
on behalf of the corporation to redress
wrongs committed against it, or E. Obligations of a Stockholder
protect/vindicate corporate rights whenever
the officials of the corporation refuse to sue, a. Liability to the corporation for unpaid
or the ones to be sued, or has control of the subscription;
corporation. (Ching v. Subic Bay, G.R. No. b. Liability to the creditors of the corporation for
174353, 2014) unpaid subscription;
- A lawyer engaged as counsel for a c. Liability to the corporation for interest on
corporation cannot represent members unpaid subscription if so required by the by-
of the Board in a derivative suit against laws;
them. To do so would be tantamount to d. Liability for watered stock;
conflicting interest between the Board e. Liability for dividends unlawfully paid;
and the corporation (Hornilla v. Salunat,
A.C. 5804, 2003). F. Meetings
Requisites of Derivative Suit i. Regular or Special:

a. He (Plaintiff) was a stockholder or member at Regular - held annually on a date fixed in the by-
the time the acts or transactions subject of laws, or if not so fixed, on date after April 15 of
the action was filed; every year as determined by the board of
directors or trustees.(Sec. 49)
b. He exerted all reasonable efforts, and alleges
the same with particularity in the complaint, to
Special - held at any time deemed necessary or
exhaust all remedies available under the as provided in the by- laws. Provided that at least
articles of incorporation, by-laws, laws or 1 week written notice shall be sent to all
rules governing the corporation or stockholders or members, unless otherwise
partnership to obtain the relief he desires; provided in the by- laws. Note that notice of any
meeting may be waived, expressly or impliedly by
The exhaustion of intra-corporate remedies any stockholder or member.
cannot be dispensed even if the company is
a family corporation (Yu v. Yukayguan, G.R. ii. Notice of Meeting
No. 177549, 2009; Ang v. Sps. Ang, G.R. No. When - written notice of regular meetings shall be
201675, 2013) sent to stockholders or members of record at
least twenty-one (21) days prior to the meeting.
c. No appraisal rights are available for the act or (Sec. 49)
acts complained of; and
d. The suit is not a nuisance or harassment suit
(Interim Rules of Procedure for Intra-
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How - written notice to regular meetings may be meeting of the corporation by giving proper notice
sent to the stockholders or members of record required by this Code or the bylaws, with the
through: petitioner presiding thereat until at least a majority
a. means of communication provided in the of stockholders/ members present have chosen a
bylaws (Sec. 50) presiding officer. (Sec. 49).
b. electronic mail (Sec.49)
c. such other manner as the SEC shall Who presides over the meetings?
allow under its guidelines. General Rule: The chairman
Exceptions:
1. In the absence of the chairman, the
Notice of Meetings shall state the time place and
purpose of the meeting and shall be president shall preside at all meetings of
accompanied by: the directors or trustees as well as of the
1. agenda for the meeting stockholders or members, unless the
2. proxy form bylaws provide otherwise.
2. In the following cases:
3. requirements and procedures to be
(1) there is no person designated by the
followed in case a stockholder elects
by-laws to call a meeting, or
and is allowed to participate, attend
(2) the person authorized unjustly
and vote by remote communication. refuses to call a meeting,
4. requirements and procedures for The petitioning stockholders / member
nomination and in case the meeting is shall preside until at least a majority of
for election of directors. (Sec. 50) stockholders/ members present have
chosen a presiding officer. (Sec 49).
Section 50 of the Corporation Code expressly
allows a shorter period of notice of stockholders’ iv. Quorum
meetings that those provided under its default two General rule: Majority of the outstanding capital
(2) week period, provided the same is provided stock, or of the members, shall constitute a
for in the By-Laws, (Ricafort v. Dicdican, 787 quorum (Sec. 51)
SCRA 163, 2016); such period set in the by-laws
is valid even when the period is reckoned from Outstanding Capital Stock – the total shares of
the mailing of the notice rather than when it is stock issued under binding subscription
actually received by the stockholder of record, agreements to subscribers or stockholders,
(Guy v. Guy, 790 SCRA 288, 2016) whether or not fully or partially paid, except
treasury shares
iii. Place and time of meetings
Where?- The meetings of stockholders or Exceptions:
members whether regular or special shall be held a. The bylaws provides for a greater
in the principal office of the corporation as set majority (Sec. 51)
forth in the articles or if not practicable, in the city b. If the rescheduled election of
or municipality where the principal office of the directors/trustees is held, the voting
corporation is located. (Sec. 49) shares of stock or membership
represented at the meeting ordered by
When? - Regular - held annually ; Special - held the SEC shall constitute a quorum for
at any time deemed necessary purposes of conducting an election under
this Section 25.
Who calls for the meetings?
c. In cases where greater vote for an act or
In case the ff. shall occur:
(1) there is no person designated by the by-laws business is required by law as when the
to call a meeting, or required vote is 2/3 of the outstanding
(2) the person authorized unjustly refuses to call capital stock, or membership as the case
a meeting, may be.
The SEC upon petition of a stockholder/ member, Note: For stock corporations, the “quorum”
and on the showing of good cause therefore, may referred to in Section 52 of the Corporation Code
issue an order directing the petitioner to call a is based on the number of outstanding voting
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stocks. For non- stock corporations, only those Resolution vs. Minutes Of The Meeting
who are actual, living members with voting rights (People v. Dumlao, G.R. No. 168918, 2009)
shall be counted in determining the existence of RESOLUTION MINUTES OF THE
a quorum during member’s meetings. Dead MEETING
members shall not be counted (Tan v. Sycip, G.R. A formal action by a A brief statement not
No. 153468, 2006). corporate board of only of what transpired
directors or other at a meeting, usually of
v. Minutes and agenda of meetings
Minutes of the meeting corporate body stockholders/members
● Records of all business transactions and authorizing a or directors/trustees,
minutes of all meetings shall be kept and particular act, but also at a meeting of
carefully preserved at a corporation’s transaction, or an executive
principal office appointment committee
● It shall set forth in detail:
- the time and place of the meeting Agenda of meetings (Sec. 49)
held At each regular meeting of stockholders or
members, the board of directors or trustees shall
- how it was authorized
endeavor to present to stockholders or members
- the notice given
the following:
- the agenda therefor a. The minutes of the most recent regular
- whether the meeting was regular or meeting
special, its object if special b. A members’ list for non-stock
- those present and absent, and corporations and, for stock corporations,
- every act done or ordered done at material information on the current
the meeting. stockholders, and their voting rights;
- upon the demand of any director, c. A detailed, descriptive, balanced and
trustee, stockholder or member, the comprehensible assessment of the
time when any director, trustee, corporation’s performance,
stockholder or member entered or d. A financial report for the preceding year,
left the meeting must be noted in the e. An explanation of the dividend policy and
minutes; the fact of payment of dividends
- on a similar demand, the yeas and f. Director or trustee profiles
nays must be taken on any motion or g. A director or trustee attendance report,
proposition, and a record thereof indicating the attendance of each director
carefully made. or trustee at each of the meetings of the
- the protest of any director, trustee, board and its committees and in regular
stockholder or member on any action or special stockholder meetings;
or proposed action must be recorded h. Appraisals and performance reports for
in full upon their. (Sec. 75) the board and the criteria and procedure
for assessment;
The signing of the minutes by all the members of
i. A director or trustee compensation report
the board is not required—there is no provision in
j. Director disclosures on self-dealings and
the Corporation Code that requires that the
minutes of the meeting should be signed by all related party transactions; and/or
the members of the board. The signature of the k. The profiles of directors nominated or
corporate secretary gives the minutes of the seeking election or reelection.
meeting probative value and credibility (People v.
Dumlao, G.R. No. 168918, 2009).
The entries contained in the minutes are prima

facie evidence of what actually took place during
the meeting, pursuant to Section 44, Rule 130 of
the Revised Rule on Evidence (People v.
Dumlao, G.R. No. 168918, 2009).
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9. BOARD OF DIRECTORS AND doctrine is confirmation after conduct, amounting

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

ratification will be implied or else it will be Officers (Sec. 26)
estopped to deny ratification (Premiere
Development Bank vs. CA, G.R. No. 159352, A person shall be disqualified from being a
2004). director, trustee, or officer of any corporation if,
within five (5) years prior to the election or
Efren was Bonanza’s General Property Manager appointment as such, the person was:
while Miguel was the President. Bonanza leased a) Convicted by final judgment:
the lot to Efren but eventually notified the latter i. Of an offense punishable by
about the rescission of lease. Using the Doctrine imprisonment for a period
of Apparent Authority, Bonanza was estopped exceeding six (6) years;
from denying the existence and enforceability of ii. For violating this Code; and
Lease Contract after it effectively ratified the iii. For violating “The Securities
lease by accepting proceeds throughout several
Regulation Code”;
years. Also, while it is true that the doctrine
b) Found administratively liable for any
cannot be invoked by one who is not a third party,
an officer of a corporation can actually be a third offense involving fraud acts; and
person in contract with the corporation. c) By a foreign court or equivalent foreign
(Quesada, et al. v. Bonanza Restaurants, Inc., regulatory authority for acts, violations or
G.R. No. 207500, 2016) misconduct similar to those enumerated
in paragraphs (a) and (b) above.
B. Tenure, Qualifications and
Disqualifications of Directors Grounds not exclusive
The foregoing is without prejudice to
Term of Office (Sec. 22) qualifications or other disqualifications, which the
SEC or the Philippine Competition Commission
● Directors shall be elected for a term of one may impose in its promotion of good corporate
(1) year from among the holders of stocks governance or as a sanction in its administrative
registered in the corporation’s books proceedings. (Sec. 26)
● Trustees shall be elected for a term not
exceeding three (3) years from among the By-law provisions that prohibit directors who have
members of the corporation. interests in competitor corporations are
Each director/trustee shall hold office until the reasonable in order to protect the interests of the
successor is elected and qualified. company (Gokongwei v. SEC, G.R. No. L-45911,
1979)
Qualifications of Directors
a. Must own at least one (1) share of the capital Hold-Over Principle
Directors/Trustees may continue to hold office
stock of the corporation in his own name or
despite the lapse of one year until their
must be a member in the case of non-stock successors are elected and qualified.
corporations
i. Any director who ceases to be the Remaining members of the board of directors
owner of at least one (1) share of the cannot elect another director to fill in a vacancy
capital stock of the corporation of caused by the resignation of a hold-over director.
which he is a director shall thereby The hold-over period is not part of the term of
cease to be a director. (Sec. 22) office of a member of the board of directors. (Valle
b. He must not be disqualified under the RCC Verde Country Club v. Africa, G.R. No. 151969,
(Sec. 26) 2009)
c. He must possess other qualifications as may
be prescribed in the by-laws of the Thus, when during the holdover period, a director
corporation. (Gokongwei, Jr. v. SEC, G.R. resigns from the board, the vacancy can only be
filled-up by the stockholders, since there is no
No. L-45911, 1979)
term left to fill-up pursuant to the provisions of
d. He must be of legal age Section 29 which mandates that a vacancy
occurring in the board of directors caused by the
expiration of a member’s term shall be filled by
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the corporation’s stockholders. (Valle Verde (P50,000,000.00) and having two

Country Club v. Africa, G.R. No. 151969, 2009) hundred (200) or more holders of
shares, each holding at least one
A director continuing to serve after one year from hundred (100) shares of a class of
his election (on a holdover capacity), cannot be its equity shares;
considered as extending his term. This hold-over b) Banks and quasi-banks, NSSLAs,
period is not part of his term, which, as declared,
pawnshops, corporations engaged in
had already expired. (Valle Verde Country Club v.
money service business, pre-need, trust
Africa, G.R. No. 151969, 2009)
and insurance companies, and other
C. Requirement of Independent Directors financial intermediaries; and
(Sec. 22) c) Other corporations engaged in business
vested with public interest similar to the
An independent director is a person who, apart above, as may be determined by the
from shareholdings and fees received from the SEC, considering such factors:
corporation, is independent of management and i. such as the extent of minority
free from any business or other relationship which ownership,
could, or could reasonably be perceived to ii. type of financial products or
materially interfere with the exercise of securities issued or offered to
independent judgment in carrying out the investors,
responsibilities as a director.
iii. public interest involved in the
nature of business operations,
Requirements:
Independent directors must be: and
1) independent of management and free iv. other analogous factors.
from any relationship which could
D. Elections
materially interfere with the exercise of
independent judgment as a director Election of Directors or Trustees (Sec. 23)
2) a shareholder and receive fees from the
corporation Manner of Election
3) elected by the shareholders present or ● In any form; or
entitled to vote in absentia during the ● By ballot when requested by any voting
election of directors. stockholder or member
4) subject to rules and regulations ● In stock corporations, voting may be in
governing their qualifications, person or by proxy
disqualifications, voting requirements,
duration of term and term limit, maximum Time to Determine Voting Right
number of board memberships and other ● At the time fixed in by- laws
requirements that the SEC will prescribe. ● If by- laws are silent, at time of election
Corporations required to have Independent i. Cumulative Voting/Straight Voting

Directors
a. Straight voting – Every stockholder may
The board of the following corporations vested vote the number of outstanding capital stock
with public interest shall have independent in his own name for as many persons as there
directors constituting at least twenty percent are directors to be elected; or in non-stock
(20%) of such board: corporations, members may cast as many
a) Corporations covered by “The Securities votes as there are trustees to be elected but
Regulation Code”, namely: may not cast more than one vote for one
i. those whose securities are candidate. (In straight voting, the votes are
registered with the SEC, spread out evenly among all the elective
ii. corporations listed with an positions)
exchange or with assets of at b. Cumulative voting for one candidate – a
least Fifty million pesos stockholder may accumulate his shares and
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give one candidate as many votes as the Note: When so authorized in the bylaws or by a
number of directors to be elected multiplied majority of the board of directors, the
by the number of his shares shall equal; stockholders or members may also vote through
c. Cumulative voting by distribution – a remote communication or in absentia. The right to
stockholder may also cumulate his shares by vote through such modes may be exercised in
multiplying the number of his shares by the corporations vested with public interest,
notwithstanding the absence of a provision in the
number of directors to be elected and
by-laws of such corporations. (sec. 23)
distribute the same among as many
candidates as he shall see fit Who Elects Directors or Trustees
● By the stockholders/members as
Methods of Voting in Relation to Type of provided in the by-laws (traditionally
Corporation
during annual SH/M meetings
● By the board, if still constituting quorum
a) Stock Corporations
for vacancies in the interim (i.e. between
Stockholders entitled to vote shall have the right
to vote the number of shares of stock standing in annual meetings) due to causes other
their own names in the stock books of the than removal or expiry of term (Sec. 28)
corporation at the time fixed in the bylaws or ● If the vacancies are due to removal or
where the bylaws are silent, at the time of the expiry of term, the directors/trustees
election must be elected by the
stockholders/members at a meeting for
The stockholder may use: this purpose (special meeting)
1) Straight Voting
2) Cumulative voting for one candidate How Elected
3) Cumulative voting by distribution ● By owners of majority of outstanding
capital stock or by members in annual
Note: The total number of votes cast shall not stockholders’/members’ meeting
exceed the number of shares owned by the ● Stockholders/members may be present
stockholders as shown in the books of the in person or by written proxy
corporation multiplied by the whole number of ● For stock corporations: Number of votes
directors to be elected; and that no delinquent = (no. of shares) x (no. of directors to be
stock shall be voted.
elected)
● By straight voting or cumulative voting,
b) Non-stock Corporations
which is all votes may be cast for a
General Rule: Members of nonstock
corporations may use Straight Voting, i.e. cast as candidate or distributed among the
many votes as there are trustees to be elected candidates
but may not cast more than one (1) vote for one ● For non-stock corporations: Unless
(1) candidate. otherwise provided in the articles of
incorporation or in the by-laws,
Exception: Unless otherwise provided in the members of non-stock corporations may
articles of incorporation or in the bylaws. (Sec. 23) cast as many votes as there are trustees
to be elected but may not cast more than
ii. Quorum one vote for one candidate.
● Viva voce (live voice) or must be by
At all elections of directors or trustees, there must ballot if requested
be present, either in person or through a
● Delinquent shares and treasury shares
representative authorized to act by written proxy:
● Stock Corporation – owners majority of cannot vote
outstanding capital stock ● Candidates with highest number of
● Non-stock Corporation – majority of votes will be declared elected
members entitled to vote
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Election Rules on Stock and Non-Stock Report Of Election of Directors, Trustees and
Corporations Officers
STOCK NON-STOCK
CORPORATION CORPORATION Within thirty (30) days after the election of the
directors, trustees and officers of the corporation,
Owners of a majority A majority of the
the secretary, or any other officer of the
of outstanding capital members, either in
corporation, shall submit to the SEC, the names,
stock, either in person person or by nationalities, shareholdings, and residence
or by representative representative addresses of the directors, trustees, and officers
authorized to act by authorized to act by elected. (Sec. 25)
written proxy, must be written proxy, must be
present at the election present at the election Only the directors and officers of the corporation
of the directors of the trustees whose names appear in the report submitted to
Cumulative voting or Cumulative voting is the SEC are deemed legally constituted to bind
Straight voting can be not available, unless the corporation in bringing a suit on behalf of the
used; a matter of right allowed by the articles corporation (Premium Marble Resources v. CA,
granted by law to or by-laws. G.R. No. 96551, 1996).
each stockholder with
voting rights. The Board may be Non-holding of Election
elected by region.
Directors are elected The non-holding of elections and the reasons
at large. shall be reported to the SEC within thirty (30)
days from the date of the scheduled election. The
Alien Membership in Board of Directors report shall specify a new date for the election,
which shall not be later than sixty (60) days from
P.D. No. 715: "election of aliens as members of the scheduled date.
the board of directors of governing body of
corporations or associations engaging in partially If no new date has been designated, or if the
nationalized activity shall be allowed in proportion rescheduled election is likewise not held, the SEC
to their allowable participation or share in the may, upon the application of a stockholder,
capital of such entities." member, director or trustee, and after verification
of the unjustified non-holding of the election,
Non-Filipino citizens may become members of summarily order that an election be held.
the board of directors of a bank to the extent of
the foreign participation in the equity of said bank. The SEC shall have the power to issue such
(General Banking Law, Sec. 15) orders as may be appropriate, including:
a) orders directing the issuance of a notice
Filling Vacancies in Board - Permissive stating the time and place of the election,
b) designated presiding officer, and
The filling of vacancies in the board by the c) the record date or dates for the
remaining directors or trustees constituting a determination of stockholders or
quorum as provided for by Section [28] is merely members entitled to vote.
permissive, not mandatory, and the vacancies
may still be filled-up by the stockholders of Notwithstanding any provision of the articles of
members in a regular or special meeting called incorporation or bylaws to the contrary, the
for the purpose. However, when the by-laws of shares of stock or membership represented at
the corporation contain a specific mode of filling- such meeting and entitled to vote shall constitute
up existing vacancies in the board, the same is a quorum for purposes of conducting an election
mandatory (Tan v. Sycip, G.R. No. 153468, under this section. (Sec. 25)
2006).
Cessation from Office
Should a director, trustee or officer die, resign or

in any manner cease to hold office, the secretary,
or the director, trustee or officer of the
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corporation, or in case of death, the officer’s heirs authorizing the removal and this fact
shall, within seven (7) days from knowledge must be so stated in the agenda and
thereof, report in writing such fact to the SEC. notice of said meeting.
(Sec. 25) c) In all other cases, the election must be
held no later than forty-five (45) days
E. Removal (Sec. 27)
from the time the vacancy arose.
Requisites of Removal from the Board
a. It must take place either at a regular meeting Vacancy NOT by removal or expiration of term
May be filled by:
or special meeting of the stockholders or
a) the vote of at least a majority of the
members called for the purpose;
remaining directors or trustees, if still
b. There must be previous notice to the
constituting a quorum;
stockholders or members of the intention to
b) if not, said vacancies must be filled by the
remove;
stockholders or members in a regular or
c. The removal must be by a vote of the
special meeting called for that purpose.
stockholders representing 2/3 of the
outstanding capital stock or 2/3 of the Cases when Emergency Action is Required
members, as the case may be; Requirements:
d. The director may be removed with or without a) If the vacancy prevents the remaining
cause unless he was elected by the minority, directors from constituting a quorum
in which case, it is required that there is cause b) emergency action is required to prevent
for removal. grave, substantial, and irreparable loss or
damage to the corporation
Note:
The SEC shall, motu proprio or upon verified Effects:
complaint, and after due notice and hearing, a) The vacancy may be temporarily filled from
order the removal of a director or trustee elected among the officers of the corporation by
despite the disqualification, or whose unanimous vote of the remaining directors or
disqualification arose or is discovered
trustees.
subsequent to an election. This is without
prejudice to other sanctions that the SEC may b) The action by the designated director or
impose on the board of directors or trustees who, trustee shall be limited to the emergency
with knowledge of the disqualification, failed to action necessary,
remove such director or trustee. c) The term shall cease within a reasonable
time from the termination of the emergency or
F. Filling of Vacancies (Sec. 28) upon election of the replacement director or
trustee, whichever comes earlier.
Replacement director or trustee - A director or d) The corporation must notify the SEC within
trustee elected to fill a vacancy and shall serve three (3) days from the creation of the
only for the unexpired term of the predecessor in emergency board, stating therein the reason
office.
for its creation.
How Elections should be held:
Vacancy filled by reason of an increase in the
In all elections to fill vacancies under this section,
number of directors or trustees
the procedure set forth in Sections 23 and 25 of
this Code shall apply.
This vacancy shall be filled only by an election at
When Elections may be held: a regular or at a special meeting of stockholders
a) Due to term expiration- the election or members duly called for the purpose, or in the
same meeting authorizing the increase of
shall be held no later than the day of
directors or trustees if so stated in the notice of
such expiration at a meeting called for the meeting.
that purpose.
b) Result of removal- the election may be
held on the same day of the meeting
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G. Compensation (Sec. 30) b. Duty of Loyalty (Basis: Secs. 30 & 33)

Directors or trustees shall not acquire any
General Rule: In the absence of any provision in personal or pecuniary interest in conflict with their
the by-laws fixing their compensation, the duty as such directors or trustees.
directors shall not receive any compensation, as
such Disloyalty: Sec. 30(2) v. Sec. 33
SEC. 30(2) SEC. 33
Exception: They may receive reasonable per Applicable to
diems [i.e. at meetings] Applicable to directors
directors, trustees,
only
and officers
Qualifiers to General Rule and Exception
Any such compensation other than per diems Allows ratification of a
may be granted to directors by the vote of the No ratification allowed transaction by the
stockholders representing at least a majority of director
the outstanding capital stock at a regular or Covers stock and
Covers stock
special stockholders' meeting. non-stock
corporations only
corporations
However: In no case shall the total yearly
compensation of directors, as such directors, c. Duty of Diligence (Basis: Sec. 30)
exceed 10% percent of the net income before Directors and/or trustees shall not willfully and
income tax of the corporation during the knowingly vote for or assent to patently unlawful
preceding year. acts of the corporation or act in bad faith or with
gross negligence in directing the affairs of the
Directors or trustees shall not participate in the corporation.
determination of their own per diems or
compensation. Doctrine of Corporate Opportunity
If there is presented to a corporate officer or
Note: The implication of the phrase “as such director a business opportunity, which the
directors” is that members of the Board may corporation has an interest or a reasonable
receive compensation, in addition to reasonable expectancy, the self-interest of the officer or
per diems, when they render services to the director will be brought into conflict with that of his
corporation in a capacity other than as directors corporation. The law does not permit him to seize
or trustees [in this case, if serving as corporate the opportunity even if he will use his own funds
officers] (Western Technology v. Salas, G.R. No. in the venture. If he seizes the opportunity thereby
113032, 1997) obtaining profits to the expense of the
corporation, he must account all the profits by
For Corporations vested with public interest refunding the same to the corporation.
These corporations shall submit to their Requisites of Doctrine of Corporate
shareholders and the SEC, an annual report of Opportunity
the total compensation of each of their directors a. The Corporation is financially able to
or trustees.
undertake the business opportunity.
H. Disloyalty b. From the nature of the business opportunity,
it is in line with the corporation’s business and
Rules on Fiduciaries’ Duties and Liabilities is of practical advantage to the corporation.
c. The corporation has an interest or a
Three-Fold Duties of Directors (Strategic reasonable expectancy, by embracing the
Alliance Development Corporation v. Radstock, opportunity.
G.R. No. 178158, 2009)
Consequence of violation
a. Duty of Obedience (Basis: Sec. 24) a. Directors must account for all the profits by
To direct the affairs of the corporation only in refunding the same to the corporation
accordance with the purposes for which it was b. Directors may be removed from the board.
organized
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Exception: The act of the director has been Liability for Watered Stocks
ratified by a vote of the stockholders owning or
representing at least two-thirds (2/3) of the Directors or officers consenting to issuance of
outstanding capital stock. watered stocks are solidarily liable with the
stockholder concerned, to the corporation or its
Violations of Secs. 30 and 33 are not penal creditors for the difference between the fair value
offenses in relation Sec. 158: Had the received (by the corporation at the time of the
Legislature intended to attach penal sanctions to issuance) and the par or issued value of the stock
said sections, it could have expressly stated such issued. (Sec. 64)
intent in the same manner it did for Section 74 of
the same Code that the violation thereof is K. Personal Liabilities
likewise considered an offense under Section
144. (Ient v. Tullet, Inc., G.R. No. 189158, 2016) Personal liability of a corporate director, trustee
or officer may so validly attach, as a rule, only
I. Business Judgment Rule when:
1. He assents:
Questions of policy or management are left solely a. To a patently unlawful act of the
to the honest decision of officers and directors of corporation, or
a corporation and the courts are without authority b. For bad faith, or gross negligence in
to substitute their judgment for the judgment of directing its affairs, or
the board of directors; the board is the business c. For conflict of interest, resulting in
manager of the corporation and so long as it acts
damages to the corporation, its
in good faith its orders are not reviewable by the
stockholders or other persons
courts or the SEC. The directors are also not
liable to the stockholders in performing such acts (solidary liability under Sec. 30(1));
(Philippine Stock Exchange, Inc. v. CA, GR No. 2. He attempts to acquire, or acquires any
130644, 1997). interest adverse to the corporation in respect
of any matter which has been reposed in
Coverage of the Rule: Two Branches them in confidence (liable as a trustee for the
a. Resolutions and transactions entered into by corporation under Sec. 30(2))
the Board of Directors within the powers of 3. He consents to the issuance of watered
the corporation cannot be reversed by the stocks or who, having knowledge thereof,
courts not even on the behest of the does not forthwith file with the corporate
stockholders of the corporation; and secretary his written objection thereto
b. Directors and officers acting within such (solidary liability under Sec. 64);
business judgment cannot be held personally 4. He agrees to hold himself personally and
liable for the consequences of such acts. solidarily liable with the corporation; or
5. He is made, by a specific provision of law, to
J. Solidary liabilities for damages personally answer for his corporate action
(Tramat Mercantile, Inc. v. CA, G.R. No.
Liability under Sec. 30(1) 111008, 1994).
Directors or trustees who willfully and knowingly: Case law states that to hold a director or officer
a) vote for or assent to patently unlawful acts personally liable for corporate obligations, two
of the corporation requisites must concur:
b) are guilty of gross negligence or bad faith in 1. it must be alleged in the complaint that
directing the affairs of the corporation the director or officer assented to patently
c) acquire any personal or pecuniary interest in unlawful acts of the corporation or that
conflict with their duty as such directors or the officer was guilty of gross negligence
trustees or bad faith; and
shall be liable jointly and severally for all damages 2. there must be proof that the officer acted
resulting therefrom suffered by the corporation, in bad faith. (Freyssinet Filipinas Corp. v.
its stockholders or members and other persons. Lapuz, G.R. No. 226722, 2019)
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L. Responsibility For Crimes Presumption of a Purchase or Sale of a

Security of an Issuer of Insider
General rule: The Board being generally a Applies when an insider or an insider’s spouse, or
policy-making body, directors as such cannot be relatives by affinity or consanguinity within the
held liable under a criminal statute making those second degree, legitimate or common-law, while
in charge of the management of the corporation in possession of material nonpublic information if
liable for the criminal acts done in pursuit of transacted after such information came into
corporate operations. existence but prior to dissemination of such
information to the public and the lapse of a
The members of the Board generally do not reasonable time for market to absorb such
concern themselves with the day-to-day affairs of information.
the corporation, except those corporate officers
who are charged with the running of the business This presumption is rebutted upon a showing by
of the corporation and are concomitantly the purchaser or seller that he was aware of the
members of the Board, like the President. material nonpublic information at the time of the
(Federated Dealers Assn. v. Del Rosario, G.R. purchase or sale.
No. 202639, 2016).
Material Nonpublic Information
Exception: To be held criminally liable for the a. It has not been generally disclosed to the
acts of a corporation, there must be a showing public and would likely affect the market price
that its officers, directors, and shareholders of the security after being disseminated to the
actively participated in or had the power to public and the lapse of a reasonable time for
prevent the wrongful act. (SEC v. Price the market to absorb the information; or
Richardson Corp., G.R. No. 197032, 2017) b. Would be considered by a reasonable person
important under the circumstances in
M. Special Fact Doctrine
determining his course of action whether to
Under the Special Facts Doctrine, although a buy, sell or hold a security.
director does not stand in fiduciary relation to the
stockholder, he is under legal obligation to make O. Contracts
fair and full disclosure of pertinent official
information where special circumstances exist, i. By Self-Dealing Directors with the
giving rise to the obligation to disclose. (Soledad Corporation (Sec. 31)
M. Cagampang, The Fiduciary Duties of
Corporate Directors Under Philippine Law, 46 A contract of the corporation with its director/s or
Phil. L. J., 513, 562 [1971]) trustee/s or officer/s, or their spouses and
relatives within the fourth civil degree of
N. Inside Information consanguinity or affinity is voidable at the option
of such corporation, unless the following are
Unlawful Acts of Insider (RA 8799, Sec. 27) present:
It shall be unlawful for an insider to sell or to buy a. The presence of such director/trustee in the
a security of an issuer, while in the possession of Board meeting in which the contract was
material information with respect to the issuer or approved was not necessary to constitute a
the security that is not generally available to the quorum.
public unless: b. The vote of such director or trustee was not
1. The insider proves that the info was not necessary for the contract’s approval.
gained from such relationship c. The contract is fair and reasonable
2. That the other party selling to or buying from d. In case of corporations vested with public
the insider is identified the insider proves interest, material contracts are approved by
a. That he disclosed the information at least two-thirds (2/3) of the entire
b. That he had reason to believe that membership of the board, with at least a
the other party otherwise is also in majority of the independent directors voting to
possession of the information approve the material contract; and
e. In case of an officer, the contract with him has
been previously authorized by the Board.
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Where any of the first three (3) conditions set forth Special Committees (Sec. 34)
in the is absent such contract may be ratified by:
a) the vote of the stockholders representing at The board of directors may create special
least two-thirds (2/3) of the outstanding committees of temporary or permanent nature
capital stock or of at least two-thirds (2/3) of and to determine the members’ term,
the members in a meeting called for the composition, compensation, powers, and
purpose; and responsibilities.
b) Full disclosure of the adverse interest of the
Other delegations of authority
directors or trustees involved is made at such
a) The Board may delegate such powers to
meeting and the contract is fair and
either an executive committee or officials or
reasonable under the circumstances.
contracted managers.
b) The delegation, except for the executive
ii. Contracts Between Corporations with
Interlocking Directors (Sec. 32) committee, must be for specific purposes.
● Accordingly, the general rules of agency
A contract between two (2) or more corporations as to the binding effects of their acts
having interlocking directors shall not be would apply.
invalidated on that ground alone. These are valid ● For such officers to be deemed fully
so long as there is no fraud and the contract is fair clothed by the corporation to exercise a
and reasonable. However, if the director’s interest power of the Board, the latter must
is nominal in one of the contracting corporations specially authorize them to do so (ABS-
(not exceeding 20% of the outstanding capital CBN Broadcasting Corporation v. CA,
stock), then the contract must comply with the GR No. 128690, 1999).
requisites provided supra, Sec. 31, otherwise
voidable. Q. Meetings
P. Executive and Other Special The corporation’s by-laws can provide otherwise
Committees to all the rules hereunder, so long as minimum
requirements are satisfied.
Executive Committees (Sec. 34)
i. Regular or Special
i. Creation
1. Regular- held monthly, unless the by- laws
If the bylaws so provide, the board may create an provide otherwise
executive committee composed of at least three 2. Special- held anytime upon the call of the
(3) directors. Said committee may act, by majority
President or as provided in the by- laws
vote of all its members, on such specific matters
within the competence of the board, as may be
(1) When and Where -
delegated to it in the bylaws or by majority vote
of the board. ○ Monthly, unless otherwise provided in the
by-laws, or anytime upon the call of the
ii. Limitations President or as provided in the by- laws ;
○ Anywhere in or outside the Philippines,
Powers That Cannot Be Delegated to the unless the bylaws provide otherwise.
Executive Committee
a. Approval of action requiring concurrence of (2) Notice of the meeting - at least two (2) days
stockholders; prior to the scheduled meeting, unless a
b. Filling of vacancies in the board; longer time is provided in the bylaws. A
c. Adoption, amendment or repeal of by-laws; director may waive the requirement,
d. Amendment or repeal of board resolution expressly or impliedly.
which by its terms cannot be amended or
repealed; (3) Attendance in Meetings - Directors or
e. Distribution of cash dividends. (Sec. 34) trustees cannot attend or vote by proxy at
board meetings.
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○ Those who cannot physically attend or Valid Corporate Acts

vote at board meetings can participate
and vote through remote General Rule: Every decision reached by at least
communication such as a majority of the directors or trustees constituting
videoconferencing, teleconferencing, a quorum are considered valid.
or other alternative modes of
Exception: The election of officers shall require
communication that allow them
the vote of a majority of all the members of the
reasonable opportunities to
board.(Sec. 52)
participate.
Note: A director or trustee who has a potential
ii. Who Presides - The chairman or, in his interest in any related party transaction must
absence, the president shall preside at all recuse from voting on the approval of the related
meetings of the directors or trustees as well as of party transaction without prejudice to compliance
the stockholders or members, unless the bylaws with the requirements of Section 31 of this Code.
provide otherwise. (Sec. 53)
iv. Rule on Abstention
iii. Quorum of Board
In case of abstention during a board meeting on
General Rule: A majority of the directors or a vote taken on any issue, the general rule is that
trustees as stated in the articles of incorporation an abstention is counted in favor of the issue that
shall constitute a quorum to transact corporate won the majority vote; since by their act of
business abstention, the abstaining directors are deem to
abide by the rule of the majority. (Lopez v. Ericta,
Exception: Unless the articles of incorporation or G.R. No. L-32991, 1972)
the by-laws provides for a greater majority (Sec.
52)
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Comparison Between Stockholders’ and Directors’ Meeting

STOCKHOLDERS’ MEETING DIRECTORS’ / TRUSTEES’
MEETING
Types of Regular and Special Regular and Special
Meetings
Place of Held in the principal office of the corporation as Anywhere in or outside of the
Meetings set forth in the articles of incorporation, or if not Philippines, unless the by- laws
practicable, in the city or municipality where the provide otherwise
principal office of the corporation is located.
When held REGULAR – held annually on a date fixed by the REGULAR – held monthly
by- laws, or if not so fixed, on any date after April
15 every year as determined by the board of
directors or trustees
SPECIAL – held at any time deemed necessary SPECIAL – held at any time upon
or as provided in the by- laws the call of the President
Notice of REGULAR – notice must be sent at least 21 days Notice must be sent at least two
Meeting before the meeting (2) days prior to the scheduled
SPECIAL – notice must be sent at least 1 week. meeting, unless a longer time is
Notice may be waived, expressly or impliedly, by provided in the bylaws. Notice
any stockholder or member may be waived expressly or
impliedly, by any Director or
Trustee
Who presides General Rule: Person designated in the bylaws The chairman or, in his absence,
In default: Chairman, and in his absence, the the president shall preside
president
Quorum Majority of the outstanding capital stock, or of the Majority of the number of
members. directors and trustees as fixed in
EXCEPT:(a) greater majority is provided in the the articles of incorporation,
bylaws (b) in cases where greater vote for an act unless the articles of
or business is required by law. incorporation or the by-laws
provides for a greater majority.
Note: For stock corporations, quorum is based
on outstanding voting stocks. For non-stock
corporations, only those who are actual, living
members with voting rights shall be counted.(Tan
v. Sycip, G.R. No. 153468, 2006
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10. CAPITAL AFFAIRS certificate. The subscription price of the stocks

subscribed by him should first be paid.
A. Certificate of stock
b. Consideration for Shares of Stock
A stock certificate or a certificate of stock is (See earlier discussion)
defined as a written instrument signed by the
proper officer of a corporation stating or ii. Uncertificated Shares/Securities
acknowledging that the person named in the Defined as security evidenced by electronic or
document is the owner of a designated number of similar records. (Securities and Regulation Code,
shares of its stock. It is prima facie evidence that Sec. 3.14)
the holder is a shareholder of a corporation.
(Teng v. Securities and Exchange Commission, Note: Under Sec. 43.1 of the Securities and
G.R. No. 184332, [February 17, 2016], 781 PHIL Regulation Code, a corporation whose shares of
133-148) stock are registered pursuant to the Corporation
Code or listed in a stock exchange may:
i. Nature of the certificate a. If so resolved by its Board of Directors and
It is the paper representation or tangible evidence agreed by a shareholder, issue shares to, or
of the stock itself and of the various record the transfer of some or all of its shares
representations therein. It expresses the contract into the name of said shareholders, investors
between the corporation and the stockholder. It is or, securities intermediary in the form of
not essential to the ownership and/or existence of uncertificated securities;
the share of stock. It is prima facie evidence that b. The use of uncertificated securities shall be
the holder is a shareholder in a corporation
without prejudice to the rights of the securities
(Makati Sports Club v. Cheng, G.R. No. 178523,
2010) intermediary subsequently to require the
corporation to issue a certificate in respect of
It is a written acknowledgment by the corporation any shares recorded in its name; and
of the stockholder’s interest in the corporation. It c. If so provided in its articles of incorporation
is a personal property that may be mortgaged or and by-laws, issue all of the shares of a
pledged. Transfer binds the corporation only particular class in the form of uncertificated
when it is recorded in the corporate books. securities and subject to a condition that
investors may not require the corporation to
Note: It is the shares that can be the subject of a issue a certificate in respect of any shares
security interest, not the certificate of stock recorded in their name.
Shares of Stock v. Certificate of Stock iii. Negotiability; Requirements for Valid

SHARES OF STOCK CERTIFICATE OF Transfer of Stocks
STOCK
Unit of interest in a Evidence of the Negotiability
corporation holder’s ownership of Stock certificates are not negotiable instruments
the stock and of his under the purview of Negotiable Instruments Law
right as a shareholder because there is no promise or order to pay
and up to the extend money.
specified therein
A stock certificate is a quasi-negotiable
Incorporeal or It is concrete and
instrument because it may be transferred by
intangible property tangible endorsement coupled with delivery but the holder
May be issued by the May be issued only if thereof takes it without prejudice to such rights or
corporation even if the the subscription is defenses as the registered owner or creditor may
subscription is not fully paid have under the law, except insofar as such rights
fully paid or defenses are subject to the limitations imposed
by the principles governing estoppel. (De los
Note: A stockholder who does not pay his Santos v. McGrath, G.R. No. L-4818, 1955)
subscription is not entitled to the issue of a stock
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Requirements for Valid Transfer of Stock:

1. If represented by a certificate, the
following must be strictly complied with: Principle of Indivisibility of Subscription
a. Endorsement by owner or his A subscription is one entire and indivisible
representative contract. It cannot be divided into portions, so that
b. Delivery coupled with an intention of the stockholder shall not be entitled to a certificate
constituting the person to whom the of stock until he has remitted the full payment.
stock is delivered the transferred (sic)
2. Payment pro rata
thereof.(Neugene Marketing, Inc. v.
All partial payments on one subscription shall be
Court of Appeals, G.R. No. 112941, deemed applied proportionately among the
[February 18, 1999], 362 PHIL 633- number of shares. To permit the issuance of a
646) stock certificate without full payment will be in
c. Must be recorded in the corporation’s violation of Sec. 63 (Timoteo Aquino, 2018)
Stock and Transfer Book (STB) to bind
the corporation and third parties (Teng In the absence of special agreement to the
v. SEC, Gr 184332, February 17, 2016) contrary, the subscriber’s right consists only in an
equity entitling him to a certificate for the total
Note: Recording in STB is only required number of shares subscribed for by him upon
for absolute transfers, which do not payment of the remaining portion of the
include pledges, mortgages, etc. subscription price (Fua Cun vs. Summers, G.R.
(Monserrat v. Ceron, G.R. No. 37078, No. 19441, 1923).
September 27, 1933)
Requisites for Issuance of Certificate of Stock
2. If NOT represented by the certificate (such 1. The certificate must be signed by the
as when the certificate has not yet been president or vice-president, countersigned
issued or where for some reason is not in by the secretary or assistant secretary;
the possession of the stockholder): 2. The certificate must be sealed with the seal
a. By means of deed of assignment or of the corporation;
public document; and 3. The certificate must be delivered;
b. Such deed of assignment or public 4. The par value, as to par value shares or full
document must be duly recorded in the subscription as to no par value shares must
books of the corporation (Ponce v. first be fully paid; and
Alsons Cement Corporation, G.R. No. 5. The original certificate must be
139802, December 10, 2002) surrendered where the person requesting
the issuance of a certificate is a transferee
If, however, the reason for the absence of from the stockholder (Bitong v. CA, G.R.
a certificate is that the subscription has No. 123553, July 13, 1998)
not been fully paid, the corporation may
refuse to record a sale given that under v. Stock And Transfer Book
Sec. 62, “[n]o shares of stock against
which the corporation holds any unpaid 1. Contents
claim shall be transferable in the books of Stock corporations must keep a stock and
the corporation.” transfer book, which shall contain a record of:
1. All stocks in the names of the
iv. Issuance stockholders alphabetically arranged;
2. The installments paid and unpaid on
1. Full Payment (Sec. 63) all stock for which subscription has
No stock certificate shall be issued unless there been made, and the date of payment
is full payment of:
of any installment;
1. Subscription;
3. A statement of every alienation, sale
2. Interest; and
or transfer of stock made; and
3. Expenses (in case of delinquent
4. Such other entries as the by-laws
shares).
may prescribe. (Sec. 73)
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b. The corporation shall publish a notice

Only absolute transfers of shares of stock are of loss once a week for at least three
required to be recorded in the corporation’s stock (3) consecutive weeks in a
and transfer book in order to have force and effect newspaper of general circulation in
as against third persons. Attachments of shares the place where the corporation has
are not “transfers” and need not be recorded in its principal office. The notice shall
the corporation’s stock and transfer book. (Ferro
state the ff:
Chemicals v. Garcia, et al., G.R. 168134, 2016)
i. name of the corporation
2. Who May Make Valid Entries ii. name of the registered
Only the corporate secretary is duly authorized to owner
make entries on the stock and transfer book. iii. the serial number of the
Hence, entries made by the Chairman or the certificate
President are invalid. (Torres Jr. v. CA, G.R. No. iv. the number of shares
120138, 1997). represented by such
certificate
Registration of a transfer of shares of stock is a v. after one (1) year from the
ministerial duty on the part of the corporation. date of the last publication
Aggrieved parties may then resort to the remedy without contest, the right to
of mandamus to compel corporations that make such contest shall be
wrongfully or unjustifiably refuse to record the
barred and the corporation
transfer or to issue new certificates of stock. This
remedy is available even upon the instance of a shall cancel the lost
bona fide transferee who is able to establish a certificate
clear legal right to the registration of the transfer. vi. in lieu thereof, a new
(Andaya v. Rural Bank of Cabadbaran, Inc., G.R. certificate of stock is issued
No. 188769, 2016) c. If a contest is presented to the
corporation or if an action is pending
3. Stock transfer agents in court, issuance of new certificates
A stock transfer agent or one engaged principally is suspended until the court renders
in the business of registering transfers of stocks a decision regarding the ownership
on behalf of a stock corporation. (Sec. 75) of the certificate of stock
d. No action is allowed against the
A stock transfer agent shall be allowed to operate corporation for issuing new shares
in the Philippines upon compliance with the
except for fraud, bad faith, or
following:
negligence.
1. securing a license from the SEC
(renewable annually)
vii. Situs of the Shares of Stocks
2. payment of a fee fixed by the SEC
The situs of shares of stock is the domicile of the
vi. Lost or Destroyed Certificate corporation (Tayag v. Benguet Consolidated Inc.,
G.R. No. L-23145, 1968).
Procedure for the issuance of new certificates to
replace those lost, stolen, or destroyed: (Sec. 72) B. Watered Stock (Diluted Stock)
a. The registered owner of a certificate
of stock in a corporation or his legal i. Definition
representative shall file with the
corporation an affidavit in triplicate Stocks issued for a consideration less than the
setting forth the ff: par or issued price thereof. (Sec. 61)
i. Circumstances of the Loss;
ii. Certificates and Serial ii. Liability Of Directors For Watered Stock
Numbers of lost certificates;
and Directors or officers who shall commit the
iii. Other Information and following will be liable to the corporation or its
creditors, solidarily with the stockholder
Evidence.
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concerned for the difference between the value ii. Notice Requirement
received at the time of issuance of the stock and
the par or issued value of the same : (Sec. 64) The unpaid subscriptions are not due and
1. consents to the issuance of stocks for a payable without a call. A corporation cannot file
consideration less than the par or issued an action to recover the unpaid price if the action
value; is not preceded by a call, until a call is made, no
2. consents to the issuance of stocks for a cause of action accrues (Lingayen Gulf Electric
consideration other than cash, valued in Power Company v. Baltazar, G.R. No. L-4824,
excess of its fair value; June 30, 1954).
3. having knowledge of the insufficient
Payment of balance of subscription
consideration does not file a written
Payment of unpaid subscription or any
objection with the corporate secretary percentage thereof, together with any interest
accrued, shall be made on the date specified in
iii. Trust Fund Doctrine On Watered Stocks the subscription contract or on the date stated in
the call made by the board.(Sec 66)
The Trust Fund Doctrine is the basis for the
prohibition on issuing watered stock. Effect of Failure to Pay Balance (Sec. 66)
1. The entire balance shall be due and
A Corporation has no power to release an original payable
subscriber of its capital stock from the obligation
2. The stockholder shall liable for interest
of paying for his shares, without a valuable
3. If no payment is made within thirty (30)
consideration for such release; and as against
creditors, a reduction of the capital stock can take days from the said date, all stocks
place only in the manner and under the conditions covered by the subscription shall
prescribed by the statute or the charter or the thereupon become delinquent and shall
articles of incorporation (Philippine Trust Corp. v. be subject to sale as hereinafter
Rivera, G.R. No. L-19761, 1923). provided, unless the board of directors
orders otherwise.
See subsection F.4. for discussion on Trust Fund
Doctrine. The prescriptive period in case of subscription of
shares begins to run only from the time the board
C. Payment of Balance of Subscription of directors declares that the balance is due and
payable (Garcia v. Suarez, G.R. No. 45493,
i. Call by Board of Directors 1939)
The board of directors may, at any time, declare Unpaid Subscriptions (Sec. 66)
due and payable to the corporation unpaid a. There will be interest imposed on unpaid
subscriptions and may collect the same or such subscriptions
percentage thereof, in either case, with accrued b. Payable to the corporation from date of
interest, if any, as it may deem necessary. subscription
c. If required by and interest fixed in the By-laws
Requisites for a valid call
a) Must be made in the manner prescribed by d. If interest is required but not fixed – legal rate
law; e. Therefore, no interest on unpaid subscription
b) Must be made by the Board of Directors; and is required:
c) Must operate uniformly upon all shareholders b. If not required by by-laws
c. If not required by subscription contract
Note: A call is not necessary in two cases
1. when the date of payment is specified in Methods of Collection of Unpaid Subscription
the subscription a. Call for payment
2. when the corporation becomes insolvent b. Declaration of delinquency and sale at public
(Velasco v. Poizat) auction of delinquent shares;
c. Ordinary civil action;
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d. Collection from cash dividends and other iv. Auction Sale

amounts due to stockholders if allowed by by- Auction Sale is conducted not less than thirty (30)
laws/agreed to by him. days nor more than sixty (60) days from the date
the stocks become delinquent.
D. Sale of Delinquent Shares
1. The delinquent stock shall be sold at a
Delinquent stocks - Stocks not paid within 30 public auction to such bidder who shall
days from the date fixed in the contract of offer to pay ff:
subscription or from the date stated in the call a. the full amount of the balance on
made by the Board of Directors. the subscription together
b. accrued interest
i. Effect of Delinquency c. costs of advertisement
1. They shall be subject to delinquency d. expenses of sale for the smallest
sale. number of shares or fraction of a
2. The stock shall not be voted or be entitled share.
to vote or to representation at any 2. The stock so purchased shall be
stockholder’s meeting. transferred to such purchaser in the
3. The holder shall not be entitled to any of books of the corporation and a certificate
the rights of a stockholder except the for such stock shall be issued in the
right to dividends purchaser’s favor.
4. The corporation has the right to apply 3. The remaining shares, if any, shall be
cash dividends due to the unpaid balance credited in favor of the delinquent
plus cost and expenses and to withhold stockholder who shall likewise be entitled
stock dividends until the unpaid to the issuance of a certificate of stock
subscription is fully paid. covering such shares. (Sec. 67)
Note: the only right that may not be exercised is
the right to dividends Note: There shall be no sale at public auction if:
a. The delinquent stockholder pays on or
Procedure of Delinquency Sale
before the sale: (a) balance due, (b)
ii. Call by resolution of the board of directors accrued interest, or (c) advertising costs
The board of directors shall issue a resolution and expenses of sale.
ordering the sale of delinquent stocks. (Sec. 67) b. The Board orders otherwise, on any of
the following grounds: (a) Defect in the
There is no need for a call if the subscription Notice of Sale; or (b) Defect in sale itself.
contract specifies dates when subscription (Sec. 67)
balance is due. If no payment is made within thirty
(30) days from the date specified, the board shall When Sale May Be Questioned
order the sale of delinquent shares. a. The action is filed on the ground of irregularity
or defect in the notice of sale, or in the sale of
iii. Notice of Sale the delinquent stock;
1. Notice of the sale, with a copy of the b. The party seeking to maintain such action
resolution, shall be sent to every first pays or tenders to the party holding the
shareholder with unpaid subscriptions stock the sum for which the same was sold
either personally, by registered mail, or with interest from the date of the sale at the
through other means provided in the legal rate; and
bylaws. c. The complaint was filed within 6 months from
2. Notice of the sale shall be published once the date of the sale (Sec. 68)
a week for two (2) consecutive weeks in
a newspaper of general circulation in the
province or city where the principal office
of the corporation is located.
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E. Alienation of shares
v. Sale of fully paid shares
i. Allowable restrictions on the sale of shares Section 63 provides that shares of stock issued
The authority granted to a corporation to regulate with a corresponding certificate of stock are
the transfer of its stock does not empower the personal property and may be transferred by
corporation to restrict the right of a stockholder to delivery of the certificate or certificates indorsed
transfer his shares, but merely authorizes the by the owner or his attorney-in-fact or other
adoption of regulations as to the formalities and person legally authorized to make the transfer.
procedure to be followed in effecting transfer
(Thomson v. CA, G.R. No. 116631, 1998). vi. Requisites of a valid transfer
If represented by a certificate, the following must
ii. Sale of partially paid shares be strictly complied with:
Section 62 provides that no share of stock against a. Delivery of the certificate;
which the corporation holds any unpaid claims b. Indorsement by the owner or his agent;
shall be transferable in the books of the c. To be valid against third parties, the transfer
corporation. must be recorded in the books of the
corporation (Rural Bank of Lipa v. CA, G.R.
iii. Sale of a portion of shares not fully paid No. 124535, 2001).
A stockholder who has not paid the full amount of
his subscription cannot transfer part of his
If NOT represented by a certificate, the following
subscription in view of the indivisible nature of a
must be complied with:
subscription contract.
a. By means of a deed of a Deed of Assignment;
b. The same must be recorded in the books of
iv. Sale of all shares not fully paid
The entire subscription, although not yet fully the corporation.
paid, may be transferred to a single transferee,
who as a result of the transfer must assume the If, however, the reason for the absence of a
unpaid balance. (SEC Opinion) Consent of the certificate is that the subscription has not
corporation must first be secured since the been fully paid, the corporation may refuse to
transfer of subscription rights and obligations record a sale given that under Sec. 62, “[n]o
contemplates a novation of contract. (Civil Code, shares of stock against which the corporation
Art. 1923) holds any unpaid claim shall be transferable
in the books of the corporation.”
The SEC correctly categorized the assignment of
the subscription agreements as a form of The failure by a seller to deliver, within a
novation by substitution of a new debtor and reasonable time, the stock certificates
which required the consent of or notice to the representing shares of stock subject of a sale
creditor. In this case, the change of debtor took transaction may be a basis to rescind such sale
place when R.C. Lee assigned the Oceanic (Fil-Estate Gold and Development v. Vertex, G.R.
shares under the subscription agreements to SSI No. 202079, 2013)
so that the latter became obliged to settle the 75%
unpaid balance on the subscription. The SEC Note: Recording in STB is only required for
was correct in saying that Interport was duly absolute transfers, which do not include pledges,
notified of the assignment when SSI tendered its mortgages, etc. (Monserrat v. Ceron, G.R. No.
payment for the 75% unpaid balance, and that it 37078, September 27, 1933)
could not anymore refuse to recognize the
transfer of the transfer of the subscription In case of chattel mortgage [Note: the Personal
agreements to SSI was to extinguish the Property Security Act has done away with chattel
obligation of R.C. Lee to Oceanic, now Interport. mortgages], a double registration is necessary
Interport was no longer obliged to accept any with the Register of Deeds where:
payment from R.C. Lee because the latter had a. The debtor resides
ceased to be privy to the subscription b. The corporation has its principal place of
agreements, but was now legally bound to accept business.
SSi’s tender of payment as the new debtor.
(Interport Resources Corporation v. Security Registration on the stock and transfer book would
Specialist, Inc., G.R. No. 154069, 2016) be of no effect
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ii. Right to inspect corporate records

In case of attachments and levies, shares may be What does the right to inspect corporate
attached by leaving with the corporate officer a records include? (Sec. 73)
copy of the writ and notice. No recording in the 1. Right to inspect corporate records
stock and transfer book is needed. The moment 2. Right to demand for their reproduction,
the notice has been duly delivered, it becomes provided that [D-E-Co]:
binding. a. demand in writing is made by the
requesting party
vii. Involuntary dealings b. copies are reproduced at the
As an incident of ownership, a stockholder may
requesting party’s expense
pledge, mortgage or encumber his shares of
c. The inspecting or reproducing
stocks. Restrictions by the corporation are only
valid when: party shall remain bound by
a. They appear in the Articles of Incorporation, confidentiality rules under
by-laws, and the certificates. prevailing laws, such as the rules
b. They are not more onerous than granting on trade secrets or processes
existing stockholders an option to purchase under Republic Act No. 8293,
within a reasonable period and within otherwise known as the
reasonable terms. “Intellectual Property Code of the
Philippines”, as amended,
F. Corporate Books and Records Republic Act No. 10173,
otherwise known as the “Data
i. Corporate records to be kept at principal Privacy Act of 2012”, Republic
office: (Sec. 73) [AB-O-NA-BResRepMi] Act No. 8799, otherwise known
1. The articles of incorporation and bylaws as “The Securities Regulation
of the corporation and all their Code”, and the Rules of Court.
amendments;
2. The current ownership structure and Who may inspect corporate records?
voting rights of the corporation, including A director, trustee, stockholder or member of the
lists of stockholders or members, group corporation in person or by a representative has
structures, intra-group relations, the right to inspect corporate records (Sec. 73).
ownership data, and beneficial
ownership; The ff. may NOT inspect or demand reproduction
3. The names and addresses of all the of corporate records: (Sec. 73)
members of the board of directors or 1. One who is not a stockholder or member
trustees and the executive officers; of record,
4. A record of all business transactions; 2. A competitor, director, officer, controlling
5. A record of the resolutions of the board of stockholder or otherwise represents the
directors or trustees and of the interests of a competitor shall have no
stockholders or members; right to inspect or demand reproduction
6. Copies of the latest reportorial of corporate records.
requirements submitted to the SEC; and
Any stockholder who shall abuse the rights
7. The minutes of all meetings of
granted under Sec. 73 shall be penalized under
stockholders or members, or of the board Section 158 the RCC without prejudice to the
of directors or trustees. provisions of Republic Act No. 8293, otherwise
known as the “Intellectual Property Code of the
Note: This is not an exclusive list. Section 73 Philippines”, as amended, and Republic Act No.
states that Every corporation shall keep and 10173, otherwise known as the “Data Privacy Act
carefully preserve at its principal office all of 2012”.
information relating to the corporation including,
but not limited to the abovementioned.
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Requisites for the exercise of the right to 11. DISSOLUTION AND LIQUIDATION
inspect
1. It must be exercised at reasonable hours Dissolution
on business days Extinguishment of the franchise of a corporation
2. The stockholder has not improperly used and the termination of its corporate existence.
any information he secured through any
previous examination However, the corporation shall nevertheless be
3. The demand is made in good faith and for continued as a body corporate for three (3) years
after the time when it would have been so
a legitimate purpose
dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to
When may corporate records be inspected?
settle and close its affairs, to dispose of and
Authorized persons may inspect corporate books
convey its property and to distribute its assets, but
at reasonable hours on business days (Sec. 73)
not for the purpose of continuing the business for
which it was established. (Sec. 122)
iii. Effect of refusal to inspect corporate
records A. Modes of Dissolution:
Any officer or agent of the corporation who shall
refuse to allow the inspection and/or reproduction i. Voluntary
of records shall be liable for:
1. damages 1. Where No Creditors Are Affected
2. shall be guilty of an offense which shall
be punishable under Section 161, RCC Procedure where no creditors are affected by
the dissolution of the corporation:
If such refusal is made pursuant to a resolution or 1. A meeting must be held on the call of
order of the board of directors or trustees, the directors or trustees;
liability under this section for such action shall be 2. Notice of the meeting should be given to
imposed upon the directors or trustees who voted the stockholders by personal delivery or
for such refusal. (Sec. 73)
registered mail at least twenty (20) days
prior to the meeting;
Defenses that may be used by officer / agent /
director / trustee: 3. The notice of meeting should also be
1. the requesting party improperly used any published for once in a newspaper
information secured through any prior published in the principal place of
examination of the records or minutes of business, otherwise, in a newspaper of
such corporation or of any other general circulation
corporation, 4. The resolution to dissolve must be
2. the requesting party was not acting in approved by the majority of the
good faith or for a legitimate purpose in directors/trustees and approved by the
making the demand to examine or stockholders representing at least
reproduce corporate records, majority of the outstanding capital stock
3. the requesting party is a competitor, or majority of members;
director, officer, controlling stockholder or 5. A verified request for dissolution is then
otherwise represents the interests of a filed with the SEC stating:
competitor (Sec. 73) a. the reason for dissolution
b. the form, manner and time when
the notices were given
c. names of the stockholders and
directors or members and
trustees who approved the
dissolution
d. the date, place, and time of the
meeting in which the vote was
made; and
e. details of publication
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6. In addition, the following shall be 4. The corporation shall submit to the SEC
submitted to the SEC: the following:
a. Copy of the resolution a. a copy of the resolution
authorizing the dissolution, authorizing the dissolution,
certified by a majority of the certified by a majority of the
board and countersigned by the board of directors or trustees and
secretary; countersigned by the secretary
b. Proof of publication of the corporation; and
c. Favorable recommendation from b. list of all its creditors.
the appropriate regulatory 5. By an order reciting the purpose of the
agency, when necessary. petition, the SEC shall fix a deadline for
7. The SEC shall, within 15 days from the filing objections to the petition (shall not
receipt of the verified request for be less than thirty (30) days nor more
dissolution, and in the absence of any than sixty (60) days after the entry of the
withdrawal within said period, approve order).
the request and issue the certificate of 6. Publication: Before such the deadline, a
dissolution, upon which the dissolution copy of the order shall be published at
will take effect. (Sec. 134) least once a week for three (3)
consecutive weeks in a newspaper of
2. Where Creditors Are Affected general circulation published in the
municipality or city where the principal
Procedure where the dissolution of the office of the corporation is situated,
corporation may prejudice the rights of any otherwise, in a newspaper of general
creditor: circulation in the Philippines
1. A verified petition for dissolution shall be
7. Posting: A similar copy shall be posted
filed with the SEC.
for three (3) consecutive weeks in three
2. The petition shall be:
(3) public places in such municipality or
a. signed by a majority of the
city.
corporation’s board of directors
8. After the expiration of the time to file
or trustees
objections, a hearing shall be conducted
b. verified by its president or
upon prior five (5) day notice to hear the
secretary or one of its directors
objections;
or trustees
9. Judgment shall be rendered dissolving
c. shall set forth all claims and
the corporation and directing the
demands against it
disposition of assets; the judgment may
d. that its dissolution was resolved
include appointment of a receiver.
upon by the affirmative vote of
10. The dissolution shall take effect only
the stockholders representing at
upon issuance by the SEC of a certificate
least two-thirds (2/3) of the
of dissolution* (Sec. 135)
outstanding capital stock or at
least two-thirds (2/3) of the 3. By Shortening Corporate Term-
members at a meeting of its
stockholders or members called Procedure on voluntary dissolution by
for that purpose. shortening of the corporate term (Sec. 36):
3. The petition shall likewise state: 1. A private corporation may extend or
a. the reason for the dissolution; shorten its term by amending the the
b. the form, manner, and time when articles of incorporation when approved
the notices were given; by a majority vote of the board of
c. the date, place, and time of the directors or trustees, and ratified at a
meeting in which the vote was meeting by the stockholders or members
made. representing at least two-thirds (2/3) of
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the outstanding capital stock or of its c. Issue such other orders as it may
members. deem appropriate. (Sec. 137)
2. Written notice of the proposed action and
the time and place of the meeting shall be Procedure on Withdrawal of Petition for
sent to stockholders or members Dissolution
3. In case of extension of corporate term, a A withdrawal of the petition for dissolution shall be
dissenting stockholder may exercise the in the form of a motion and similar in substance
right of appraisal under the conditions to a withdrawal of request for dissolution but shall
be verified and filed prior to publication of the
provided in this Code. (Sec. 137)
order setting the deadline for filing objections to
the petition. (Sec. 137)
Note: Under Sec. 11, the RCC now allows the
revival of a the corporate existence of an Expired
ii. Involuntary
Corporation.
A corporation may be dissolved by the SEC motu
If a corporation’s term has expired, it may apply
proprio or upon filing of a verified complaint by
for a revival of its corporate existence,
any interested party. (Sec. 138)
together with all the rights and privileges under its
certificate of incorporation and subject to all of its
Grounds for dissolution of the corporation:
duties, debts and liabilities existing prior to its
a. Non-use of corporate charter as provided
revival. Upon approval by the SEC, the
corporation shall be deemed revived and a under Section 21 of this Code;
certificate of revival of corporate existence shall b. Continuous inoperation of a corporation
be issued, giving it perpetual existence, unless as provided under Section 21 of this
its application for revival provides otherwise. Code;
(Sec. 11) c. Upon receipt of a lawful court order
dissolving the corporation;
4. Withdrawal of dissolution d. Upon finding by final judgment that the
corporation procured its incorporation
Procedure on Withdrawal of Request for through fraud;
Dissolution: e. Upon finding by final judgment that the
1. Withdrawal of Request of Dissolution: corporation:
Not later than 15 days from the receipt by 1. Was created for the purpose of
SEC of the request for dissolution, the committing, concealing or aiding
withdrawal thereof shall be made in the SEC of securities violations,
writing, duly verified by any incorporator, smuggling, tax evasion, money
director, trustee, shareholder, or member laundering, or graft and corrupt
and signed by the same number of practices;
incorporators, directors, trustees, 2. Committed or aided in the SEC
shareholders, or members necessary to of securities violations,
request for dissolution. smuggling, tax evasion, money
2. Upon receipt of a withdrawal of request laundering, or graft and corrupt
for dissolution, the SEC shall withhold practices, and its stockholders
action on the request for dissolution and knew of the same; and
shall, after investigation: 3. Repeatedly and knowingly
a. Make a pronouncement that the tolerated the SEC of graft and
request for dissolution is deemed corrupt practices or other
withdrawn; fraudulent or illegal acts by its
b. Direct a joint meeting of the directors, trustees, officers, or
board of directors or trustees and employees. (Sec. 138)
the stockholders or members for
the purpose of ascertaining If the corporation is ordered dissolved by final
whether to proceed with judgment pursuant to the grounds set forth in
dissolution; or subparagraph (e) hereof, its assets, after
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payment of its liabilities, shall, upon petition of the ● Entering into contracts or negotiations for
SEC with the appropriate court, be forfeited in lease or sale of properties to be used as
favor of the national government. Such forfeiture business or factory site;
shall be without prejudice to the rights of innocent ● Making plans for and the construction of the
stockholders and employees for services factory; and
rendered, and to the application of other penalty ● Taking steps to expedite the construction of
or sanction under this Code or other laws. (Sec.
the company’s working equipment
138)
In the event of failure to file for an extension if a
The SEC shall give reasonable notice to, and
corporation’s term has expired, it may apply for a
coordinate with, the appropriate regulatory
revival of its corporate existence, together with all
agency prior to the involuntary dissolution of
the rights and privileges under its certificate of
companies under their special regulatory
incorporation and subject to all of its duties, debts
jurisdiction.(Sec. 138)
and liabilities existing prior to its revival. Upon
approval by the SEC, the corporation shall be
Non-use of corporate charter (Sec. 21)
deemed revived and a certificate of revival of
If a corporation does not formally organize and
corporate existence shall be issued, giving it
commence its business within 5 years
perpetual existence, unless its application for
● Effect: certificate of incorporation shall be
revival provides otherwise.
deemed revoked following the end of
the 5-year period Demands of Minority for Dissolution
Corporate dissolution due to mismanagement of
Continuous Inoperation (Sec. 21) majority stockholder is too drastic a remedy,
If a corporation has commenced its business but especially when the situation can be remedied
subsequently becomes inoperative for a period of such as giving minority stockholders a veto power
at least 5 consecutive years to any decision (Chase v. Buencamino, G.R. No.
● Effect: after due notice and hearing, the 20395, 1985).
corporation will be put on delinquent
status Effects of Dissolution
● Remedy: it shall have a period of 2 years (a) Vesting of legal title to the corporate property
to resume operations. Otherwise, in the stockholders, who become co-owners
certificate of incorporation will likewise be thereof
revoked. (b) The corporation ceases to be a body
corporate to continue the business for which
“Organization” under SEC Rules it was established.
● Adoption of the by-laws and the filing and
approval of the same with and by the SEC if The termination of the life of a juridical entity does
the same were not adopted and filed not by itself cause the extinction or diminution of
simultaneously with the articles of the rights and liability of such entity, since it is
incorporation; allowed to continue as a juridical entity for three
● Election of the Board of Directors or Trustees (3) years for the purpose of prosecuting and
and of the officers; defending suits by or against it and enabling it to
● Establishment of the principal office; and settle and close its affairs, to dispose of and
● Providing for the subscription and payment of convey its property, and to distribute its assets
(Republic v. Tancinco, G.R. No. 139256, 2002).
the capital stock and the taking of such steps
as are necessary to endow the legal entity
A board resolution to dissolve the corporation
with capacity to transact the legitimate does not operate to so dissolve the juridical entity.
business for which it was created For dissolution to be effective “the requirements
mandated by the Corporation Code should have
“Commenced Business” under SEC Rules been strictly complied with” (Vesagas v. Court of
When the corporation has performed preparatory Appeals, G.R. No. 142924, 2001)
acts geared towards the fulfillment of the
purposes for which it was established such as but When the period of corporate life expires, the
not limited to the following: corporation ceases to be a body corporate for the
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purpose of continuing the business for which it designation of the trustee is made within said
was organized (PNB v. Court of First Instance of period.
Rizal, Pasig, Br. XXI, G.R. No. 63201, 1992).
c. Through Receiver – created by means of
A party’s stockholding in a corporation, whether judicial or quasi-judicial appointment of the
existing or dissolved, is a property right which he receiver. The receiver is actually an officer of
may vindicate against another party who has the court and must therefore be accountable
deprived him thereof.
to the court.
Stockholders may convey their respective
Note: If there is no Board of Directors or
shareholdings toward the creation of a new
Trustees, those having pecuniary interest in the
corporation to continue the business of the old or
assets, including not only the shareholders but
they may reincorporate by filing new articles of
likewise the creditors of the corporation, acting for
incorporation and by-laws.
and in its behalf, may liquidate (Alabang Dev’t v.
B. Methods of Liquidation Alabang Hills Village Ass’n, G.R. No. 196950,
2014)
Liquidation
Process by which all the assets of the corporation d. Liquidation after Three Years
are converted into liquid assets in order to
facilitate the payment of obligations to creditors, If full liquidation can only be effected after the 3-
and the remaining balance if any is to be year period and there is no trustee, the directors
distributed to the stockholders. may be permitted to complete the liquidation by
continuing as trustees by legal implication
There is no time limit within which the (Reburiano v. CA, G.R. No. 102965, 1999).
trustees must complete a liquidation placed in
their hands (Vigilla et.al. v. Philippine College of The trustee may continue to prosecute a case
Criminology, G.R. No. 200094, 2013). commenced by the corporation within three years
from its dissolution until rendition of the final
Modes of Liquidation judgment, even if such judgment is rendered
beyond the three-year period allowed by Section
a. Through Board of Directors or Trustees – [139]. However, an already defunct corporation
normal method of procedure cannot initiate a suit after the lapse of the three-
year period. (Alabang Dev’t v. Alabang Hills
Even if no trustee is appointed or designated Village Ass’n, G.R. No. 196950, 2014)
during the three-year period of the liquidation of
Note: When a corporation threatened by
the corporation, the Court has held that the Board
of Directors may be permitted to complete the bankruptcy is taken over by a receiver, all the
corporate liquidation by continuing as trustees by creditors shall stand on equal footing. Not one of
legal implication (Vigilla et al. v Philippine College them should be given preference by paying one
of Criminology, G.R. No. 200094, 2013) or some of them ahead of the others.
Note: This only concerns the matters/actions that The Civil Code provisions on concurrence and
are initiated during the 3 year grace period. The preference of credits are applicable to the
Board cannot be considered as trustees for liquidation proceedings.
matters initiated after the 3-year period.
A corporation in the process of liquidation has no
b. Through Trustee – at any time during the legal authority to engage in any new business,
even if the same is in accordance with the primary
three years of liquidation, a corporation is
purpose stated in its articles of incorporation.
authorized and empowered to convey all of
its property to trustees for the benefit of When a Corporation Must Wind Up (Sec. 139)
stockholders, members, creditors, and other If it is dissolved by:
persons in interest. The three (3)-year a. By expiry of term or
limitation will not apply provided the b. Is annulled by forfeiture, or
otherwise, or
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c. Is terminated In any other

manner Notwithstanding the foregoing, a corporation shall
not be deemed a close corporation when at least
Effects of Winding Up of Affairs: (Sec. 139) two-thirds (2/3) of its voting stock or voting rights
a. Continues as a corporate body for 3 is owned or controlled by another corporation
years to prosecute and defend suits which is not a close corporation within the
against it, close its affairs, dispose and meaning of the Corporation Code. (Sec. 95)
convey its property and distribute assets
Suppletory Effect
b. Cannot continue business for which it
The provisions of other Titles of the Corporation
was established
Code shall apply suppletorily except insofar as
c. Can convey property to trustees for the Title of Close Corporation otherwise provides.
benefit of the stockholders/members, (Sec. 95)
creditors and other persons in interest
i. Legal interest vests in Management of a close corporation
business 1. The articles of incorporation of a close
ii. Beneficial interest remains corporation may provide that the business of
with stockholders/ the corporation shall be managed by the
members, creditors stockholders of the corporation rather than by
d. Assets distributable to unknown a board of directors.
creditors, stockholders/ members, a. When they manage, stockholders are
persons in interest or those who cannot liable as directors;
be found shall be escheated to the city or b. There is no need to call a meeting to elect
municipality where the assets are directors;
located. c. To the extent that the stockholders are
e. Distribution of assets only upon lawful actively engaged in the management,
dissolution and payment of all debts and said stockholders shall be liable for
liabilities. corporate torts unless the corporation
Exceptions: has obtained reasonably adequate
a. Decrease of capital stock liability insurance.
b. As otherwise allowed in the
Corporation Code Companies That Cannot Be Close
Corporations (MIPES-BOO)
12. OTHER CORPORATIONS a. Mining companies;
b. Insurance companies;
A. Close Corporations c. Public utilities;
d. Educational institutions;
i. Characteristics of a close corporation e. Stock exchanges;
f. Banks;
A close corporation, within the meaning of the g. Oil companies;
Corporation Code, is one whose articles of h. Other corporations declared to be vested with
incorporation provides that: public interest.
1. All the corporation's issued stock of all
classes, exclusive of treasury shares, shall ii. Validity Of Restrictions On Transfers Of
be held of record by not more than a specified Shares (Sec 97)
number of persons, not exceeding twenty Restrictions on the right to transfer shares must
(20) appear in:
2. All the issued stock of all classes shall be 1. The articles of incorporation;
subject to one or more specified restrictions 2. The by-laws; and
on transfer permitted by this Title 3. In the certificate of stock
3. The corporation shall not list in any stock
exchange or make any public offering of any Otherwise, the same shall not be binding on any
of its stock of any class. purchaser thereof in good faith.
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Said restrictions shall not be more onerous than permitted under its articles of
granting the existing stockholders or the incorporation; or
corporation the option to purchase the shares of 3. that the transfer violates a restriction on
the transferring stockholder with such reasonable transfer of stock, and the corporation
terms, conditions or period stated therein. may, at its option, refuse to register the
transfer in the name of the transferee.
If upon the expiration of said period, the existing
stockholders or the corporation fails to exercise
(e) The provisions of subsection (d) shall not
the option to purchase, the transferring
be applicable if the transfer of stock, though
stockholder may sell his shares to any third
contrary to subsections (a), (b) or (c), has been
person.
consented to by all the stockholders of the close
corporation, or if the close corporation has
iii. Effects of Issuance or Transfer of Stock in
amended its articles of incorporation in
Breach of Qualifying Conditions. –
accordance with this Title.
(a) If shares of stock of a close corporation
(f) The term “transfer”, as used in this
are issued or transferred to any person who is not
section, is not limited to a transfer for
eligible to be a holder thereof under any provision
value.
of the articles of incorporation, and if the
certificate for such stock conspicuously shows
(g) The provisions of this section shall not
the qualifications of the persons entitled to be
impair any right which the transferee may have to
holders of record thereof, such person is
either rescind the transfer or recover the stock
conclusively presumed to have notice of the
under any express or implied warranty. (Sec. 98)
fact of the ineligibility to be a stockholder.
Note: Even if the transfer of shares is made in
(b) If the articles of incorporation of a close
violation of the restrictions enumerated under
corporation states the number of persons, not
[Sec. 98 of RCC], such transfer is still valid if it
exceeding twenty (20), who are entitled to be
has been consented to by all the shareholders of
stockholders of record, and if the certificate for
the close corporation and the corporation cannot
such stock conspicuously states such number,
refuse to register the transfer of shares in the
and the issuance or transfer of stock to any
name of the transferee. (Florete, Sr. v. Florete,
person would cause the stock to be held by more
Jr., G.R. No. 223321, 2018)
than such number of persons, the person to
whom such stock is issued or transferred is
Need for factual determination of close
conclusively presumed to have notice of this
corporation to apply
fact.
Before courts can allow the operation of Section
98 to a case, there must first be a factual
(c) If a stock certificate of a close corporation
determination that the corporation is indeed a
conspicuously shows a restriction on transfer of
close corporation. There needs to be a
the corporation’s stock and the transferee
presentation of evidence on the relevant
acquires the stock in violation of such restriction,
restrictions in the articles of incorporation and by-
the transferee is conclusively presumed to have
laws of the corporation. (Rural Bank of Andaya v.
notice of the fact that the stock was acquired
Cabadbaran, G.R. No. 188769, 2016)
in violation of the restriction.
iv. When board meeting is unnecessary or
(d) Whenever a person to whom stock of a
improperly held (Sec. 100)
close corporation has been issued or transferred
has or is conclusively presumed under this
General Rule: Any action taken by the directors
section to have notice of:
without a board meeting shall be deemed
1. the person’s ineligibility to be a
INVALID.
stockholder of the corporation; or
2. that the transfer of stock would cause the Exception: The following shall nonetheless be
stock of the corporation to be held by valid despite the lack of a valid board meeting,
more than the number of persons unless the by-laws provide otherwise
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1. Before or after such action is taken, a vii. Deadlocks (Sec. 103)

written consent thereto is signed by all
the directors; or Power To Buy-Back Shares Of Close
2. All the stockholders have actual or Corporations v. Appraisal Right In Stock
implied knowledge of the action and Corporations
make no prompt objection in writing; or CLOSE CLOSE STOCK
3. The directors are accustomed to take CORP CORP CORP
informal action with the express or Sec. 103 Sec. 104
implied acquiescence of all the (Deadlocks) (Withdrawal)
stockholders; or Exercised by Exercised by Exercised by
4. All the directors have express or implied the the the
knowledge of the action in question and corporation stockholder stockholder
none of them makes a prompt objection There are
in writing. certain
Exercisable
Exercisable instances
An action within the corporate powers taken at only in a
for any where
a meeting held without proper call or notice, is deadlock
reason appraisal
deemed ratified by a director who failed to situation
rights can be
attend, unless after having knowledge thereof, exercised
the director promptly files his written objection
Can be
with the secretary of the corporation.
directed
Available Available
v. Pre-Emptive Rights Of Stockholders In either against
only against only against
Close Corporations (Sec 101) the
the the
corporation
corporation corporation
General Rule: It shall extend to all stock to be or any other
issued, including reissuance of treasury shares, stockholder
whether for money, property or personal services, Available Limited only Unrestricted
or in payment of corporate debts even without in a situation retained
unrestricted when the earnings are
Exception: Unless the articles of incorporation retained corporation required for
provide otherwise. earnings and has sufficient buyback to
not subject to assets in its happen,
vi. Amendment of the articles of incorporation
any formula books generally
(Sec. 102)
Any amendment to the articles of incorporation Compelling Dissolution In Close

which seeks to delete or remove any provision Corporations v. Stock Corporations
required by this Title or to reduce a quorum or CLOSE CLOSE STOCK
voting requirement stated in said articles of CORP CORP CORP
incorporation shall require the affirmative vote Sec. 104 Sec. 105
of at least two- thirds (2/3) of the outstanding SEC is given
capital stock, whether with or without voting express Majority of
rights, or of such greater proportion of shares as power to A stockholder the Board
may be specifically provided in the articles of
dissolve a must make a plus 2/3
incorporation for amending, deleting or removing
any of the aforesaid provisions, at a meeting duly close written stockholder
called for the purpose. corporation petition to the vote is
when there is dissolution required for
a deadlock dissolution
situation
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B. Non-Stock Corporations
The incurring of profit or losses does not
i. Definition determine whether an activity is for profit or non-
A non-stock corporation is one where no part of profit, and the courts will consider whether
its income is distributable as dividends to its dividends have been declared or its members or
members, trustees, or officers, subject to the that is property, effects or profit was ever used for
provisions of the Corporation Code on dissolution personal or individual gain, and not for the
purpose of carrying out the objectives of the
Any profit which a non-stock corporation may enterprise (Manila Sanitarium and Hospital v.
obtain as an incident to its operations shall, Gabuco, G.R. No. 13873, 1963).
whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which In a mutual life insurance corporation, organized
the corporation was organized, subject to the as a non-stock nonprofit corporation, the so-
provisions of this Title. (Sec. 86) called “dividend” that is received by members-
policyholders is not a portion of profits set aside
Requisites: for distribution to the stockholders in proportion to
1. Does not have a capital stock divided into their subscription to the capital stock of a
share corporation. One, a mutual company has no
2. No part of its income is distributable as capital stock to which subscription is necessary;
dividends to its member there are no stockholders to speak of, but only
3. They must be formed or organized for members. And, two, the amount they receive
purposes specified in Sec. 87 does not partake of the nature of a profit or
income. The quasi-appearance of profit will not
change its character; it remains an overpayment,
Conversion between Stock and Non-Stock
a benefit to which the member-policyholder is
Corporation
equitably entitled (Republic v. Sunlife Assurance
A non-stock corporation cannot be converted into
Company of Canada, GR No. 158085, 2005).
a stock corporation through mere amendment of
its Articles of Incorporation as this would be in
Delinquency in Membership Dues of Non-
violation of Section 87 which prohibits distribution
Stock Corporations
of income as dividends to members. (SEC
A non-stock corporation may seize and dispose
Opinion, 20 March 1995) However, a non-stock
of the membership share of a fully-paid member
corporation can be converted into a stock
on account of his unpaid monthly dues, when
corporation only if the members dissolve it first
such corporation is authorized to do so under the
and then organize a stock corporation. The result
by-laws, even when no provision on the matter
is a new corporation. (SEC Opinion, 13 May
appears in the articles of incorporation, and in
1992)
spite of the fact that Sec. 67 of Corporation Code
on delinquency sale pertains to payment of
On the other hand, a stock corporation may be
shares subscription. (Valley Golf v. De Caram,
converted into a non-stock corporation by mere
G.R. No. 155805, 2000)
amendment provided all the requirements are
complied with. Its rights and liabilities will remain.
Theory on Non-Stock Corporations

A non-stock corporation may only be formed or
organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific,
social, civic or other similar purposes. It may not
engage in undertakings such as the investment
business where profit is the main or underlying
purpose. Although the non-stock corporation may
obtain profits as an incident to its operation such
profits are not to be distributed among its
members but must be used for the furtherance of
its purposes (People v. Menil, G.R. No. 115054-
66, 1999).
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Comparative Table: Stock v. Non-Stock explanation if its articles or by-laws provide for
Corporations more than 15 members of the Board. (Sec. 91)
STOCK CORP NON-STOCK CORP
Can they earn profit? Term
Trustees shall hold office for a period of three (3)
Yes Yes
years until their successors are elected and
Distribution of Dividends qualified (Sec. 91)
Yes No
Name of “Constituents” Qualifications of Trustees
Stockholders Members Only ONE qualification under Sec. 92:
Limitation to Purpose Membership in the corporation. Nonetheless, the
May not include a member who may be elected as trustee may just
There can be purpose which would be a nominee. A trustee who ceases to be a
secondary purposes change or contradict member of the corporation can no longer act as a
trustee.
its nature in AOI
Kind of Board Note: An independent trustee of a non-stock
Board of Directors Board of Trustees corporation vested with public interest need not
Number of Board Members be a member of such non-stock corporation (Sec.
may be more than 15 91)
must not be more
EXC: special
than 15
corporations For stock corporations, the "quorum" referred to
Term of Board Members in Section 52 of the Corporation Code is based on
3 years, but AOI or the number of outstanding voting stocks. For
by-laws may provide nonstock corporations, only those who are actual,
otherwise living members with voting rights shall be counted
1 year in determining the existence of a quorum during
5 years - educational members' meetings. Dead members shall not be
Constant terms counted. (Tan v. Sycip, G.R. No. 153468 August
institutions
17, 2006)
Staggered terms
How Board Members are Elected ii. Purposes
A non-stock corporation may be formed or
Directly elected by
Elected by the organized for the following purposes:
the members, unless a. Charitable,
stockholders (per
AOI provides b. Religious,
Corp. Code)
otherwise c. Educational,
Manner of Voting d. Professional,
Straight voting, e. Cultural,
Straight or cumulative unless AOI or by- f. Recreation,
voting laws provide g. Fraternal,
otherwise h. Literary,
Can a stockholder/member disengage i. Scientific,
from the corporation? j. Social,
Can sell to other Articles or by-laws k. Civic Service,
stockholders OR specifically provide l. Similar purposes, like trade, industry,
exercise of appraisal for the method of agriculture and like chambers, or
rights termination m. Any combination of thereof (Sec. 87)
Number of Trustees In the Articles of Incorporation, a non-stock

A non-stock corporation may OR may not have corporation may not include a purpose which
more than 15 trustees. would change or contradict its nature as such.
NOTE: However, SEC has adopted a policy of

requiring registrant corporations to submit an
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iii. Treatment Of Profits 2. Assets held by the corporation upon a

Non-stock non-profit corporations may actually condition requiring return, transfer or
earn profits incidentally from its operations, conveyance, and which condition occurs
provided that the profits are devoted to their by reason of the dissolution, shall be
purpose. returned, transferred or conveyed in
accordance with such requirements;
The mere fact that a non-stock corporation may
3. Assets received and held by the
earn profit does not make it a profit-making
corporation subject to limitations
corporation, where such profit is used to carry out
the purposes set forth in the Articles of permitting their use only for charitable,
Incorporation and is not distributed to its religious, benevolent, educational or
incorporators, members, trustees, or officers. similar purposes, but not held upon a
(SEC Opinion, 13 November 1990, XXIV SEC condition requiring return, transfer or
Quarterly Bulletin 63) conveyance by reason of the dissolution,
shall be transferred or conveyed to one
Note: or more corporations, societies or
Despite its nomenclature, the essence of a non- organizations engaged in activities in the
stock non-profit corporation is not the non- Philippines substantially similar to those
existence of shares of stock to cover its capital (it of the dissolving corporation according to
is legally possible for a corporation having capital a plan of distribution adopted pursuant to
stock to still be considered a non-stock
this Chapter;
corporation), but that:
a. Its primary purpose should be any of those 4. Assets other than those mentioned in the
under Sec. 88 of the Corporation Code, and preceding paragraphs, if any, shall be
b. There is a prohibition in the articles of distributed in accordance with the
incorporation and by-laws that no part of the provisions of the articles of incorporation
income or any form of dividend is or the by-laws, to the extent that the
distributable to the members, trustees, and articles of incorporation or the by-laws,
officers of the corporation (CIR v. Club determine the distributive rights of
Filipino Inc. de Cebu, G.R. No. L-12719, members, or any class or classes of
1962) members, or provide for distribution; and
● Even though the corporation 5. In any other case, assets may be
may incidentally earn profits distributed to such persons, societies,
from its operations. (CIR v. organizations or corporations, whether or
University of Visayas, G.R. No. not organized for profit, as may be
L-13554, 1961) specified in a plan of distribution adopted
pursuant to this Chapter.(Sec. 93)
iv. Plan and Distribution of Assets upon
Dissolution Plan of Distribution of Assets
A non-stock corporation in the process of
Rules of Distribution of Assets upon dissolution may adopt a plan providing for the
Dissolution distribution of assets, not inconsistent with the
The assets of a nonstock corporation undergoing RCC, in the following manner:
the process of dissolution for reasons other than
those set forth in Section 139 of the RCC (every 1. The board of trustees shall, by majority
corporation whose charter expires pursuant to its vote, adopt a resolution recommending a
articles of incorporation, is annulled by forfeiture, plan of distribution and directing the
or whose corporate existence is terminated in any submission thereof to a vote at a regular
other manner) shall be applied and distributed as or special meeting of members having
follows: voting rights;
1. All liabilities and obligations of the 2. Each member entitled to vote shall be
corporation shall be paid, satisfied and given a written notice setting forth the
discharged, or adequate provision shall proposed plan of distribution or a
be made therefore; summary thereof and the date, time and
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place of such meeting within the time and

in the manner provided in this Code for Term of Office
the giving of notice of meetings; and Unless otherwise provided in the articles of
3. Such plan of distribution shall be adopted incorporation or bylaws, the board of trustees of
upon approval of at least two-thirds (2/3) incorporated schools, colleges, or other
of the members having voting rights institutions of learning shall, as soon as
organized, so classify themselves that the term of
present or represented by proxy at such
office of one- fifth (1/5) of their number shall
meeting.
expire every year. Trustees thereafter elected to
fill vacancies, occurring before the expiration of a
Note: particular term, shall hold office only for the
Although a non-stock corporation cannot unexpired period. Trustees elected thereafter to
distribute incidental profits or dividends to its fill vacancies caused by expiration of term shall
members, trustees and officers during its hold office for five (5) years. (Sec. 106)
corporate term, in the event of dissolution, after
the payment of all liabilities and return of assets Note: For institutions organized as stock
received subject to limitations permitting their corporations, the number and term of directors
use, the remaining assets may be distributed to shall be governed by the provisions on stock
the members, as provided for in the articles of corporations.(Sec. 106)
incorporation of by-laws.
Quorum
In the absence of distribution rules, the remaining A majority of the trustees shall constitute a
assets may be distributed to such persons, quorum for the transaction of business. The
societies, organizations, or corporations, powers and authority of trustees shall be defined
whether or not organized for profit, as may be in the bylaws.(Sec. 106)
specified in a plan of distribution as adopted by
the Board of Trustees and ratified by the 1987 Constitution Provisions
members. Article II, Sec. 17 of the Constitution: “The State
shall give priority to education [...] to foster
In a regular non-stock corporation it is possible for patriotism and nationalism, accelerate social
its net assets and accumulated “earnings” from its progress, and promote total human liberation and
operations, to inure to the benefit of private development.”
individuals (e.g., its own members) or entities,
but only as a consequence of dissolution. Article XIV, Sec. 4 of the Constitution requires:
1. That educational institutions shall be:
Suppletory Effect a. Solely owned by Filipino
The provisions governing stock corporation,
citizens; OR
when pertinent, shall be applicable to non-stock
b. If owned by a corporation, at
corporations, except as may be covered by
specific provisions of this Title. least 60% of the capital must be
owned by Filipino citizens.
C. Educational Corporations 2. The control and administration shall be
vested in citizens of the Philippines.
Educational corporations shall be governed by: 3. No educational institution shall be
1. Special laws (e.g. “Education Act of established exclusively for aliens. The
1982”) 60% ownership requirement does not
2. General provisions of the Revised apply to the following:
Corporation Code (Sec. 105) a. Educational institutions
established by religious groups
Board of Trustees of Educational and mission boards;
Corporations b. Schools established for foreign
Trustees of educational institutions organized as diplomatic personnel and their
nonstock corporations shall not be less than five dependents;
(5) nor more than fifteen (15): Provided, That the
number of trustees shall be in multiples of five
(5).(Sec 106)
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c. Other foreign temporary 4. The manner by which any vacancy

residents (unless otherwise occurring in the office of chief
provided by law) archbishop, bishop, priest, minister,
4. No group of aliens shall comprise more rabbi, or presiding elder is required to be
than ⅓ of the enrollment in any school. filled, according to the rules, regulations
or discipline of the religious
D. Religious Corporations denomination, sect or church; and
5. The place where the principal office of the
i. Corporation Sole; Nationality corporation sole is to be established and
Special form of corporation, usually associated located, which place must be within the
with the clergy and consists of one person only
territory of the Philippines.
and his successors, who are incorporated by law
to give some legal capacities and advantages. 6. The articles of incorporation may include
any other provision not contrary to law for
A corporation sole does not have any nationality the regulation of the affairs of the
but for purposes of applying our nationalization corporation. (Sec. 109)
laws, nationality is determined by the nationality
of the members (Roman Catholic Apostolic Note: The articles must be verified by affidavit or
Church v. LRC, G.R. No. 8451, 1957). affirmation of presiding elder. Document that
such presiding elder was duly elected or
Composition appointed as such and this document must be
A corporation sole may be formed by the chief certified by notary public. (Sec. 110)
archbishop, bishop, priest, minister, rabbi, or
other presiding elder of such religious Acquisition and Alienation of Property
denomination, sect or church, for the purpose of A corporation sole may purchase and hold real
administering and managing, as trustee, the estate and personal property for its church,
affairs, property and temporalities of any religious charitable, benevolent, or educational purposes,
denomination, sect or church. and may receive bequests or gifts for such
purposes. (Sec. 111)
Articles of Incorporation: Contents
In order to become a corporation sole, the chief Such corporation may sell or mortgage real
archbishop, bishop, priest, minister, rabbi, or property held by it by obtaining an order for that
presiding elder of any religious denomination, purpose from the Regional Trial Court of the
sect or church must file with the SEC articles of province where the property is situated upon
incorporation setting forth the following: proof that the notice of the application for leave to
1. That the applicant chief archbishop, sell or mortgage has been made through
bishop, priest, minister, rabbi, or publication or as directed by the Court, and that it
presiding elder represents the religious is in the interest of the corporation that leave to
denomination, sect or church which sell or mortgage be granted. (Sec. 111)
desires to become a corporation sole;
Note: In cases where the rules, regulations, and
2. That the rules, regulations and discipline
discipline of the religious denomination, sect or
of the religious denomination, sect or church, religious society, or order concerned
church are consistent with becoming a represented by such corporation sole regulate the
corporation sole and do not forbid it; method of acquiring, holding, selling, and
3. That such chief archbishop, bishop, mortgaging real estate and personal property,
priest, minister, rabbi, or presiding elder such rules, regulations and discipline shall
is charged with the administration of the govern, and the intervention of the courts shall not
temporalities and the management of the be necessary. (Sec. 111)
affairs, estate and properties of the
religious denomination, sect, or church The doctrine in Republic v. Villanueva (G.R. No.
within the territorial jurisdiction, so 55418-19, 1982) and Republic v. Iglesia ni Cristo
described succinctly in the articles of (G.R. No. 180067, 1984), that a corporation
sole is disqualified to acquire/hold alienable
incorporation
lands of the public domain, because of the
constitutional prohibition qualifying only
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individuals to acquire land and the provision Exception: As otherwise provided by special
under the Public Land Act which applied only to law.
Filipino citizens or natural persons, has been
expressly overturned in Director of Lands v. Note: Unless required by applicable laws or
IAC (G.R. No. 66575 1986). regulations, no portion of the authorized capital is
required to be paid up at the time of incorporation.
A registered corporation sole can acquire land if (SEC Circular No. 7, Series of 2019)
its members constitute at least 60% Filipinos.
(SEC Opinion, 8 August 1994) iii. Articles of incorporation and by-laws
Dissolution of a Corporation Sole Requirements for filing the Articles of

A corporation sole may be dissolved and its Incorporation:
affairs settled voluntarily by submitting to the SEC i. In accordance with Sec. 14 of the RCC.
a verified declaration of dissolution, setting forth: ii. If the single stockholder is a trust or an
1. The name of the corporation; estate - the name, nationality, and
2. The reason for dissolution and winding residence of the trustee, administrator,
up; executor, guardian, conservator,
3. The authorization for the dissolution of custodian, or other person exercising
the corporation by the particular religious fiduciary duties together with the proof
denomination, sect or church; and of such authority to act on behalf of the
4. The names and addresses of the trust or estate
persons who are to supervise the winding iii. Name, nationality, residence of the
up of the affairs of the corporation. nominee and alternate nominee, and
the extent, coverage and limitation of
Upon approval of such declaration of dissolution the authority. (Sec. 118)
by the SEC, the corporation shall cease to carry
on its operations except for the purpose of Note: OPCs are NOT required to file their
winding up its affairs. (Sec. 113) corporate bylaws. (Sec. 119)
E. One Person Corporations iv. Corporate name
i. Excepted Corporations It should Indicate the letters “OPC” either below

or at the end of their corporate name. (Sec. 120)
The following are not allowed to incorporate as
OPC: v. Corporate structure and officers
a. Banks,
b. Non-bank financial institutions, One Person Corporation (OPC) (Sec. 116)
c. Quasi-banks, - a corporation with a single stockholder
d. Pre-need,
e. Trust, Who may form?
f. Insurance public and publicly listed 1. Natural person – must be of legal age
companies, a. A foreign natural person may
g. Non-chartered GOCCs; and put up an OPC subject to
h. Natural person who is licensed to applicable capital requirement
exercise a profession may not organize and constitutional and statutory
an OPC for the purpose of exercising restrictions on foreign
such a profession. EXC: unless participation in certain
otherwise provided by special laws. (Sec. investment areas or activities
116) (SEC Memorandum 7-2019)
b. Trust – does not refer to a trust
ii. Capital stock requirement (Sec. 117) entity, but the subject being
managed by a trustee. If the
General Rule: A One Person Corporation is not single stockholder is a trustee,
required to have a minimum authorized capital administrator, executor,
stock. guardian, conservator,
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custodian, or other person BOND REQUIREMENT as per SEC

exercising fiduciary duties Memorandum 7-2019:
i. proof of authority to act on ACS Surety Bond
behalf of the trust or estate Coverage
must be submitted at the 1 to 1,000,000 1,000,000
time of incorporation (SEC 1,000,001 to 2,000,000 2,000,000
Memorandum 7-2019) 2,000,001 to 3,000,000 3,000,000
c. Estate 3,000,001 to 4,000,000 4,000,000
4,000,001 to 5,000,000 5,000,000
Who may NOT form?
5,000,001 and above Equal to the
1. Banks and quasi-banks, non-bank
OPC’s ACS
financial institutions (SEC Memorandum
7-2019)
2. Pre-need, trust, insurance, public and ● Bond shall be renewed every two (2)
publicly-listed companies years or as often as may be required,
3. Non-chartered government-owned and - upon review of the Audited Financial
controlled Statements/ Financial Statements
4. Natural person who is licensed to certified under oath by the
exercise a profession to form an OPC for company’s President/Treasurer
the purpose of exercising such ● Bond is a continuing requirement as
profession long as the single stockholder is the
self-appointed Treasurer of the OPC
Exception: as provided under special laws ● Bond may be cancelled upon proof of
appointment of another person as
The single stockholder shall be the sole director the Treasurer and Filing of Amended
and president of the One Person Corporation. Form for Appointment of Officers
(Sec. 121) 2. Undertake in writing to faithfully
administer the One Person Corporation’s
When to appoint officers? (Sec. 122) funds to be received as treasurer
Within fifteen (15) days from the issuance of its 3. To disburse and invest the same
certificate of incorporation according to the articles of incorporation
as approved by the SEC
Who to appoint?
a. Treasurer Special Functions of the Corporate
b. Corporate secretary Secretary(Sec. 123)
c. Other officers as may be deemed necessary In addition to the functions designated by the One
Person Corporation, the corporate secretary
Who and when to notify? shall:
Securities and Exchange Commission (SEC) 1. Be responsible for maintaining the
- within five (5) days from appointment minutes book and/or records of the
- using the Appointment Form as may be corporation
prescribed by the SEC (SEC Memorandum 2. Notify the nominee or alternate
7-2019) nominee of the death or incapacity of the
single stockholder
Single stockholder allowed? i. notice shall be given no
- Corporate secretary – NO later than five (5) days from
- Treasurer – YES such occurrence
- Conditions: 3. Notify the SEC of the death of the
1. Give bond to the SEC in such a sum single stockholder
as may be required i. within five (5) days from
such occurrence
ii. state the names, residence
addresses, and contact
details of all known legal
heirs
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4. Call the nominee or alternate 2. Death or Permanent - until the legal heirs
nominee and the known legal heirs to a of the single stockholder have been lawfully
meeting and advise the legal heirs with determined, and the heirs have designated one of
regard to: them or have agreed that the estate shall be the
i. the election of a new single stockholder of the One Person Corporation
director
ii. amendment of the articles Alternate Nominee
of incorporation - shall sit as director and manage the One
iii. other ancillary and/or Person Corporation in case of the nominee’s
consequential matters inability, incapacity, death, or refusal to
discharge the functions as director and
manager of the corporation
vi. Nominee
- for the same term and under the same
1. designated by a single stockholder
conditions applicable to the nominee
2. in the event of the single stockholder’s
death or incapacity, nominee takes the
Minimum Capital Stock Required for One
place of the single stockholder as director
Person Corporation (Sec. 117)
and shall manage the corporation’s
affairs
General rule: No minimum authorized capital
3. written consent of both nominee and
stock
alternate nominee (SEC Memorandum 7-
2019) – to be attached in the application
Exception: as otherwise provided by special law
of incorporation
a. may be withdrawn in writing any
Required Paid Up Capital (SEC Memorandum
time before the death or
7-2019)
incapacity of the single
stockholder
General rule: No portion of authorized capital
4. may be changed at any time
stock is required to be paid up at the time of
a. by submitting to the SEC the
incorporation
names of the new nominees and
their corresponding written
Exception: as otherwise required by applicable
consent
laws or regulations
b. Articles of Incorporation need
NOT be amended (SEC
vii. Minutes and records
Memorandum 7-2019)
A One Person Corporation shall maintain a
minutes book which shall contain all actions,
What shall be contained in articles of
decisions, and resolutions taken by the One
incorporation with regard to the nominee and
Person Corporation. (Sec. 127)
alternate nominee?
a. names
When action is needed on any matter, it shall be
b. residence addresses
sufficient to prepare a written resolution, signed
c. contact details
and dated by the single stockholder, and
d. extent and limitations of their authority in
recorded in the minutes book of the One Person
managing the affairs of the One Person
Corporation. The date of recording in the minutes
Corporation.
book shall be deemed to be the date of the
meeting for all purposes under this Code. (Sec.
Term of Nominee and Alternate Nominee (Sec.
128)
125)
viii. Liability (Sec. 130)
Incapacity of the single stockholder:
1. Temporary - until the stockholder, by self
A sole shareholder claiming limited liability has
determination, regains the capacity to assume
the burden of affirmatively showing that:
such duties.
1. the corporation was adequately financed.
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2. the property of the One Person for all the latter’s outstanding liabilities as of the
Corporation is independent of the date of conversion.
stockholder’s personal property.
F. Foreign Corporations
The principles of piercing the corporate veil
applies with equal force to One Person A corporation formed, organized or existing under
Corporations as with other corporations any law other than those of the Philippines, and
whose laws allow Filipino citizens and
ix. Conversion of corporation to OPC and corporations to do business in its own country or
vice-versa state. (Sec. 140)
Conversion from an Ordinary Corporation to A foreign corporation is one which owes its
a OPC (Sec. 131) existence to the laws of another state, and
generally, has no legal existence within the state
When a single stockholder acquires all the stocks in which it is foreign (Avon Insurance PLC v.
of an ordinary stock corporation, the latter may Court of Appeals, G.R. No. 97642, 1997).
apply for conversion into a OPC, subject to the
submission of such documents as the SEC may A fundamental rule of international jurisdiction is
require. If the application for conversion is that no state can by its laws, and no court which
approved, the SEC shall issue certificate of filing is only a creature of the state, can by its
of amended articles of incorporation reflecting the judgments and decrees, directly bind or affect
conversion. property or persons beyond the limits of that state
(Time, Inc. v. Reyes, GR No. 28882, 1971).
Conversion from an OPC to an Ordinary Stock
Corporation (Sec. 132) i. Bases of Authority over Foreign
Corporations
A One Person Corporation may be converted into
an ordinary stock corporation after due notice to 1. Consent - It is the voluntary surrender of
the SEC of such fact and of the circumstances jurisdiction over its person in a pending suit
leading to the conversion, and after compliance before the host state (Salonga, Private
with all other requirements for stock corporations International Law, 1979 ed., p.344).
under this Code and applicable rules. Such notice
shall be filed with the SEC within sixty (60) days 2. “Doing Business” with regard to Foreign
from the occurrence of the circumstances leading Corporations - Continuity of commercial
to the conversion into an ordinary stock dealings incident to prosecution of purpose and
corporation. If all requirements have been object of the organization. Isolated, occasional or
complied with, the SEC shall issue an amended casual transactions do not amount to engaging in
certificate of incorporation reflecting the business. But where the isolated act is not
conversion. incidental/casual but indicates the foreign
corporation’s intention to do other business, said
In case of death of the single stockholder, the single act constitutes engaging in business in the
nominee or alternate nominee shall transfer the Philippines.
shares to the duly designated legal heir or estate
within seven (7) days from receipt of either an Test to Determine “Doing Business”
affidavit of heirship or self- adjudication executed
by a sole heir, or any other legal document a. Isolated Transactions Test: where a foreign
declaring the legal heirs of the single stockholder corporation needs to obtain a license and
and notify the SEC of the transfer. Within sixty fails to do so, whether it should be denied
(60) days from the transfer of the shares, the legal legal standing to obtain remedies from local
heirs shall notify the SEC of their decision to courts and administrative agencies or not,
either wind up and dissolve the One Person depends therefore on the issue whether it will
Corporation or convert it into an ordinary stock engage in business in the Philippines. Not
corporation.
every activity undertaken in the Philippines
amounts to doing business as to require a
Note: The Converted Corporations shall succeed
the former corporation and be legally responsible foreign corporation to obtain such license.
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business subjecting the parties to local

Single or isolated acts, contracts, or transactions registration and licensing requirements
of foreign corporations are not regarded as a (Pacific Vegetable Oil Corp. v Singzon, G.R.
doing or carrying on of business. Typical No. 7917, 1955)
examples of these are the making of a single
contract, sale, sale with the taking of a note and “Doing Business” Under The Foreign
mortgage in the state to secure payment thereof, Investment Act and IRR
purchase, or note, or the mere commission of a
tort. In these instances, there is no purpose to do “Doing Business” in the Philippines - Includes:
any other business within the country (MR. a. Soliciting orders, service contracts, opening
Holdings, Ltd. V. Bajar, G.R. No. 138104, 2002). offices, whether called “liaison” offices or
branches;
BUT: Where a single act or transaction is not
b. Appointing representatives or distributors
merely incidental or casual but indicates the
foreign corporation's intention to do other domiciled in the Philippines;
business in the Philippines, said single act or
transaction constitutes doing business (Far East Note: Includes “appointing representatives or
Int'l. v. Nankai Kogyo, G.R. No. 13525, 1962). distributors in the Philippines” but not when the
representative or distributor “transacts business
Need to Allege: The fact that a foreign in its name and for its own account.” (Alfred Hahn
corporation is not doing business in the v. CA, G.R. No.113074, 1997)
Philippines must be alleged, if a foreign
corporation desires to sue in Philippines courts c. Participating in the management,
under the “isolated transactions rule” (Atlantic supervision, or control of any domestic
Mutual Inc. Co. v. Cebu Stevedoring Co., G.R. business, firm, entity, or corporation in the
No. 18961, 1966); if not alleged, it can be Philippines; and
dismissed for lack of capacity to sue by the d. Any other act or acts that imply a continuity of
plaintiff (Commissioner of Customs v. K.M.K. commercial dealings or arrangements, and
Gani, G.R. No. 73722, 1990). contemplate to that extent the performance of
acts or works, or the exercise of some of the
b. Twin Characterization Test (Mentholatum functions normally incident to, and in
Co. Inc v. Mangaliman G.R. No. 47701, 1941) progressive prosecution of, commercial gain
or of the purpose and object of the business
Substance Test: Consider the body or organization
substance of the business or the enterprise for
which it was ORGANIZED or whether it has
Note: “Doing business” was upheld against
substantially retired from it and turned it over to
Pioneer International for soliciting orders and
another.
service contracts in the performance of acts that
imply continuity of commercial dealings. Pioneer
Continuity Test: That doing business implies a
International’s alleged acts in actively negotiating
continuity of commercial dealings and
to employ Todaro to run its pre-mixed concrete
arrangements and contemplates, to that extent,
operations in the Philippines, which acts are
the performance of acts or works or the exercise
hypothetically admitted in Pioneer International’s
of some of the functions normally incidental to,
motion to dismiss, are not mere acts of a passive
and in progressive prosecution of, the purpose
investor in a domestic corporation. Such are
and object of its organization.
managerial and operational acts in directing and
establishing commercial operations in the
Taken together, DOING BUSINESS in the
Philippines. (Pioneer International, LTD v.
Philippines must cover transactions and series of
Guadiz, G.R. No. 156848, 2007)
transactions in pursuit of the main business goals
of the corporation and done with the intent to
Does Not Include:
continue the same in the Philippines.
a. Mere investment as a shareholder by a
c. Contract Test: if the salient points of a foreign entity in domestic corporations duly
contract do not find themselves in the registered to do business, and/or the exercise
Philippines, Philippine authorities have no of rights as such investor;
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b. Having a nominee director or officer to 2. The application shall be under oath and shall
represent its interests in such corporation; specifically set forth the following:
c. Appointing a representative or distributor a. The date and term of incorporation;
domiciled in the Philippines which transacts b. The address, including the street
business in its own name and for its own number, of the principal office of the
account; corporation in the country or State of
d. The publication of a general advertisement incorporation;
through any print or broadcast media; c. The name and address of its resident
e. Maintaining a stock of goods in the agent authorized to accept summons
Philippines solely for the purpose of having and process in all legal proceedings
the same processed by another entity in the and all notices affecting the
Philippines; corporation, pending the
f. Consignment by a foreign entity of equipment establishment of a local office;
with a local company to be used in the d. The place in the Philippines where
processing of products for export; the corporation intends to operate;
g. Collecting information in the Philippines; and e. The specific purpose or purposes
h. Performing services auxiliary to an existing which the corporation intends to
isolated contract of sale which are not on a pursue in the transaction of its
continuing basis, such as Installing in the business in the Philippines:
Philippine machinery it has manufactured or Provided, That said purpose or
exported to the Philippines, servicing the purposes are those specifically
same, training domestic workers to operate it, stated in the certificate of authority
and similar incidental services. issued by the appropriate
government agency;
No foreign corporation transacting business in the f. The names and addresses of the
Philippines without a license, or its successors or present directors and officers of the
assigns, shall be permitted to maintain or corporation;
intervene in any action, suit or proceeding in any g. A statement of its authorized capital
court or administrative agency of the Philippines; stock and the aggregate number of
but such corporation may be sued or proceeded
shares which the corporation has
against before Philippine courts or administrative
authority to issue, itemized by class,
tribunals on any valid cause of action recognized
under Philippine laws (Lorenzo Shipping Corp. v. par value of shares, shares without
Chubb & Sons, Inc., et al., G.R. No. 147724, par value, and series, if any;
2004). h. A statement of its outstanding capital
stock and the aggregate number of
ii. Necessity of a License to Do Business: shares which the corporation has
● To place them under the jurisdiction of issued, itemized by class, par value
the courts of shares, shares without par value,
● To place them in the same footing as and series, if any;
domestic corporations i. A statement of the amount actually
● Protection for the public in dealing with paid in; and
said corporations. j. Such additional information as may
be necessary or appropriate in order
1. Requisites for Issuance of License to enable the Commission to
determine whether such corporation
A foreign corporation applying for a license to is entitled to a license to transact
transact business in the Philippines shall submit business in the Philippines, and to
to the SEC the following: determine and assess the fees
1. A copy of its articles of incorporation and
payable.
bylaws, certified in accordance with law and
3. The application shall be accompanied by the
their translation to an official language of the
following:
Philippines, if necessary.
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a. A certificate under oath duly Service of Process upon a Foreign

executed by the authorized official or Corporation Through A Resident Agent
officials of the jurisdiction of its Before a foreign corporation can be issued a
incorporation, attesting to the fact license to transact business in the Philippines,
that the laws of the country or State such corporation must first file with the SEC
of the applicant allow Filipino citizens 1. A written power of attorney designating some
and corporations to do business person who must be a resident of the
therein, and that the applicant is an Philippines, on whom any summons and
existing corporation in good other legal processes may be served in all
standing. If the certificate is in a actions or other legal proceedings against
foreign language, a translation such corporation;
thereof in English under oath of the 2. Consent that service upon such resident
translator shall be attached to the agent shall be admitted and held as valid as
application. if served upon the duly authorized officers of
b. A statement under oath of the the foreign corporation at its home office.
president or any other person a. Whenever such service of summons
authorized by the corporation, or other process is made upon the
showing to the satisfaction of the SEC, it must, within 10 days
Commission and when appropriate, thereafter, transmit by mail a copy of
other governmental agencies that such summons or other legal
the applicant is solvent and in sound process to the corporation at its
financial condition, setting forth the home or principal office. When SEC
assets and liabilities of the sends such copy, it shall constitute a
corporation as of the date not necessary part of and shall complete
exceeding one (1) year immediately such service
prior to the filing of the application. b. In case of a change of address of the
4. Foreign banking, financial, and insurance resident agent, it shall be his or its
corporations shall, in addition to the above duty to immediately notify the SEC in
requirements, comply with the provisions of writing. (Sec. 145)
existing laws applicable to them.
5. In the case of all other foreign corporations, 3. Amendment of license (Sec. 148)
no application for license to transact business
A foreign corporation authorized to transact
in the Philippines shall be accepted by the
business in the Philippines shall obtain an
Commission without previous authority from
amended license in the event it changes its
the appropriate government agency, corporate name, or desires to pursue other or
whenever required by law. (Sec. 142) additional purposes in the Philippines, by
submitting an application with the Commission,
2. Resident Agent favorably endorsed by the appropriate
government agency in the proper cases.
Who may be a Resident Agent
a. Individual residing in the Philippines of Amendment of the Articles of Incorporation or
good moral character and of sound By-laws of Foreign Corporations
financial standing
b. Domestic corporation lawfully transacting Sixty (60) days after the effectivity of the
business in the Philippines, with a sound amendment of the articles of incorporation or
financial standing and must show proof bylaws of a foreign corporation authorized to
that it is in good standing as certified by transact business in the Philippines, such foreign
the SEC (Sec. 144) corporation shall, file with the Commission, and in
the proper cases, with the appropriate
government agency, a duly authenticated copy of
the amended articles of incorporation or bylaws,
indicating clearly in capital letters or underscoring
the change or changes made, duly certified by the
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authorized official or officials of the country or rights, may sue in trademark or service mark
State of incorporation. enforcement action (Sehwani Inc v. In-n-Out
Burger, G.R. No. 171053, 2007).
Such filing shall not in itself enlarge or alter the
purpose or purposes for which such corporation Rules Regarding A Foreign Corporation’s
is authorized to transact business in the Right to Bring Suit in the Philippines
Philippines. (Sec. 147) FOREIGN CORP CAN FC SUE IN PH?
STATUS
iii. Personality to Sue Doing business in
Section 35 enumerates the express powers of a Cannot sue before
Philippines without a
corporation, which includes the corporation’s Philippine courts
license
ability to sue and be sued. Can sue before
Philippine courts on
The power of the corporation to sue and be sued an isolated
in any court is lodged with the board of directors Not doing business in transaction or on a
that exercises its corporate powers. (Bitong v. the Philippines cause of action
CA, G.R. No. 123553, 1998) entirely independent
of any business
iv. Suability of Foreign Corporations transaction
Doing business in the
Every foreign corporation Philippines without a
● Doing business in the Philippines with a license, but Philippine
license may sue and can be sued in the Can sue before
citizen or entity has
Philippines Philippine courts due
contracted with said
● Doing business in the Philippines without a to estoppel
corporation or derived
license cannot sue, but may be sued in the benefits from the
Philippines Foreign Corporation
● Not doing business in the Philippines, or on Doing business in the Can sue before
isolated transactions may sue and can be Philippines and has Philippine courts on
sued (if jurisdiction can be acquired) the required license any transaction
(Agilent Technologies v. Integrated Silicon, G.R.
v. Instances When Unlicensed Foreign No. 154618, 2004)
Corporations May Be Allowed To Sue:
a. Isolated transactions; Capability to Sue and Suability of Foreign
b. Action to protect good name, goodwill, Corporations W/N Doing Business
and reputation of a foreign corporation; NOT DOING
DOING BUSINESS IN
c. The subject contracts provide that BUSINESS IN
PHILIPPINES
Philippine Courts will be venue to PHILIPPINES
controversies; Isolated
Licensed Unlicensed
d. A license subsequently granted enables Transactions
the foreign corporation to sue on Yes, can sue;
contracts executed before the grant of
NO, cannot EXC: if
the license (Eriks Ltd. v. Court of
sue; transactions
Appeals, G.R. No. 118843, 1997); YES, can
exhibits intent to
e. Recovery of misdelivered property; sue
EXC: do business,
f. Where the defendant is estopped. estoppel Foreign
Corporation needs
The Intellectual Property Code provides that any license to sue
foreign corporation not engaged in business in YES, can be sued
the Philippines and a national of a country which
is a party to any convention, treaty or agreement YES, can
Qualifier: as long as summons
relating to intellectual property rights or the be sued
were properly served (to acquire
repression of unfair competition, to which the jurisdiction)
Philippines is also a party or extends reciprocal
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vi. Grounds for Revocation of License 13. MERGER AND CONSOLIDATION
Section 151 provides that the SEC may cancel A. Definition and Concept
the certificate or license of a foreign corporation
on any of the following grounds: Merger
a. Failure to file its annual report or pay any A union whereby one or more existing
fees as required by Code; corporations are absorbed by another corporation
b. Failure to appoint and maintain a resident that survives and continues the combined
agent; business (Villanueva, 2018).
c. Failure to inform SEC of the change of
resident agent or the latter’s change of Consolidation
address; The union of two or more existing corporations. A
new corporation is created, and consolidating
d. Failure to submit a copy of amended
corporations are extinguished. (PNB v. Andrada
articles of incorporation or by- laws; or Electric & Engineering Co., G.R. No. 142936,
articles of merger or consolidation; [April 17, 2002], 430 PHIL 882-903)
e. A misrepresentation of any material
matters in reports; MERGER CONSOLIDATION
f. Failure to pay any and all taxes, imposts, A corporation A NEW corporation is
assessments or penalties; ABSORBS another created, and
g. Engaged in a business not authorized by corporation and constituent
SEC; REMAINS IN corporations are
h. Acting as a dummy of a foreign EXISTENCE while EXTINGUISHED.
corporation not licensed to do business in the other is
the Philippines; or DISSOLVED
i. Any other ground as would render it unfit
to transact business in the Philippines. The power to merge or consolidate is not within
the inherent powers of the corporation.
Therefore, it must be expressly granted by law.
Law applicable to Foreign Corporations (Sec.
146)
Merger or consolidation does not become
effective by mere agreement of the constituent
A foreign corporation lawfully doing business in
corporations. The approval of the SEC is required
the Philippines shall be bound by all laws, rules
(PNB v. Andrada Electric & Engr. Co., Inc., G.R.
and regulations applicable to domestic
No. 142936, 2002)
corporations of the same class, except:
1. those which provide for the creation,
Mere Acquisition/Transfer (3 Levels)
formation, organization or dissolution of
Merger/ Consolidation Transfer of
corporations or
Property
2. those which fix the relations, liabilities,
Loss of separate No loss of
responsibilities, or duties of stockholders, existence by the separate
members, or officers of corporations to absorbed corporation (in existence
each other or to the corporation. mergers) or the
constituent corporations
(in consolidation)
1) Assets-Only Level.
General Rule: A corporation that purchases
the assets of another will not be liable for the
debts and liabilities of the selling corporation
provided the former acted in good faith.
Except, when the following circumstances
are present:
1. where the purchasers expressly or
impliedly agrees to assume the debts
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2. where the selling corporation fraudulently Philippines, Inc. et al. v James Yu, G.R. No.
enters into the transactions to escape 207161, 2015)
liability for those debts
3. where the purchasing corporation is 3) Equity Level. Purchaser takes control of the
merely a continuation of the selling business by purchasing the shareholdings.
corporation Purchasing corporation is still protected by
4. where the transaction amounts to a the limited liability feature but the same can
consolidation or merger of the be pierced.
corporations
(Edward J. Nell Co. v Pacific Farms Inc., G.R. In order to transfer ownership of shares of stock
No. L-20850, 1965) not traded in the Stock Exchange, it is necessary
to secure a Certificate of Authorizing Registration
2) Business Enterprise Level. Purchase of (CAR) pursuant to the process laid down in RMO
substantially all the assets of the corporation No. 15-03. The receipts of the payment of the tax
should also be filed with and recorded by the
extending to its “going concern” (ability to do
secretary of the corporation pursuant to Section
business and make money, goodwill,
11 of RR. No. 06-08.
clientele, stock-in-trade, etc). There is case
law, based on equity, that holds the B. Constituent and consolidated
transferee liable for the debts and corporations
liabilities of the transferor. A “free and
harmless clause” holding the transferee free Constituent Consolidated
from the liabilities of the transferor is binding Corporations Corporation
only between them and cannot prejudice The corporations that The corporation
creditors who are not parties thereto. (Y-I shall cease to exist after formed after the
Leisure Philippines, Inc. et al. v James Yu, joining together through consolidation of
G.R. No. 207161, 2015) consolidation (Bank of two constituent
Commerce v. Radio corporations
Note: The sale under [Sec. 39] does not Philippines Network, Inc.,
contemplate an ordinary sale of all corporate G.R. No. 195615, [April
assets; the transfer must be of such degree that 21, 2014], 733 PHIL 491-
the transferor corporation is rendered incapable 581)
of continuing its business or its corporate
purpose. (Y-I Leisure Philippines, Inc. et al. v The names of the
James Yu, G.R. No. 207161, 2015)8 corporations proposing to
merge or consolidate,
However, not every transfer of the entire hereinafter referred to as
corporate assets would qualify under Section the constituent
[39]. It does not apply: corporations;
(1) if the sale of the entire property and
assets is necessary in the usual and The constituent corporations shall become a
regular course of business of single corporation which, in case of merger, shall
corporation, or be the surviving corporation designated in the
(2) if the proceeds of the sale or other plan of merger; and, in case of consolidation,
disposition of such property and assets shall be the consolidated corporation designated
will be appropriated for the conduct of its in the plan of consolidation
remaining business.
Thus, the litmus test to determine the applicability

of Section [39] would be the capacity of the
corporation to continue its business after the sale
of all or substantially all its assets.(Y-I Leisure
8 Please refer to the Net Asset Value Test and the

Incapacity Test in p. 123
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C. Plan of Merger or Consolidation (Sec. E. Procedure of Consolidation or Merger

75)
STEP 1: Drawing up of the Plan of Merger or
The plan of merger or consolidation shall set forth Consolidation (Sec. 75)
the ff:
1) The names of the constituent The board of constituent corporations shall draw
corporations; up a plan of merger or consolidation. It shall
2) The terms of the merger or consolidation contain the following:
and the mode of carrying the same into a. The names of the constituent
effect; corporations;
3) A statement of the changes, if any, in the b. The terms of the merger or
articles of incorporation of the consolidation and the mode of
surviving corporation in case of merger; carrying the same into effect;
and, in case of consolidation, all the c. A statement of the changes, if any, in
statements required to be set forth in the the articles of incorporation of the
articles of incorporation for corporations surviving corporation in case of
organized under this Code; and merger; and, in case of
4) Such other provisions with respect to consolidation, all the statements
the proposed merger or consolidation as required to be set forth in the articles
are deemed necessary or desirable. of incorporation for corporations
organized under this Code; and
Note: The plan of merger has to be approved by d. Such other provisions with respect
majority of the board of each constituent to the proposed merger or
corporation; it has to be approved by affirmative consolidation as are deemed
vote of stockholders representing ⅔ of the necessary or desirable.
outstanding capital stock or ⅔ of the members in
case of a non-stock corporation. STEP 2: Board Approval (Sec. 75)
D. Articles of Merger or Consolidation The plan of merger or consolidation shall be

(Sec. 78) approved by majority vote of each of the boards
of the corporations involved at separate
The articles must be signed by the president or meetings;
vice president and certified by the secretary or
assistant secretary setting forth: STEP 3: Stockholders’ or Members’ Approval
1) The plan of the merger or the plan of (Sec. 76)
consolidation; 1. Notice of such meeting should be given
2) As to stock corporations, the number of to all stockholders or members at least 1
shares outstanding, or in the case of non- week before the meeting.
stock corporations, the number of members; 2. The plan has to be approved by a vote of
3) As to each corporation, the number of shares stockholders representing ⅔ of the
or members voting for or against such plan, outstanding capital stock, if a stock
respectively; corporation, or ⅔ of the members of the
4) The carrying amounts and fair values of the non- stock corporation.
assets and liabilities of the respective 3. Dissenting stockholders may exercise
companies as of the agreed cut-off date; their right of appraisal. However, if the
5) The method to be used in the merger or board abandons the plan, such right is
consolidation of accounts of the companies; extinguished.
6) The provisional or pro-forma values, as 4. Any amendment to the plan must be
merged or consolidated, using the approved by the same votes of the board
accounting method; and members or trustees and stockholders or
7) Such other information as may be prescribed members required for the original plan.
by the SEC.
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STEP 4: Articles of Merger or Consolidation constituent corporation at least two (2)

(Sec. 77) weeks before said hearing.
Once the required number of stockholders or F. Effectivity of Merger or Consolidation

members approved of the plan, Articles of Merger
or Articles of Consolidation shall be executed by A merger does not become effective upon the
each of the constituent corporations, to be signed mere agreement of the constituent corporations,
by the president or vice-president and certified by but open approval of the articles of merger by the
the secretary or assistant secretary of each SEC issuing the certificate of merger as required
corporation, setting forth: by Section 79 of the Corporation Code (Bank of
a. The plan of the merger or the plan of Commerce v. Heirs of Rodolfo dela Cruz).
consolidation;
b. As to stock corporations, the number G. Limitations of Merger and Consolidation
of shares outstanding, or in the case
of non-stock corporations, the number Under the Philippine Competition Act (R.A. no.
10667), the Philippine Competition Commission
of members;
can review the mergers and acquisitions of a
c. As to each corporation, the number of
corporation/s based on the factors it deems to be
shares or members voting for or relevant. (Sec. 16 of R.A. no. 10667)
against such plan, respectively;
d. The carrying amounts and fair values Parties to a merger or acquisition agreement
of the assets and liabilities of the without complying with the thresholds are
respective companies as of the prohibited from consummating their agreement
agreed cut-off date; until thirty (30) days after providing notification to
e. The method to be used in the merger the Commission in the form and containing the
or consolidation of accounts of the information specified in the regulations issued by
companies; the Commission. A transaction that meets the
f. The provisional or pro-forma values, thresholds and does not comply with the
as merged or consolidated, using the notification requirements and waiting periods set
out in Section 5 shall be considered void and will
accounting method; and
subject the parties to an administrative fine of one
g. Such other information as may be
percent (1%) to five percent (5%) of the value of
prescribed by the SEC. the transaction. (Sec. 17 of R.A. no. 10667; PCA
Rule 4, as amended by PCC Resolution No. 02-
STEP 5: Approval by the SEC 2020)
The Articles of Merger or Articles of Consolidation Thresholds for compulsory notification
shall be submitted to the SEC for approval. M&A transactions whose definitive agreements
However, in the case of special corporations, like are executed on or after 1 March 2020 will be
banks, insurance companies, building and loan subject to mandatory notification to the PCC if
associations, etc., the favorable recommendation they meet the ff. thresholds:
of the appropriate government agency shall first Size of (i) the aggregate annual gross
be obtained. Party revenues in, into or from the
1. If the SEC is satisfied that the merger or Philippines, or
consolidation of the corporations (ii) the value of the assets in the
concerned is legal, it shall issue a Philippines of the ultimate
certificate of merger or of consolidation, parent entity (UPE) of either the
at which time the merger or consolidation acquiring or acquired entities
shall be effective. exceeds PhP 6 billion
2. If the SEC is not satisfied, it shall set a Size of The size of transaction will be
hearing to give the corporations Transaction met if the transaction value, as
concerned the opportunity to be heard. determined below, exceeds
Written notice of the date, time and place PhP 2.4 billion.
of hearing shall be given to each
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Merger or acquisition agreements that power to file an action for recovery)

substantially prevent, restrict or lessen including:
competition in the relevant market or in the i. subscriptions to shares and
market for goods or services as may be other choses in action
determined by the Commission shall be ii. and every other interest of,
prohibited. (Sec. 20 of R.A. no. 10667) belonging to, or due to each
constituent corporation
Exemptions: Notwithstanding such prohibition,
5. Regarding liabilities and pending claims:
the PCC would allow such merger or acquisition
provided the parties prove the following: a. Liabilities and obligations of each
constituent corporation:
(a) The concentration has brought about or is i. Surviving or consolidated
likely to bring about gains in efficiencies that are corporation shall be
greater than the effects of any limitation on responsible
competition that result or likely to result from the b. Pending claim, action or proceeding
merger or acquisition agreement; or brought by or against any constituent
corporation
(b) A party to the merger or acquisition agreement i. may be prosecuted by or
is faced with actual or imminent financial failure, against the surviving or
and the agreement represents the least anti- consolidated corporation
competitive arrangement among the known
c. The rights of creditors or liens upon
alternative uses for the failing entity’s
assets.(Sec. 21 of R.A. no. 10667) the property of such constituent
corporations are not impaired
H. Effects of Merger or Consolidation
14. INVESTIGATIONS, OFFENSES, AND
1. Constituent corporations become a single PENALTIES
corporation
a. Merger: surviving corporation A. Authority of Commissioner
b. Consolidation: consolidated
corporation under the plan of i. Investigation and prosecution of
consolidation offenses
2. Separate existence of constituent
corporations cease EXCEPT that of the The SEC may investigate an alleged violation of
surviving or consolidated corporation this Code, rule, regulation, or order of the SEC.
3. Surviving or consolidated corporation
The SEC may publish its findings, orders,
possesses the rights privileges immunities;
opinions, advisories, or information concerning
and powers and is subject to all duties and any such violation, as may be relevant to the
liabilities of a corporation organized under general public or to the parties concerned,
this Code subject to the provisions of the “Data Privacy Act
4. ALL of the following are deemed transferred of 2012”, and other pertinent laws.
to and vested in such surviving or
consolidated corporation: (BY OPERATION The SEC shall give reasonable notice to and
OF LAW) coordinate with the appropriate regulatory agency
a. Rights prior to any such publication involving companies
b. Privileges under their special regulatory jurisdiction.
c. Immunities
ii. Administration of oath and issuance
d. Franchises of each constituent
of subpoena
corporation
e. Real or personal property The SEC, through its designated officer, may
f. Receivables due on whatever administer oaths and affirmations, issue
account (hence surviving / subpoena and subpoena duces tecum, take
consolidated corporation has the testimony in any inquiry or investigation, and may
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perform other acts necessary to the proceedings P1,000.00 for each day of continuing violation
or to the investigation. but in no case to exceed P2,000,000.00;
2. Issuance of a permanent cease-and-desist
iii. Cease and desist power order;
3. Suspension or revocation of the certificate of
Whenever the SEC has reasonable basis to incorporation; and
believe that a person has violated, or is about to 4. Dissolution of the corporation and forfeiture of
violate, the RCC, rule, regulation, or order of the its assets under the conditions in Title XIV of
SEC, it may direct such person to desist from the RCC
committing the act constituting the violation.
ii. Prohibited Acts and Penalties
The SEC may issue a cease and desist order ex
parte to enjoin an act or practice which is Table of Violations and Fines
fraudulent or can be reasonably expected to Violation Fine
cause significant, imminent, and irreparable SEC. 165. Fraudulent 200k - 2M
danger or injury to public safety or welfare. The Conduct of Business
ex parte order shall be valid for a maximum period
of twenty (20) days, without prejudice to the order A corporation that conducts 400k - 5M
being made permanent after due notice and its business through fraud. (When the
hearing. violation of this
provision is
Thereafter, the SEC may proceed injurious or
administratively against such person in detrimental to
accordance with Section 158, and/or transmit the public)
evidence to the Department of Justice for SEC. 166. Acting as 100k - 5M
preliminary investigation or criminal prosecution Intermediaries for Graft
and/or initiate criminal prosecution for any and Corrupt Practices
violation of this Code, rule, or regulation.
A corporation used for
iv. Contempt fraud, or for committing or
concealing graft and corrupt
Any person who, without justifiable cause, fails or practices as defined under
refuses to comply with any lawful order, decision, pertinent statutes.
or subpoena issued by the SEC shall, after due
notice and hearing, be held in contempt and fined When there is a finding that
in an amount not exceeding P30,000.00. When any of its directors, officers,
the refusal amounts to clear and open defiance of employees, agents, or
the SEC’s order, decision, or subpoena, the SEC representatives are
may impose a daily fine of P1,000.00 until the engaged in graft and corrupt
order, decision, or subpoena is complied with. practices, the corporation’s
failure to install:
B. Sanctions for violations a. safeguards for the
transparent and lawful
i. Administrative sanctions (Sec. 158) delivery of services;
and
If, after due notice and hearing, the SEC finds that b. policies, code of ethics,
any provision of this Code, rules or regulations, or and procedures against
any of the SEC’s orders has been violated, the graft and corruption
SEC may impose any or all of the following shall be prima facie
sanctions, taking into consideration the extent of evidence of corporate
participation, nature, effects, frequency and liability under this
seriousness of the violation: section.
SEC. 167. Engaging 100k – 1M
1. Imposition of a fine ranging from P5,000.00) Intermediaries for Graft
to P2,000,000.00, and not more than and Corrupt Practices
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preclude the institution

A corporation that appoints of appropriate action
an intermediary who against the director,
engages in graft and corrupt trustee, or officer of the
practices for the corporation responsible
corporation’s benefit or for said violation:
interest. - Provided, further, That
SEC. 168. Tolerating Graft 500k – 1M nothing in this section
and Corrupt Practices shall be construed to
repeal the other causes
A director, trustee, or officer for dissolution of a
who knowingly fails to corporation provided in
sanction, report, or file the this Code.
appropriate action with
proper agencies, allows or Liability for any of the
tolerates the graft and foregoing offenses shall be
corrupt practices or separate from any other
fraudulent acts committed administrative, civil, or
by a corporation’s directors, criminal liability under this
trustees, officers, or Code and other laws.
employees.
SEC. 169. Retaliation 100k – 1M iii. Who are liable (Sec. 171-172)
Against Whistleblowers 1. Corporation- Penalty may be imposed
upon its directors, trustees, stockholders,
Any person who, knowingly members, officers, or employees
and with intent to retaliate, responsible for the violation or
commits acts detrimental to indispensable to its commission.
a whistleblower such as 2. Aiders and Abettors- Penalty would be a
interfering with the lawful punishment of a fine not exceeding that
employment or livelihood of imposed on the principal offenders, at the
the whistleblower. discretion of the Court, after taking into
account their participation in the offense.
A whistleblower refers to
any person who provides C. Authority of the Securities and
truthful information relating Exchange Commission (Jurisdiction)
to the SEC or possible
commission of any offense The SEC’s visitorial powers. (Sec. 178)
or violation under this Code.
SEC. 170. Other Violations 10k – 1M The SEC shall have visitorial powers over all
of the Code corporations. These powers include:
Violations of any of the other 1. Examination and inspection of records

provisions of this Code or its 2. Regulation and supervision of activities
amendments not otherwise 3. Enforcement of compliance
specifically penalized 4. Imposition of sanctions in accordance
therein with the Revised Corporation Code.
If the violation is committed Should the corporation, without justifiable

by a corporation, the same cause, refuse or obstruct the SEC’s exercise of
may, after notice and powers, the SEC may revoke its certificate of
hearing, be dissolved in incorporation, without prejudice to the
appropriate proceedings imposition of other penalties and sanctions under
before the SEC: the RCC.
- Provided, That such
dissolution shall not
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GENERAL RULE: All interrogatories propounded and books of accounts of any entity or
by the SEC and the answers thereto, as well as person under investigation as may be
the results of any examination made by the SEC necessary for the proper disposition of
or any other official authorized by law to make an the cases, subject to the provisions of
examination of the operations, books, records of existing laws;
any corporation, shall be kept strictly 10. Suspend or revoke the certificate of
CONFIDENTIAL, incorporation after proper notice and
hearing;
EXCEPT: 11. Dissolve or impose sanctions on
(1) When the law requires the same to be corporations, upon final court order, for
made public; committing, aiding in the SEC of, or in
(2) When necessary for the SEC to take any manner furthering securities
action to protect the public; violations, smuggling, tax evasion,
(3) To issue orders in the exercise of its money laundering, graft and corrupt
powers under RCC practices, or other fraudulent or illegal
(4) Where such interrogatories, answers or acts;
results are necessary to be presented as 12. Issue writs of execution and attachment
evidence before any Court. (Sec. 178) to enforce payment of fees,
administrative fines, and other dues
What are the functions, powers, and collectible under this Code;
jurisdiction of the SEC? (Sec. 179) 13. Prescribe the number of independent
directors and the minimum criteria in
SEC shall have the power and authority to: determining the independence of a
1. Exercise supervision and jurisdiction director;
over all corporations and all persons 14. Impose or recommend new modes by
acting on their behalf, except otherwise which a stockholder, member, director,
provided by RCC; or trustee may attend meetings or cast
2. Retain jurisdiction over pending cases their votes, as technology may allow,
involving intra-corporate disputes taking into account the company’s scale,
submitted for final resolution. (PD 902-A); number of shareholders or members,
a. The SEC shall retain jurisdiction structure, and other factors consistent
over pending suspension of with the basic right of corporate suffrage;
payment/ rehabilitation cases 15. Formulate and enforce standards,
filed as of 30 June 2000 until guidelines, policies, rules, and
finally disposed. regulations to carry out the provisions of
3. Impose sanctions for the violation of the this Code; and
RCC, its implementing rules and orders 16. Exercise such other powers provided by
of the SEC; law or those, which may be necessary or
4. Promote corporate governance and the incidental to carrying out, the powers
protection of minority investors, through, expressly granted to the SEC.
among others, the issuance of rules and
regulations consistent with international Note: In imposing penalties and other
best practices; requirements, SEC shall take into consideration
5. Issue opinions to clarify of laws, rules, the size, nature of the business, and capacity
and regulations; of the corporation.
6. Issue cease and desist orders ex parte to
prevent imminent fraud or injury to the NO COURT BELOW THE CA SHALL HAVE
public; JURISDICTION (Sec. 179)
7. Hold corporations in direct or indirect
contempt; Only the CA has the jurisdiction to issue a
8. Issue subpoena duces tecum and restraining order, preliminary injunction, or
summon witnesses to appear in preliminary mandatory injunction in any case,
proceedings before the SEC; dispute, or controversy that directly or indirectly
9. In appropriate cases, order the interferes with the exercise of the powers,
examination, search and seizure of duties, and responsibilities of the SEC that
documents, papers, files and records, falls exclusively within its jurisdiction.
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declared in the state of suspension of

JURISDICTIONS payments.
4. Appointment of Rehabilitation Receiver or
On Jurisdiction of RTC in Intra-Corporate Management Committee
Disputes:
Section 5 of the Securities Regulation Code What is a management committee?
transferred the jurisdiction of the (SEC) over - Tasked to manage, take custody of and
intra-corporate disputes to RTCs designated by control all existing assets, funds, and
the Supreme Court as commercial courts. The records of the corporation.
existence of an intra-corporate dispute must be - To determine the best way to protect the
clearly alleged in the complaint. interest of its stockholders and creditors.
Two tests to determine existence of intra- What is a Rehabilitation Receiver?

corporate dispute - Appointed when the corporation is in
financial distress.
Relationship Test - To rehabilitate.
A dispute is intra-corporate if it is:
1. Between the corporation, partnership or Arbitration for unlisted corporations. (Sec.
association and the public; 181)
2. Between the corporation, partnership or
association and the state insofar as its Where can the arbitration agreement be
franchise, permit or license to operate is found? The same may be provided in the articles
concerned; of incorporation or by-laws of an unlisted
corporation.
3. Between the corporation, partnership or
association and its stockholders, partners,
When can cases be referred to arbitration?
members or officers; and When the agreement is in place, disputes
4. Among the stockholders, partners or between the corporation, its stockholders or
associates themselves (Philippine members, which arise from the implementation
Communications Satellite Corp. v. of the articles of incorporation or by-laws, or
Sandiganbayan, G.R. No. 203023, 2015) from intra-corporate relations.
Nature of the Controversy Test When shall the dispute be non-arbitrable?

The dispute itself must be intrinsically connected When it involves criminal offenses and
with the regulation of the corporation, partnership interests of third parties.
or association.
The arbitration agreement. (Sec. 181)
The controversy "must not only be rooted in the - The same shall be binding on the
existence of an intra-corporate relationship, but corporation, its directors, trustees, officers,
must also refer to the enforcement of the parties' and executives or managers.
correlative rights and obligations under the - To be enforceable, the same should
Corporation Code as well as the internal and indicate
intra-corporate regulatory rules of the - the number of arbitrators
corporation." (Dy Teban Trading Inc. v. Dy, G.R. - the procedure for their appointment.
No. 161803, 2008) - The power to appoint the arbitrators forming
the arbitral tribunal shall be granted to a
The following are within the jurisdiction of the designated independent third party.
RTC: - Should the third party fail to appoint
1. Fraudulent devices and schemes employed the arbitrators in the manner and
by directors detrimental to the public interest within the period specified in the
and to other firms arbitration agreement, the parties
2. Intra-corporate dispute and with the state in may request the SEC to appoint the
relation to their franchise and right to exist arbitrators. In any case, arbitrators
3. Controversies in election, appointment of must be accredited or must belong
directors or trustees and petition to be to organizations accredited for the
purpose of arbitration.
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The arbitral tribunal (Sec. 181)

- shall have the power to rule on its own
jurisdiction and on questions relating to the
validity of the arbitration agreement. When
an intra-corporate dispute is filed with a
Regional Trial Court, the Court shall dismiss
the case before the termination of the
pretrial conference, if it determines that an
arbitration agreement is written in the
corporation’s articles of incorporation, by-
laws, or in a separate agreement.
- shall have the power to grant interim
measures necessary to ensure enforcement
of the award, prevent a miscarriage of
justice, or otherwise protect the rights of the
parties.
Final Arbitral award (Sec. 181)

- Shall be executory after the lapse of fifteen
(15) days from receipt thereof by the parties
and shall be stayed only by the filing of a
bond or the issuance by the appellate court
of an injunctive writ. (Under Sec. 181
specifically)
2 kinds of arbitration
1. Voluntary- when parties both agree to submit
themselves to the jurisdiction of the
arbitrators. The parties choose who the
arbitrators will be.
2. Compulsory- The judge is a stranger. There
is still a decision. This kind of arbitration is
more commonly known as “litigation”. The
arbitrators are the judges of the courts (MTC,
RTC etc.)
Jurisdiction over Party-List Organizations.

(Sec. 182)
- The powers, authorities, and responsibilities
of the SEC involving party-list organizations
are transferred to the SEC on Elections
(COMELEC)
- Within 6 months after the effectivity of the
RCC, the monitoring, supervision, and
regulation of such corporations shall be
deemed automatically transferred to the
COMELEC.
- The COMELEC in coordination with the SEC
shall promulgate the corresponding IRR for
the transfer of jurisdiction
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SECURITIES
Commercial Law
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V. SECURITIES A. STATE POLICY
TOPIC OUTLINE UNDER THE SYLLABUS:

The State policies underlying the Securities
Regulation Code (SRC) are the following:
V. SECURITIES a. Establish a socially conscious free
A. State Policy market that regulates itself;
B. Definition of Securities b. Encourage the widest participation of
C. Kinds of Securities ownership in enterprises;
1. Exempt Securities c. Enhance the democratization of wealth
2. Exempt Transactions d. Promote the development of the capital
3. Non-exempt Transactions market;
D. Powers and functions of the Securities e. Protect investors;
and Exchange Commission f. Ensure full and fair disclosure about
E. Procedure for registration of securities securities; and
F. Prohibitions on fraud, manipulation, and g. Minimize, if not totally eliminate, insider
insider trading trading and other fraudulent or
4. Manipulation of security prices manipulative devices (SRC, Sec. 2)
5. Short sales
6. Option trading The overriding objective of the SRC is investor
7. Fraudulent transactions
protection through full and fair disclosure about
8. Insider trading
securities to be offered to the public and by
G. Protection of shareholder interests
minimizing fraudulent and manipulative activities
1. Tender offer rule
for public companies. Note that the SRC will not
2. Rules on proxy solicitation
3. Disclosure rule apply to non-public company. A public company
is defined under the SRC as either a publicly-
listed company, or a company with total assets of
at least P50M and with at least 200 shareholders
each holding 100 shares of the same class.
The principal purpose of SRC and its regulations

(also known as the Blue Sky Laws) is to protect
the public from worthless ventures, that have no
basis at all, and the sale of securities therein to
investors, who are then left holding certificates
representing nothing more than a claim to a
square of a blue sky.
B. DEFINTION OFSECURITIES
Securities are shares, participation or interests in

a corporation or in a commercial enterprise or
profit-making venture evidenced by a certificate,
contract, instrument, whether written or electronic
in character. The definition includes investment
contracts. (SRC, Sec. 3.1)
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C. KINDS OF SECURITIES scheme partakes the nature of

investment contracts and thus falls under
a. “Per Se” Securities: those enumerated the definition of "securities" under the
specifically under Sec. 3 of the SRC to SRC (Power Homes Unlimited Corp. v.
fall within the definition of “securities”. SEC, G.R. No. 164182, 2008).
Examples of those named as securities
are shares of stock, bonds, fractional Securities Market Participants
undivided interests in oil/gas/other
mineral rights, derivatives like options a. Issuer is an originator, maker, obligor, or
and warrants, proprietary or non- creator of the security. (SRC, Sec. 3.2)
proprietary membership certificates in b. Broker is a person engaged in the
corporations, etc. business of buying and selling securities
for the account of others. (SRC, Sec. 3.3)
b. “Investment Contracts: as defined The client of the broker is a third party.
under the 2015 IRR of the SRC, An c. Dealer is a person, who buys and sells
investment contract means a contract, securities for his own account in the
transaction or scheme (collectively ordinary course of business. (SRC. Sec.
"contract") whereby a person invests his 3.4) A dealer transacts using the dealer’s
money in a common enterprise and is led own resources and not for third parties,
to expect profits primarily from the efforts unlike a broker.
of others. An investment contract is d. Prospectus is the document, made by or
presumed to exist whenever a person on behalf of an issuer, underwriter or
seeks to use the money or property of dealer, to sell or offer securities for sale
others on the promise of profits. to the public through a registration
statement filed with the SEC. (SRC. Sec.
c. Catch-all – Other instruments as SEC 3.11) This is the offering circular
may determine in the future. containing all material information about
the issuer and the securities sought to be
Note: “Public offering” for purposes of offered to the public.
registration, means a random or indiscriminate
offering of securities in general to more than Registration
nineteen (19) persons, whether solicited or General rule: Securities are prohibited to be sold
unsolicited. or offered for sale or distribution within the
Philippines (SRC. Sec. 8.1):
Turner Test a. Without registration statement duly filed
The Turner Test is used to determine whether a with and approved by SEC; and
contract is an investment contract within the b. Prior to such sale, information on the
definition of securities. securities, in such form and with such
 Under this test, an investment contract substance as SEC may prescribe, must be
may be a transaction, contract, or made available to each prospective
scheme whereby a person: purchaser.
a. Makes an investment of money,
b. In a common enterprise, Exception: The following may be sold without
c. With the expectation of profits, need of registration:
d. To be derived primarily from the a. Exempt securities (SRC, Sec. 9)
efforts of others b. Exempt transactions (SRC, Sec. 10)
 The Turner Test was adopted in the NOTE:

Philippines, specifically in the case of  Registration is required whenever
Power Homes wherein it was determined securities are sold or offered to be sold
that transactions under a pyramiding to the public. At the end of the registration
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process, the registration statement will be b. Housing and Land Use Rule
rendered effective by the SEC and a permit Regulatory Board, or the;
to sell will be issued. Registration allows the c. Bureau of Internal Revenue.
SEC to ensure that there is full and fair
disclosure of all material information in e. Any security issued by a bank except its
connection with the public offering. own shares of stock. (SRC, 9)
 In approving the registration of the
securities, the SEC is not only concerned REMEMBER THIS: When a bank issues
with the requirement that full disclosure of securities other than its own shares of stock,
information is given to the public but the SEC common or preferred, it does not need to
is also concerned with the merit of the register the said securities with the SEC as
securities themselves and the issuer (PSE v. long as the BSP consents thereto. If, however,
Court of Appeals, G.R. No. 125469, 1997). the security to be issued by a bank is a share of
stock, then those shares need to be registered
1. EXEMPT SECURITIES with the SEC prior to any public offering.
Exempt securities are those to which the 2. EXEMPT TRANSACTIONS

requirement of registration under Subsection 8.1
of the SRC generally does not apply. The The enumeration of transactions under Sec. 10
following are exempt securities: that can qualify as exempt transactions are
a. Any security issued or guaranteed by the exclusive and specific. Hence, the exemption is
Government of the Philippines, or by any transaction-specific, unlike the exempt
political subdivision or agency thereof, or securities under Sec. 9 which will always be
by any person controlled or supervised exempt from registration regardless of the
by, and acting as an instrumentality of underlying transaction or offering. For the
said Government. upcoming bar exam, be familiar or understand the
rationale for the exemption of the transactions
NOTE: The reason why the Government should under Sec. 10 – either the SEC approved the
not be required to furnish a bond is that the State issuance (such as for increase in authorized
is undoubtedly always solvent (Araneta v. capital stock), or the issuance is approved by a
Gatmaitan, G.R. Nos. L-8895, L-9191, 1957). court of law (such as judicial sale), or the
b. Any security issued or guaranteed by the issuance is pursuant to a contract (such as
government of any country with which the exercise of a right of conversion), or is a private
Philippines maintains diplomatic placement (less than 20 buyers) or a QIB offering
relations, or by any state, province or (qualified institutional buyers are those with
political subdivision thereof on the basis sophistication, experience and knowledge
of reciprocity: Provided, That the sufficient to form judgment on whether to invest
Commission may require compliance or not in a securities offering).
with the form and content for disclosures a. Judicial sale of securities: Any judicial
the Commission may prescribe. sale, or sale by an executor,
administrator, guardian or receiver or
c. Certificates issued by a receiver or by a trustee in insolvency or bankruptcy
trustee in bankruptcy duly approved by
the proper adjudicatory body. NOTE: As distinguished from exempt securities
specially issued by the receiver or trustee in a
d. Any security or its derivatives the sale or bankruptcy proceeding mentioned above, the
transfer of which, by law, is under the shares covered under exempt transactions are
supervision and regulation of the ordinary shares; however the owner of the shares
a. Office of the Insurance is bankrupt and so the shares are sold.
Commission,
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b. Sale of foreclosed securities: By or on h. Broker’s transactions: Broker’s

account of a pledge holder or mortgagee transactions, executed upon customer’s
or any other similar lien holder, selling or orders, on any registered Exchange or
offering for sale or delivery in the ordinary trading market;
course of business, not for the purpose of
avoiding the provisions of SRC, to i. Pre-incorporation subscription or
liquidate a bona fide debt, a security subscription to a capital increase:
pledged in good faith as security for such Subscriptions to shares of capital stock
debt; (1) prior to incorporation or (2) pursuant
to an increase in authorized capital stock
c. Isolated transaction: An isolated – both to comply with the requirements of
transaction in which any security is sold, the law for minimum subscription;
offered for sale, subscription or delivery
by the owner thereof, or for his account, j. Exchange of securities with existing
not being made in the course of repeated security holders: Exchange of
and successive transactions of a like securities by the issuer exclusively with
character, and such owner or its existing security holders exclusively,
representative not being the underwriter where no commission or other
of such security; remuneration is paid or given directly or
indirectly for soliciting such exchange
d. Stock dividends: Distribution by a  The difference between (h) and (j)
corporation of securities to its is that the exchange in (h) is for
stockholders or other security holders as any other security of the issuer
stock dividend or other distribution out of while in (j), the exchange is
surplus; between the issuer and its existing
security holders wherein the
e. Sale of shares to stockholders not securities exchanged are not from
underwritten: Sale of capital stock of a the same issuer;
corporation to its own stockholders
exclusively – stock which has already k. Private placements: Sale of securities
been issued; by an issuer to fewer than 20 persons
during any twelve-month period; and
f. Issuance of bonds to a single
purchaser: Issuance of bonds or notes REMEMBER THIS: This exempt transaction
secured by mortgage upon real estate or which requires as a precondition the offering
tangible personal property; to fewer than 20 persons over a 12-month
period is the very essence of what constitutes
g. Transaction pursuant to the right of an offering that is not public. If, however, the
conversion: Issuance and delivery of offering is made to qualified institutional
any security in exchange for any other buyers or qualified individual buyers, the
security of the same issuer pursuant to a number of persons becomes irrelevant as
right of conversion, provided that the: you can see in the subsequent exemption for
i. Surrendered has been qualified buyers.
registered under the SRC or
was, exempt, when sold l. Sale to qualified buyers: Sale of
ii. Security issued and securities to any of the following qualified
delivered in exchange buyers:
would, at the time of i. Bank
conversion, fall into the class ii. Registered investment
entitled to registration; house
iii. Insurance company
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iv. Pension fund or retirement approved by the Securities and Exchange

plan maintained by the Commission. (SRC, Sec. 8)
government or managed by
a bank or other persons The Securities and Exchange Commission may
authorized by the BSP to conditionally approve registration statements of
engage in trust functions securities, subject under terms it may deem
v. Investment company necessary, and may specify the terms and
vi. Such other person at the conditions under which a written communication,
Commission may determine including any summary prospectus, shall be
as qualified. deemed not to constitute an offer for sale. (SRC,
Sec. 8.2 and 8.3)
REMEMBER THIS: The parties to the offering
may seek a confirmation of exempt transaction D. POWERS AND FUNCTIONS OF THE
status from the SEC, but this step is optional. SECURITIES AND EXCHANGE
Note that the burden of proving entitlement to an COMMISSION
exemption rests with the claimant. Only a notice
of exempt transaction is required under the 2015 a. Have jurisdiction and supervision over all
IRR of the SRC. corporations, partnership or associations
who are the grantees of primary
Notes: franchises and/or a license or a permit
issued by the Government;
The SEC may exempt other transactions, if it
finds that the requirements of registration under b. Formulate policies and
the SRC is not necessary in the public interest or recommendations on issues concerning
for the protection of the investors such as by the the securities market, advise Congress
reason of the small amount involved or the limited and other government agencies on all
character of the public offering. (SRC, Sec. aspect of the securities market and
10.2)An example of this provision is a stock propose legislation and amendments
option plan or an employee stock purchase plan thereto;
which is commonly offered by publicly-listed
companies to their executives and employees. c. Approve, reject, suspend, revoke or
require amendments to registration
Issuance from authorized but previously unissued statements, and registration and
capital stock may be granted exemption (Nestle licensing applications;
Philippines v. CA, G.R. No. 86738, 1991)
d. Regulate, investigate or supervise the
3. NON-EXEMPT TRANSACTIONS activities of persons to ensure
compliance;
All transactions involving securities which are
offered to the public, unless it is an exempt e. Supervise, monitor, suspend or take over
security or an exempt transaction subject to the the activities of exchanges, clearing
provisions of the SRC, needs to be registered as agencies and other SROs;
such with the Securities and Exchange
Commission, unless otherwise provided by law or f. Impose sanctions for the violation of laws
the Rules, and as such are non-exempt and rules, regulations and orders, and
transactions. issued pursuant thereto;
Securities shall not be sold or offered for sale g. Prepare, approve, amend or repeal rules,
or distribution within the Philippines, without a regulations and orders, and issue
registration statement duly filed with and opinions and provide guidance on and
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supervise compliance with such rules, E. PROCEDURE FOR REGISTRATION OF

regulation and orders; SECURITIES
h. Enlist the aid and support of and/or Procedure for Registration of Securities
deputized any and all enforcement
agencies of the Government, civil or a. Filing
military as well as any private institution,
The issuer must file in the main office of the SEC:
corporation, firm, association or person in
a. Sworn registration statement with
the implementation of its powers and respect to such securities; and
function under its Code; b. Registration statement must include any
prospectus required (SRC. Sec. 12.1)
i. Issue cease and desist orders to prevent
fraud or injury to the investing public; NOTE: A registration statement may be
withdrawn by the issuer only with SEC’s consent.
j. Punish for the contempt of the This is called a voluntary revocation. (2015 IRR
Commission, both direct and indirect, in of R.A. 8799, Rule 13.2.)
accordance with the pertinent provisions
b. Signature
of and penalties prescribed by the Rules
of Court; The registration statement shall be signed by the
issuer’s executive officer, its principal operating
k. Compel the officers of any registered officer, its principal financial officer, its
corporation or association to call comptroller, its principal accounting officer, its
meetings of stockholders or members corporate secretary or persons performing similar
thereof under its supervision; functions accompanied by a duly verified
resolution of the board of directors of the issuer
l. Issue subpoena duces tecum and corporation and accompanied by:
a. A duly verified resolution of the board of
summon witnesses to appear in any
directors;
proceedings of the Commission and in
b. The written consent of the expert, who
appropriate cases, order the certified any part of the registration
examination, search and seizure of all statement; and
documents, papers, files and records, tax c. If the registration statement includes
returns and books of accounts of any shares to be sold by selling shareholders.
entity or person under investigation as A written certification by the selling
may be necessary for the proper stockholders as to the accuracy of the
disposition of the cases before it, subject information of any part of the registration
to the provisions of existing laws; statement. (SRC. Sec. 12.4)
c. Payment of Filing Fee

m. Suspend, or revoke, after proper notice
and hearing the franchise or certificate of Not more than one-tenth (1/10) of one per centum
registration of corporations, partnership (1%) of the maximum aggregate price of the
or associations, upon any of the grounds securities (SRC. Sec. 12.5[a])
provided by law; and
d. Publication
n. Exercise such other powers as may be
provided by law as well as those which Notice of the filing of the registration statement
may be implied from, or which are shall be immediately published by the issuer, at
its own expense, in two (2) newspapers of
necessary or incidental to the carrying
general circulation in the Philippines, once a
out of, the express powers granted the
week for two (2) consecutive weeks, reciting that:
Commission to achieve the objectives a. A registration statement for the sale
and purposes of these laws. (SRC, Sec. of such security has been filed,
5)
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b. The registration statement, and its i. Termination or Completion of Offering

attachments, are open to inspection;
and A written notification of completion or termination
c. Copies shall be furnished to of the offering shall be filed by the Issuer with the
interested parties at such reasonable Commission within three (3) business days from
charge as the SEC may prescribe. such completion or termination, and the notice
(SRC. Sec. 12.5[b]) shall state the number of securities sold. (2015
IRR of R.A. 8799 Rule 8.1.1.6)
NOTE: As part of its registration statement, the
Issuer shall submit to the SEC an affidavit of Procedure for Delayed and Continuous
publication with a copy of the notice that was Offering and Sale of Securities (Shelf
published or a copy of the pro-forma notice to be Registration)
published, with the attestation that the publication
has been or will be immediately undertaken. Securities, which are intended to be issued in
(2015 IRR of R.A. 8799 Rule 12.5(b).2) tranches at more than one instance after the
e. Order registration statement has been rendered
effective by the Commission, may be registered
Within forty-five (45) days after the date of filing, for an offering to be made on a continuous or
the SEC shall declare the registration statement delayed basis in the future, for a period not
effective or rejected. (SRC. Sec. 12.6) exceeding three (3) years from the effective date
of the registration statement under which they are
f. Entry of Order being offered and sold. (2015 IRR of R.A. 8799
Rule 8.1.2)
The SEC will enter an order declaring the
registration statement to be effective. (SRC. Sec. Securities offered after the initial tranche shall
12.6) comply with the following requirements:
g. Oath of an Issuer
a. At least five (5) business days prior to the
offering or sale of the securities, it shall
Upon effectivity of the registration statement, the
disclose to the Commission the required
issuer shall state under oath in every prospectus
information using SEC Form 12-I-SR;
that all registration requirements have been met
b. Filing Fees
and that all information are true and correct as
c. Upon filing of an RS, the total filing fee
represented by the issuer or the one making the
shall be computed based on Section 12.5
statement. (SRC. Sec. 12.7)
(a) of the SRC, payable per tranche of
issuance and proportional to the issued
NOTE: The order of the Commission rendering
value.
effective the registration statement shall, at the
d. The filing fees of the subsequent
expense of the Issuer, be published in a national
tranches shall be payable within seven
newspaper of general circulation and uploaded in
(7) business days prior to
its website within two (2) business days from its
commencement of the offer/sale of the
issuance. (2015 IRR of R.A. 8799 Rule 12.5(b).3)
said securities.
e. The registrant shall execute an
h. Offer Period of Securities
Undertaking to pay the remaining
registration fees no later than thirty (30)
The sale of the securities subject of the
business days prior to the expiry of the
registration statement shall commence within ten
three (3) year period reckoned from the
(10) business days from the date of the effectivity
date of effectivity of the RS.
of the registration statement' and shall continue
until the end of the offering period or until the sale
is terminated by the Issuer. If the sale is not
commenced within ten (10) business days, the
RS shall be cancelled and all fees paid thereon
forfeited. (2015 of R.A. 8799 Rule 8.1.1.5)
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Rejection and Revocation of Registration other person connected to its

Statement business affairs.
a. Grounds for Rejection and Revocation of NOTE: the term “competent judicial or
Registration Statement administrative body” shall include a foreign court
a. When the issuer: of competent jurisdiction as provided for under
i. Has been judicially declared the Rules of Court.
insolvent;
ii. Has violated any of the b. Requirements for Voluntary Revocation
provision of the SRC, the An Application for Voluntary Revocation of
rules promulgate pursuant Registration of Securities shall include the
thereto, or any order of the following documents: (2015 IRR of R.A.
Commission of which the 8799 Rule 13.2.1):
issuer has notice in
connection with the offering 1. Verified Petition for Revocation of
for which a registration Registration;
statement has been filed
iii. Has been or is engaged or is 2. Board Resolution approving the
about to engage in revocation, certified under oath by the
fraudulent transactions; corporate secretary and attested to
iv. Has made any false or by the president or anyone
misleading representation of performing a similar function;
material facts in any
prospectus concerning the 3. List of stockholders indicating their
issuer or its securities; respective shareholdings as of the
v. Has failed to comply with any latest date;
requirements that the
Commission may impose as 4. All relevant books and papers of the
a condition for registration of Issuer, as may be determined by the
the security for which the Commission;
registration statement has
been filed;
5. Proposed Notice of Filing of Petition
b. The registration statement is on its
for Voluntary Revocation of
face incomplete or inaccurate in any
Registration of Securities, reciting the
material respect or includes any
facts supporting the said petition
untrue statements of a material fact
which shall be subject to the approval
required to be stated therein or
of the Commission; and
necessary to make the statement
therein not misleading; or
c. The issuer, any officer, director or 6. Copy of the official receipt
controlling person performing similar representing payment of the
functions, or any underwriter has prescribed filing fees.
been convicted, by a competent
judicial or administrative body, upon NOTE: The Commission may impose such other
plea of guilty, or otherwise, of an requirements or conditions it may deem
offense involving moral turpitude and necessary. (2015 IRR of R.A. 8799 Rule 13.2.2)
/or fraud or is enjoined or restrained
by the Commission or other c. Procedure for Voluntary Revocation of
competent or administrative body for Registration of Securities
violations of securities, commodities,  If, after fifteen (15) business days
and other related laws. from the publication of the Notice of
d. Where the issuer refused to comply Filing of Petition for Voluntary
with the order of SEC for the Revocation, the Commission finds
production of all books and papers, that the petition together with all other
administration of oath, or papers and documents attached to it,
examination of its officers, or any is on its face complete and that no
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party stands to suffer any damage  The issuer, or any

from the revocation, it shall prepare person acting on behalf
an order revoking the registration. of the issuer in
connection with the
 The Order of Revocation shall distribution of said
exempt the Issuer from its reporting securities, shall, within
obligations under Section 17.2 of the ten (10) days from
SRC unless it still qualifies as a public receipt of notification of
company. such election, return the
contributions paid by
Consequences of an Incomplete or False and such purchasers without
Inaccurate Statement In A Material Respect In making any deduction.
The Registration Statement
o Purchasers who decide not to
 If the registration statement is on its face renounce their purchase of
incomplete or inaccurate in any material securities shall be subject to the
respect: terms of the amended offering.
(SRC, Sec. 14)
o The Commission shall issue an
order directing the amendment Grounds For Suspension Of The Registration
of a registration statement; upon Of A Security
compliance with such order, the
amended registration statement If at any time, the information contained in the
shall become effective; registration statement filed is or has become
misleading, incorrect, inadequate or incomplete
o But if such registration statement in any material respect
has already become effective,  The sale or offering for sale of the
the issuer needs to publish a security registered thereunder may work
notice of the proposed or tend to work a fraud
amendments in 2 newspapers of  Pending further investigation of the
general circulation in the security registered to ascertain whether
Philippines stating that the the registration of such security should
offering in its current form has be revoked on any ground specified in
been cancelled. the SRC; or
 Refusal to furnish information required by
 If the changes shall result to a derogation the Commission. (SRC, Sec. 15)
of rights of existing security holders or
purchasers of subject securities who VI. Procedure For Suspension Of The Sale Of
have paid a portion of the selling price: Securities (SRC, Sec. 15)
o The issuer shall include in the  SEC may order the suspension of the
above-mentioned publication an offer and sale of securities pending any
offer to rescind all transactions investigation, stating the grounds for
that have been completed for taking such action.
sale to date, without making any
deduction and wait for thirty (30)  Such order, although binding upon
days for purchasers to respond persons notified thereof, shall be deemed
to the rescission offer before confidential, and shall not be published.
initiation of the amended
offering.  Notice of such order shall be given to the
issuer and every dealer and broker
o Purchasers may, within thirty known as participating in such offering.
(30) days from the date of such
notification, renounce their  Upon issuance of suspension order, no
purchase of securities. further offer or sale of such security shall
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be made until lifted or set aside by the from purchasers within 10 days after the
SEC; otherwise, such sale is void. notice is first published.
 Upon issuance of an order of  If the public offering is already terminated

suspension, the SEC shall conduct a and the Commission, after due notice
hearing. and hearing, revokes the effectivity of the
registration statement under Section 13,
 If it determines that the sale of any or suspends registration under Section
security should be revoked, it shall issue 15, the Commission shall publish a notice
an order prohibiting the sale of such of the order of revocation or suspension
security. (SRC, Sec. 15) in a newspaper of general circulation in
the Philippines and/or post in the
Publication of the Notice of the Order of Commission’s website.
Revocation or Suspension
NOTE: if the public offering has already
 If during a public offering, the terminated, there is no more return of payments.
Commission, after due notice and
hearing, revokes the effectivity of a Material Information
registration statement under Section 13,
or suspends registration under Section Generally, it is any fact or omission, which is
15. material to the investor in making his decision
whether he should invest in the security or not.
 Such order shall be published in: However, the Rules provide for an enumeration
 A newspaper of general of matters considered as material information.
circulation in the Philippines; With regard to those specifically included in the
and/or enumeration, the issuer cannot argue otherwise
to say that those are immaterial:
 Post(ed) on the Commission’s a. Any event or transaction which creates or
website along with a statement increases a risk on the investments or on
that the– the securities covered by the registration;
i. Offering in its current form
has been cancelled; and b. Increase/decrease in the volume of the
ii. Issuer subject to such securities being offered at an issue price
order, or any person, higher/lower than the range set and
acting on behalf of such disclosed in the registration statement
issuer in the distribution of and which results to a derogation of the
the subject securities and rights of existing security holders, as may
has in his possession any be determined by the Commission;
payment for the purchase
of securities, has the duty c. Major change in the primary business of
to return any and all the registrant;
payments made by
purchasers of the subject d. Reorganization of the company;
securities within 10 days of
such publication, and e. Change in the work program or use of
simultaneously furnish the proceeds;
issuer a copy of this
notice. f. Loss, deterioration or substitution of the
property underlying the securities;
 Upon receipt of a notice, the issuer and
all persons acting on its behalf in the g. Significant or ten percent (10%) or more
distribution of the subject securities shall change in the financial condition or
immediately terminate the offering and results of operation of the registrant
return any and all payments received unless a report to that effect is filed with
the Commission and furnished the
prospective purchaser;
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the SRC or the SEC rules. (SRC, Sec.

h. Classification, de-classification or re- 24)
classification of securities, which results
to derogation of rights of existing security Examples of manipulative practices:
holders, as may be determined by the a. Painting the tape - engaging in a series
Commission. of transactions in securities that are
reported publicly to give the impression
REMEMBER THIS: Material information pertains of activity or price movement in a
to any and all information that are “market- security;
moving” in that a reasonable investor will
consider the information in the investment b. Marking the close - buying and selling
decision. Hence, these are what we call “price- securities at the close of the market in an
sensitive” information which, for publicly listed effort to alter the closing price of the
companies, need to be fully and promptly security;
disclosed for the benefit of the investing public.
c. Improper Matched Orders – engaging
F. PROHIBITIONS ON FRAUD, in transaction where both the buy and sell
MANIPULATION, AND INSIDER TRADING orders are entered at the same time with
the same price and quantity by different
1. MANIPULATION OF SECURITY PRICES but colluding parties, who have
knowledge that such orders would create
It shall be unlawful for any person, for himself an appearance of active trading of the
or through a dealer or broker, directly and shares;
indirectly to –
a. Create a false or misleading appearance d. Hype And Dump – engaging in buying
of active trading in any listed security activity at increasingly higher prices and
traded in an Exchange; then selling securities in the market at the
higher prices after announcing a glossy
b. Effect along, or with others, a series of picture of a particular security as good
transactions in securities that: investment and thus lure investors to
i. Raises their price to induce trade.
purchase;
ii. Depresses their price to induce their e. Wash Sales – engaging in stock trading
sale; and where there is no genuine change in
iii. Creates active trading to induce actual beneficial ownership of a security
purchase or sale through but makes it appear that the stocks are
manipulative devices actively traded.
c. Circulation or dissemination of f. Squeezing The Float – taking

information to the effect that the price of advantage of a shortage of securities in
any such security will or is likely to rise or the market by controlling the demand
fall because of market operations; side and exploiting market congestion
during such shortages in a way as to
d. Make, regarding any security registered create artificial prices
on an exchange, any statement which is
false or misleading with respect to any g. Disseminating false or misleading
material fact, and which he knew or had market information through media,
reasonable ground to believe is false or including the internet. (2015 IRR of
misleading; R.A. 8799, Rule 24.1.5)
e. Effect series of transactions for the 2. SHORT SALES

purpose of pegging, fixing or stabilizing
the price of security trade in an Short sales are any sale of a security which the
Exchange, unless otherwise allowed by seller does not own or any sale which is
consummated by the delivery of a security
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borrowed by, or for the account of the seller. require taking advantage of information, mere
(SRC, Sec. 24) possession is enough (SRC, Sec. 27.4)
Who is an insider? (TRIGOD)
No person shall, directly or indirectly, by the use
of any facility of a securities exchange, effect a a. Issuer;
short sale in a security registered or listed on any b. Director or Officer of issuer;
securities exchange, where the seller does not c. Person whose Relationship or former
intend or is unable to make delivery of the relationship with issuer gives him access
securities within the prescribed settlement period. to material information not generally
Failure on the part of the seller to make delivery available to the public;
on such date will be construed by the d. Government employee or director or
Commission as prima facie evidence of the lack officer of an exchange, clearing agency
of intention on his part to make such delivery. and/or self-regulatory organization who
(2015 IRR of R.A. 8799, Rule 24.2.2.6) has access to material information; or
e. A person who learns such information by
communication from any of the foregoing
3. OPTION TRADING
insiders. NOTE: In securities parlance,
this is called “tippee. This tippee must
No member of an Exchange shall, directly or
know that the tipper is an insider” (SRC
indirectly, endorse or guarantee the performance
Sec. 3.8)
of any put, call, straddle, option or privilege in
relation to any security registered on a securities
Defenses against insider trading
exchange. (SRC, Sec. 25)
a. Proof that information was not gained
4. FRAUDULENT TRANSACTIONS from such relationship or
b. If the other party buying or selling is
It is unlawful, with respect to the purchase or sale identified, insider proves that:
of securities: i. The disclosed the information to
a. To employ any device, scheme, or the other party; or
artifice to defraud; ii. Had reason to believe that the
other party already knew of the
b. Obtain money or property by means of information. (2015 IRR of R.A.
any untrue statement of a material fact or 8799, Rule 27.1)
any omission to state a material fact, that
is necessary in order to make the Presumption of Insider Trading
statements made, in the light of the
circumstances under which they were Purchase or sale by:
made, not misleading a. Insider
b. Insider’s spouse or relatives by affinity or
c. Engage in any act, transaction, practice, consanguinity within the second (2 nd)
or course of business which would degree, legitimate or common-law, under
operate as a fraud or deceit upon a the following conditions:
person – actual intent to deceive not i. Transacted after the information
necessary. (SRC, Sec. 26) came into existence; but
ii. Prior to dissemination of the
Fraud or deceit is required, not mere negligence, information to the public and a
on the part of offender (SEC v. CA, 246 SCRA lapse of a reasonable time for the
738 [1995]) market to absorb such
information. (2015 IRR of R.A.
5. INSIDER TRADING 8799, Rule 27.1)
It is unlawful for an insider to sell or buy a security
NOTE: This is a rebuttable presumption of insider
of the issuer, while in possession of material
trading.
information with respect to the issuer that is not
generally available to the public – does not
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Material Nonpublic Information Insurance Co., G.R. No. 171815, 2007, as cited
in Osmeña, 533 SCRA 313).
Information is “material nonpublic” if: Both acquisitions from either the associated
a. It has not been generally disclosed to the company or the target company must be taken
public and would likely affect the market into account. If the total acquisition of shares in
price of the security after being both the companies exceed the threshold of 35%
disseminated to the public and the lapse percent a tender offer must be made to both
of a reasonable time for the market to corporations.
absorb the information; or
b. Would be considered by a reasonable Target company means any Issuer whose equity
person important under the securities are sought by an Offeror pursuant to a
circumstances in determining his course tender offer. (2015 IRR of R.A. 8799 Rule 19.1.7)
of action whether to buy, sell or hold a
security (SRC. Sec. 27.2.) Cases
A “tender offer” is a publicly announced intention
G. PROTECTION OF INVESTORS by a person acting alone or in concert with other
persons to acquire equity securities of a public
1. TENDER OFFER RULE company, i.e., one listed on an exchange, among
others.
Tender Offer Rule  The term is also defined as “an offer by
A publicly announced intention by a person, the acquiring person to stockholders of a
acting alone or in concert with other persons, to public company for the latter to tender
acquire equity securities of a public company. their shares therein on the terms
(SRC, Sec. 19) specified in the offer.” (Morales, The
Philippine Securities Regulation Code,
It also means: a publicly announced intention by 2005 ed., p. 153, as cited in Osmeña, 533
a person acting alone or in concert with other SCRA 313).
persons (hereinafter referred to as "person") to
acquire outstanding equity securities of a public  Tender offer is in place to protect the
company as defined in SRC Rule 3, or interests of minority stockholders of a
outstanding equity securities of an associate or target company against any scheme that
related company of such public company which dilutes the share value of their
controls the said public company. (2015 IRR of investments. It affords such minority
R.A. 8799 Rule 19.1.8) shareholders the opportunity to withdraw
or exit from the company under
NOTE: The 2015 IRR of the Securities Regulation reasonable terms, a chance to sell their
Code has expanded the tender offer rule to shares at the same price as those of the
intended acquisitions of not just the target public majority stockholders (Cemco Holdings,
company but also to associate company of the Inc. v. National Life Insurance Co., G.R.
target company, where the associate company No. 171815, 2007, as cited in Osmeña,
controls said target company to incorporate the 533 SCRA 313).
doctrine in Cemco Holdings, Inc. v. national Life
Insurance.  It is done by filing with the SEC a
declaration to that effect, furnishing the
In the Cemco case, the coverage of the issuer with a statement with the facts
mandatory tender offer rule was clarified by the required by the SEC, and the publication
SC to cover not only direct acquisition but also of all requests or invitations for tender.
indirect acquisition or ‘any type of acquisition. The
legislative intent behind the tender offer rule Mandatory Tender Offer Rule
makes clear that the type of activity intended to 1. Any person or group of person intends to
be regulated is the acquisition of control of the acquire 35% or more of equity shares in
listed company through the purchase of shares. a public company, in one or more
Control may [be] effected through a direct and transactions within a period of 12 months.
indirect acquisition of stock, and when this takes (2015 IRR of R.A. 8799 Rule 19.2.1)
place, irrespective of the means, a tender offer
must occur (Cemco Holdings, Inc. v. National Life
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2. Acquisition of even less than 35% but 2. RULES ON PROXY SOLICITATION

would result in ownership of more than
51% of the total outstanding equity This only refers to solicited proxies. (SRC, Sec.
securities of a public company (2015 IRR 20)
of R.A. 8799 Rule 19.2.5)
Requirements
Creeping Acquisition a. In writing; signed by the stockholder or
Any person or group of person intends to acquire duly authorized representative; and
35% or more of equity shares in a public b. Filed before the scheduled meeting with
company, in one or more transactions within a the corporate secretary
period of 12 months. (2015 IRR of R.A. 8799 Rule c. Valid only for the meeting for which it is
19.2.1) intended.
NOTE: If any acquisition that would result in  Cannot be valid for a period longer than five
ownership of over fifty percent (50%) of the total years at one time (Maximum effectivity
outstanding equity securities of a public period: 5 years)
company, the acquirer shall be required to make
a tender offer under this Rule for all the  Broker or dealer who holds or acquires the
outstanding equity securities to all remaining proxy for at least 10% of the outstanding
stockholders of the said company at a price shares of the issuer shall submit a report
supported by a fairness opinion provided by an identifying the beneficial owner within 10
independent financial advisor or equivalent third days after such acquisition to the:
party. The acquirer in such a tender offer shall be o Issuer of the security;
required to accept all securities tendered. (2015 o The Exchange where the security is
IRR of R.A. 8799 Rule 19.2.5) traded; and the
o SEC.
Exemptions to the Mandatory Tender Offer
Rule under the 2015 IRR of the SRC: 3. DISCLOSURE RULE
a. From unissued capital stock, provided
that the acquisition will not result in a 50% This rule only applies to issuer corporations that
or more ownership; satisfy the any of the following conditions (SRC
b. Increase in authorized capital stock; Sec. 17):
c. Foreclosure proceedings; a. Has sold a class of its securities pursuant
d. Privatization by the government; to a registration;
e. Rehabilitation under court supervision;
f. Through an open market at the prevailing b. Has a class of securities listed for trading
market price; on an Exchange; or
g. Merger or consolidation; and
h. By any person or group of persons who c. With assets of at least ₱50 Million (or
intends to acquire 35% through an such other amount as SEC shall
exchange trading system. prescribe), and having 200 or more
holders each holding at least 100 shares
NOTE: Any person or group of persons acting in of a class of its equity securities (“Public
concert, who intends to acquire thirty five percent company”)
(35%) of the outstanding voting shares or such
outstanding voting shares that are sufficient to Reportorial Requirements
gain control of the board in a public company a. Annual Report – for fiscal year in which
through the Exchange trading system shall not registration statement became effective
be required to make a tender offer even if such and every fiscal year thereafter, within
person or group of persons acting in concert 135 days after the end of the fiscal year
acquire the remainder through a block sale if,
after acquisition through the Exchange trading b. Quarterly Report – within 45 days after
system, they fail to acquire their target of thirty the end of each of the first three quarters
five percent (35%) or such outstanding voting of the fiscal year
shares that is sufficient to gain control of the
board. (2015 IRR of R.A. 8799 Rule 19.2.3)
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c. Current Report – whenever necessary

to make a full, fair and accurate
disclosure to the public of every material
fact or event that occurs, which would
reasonable be expected to affect
investors’ decisions in relation to those
securities
d. Monthly Report (for issuers of

registered commercial papers) –
regarding commercial paper total
issuances outstanding at the end of each
month, within 10 business days following
the end of the month
REMEMBER THIS: The reportorial obligations of

public companies under the SRC pertain to
Sections 17 (Annual and quarterly reports), 18
(5% beneficial owners), 20 (Information
Statement), and 23 (change in beneficial
ownership), among others.
Note: Reports Filed By 5% Beneficial Owners -

any person who directly or indirectly acquires the
beneficial ownership of more than five percent
(5%) or such lesser per centum as the
Commission may prescribe, of any class of equity
securities of an Issuer, covered by the Disclosure
Rule, shall file a report within five (5) business
days after such acquisition submit to the Issuer,
the Exchange where the security is traded, and to
the Commission a sworn statement prescribed by
the SEC (SRC, Sec. 18)
----end of topic----
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BANKING
Commercial Law
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VI. BANKING 2. Distinction of banks from quasi-banks

and trust entities
3. Bank powers and liabilities
TOPIC OUTLINE UNDER THE SYLLABUS: a. Corporate powers
b. Banking and incidental powers
VI. BANKING 4. Diligence required of banks in view of
A. THE NEW CENTRAL BANK ACT fiduciary nature of banking
1. State Policies 5. Nature of bank funds and bank
2. Creation of the Bangko Sentral ng deposits
Pilipinas 6. Grant of loans and security
3. Responsibility and primary objective requirements
4. Corporate powers a. Ratio of new worth to total risk
5. Operations of the Bangko Sentral ng assets
Pilipinas b. Single borrower’s limit
a. Authority to obtain data and c. Restrictions on bank exposure
information to directors, officers,
b. Supervision and examination stockholders, and their related
c. Bank deposits and investments interests
d. Prohibitions d. Prohibited acts of borrowers
e. Examination and fees e. Floating interest rates and
6. Monetary Board; powers and escalation clauses
functions 7. Penalties for violations
7. How the Bangko Sentral ng Pilipinas a. Fine, imprisonment
handles banks in distress b. Suspension or removal of
a. Conservatorship director or officer
b. Closure c. Dissolution of bank
c. Receivership
d. Liquidation D. PHILIPPINE DEPOSIT INSURANCE
8. Administrative sanctions on CORPORATION ACT
supervised entities 1. Basic Policy
9. Rules on bank deposits and 2. Powers and functions of the Philippine
investments by directors, officers, Deposit Insurance Corporation;
stockholders and their related prohibitions
interests 3. Concept of insured deposits
10. Supervision and regulation of bank 4. Liability to depositors
operations a. Deposit liabilities required to be
a. Loans and other credit insured with Philippine Deposit
accommodations Insurance Corporation
b. Selective regulation b. Commencement of liability
i. Margin requirements c. Deposit accounts not entitled to
against letters of credit payment
ii. Required security against d. Extent of liability
bank loans e. Determination of insured
iii. Portfolio ceilings deposits
iv. Minimum capital ratios f. Calculation of liability
11. Rate of exchange i. Per depositor, per capacity
rule
B. LAW ON SECRECY OF BANK ii. Joint accounts
DEPOSITS iii. Mode of payment
1. Purpose iv. Effect of payment of
2. Prohibited acts insured deposits
3. Deposits covered v. Payment of insured
4. Exceptions deposits as preferred credit
5. Garnishment of deposits, including vi. Failure to settle claim of
foreign deposits insured depositor
6. Penalties for violation vii. Failure of depositor to claim
insured deposits
C. GENERAL BANKING ACT (a) Examination of banks
1. Definition and classification of banks and deposit accounts
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(b) Prohibition against A. THE NEW CENTRAL BANK ACT

splitting of deposits
(c) Prohibition against 1. STATE POLICIES
issuances of
temporary restraining The State shall maintain a central monetary
orders authority that shall function and operate as an
5. Concept of bank resolution
independent and accountable body corporate in
6. Role of the Philippine Deposit
the discharge of its mandated responsibilities
Insurance Corporation in relation to
banks in distress concerning money, banking, and credit. In line
a. Closure and takeover with this policy, and considering its unique
b. Conservatorship functions and responsibilities, the central
c. Receivership monetary authority established under this Act,
d. Liquidation while being a government-owned corporation,
shall enjoy fiscal and administrative autonomy.
(New Central Bank Act [hereinafter “NCBA”], Sec
1)
2. CREATION OF THE BANGKO SENTRAL

NG PILIPINAS (BSP)
There is hereby established an independent

central monetary authority, which shall be a body
corporate known as the BSP. (NCBA, Sec. 2)
The BSP is a Constitutionally mandated (not

created) authority. (1987 Constitution, Article XII,
Sec. 20)
The State’s central monetary authority is charged

with the responsibility of administering the
monetary, banking, and credit system of the
country and is granted the power of supervision
and examination over bank and non-bank
financial institutions performing quasi-banking
functions, including savings and loan
associations. (Busuego v. Court of Appeals [CA],
G.R. No. 95326, 1999)
3. RESPONSIBILITY AND PRIMARY

OBJECTIVE
Responsibilities of the BSP

a. Banker of Government. The
government’s political subdivisions and
instrumentalities (Sec. 110), and their
cash balances should be deposited with
the BSP, with only minimum working
balances to be held by government-
owned banks, and such other banks
incorporated in the Philippines as the
Monetary Board may designate. (Sec.
113)
b. Representation with the International
Monetary Board. The BSP shall
represent the government in all dealings,
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negotiations, and transactions with the 4. CORPORATE POWERS

IMF, and shall carry such accounts as
may result from the Philippine Corporate powers of the BSP
membership in, or operations with IMF. a. To adopt, alter, and use a corporate seal
(Sec. 111) which shall be judicially noticed;
c. Representation with other financial b. To enter into contracts;
institutions. The BSP may represent the c. To own, lease, sell or dispose real and
government in dealings, negotiations, or personal property;
transactions with the World Bank and d. To sue and be sued;
with other foreign or international e. To acquire and hold assets and incur
financial institutions or agencies. (Sec. liabilities essential to the proper conduct
112) of its operations;
d. Fiscal operations. The BSP shall open f. To compromise, condone, or release any
a general cash account for the Treasurer claim or settled liability to the BSP
of the Philippines, in which the liquid regardless of the amount, and
funds of the Government shall be g. To do and perform such other necessary
deposited, and the transfer of funds from or proper powers to carry out the
this account to be made only upon the purposes of the Act. (Sec. 5)
order of the Philippine Treasurer. (Sec.
114) 5. OPERATIONS OF THE BANGKO
SENTRAL NG PILIPINAS
Primary Objectives of the BSP
a. To provide policy directions in areas of A. Authority to obtain data and information
money, banking, and credit, with
supervision over operations of banks, BSP’s has power to require any data:
and with regulatory and examination a. Collective or aggregate data may be
powers over money service businesses, released to any interested person
credit granting businesses, and payment b. Disaggregated data (i.e. data of individuals
system operators. (Sec. 3) and firms).
b. To maintain price stability conducive to a 1. Subject to confidentiality laws;
balanced and sustainable growth of the 2. Cannot be made available to the
economy and employment (Id.) public except upon court order or
c. To promote and maintain the monetary directive of the Monetary Board;
stability and convertibility of the peso. 3. Data on banks are secured
(Id.) pursuant to BSP’s banking
supervision powers and are
Monetary stability pertains to confidential. Its release is subject
preservation of the international value of to conditions imposed by the
the Philippine currency. (Commissioner Monetary Board, government
of Customs v. Eastern Sea Trading, GR agencies authorized by law, orders
No. L-14279, 1961) of the court, or Congress. (Sec. 27)
4. Can be secured from any person
Note: Promotion of financial stability is a or entity, including government
shared mandate with the National entities.
Government i.e., DOF, SEC, IC, and 5. Limited for statistical and policy
PDIC. development purposes.
d. To promote broad and convenient access BSP has the power to issue subpoena for the
to high quality financial services. (Sec. 3) production of books and records, and refusal
e. To oversee the payments and settlement shall be subject to punishment for contempt
systems. (R.A. No. 11127 - National under the Rules of Court. (Sec. 23)
Payment Systems Act, Sec. 3)
B. Supervision and examination
Supervision is a broad term, which includes

examination and investigation. Supervision also
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includes issuance of rules of conduct and Prohibition on issuance of injunction

standards, overseeing that laws and regulations No restraining order or injunction shall be issued
are complied with and enforcing prompt by the court enjoining the BSP from examining
corrective actions. (General Banking Law any institution subject to its supervision or
[hereinafter “GBL”], Sec. 4) examination powers except when the action of
the BSP is plainly arbitrary and made in bad faith.
Supervision includes audit. The Commission on (Id.)
Audit (COA) and the BSP have concurrent
jurisdiction to audit government banks. (DBP v. C. Authority to approve transfer of shares
COA, GR. No. 88435, 2002)
Transfers or acquisitions, or a series thereof, of at
Coverage of BSP’s supervision and least ten percent (10%) of the voting shares in
examination powers banks or quasi-banks shall require the prior
a. Banks approval of the BSP. The BSP shall consider the
b. Quasi-banks fitness of the incoming stockholders as may be
c. Subsidiaries (ownership of more than indicated in their integrity, reputation, and
50% of the voting stock) and affiliates financial capacity. (Sec. 25-A)
(ownership of 50% or less) of banks and
quasi-banks engaged in allied activities. Effect of lack of BSP approval
The transfer or acquisition shall have no legal
Note: BSP is also granted the authority to effect and cannot be recognized in the books of
conduct examination of a wholly or the institution or by any government agency. The
majority owned or controlled enterprise transferor-stockholders shall remain accountable
by a bank, not necessarily engaged in and responsible. (Sec. 25-A)
allied activities. (GBL, Sec. 7)
Transfer of actual control or management shall
d. Other institutions performing similar make the transferor, the transferee, and any
functions as provided for by special laws person responsible liable. (Id.)
i.e., non-stock savings and loan
association (R.A. No. 8367), pawnshops D. Prohibitions
(P.D. No. 114), stand-alone trust entities
(GBL, Sec. 79). Personnel of the BSP are hereby prohibited from:
e. Money service businesses i.e., foreign a. Being an officer, director, lawyer or
exchange dealers, money changers and agent, employee, consultant, or
remittance agents stockholder, directly or indirectly, of any
f. Credit granting businesses institution subject to supervision or
g. Payment system operators (Sec. 25) examination by the BSP; (Sec. 27[a])
h. Trust entities (GBL, Sec.4, 79) b. Directly or indirectly requesting or
i. Pawnshops (PD 114, Sec. 17) receiving any gift, present or pecuniary or
j. Non-stock savings and loan associations material benefit for himself or another,
(R.A. No. 8367, Sec. 22) from any institution subject to supervision
or examination by the BSP; (Sec. 27 [b])
Resolution of examination issues c. Revealing, in any manner, information
BSP is required to establish a mechanism for relating to the condition or business of
resolving issues pertaining to bank examination. any such institution unless:
The resolution “body” shall be independent and 1. Under orders of the court, the
report directly to the Monetary Board. (Sec. 25) Congress or any government
office or agency authorized by
Authority of bank examiners law, or under such conditions as
BSP bank examiners are authorized to administer may be prescribed by the
oaths and compel the presentation of documents Monetary Board; and
of institutions under examination. This authority is 2. The information is to be given to
subject to the confidentiality of bank deposits and the Monetary Board or the
government debt securities. (Id.) Governor of the BSP, or to any
person authorized by either of
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them, in writing, to receive such

information. (Sec. 27 [c]) While Sec. 6(a) of the NCBA requires that the
d. Borrowing from any institution subject to Governor be subject to confirmation by the
supervision or examination by Commission on Appointments, he is not among
the BSP unless: government officials expressly mentioned in Sec.
1. It is transacted on an arm's 16, Article VII of the Constitution who should be
length basis; confirmed. (Tarrosa vs. Singson, G.R. No.
2. It is fully disclosed to the 111243, 1994)
Monetary Board; and
3. It shall be subject to such rules Vacancies
and regulations as the Monetary Any vacancy in the Monetary Board created by
Board may prescribe. (Sec. the death, resignation, or removal of any member
27[d]) shall be filled by the appointment of a new
member to complete the unexpired period of the
E. Examination and Fees term of the member concerned. (Sec. 7)
Banks, quasi-banks, and other BSP-supervised Qualifications

entities shall be examined by BSP examiners in a. Natural-born citizens of the Philippines;
accordance with guidelines, taking into b. At least 35 years of age; (except the
consideration sound and prudent practices. Governor, who should be at least 40
a. There shall be an interval of at least years of age)
twelve (12) months between regular bank c. Of good moral character;
examinations. It is no longer annual. d. Of unquestionable integrity;
b. Special examinations need at least five e. Of known probity and patriotism; and
(5) votes of the members of the Monetary f. With recognized competence in social
Board. and economic disciplines (Sec. 8)
c. The supervised institution shall afford
BSP examiners full opportunity to Disqualifications
examine its books and records, assets, a. Disqualifications imposed by R.A. No.
and general condition, and review its 6713 – Code of Conduct and Ethical
systems and procedures. Standards for Public Officials;
d. Reports and papers are confidential and b. Disqualified from being a director, officer,
not open to the public, except when employee, consultant, lawyer, agent or
incidental to examination proceedings stockholder of any bank, quasi-bank or
and when necessary for the prosecution any other institution which is subject to
of violations. supervision or examination by the BSP;
e. There is an annual supervision fee based c. Members coming from the private sector
on cost of supervision. (Sec. 28) shall not hold any other public office or
public employment during their tenure.
6. MONETARY BOARD, POWERS AND d. Person who has been connected directly
FUNCTIONS with any multilateral banking or financial
institution or has a substantial interest in
The Monetary Board is a seven (7) man body any private bank in the Philippines, within
appointed by the President through which the 1 year prior to his appointment;
powers and functions of the BSP are exercised. e. No member shall be employed in any
Its members shall serve a term of six (6) years, such institution within 2 years after the
and no member shall be reappointed more than expiration of his term except when he
once. (Sec. 6) serves as an official representative of the
Philippine Government to such
Composition institution; and
a. Chairman who is the BSP Governor; f. Person who has substantial interest in
b. A cabinet member to be designated by any private bank in the Philippines, within
the President of the Philippines; 1 year prior to his appointment. (Sec. 9)
c. 5 Members who shall come from the
private sector, all of whom shall serve full
time (Id.)
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Degree of Diligence b. Direct the management, operations, and

The degree of diligence required of Monetary administration of the BSP;
Board Members, BSP Officials, and Employees, c. Establish a human resource
is now aligned with that required of public officers management system;
under Sec. 38 and 39 of Chapter 9, Book I of the d. Adopt its annual budget and authorize
Revised Administrative Code of 1987. They expenditures;
cannot be liable for acts done in the performance e. Indemnify its members and other officials
of their official duties “unless there is a clear of the BSP against all costs and
showing of bad faith, malice or gross negligence.” expenses reasonably incurred by such
(Sec. 16) The former requirement of persons by reason of the performance of
extraordinary diligence was already amended. their functions or duties in accordance
with the free and harmless, and
General Rule: indemnification clause. (Secs. 15 and 16)
Free and Harmless
BSP, members of the Monetary Board, and its Myriad of functions
other personnel, are held free and harmless to the BSP is an administrative agency which exercises
fullest extent permitted by law from any liability. "powers and/or functions which may be
(Sec. 16) characterized as administrative, investigatory,
regulatory, quasi-legislative, or quasi-judicial.”
Indemnification (Bank of Commerce v. Planter’s Development
They shall be indemnified for any and all Bank, G.R. Nos. 154470-71 and 154589-90,
liabilities, losses, claims, demands, damages, 2012)
deficiencies, costs and expenses of whatsoever
kind and nature that may arise in connection with The BSP Monetary Board is a quasi-judicial
the exercise of their powers and performance of agency exercising quasi-judicial powers or
their duties and functions. (Id.) functions. It has the power to issue subpoena, to
sue for contempt those refusing to obey the
Exception: Their actions or omissions are finally subpoena without justifiable reason, or administer
adjudged to be in willful violation of this Act, oaths and compel presentation of books, records,
performed in evident bad faith, or with gross and others, needed in its examination, to impose
negligence. (Id.) fines and other sanctions and to issue cease and
desist order. The BSP Monetary Board can
The legal obligations of diligence and good faith exercise discretion in determining whether
that BSP officials owe to the public start with the administrative sanctions should be imposed on
official acts of the Monetary Board which, rightly banks and quasi-banks. (UCPB v. Ganzon, G.R.
or wrongly, are the cause of loss or injury to third No. 168859, 2009; NCBA, Sec. 37)
parties, not any preparatory report or
recommendation. (Borlongan v. Reyes, G.R. No. Decisions appealable to the Court of Appeals
161726, 2005) Any petition for certiorari against an act or
omission of BSP, when it acts through the
Removal of Members of the Monetary Board Monetary Board, must be filed with the Court of
The President may remove any member of the Appeals. (Vivas vs. Monetary Board, G.R. No.
Monetary Board for any of the following reasons: 191424, 2013).
a. The member no longer possesses the
qualifications under NCBA, Sec. 8; Note: This is a petition for review on certiorari
b. The member is guilty of acts or over decisions of quasi-judicial bodies (Monetary
operations which are fraudulent or illegal; Board) under Rule 45 of the Rules of Court. This
c. The member is physically, or mentally is different from a special petition for certiorari for
incapacitated and such incapacity lasted bank closures under Sec. 30 of the NCBA.
for more than 6 months;
d. The member is subsequently disqualified
under NCBA, Sec. 9. (Sec. 10)
Powers and Functions of the Monetary Board

a. Issue rules and regulations;
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7. HOW THE BANGKO SENTRAL NG

PILIPINAS HANDLES BANKS IN DISTRESS Appointment of Conservator
A conservator is appointed based on a report
Methods submitted to the Monetary Board by the
Conservatorship, Receivership, and Liquidation appropriate supervising or examining department
showing that the bank or quasi-bank is in a state
A bank placed under conservatorship remains of illiquidity which is not adequate to protect the
open but under the management and control of interest of depositors and creditors. (Id.)
the conservator. On the other hand, when a bank
is ordered closed by the Monetary Board, it is Qualifications of a Conservator
taken over by the PDIC as statutory “receiver”, The conservator should be competent and
and the PDIC is directed to proceed with the knowledgeable in bank operations and
liquidation. (Sec. 30(d); New PDIC Charter, Sec. management. (Id.)
12)
The Monetary Board has exclusive power to
Before the amendments to the PDIC Charter and designate the conservator. (Koruga v. Arcenas,
NCBA by Sec. 12 of R.A. No. 10846 (2016), there G.R. Nos. 168332, 2009)
was a 90-day period of receivership after closure
and before a final order of liquidation by the Duration of Conservatorship
Monetary Board to determine whether the bank Shall not exceed 1 year. (Sec. 29)
can still be rehabilitated. This period was
removed by the amendment. PDIC now takes Powers of a Conservator:
over the assets of the closed bank for purposes a. To take charge of the assets, liabilities,
of liquidation and thereafter files a petition for and the management thereof;
court assisted liquidation. (A.M. No. 19-12-02-SC b. Reorganize the management;
Rules on Liquidation of Closed Banks, February c. Collect all monies and debts due said
18, 2020) institution;
d. Exercise all powers necessary to restore
Liquidity its viability;
Ability to pay off obligations when they fall due. e. Report and be responsible to the
Monetary Board; and
An institution which fails to pay its matured f. Where necessary, overrule or revoke the
obligations or meet the normal demands of actions of the previous management and
withdrawals for deposits due to insufficient cash, board of directors of the bank or quasi-
or resorts to intermittent/staggered payments or bank. (Id.)
withdrawals may be considered as suffering from
liquidity problems. A bank conservator appointed by the BSP has no
power to unilaterally rescind contracts entered
Insolvency into by the previous management. The power to
There are two tests for insolvency: revoke cannot extend to post-facto repudiation of
a. Balance sheet test. It is where the perfected transactions otherwise they would
realizable assets of the bank is infringe against the non-impairment clause of the
insufficient to meet its liabilities Constitution. The law merely gives the
(Sec.30[b]) conservator the power to file court actions to
b. Equity test. The bank’s inability to pay its revoke contracts that are defective – void,
liabilities as they become due in the voidable, unenforceable, or rescissible.
ordinary course of business (Sec. 30[a]) (Producers Bank v. NLRC, G.R. No. 118069,
1998; First Philippine International Bank v. CA,
Either is sufficient ground to close a bank. G.R. No. 115849, 1996)
A. Conservatorship Remuneration of a Conservator
A tool in restoring the viability of a bank or quasi- General Rule: The conservator shall receive
bank through measures to address its state of remuneration in an amount not to exceed 2/3 of
illiquidity. For this purpose, the Monetary Board the salary of the president of the institution (i.e.
may appoint a conservator. (Sec. 29)
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the bank under conservatorship) in 1 year, C. Receivership

payable in 12 equal monthly payments.
The PDIC manages the affairs of the closed bank
Exception: A conservator connected with the and preserves its assets for the benefit of
BSP, in which case said conservator shall not be creditors. (New PDIC Charter, Sec. 10[a][b])
entitled to receive any remuneration or
emolument. (Sec. 29) Note: The receiver also has the duty to continue
with the liquidation; thus, PDIC as receiver is also
Note: If at any time within one-year period, the the liquidator. (Id., Sec. 4[c])
conservatorship is terminated on the ground that
the institution can operate on its own, the The appointment of a receiver operates to
conservator shall receive the balance of the suspend the authority of the bank and of its
remuneration which he would have received up to directors and officers over its property and
the end of the year; but if the conservatorship is effects. (Villanueva v. CA, G.R. No. 114870,
terminated on other grounds, the conservator 1995)
shall not be entitled to such remaining balance.
(Id.) Requisites for Placement of a Bank under
Receivership
Expenses 1. Report of the head of the supervising
The expenses attendant to the conservatorship department involving the bank;
shall be borne by the bank or quasi-bank 2. Finding of the Monetary Board of the
concerned. (Id.) existence of any of the grounds for
receivership;
Termination of Conservatorship 3. Decision of the Monetary Board to forbid
a. When the Monetary Board is satisfied the institution from doing business which
that the institution can continue to decision may be done summarily and
operate on its own and the without need of prior hearing; and
conservatorship is no longer necessary; 4. Notice in writing to the Board of Directors
b. When the Monetary Board determines informing the institution of the Order of
that the continuance in business of the the Monetary Board.
institution would involve probable loss to
its depositors or creditors, in which case, Grounds for Receivership
proceedings for receivership and When the Monetary Board finds that a bank or
liquidation shall be pursued. (Id.) quasi-bank:
a. Notified the BSP or publicly announced
B. Closure a unilateral closure; (Sec. 30[a])
b. Has been dormant for at least sixty (60)
For banks, the Monetary Board may summarily days; (Id.)
and without need for prior hearing forbid the c. Suspended the payment of its deposit or
institution from doing business in the Philippines deposit substitute liabilities continuously
and designate the PDIC as receiver. The PDIC is for more than 30 days; (GBL, Sec 53)
directed to proceed with the liquidation of the d. Is unable to pay its liabilities as they
closed bank. become due in the ordinary course of
business (“Equity test”)
The Monetary Board shall notify in writing,
through the PDIC, the board of directors of the Exception: Inability to pay caused by
closed bank of its decision. (Sec. 30) extraordinary demands induced by
financial panic in the banking community
Note: Formerly, there was a 90-day period to (bank run). (Sec. 30[a])
determine whether the bank can still be
rehabilitated. e. Has insufficient realizable assets to
meet its liabilities (“Balance Sheet
Test”); (Sec. 30[b])
f. Cannot continue business without
involving probable losses to its
depositors and creditors; (Sec. 30[c])
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g. Has willfully violated a cease-and-desist b. Involuntary Liquidation (Sec. 30)

order under NCBA, Sec. 37
(Administrative Sanctions) that has Modes of Liquidation
become final and involves acts or a. Conventional liquidation.
transactions which amount to fraud or a b. Purchase of Assets and/or Assumption of
dissipation of assets; (Sec. 30[d]) Liabilities
h. If a bank persists in conducting its
business in an unsafe or unsound Note: This shall be further discussed under the
manner. (GBL, Sec. 56) topic on PDIC.
Close Now-Hear Later Doctrine Judicial Remedy from the decision of the
Due process does not necessarily require prior Monetary Board of BSP placing a bank under
hearing; a hearing or an opportunity to be heard conservatorship, receivership, or liquidation
may be subsequent to closure. One can just
imagine the dire consequences of a prior hearing; Final and Executory. The action of the Monetary
bank runs would be the order of the day, resulting Board in placing a bank under conservatorship or
in panic and hysteria. In the process, fortunes placing it under receivership or liquidation shall
may be wiped out and disillusionment will run the be final and executory and, as a general rule, may
gamut of the entire banking community. (Rural not be restrained or set aside by the court.
Bank of Buhi, Inc. vs. CA, G.R. No. L-61689,
1988) Nature of Action
A petition for certiorari on the ground that the
The purpose is to prevent unwarranted action taken was in excess of jurisdiction or with
dissipation of the bank’s assets and as a valid such grave abuse of discretion as to amount to
exercise of the police power to protect the lack or excess of jurisdiction.
depositors, creditors, stockholders, and the
general public. (Central Bank of the Philippines v. Petitioner
CA, G.R. No. 72200, 1993) Petition is filed by the stockholders of record
representing the majority of the capital stock
D. Liquidation within ten (10) days from receipt by the board of
directors of the institution of the order directing
The recovery and conversion of assets into cash receivership, liquidation, or conservatorship.
for distribution to all creditors in accordance with (Sec. 30)
the rules on concurrence and preference of
credits. PDIC is the receiver and liquidator (AM Court of Appeals
No. 19-12-02-SC, Sec. 1 (m), Rule 2). The petition for certiorari must be filed with the
CA, not the SC, in accordance with Rule 65, since
Note: With the removal of the 90-day the Monetary Board is a quasi-judicial agency.
receivership to determine if the bank can still be (Vivas, et al. v. Monetary Board, G.R. No.
rehabilitated, a bank placed under receivership is 191424, 2013)
considered also as under liquidation.
Note: Other decisions of the Monetary Board
Types of Liquidation acting as a quasi-judicial body can be elevated to
a. Voluntary liquidation the Court of Appeals by way of a petition for
In case of the voluntary liquidation of any review under Rule 45.
bank organized under the laws of the
Philippines, or of any branch or office in Involuntary dissolution and liquidation
the Philippines of a foreign bank, written CORPORATION NCBA (MONETARY
notice of such liquidation shall be sent to CODE (SEC) BOARD, PDIC)
the Monetary Board before such Filing of Complaint
liquidation is undertaken, and the Requires filing of a Monetary Board may
Monetary Board shall have the right to verified complaint and summarily and without
intervene and take such steps as may be proper notice and need for prior hearing,
necessary to protect the interests of hearing forbid the bank from
creditors. (GBL, Sec. 68) doing business
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Prior to dissolution 8. ADMINISTRATIVE SANCTIONS ON

Requires a BIR Tax PDIC shall SUPERVISED ENTITIES
Clearance; SEC shall immediately gather
issue final order of and take charge of all The imposition of administrative sanctions shall
dissolution after its assets and be fair, consistent, and reasonable. (Sec. 37)
submission of tax liabilities
clearance Supervised entities
Authority of the corporation in the dissolution The Monetary Board may impose administrative
Corporation is allowed Bank is not given the sanctions upon: (1) its supervised entities i.e.,
to undertake its own option to undertake its those covered by BSPs supervision and
liquidation or at any own liquidation examination powers, and (2) their directors,
time during 3 years officers, or employees. (Sec. 37)
after its dissolution
(In re: Petition for Assistance in the Liquidation of Acts subject to administrative sanction
the Rural Bank of Bokod Benguet, Inc., PDIC v. a. Willful violation of its charter or by-laws;
BIR, G.R. No. 158261, 2006) b. Willful delay in the submission of reports
or publications thereof as required by
Exclusive jurisdiction of the Liquidation Court law, rules and regulations;
Liquidation court is a court where the PDIC as c. Refusal to permit examination into the
receiver files a petition for assistance in the affairs of the institution;
liquidation (judicial liquidation). d. Willful making of a false or misleading
statement to the Board or the appropriate
General Rule: In a judicial liquidation of an supervising and examining department or
insolvent bank, all claims against the bank should its examiners;
be filed in the liquidation proceeding. (In re: e. Willful failure or refusal to comply with, or
Petition for Assistance in the Liquidation of the violation of, any banking law or any order,
Rural Bank of Bokod Benguet, Inc., PDIC v. BIR, instruction or regulation issued by the
G.R. No. 158261, 2006) Monetary Board, or any order, instruction
or ruling by the Governor; or
Exceptions: f. Commission of irregularities, and/or
a. When re-filing and re-litigating the case conducting business in an unsafe or
before the liquidation court would be an unsound manner as may be determined
exercise in futility in view of the number by the Monetary Board. (Sec. 37)
of years the case has been on trial and
additional expenses to the party who is Administrative sanctions
living in poverty. (Valenzuela v. CA, G.R. Both the Monetary Board and the Governor
No. L-56168, 1988) have administrative disciplinary jurisdiction and
b. When more inconveniences would be authority to impose sanctions.
caused to the parties, entailing waste of
more money and precious time Monetary Board
(Carandang v. CA, G.R. No. L-44932, a. Fines
1988); and 1. Not to exceed P1,000,000 for each
c. When the issue is the validity of contracts transactional violation, or
upon which a claim is based. 2. P100,000 per calendar day for
violations of a continuing nature
Note: Even if the case falls within the exceptions, 3. Disgorgement. In case profit is
the claimant should still file the adjudicated claim gained or loss is avoided as a
with the liquidator or liquidation court for result of the violation, a fine no
processing of claims to determine the proper more than three (3) times the profit
concurrence and preference of credit among the gained, or loss avoided. (Sec.
different creditors of the bank. (Cudiamat v. 37(a))
Batangas Savings Bank, G.R. No. 182403, 2010)
b. Suspension of:
1. Rediscounting privileges or access
to BSP credit facilities; (Sec. 37(b))
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2. Lending or foreign exchange the commission of the prohibited practices or

operations or authority to violations. (Sec. 37)
accept new deposits or make new
investments; (Sec. 37(c)) Procedure on CDO
3. Interbank clearing privileges; This is in the nature of a reconsideration of the
and/or (Sec. 37(d)) order. The respondents shall be afforded an
4. Quasi-banking or other special opportunity to defend their action in a hearing
licenses, including its before the Monetary Board or any committee
revocation. (Sec. 37(e)) chaired by any Monetary Board member created
for the purpose, upon request made by the
Governor respondents within five (5) days from their receipt
Authorized to impose fines not in excess of of the order. Otherwise, the CDO shall become
P100,000 for each transactional violation or final. (Id.)
P30,000 per calendar day for violations of a
continuing nature. The imposition is final and Injunctions and/or restraining orders
executory until reversed, modified, or lifted by the No court, other than the Court of Appeals and the
Monetary Board on appeal. (Sec. 37) Supreme Court, shall issue any temporary
restraining order, preliminary injunction, or
Resignation or termination from office shall not preliminary mandatory injunction against the BSP
exempt such director, officer, or employee from for any action under the NCBA.
administrative or criminal sanctions. (Id.)
Any restraining order or injunction issued in
Administrative Due Process violation of this section is void and of no force and
The Monetary Board, as an administrative effect. (Sec. 38-a)
agency, is legally bound to observe due process,
although they are free from the rigidity of 9. SUPERVISION AND REGULATION OF
procedural requirements. The essence of due BANK OPERATIONS
process is to be afforded a reasonable
opportunity to be heard and to submit any A. Loans and other credit accommodations
evidence. Petitioners having availed of their
opportunity to present their position by letters- As the “lender of last resort” (LOL), the BSP is
explanation were not denied due process. authorized to extend rediscounts, discounts,
(Busuego, et al vs. CA, G.R. No. 95326, 1999) loans and advances to banking institutions
only. The purpose is limited to influencing the
Preventive suspension volume of credit consistent with the objective of
The Monetary Board has authority to issue price stability and maintenance of financial
preventive suspension orders for up to 120 days stability. (Sec. 81)
for bank officers, directors, and employees. After
the lapse of the said period, they can be Types of Credit Operations
reinstated unless delay is due to their fault.
Normal credit operations
When suspension is only preventive in nature, no a. Commercial Credits. With maturities of
notice or hearing is necessary. Until such time not more than 180 days related to:
that suspended directors have proved their 1. Importation, exportation, purchase
innocence, they may be preventively suspended or sale of readily saleable goods
from holding office so as not to influence the and products, or their
conduct of investigation, and to prevent the transportation within the
commission of further irregularities. (Busuego, et Philippines; or
al v. CA, G.R. No. 95326, 1999) 2. Storing of non-perishable goods
and products which are duly
Cease and desist order (CDO) insured and deposited in
A CDO, which is immediately executory, can be authorized bonded warehouses or
issued by the Monetary Board if the institution in other places approved by the
and/or the directors, officers or employees Monetary Board. (Sec. 82[a])
concerned continue with or otherwise persist in
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b. Production Credits. With maturities of e. Disbursed in 2 tranches:

not more than 360 days related to the 1. 1st tranche (25% of total deposits
production or processing of agricultural, secured by first class collaterals
animal, mineral, or industrial products. (government securities, secured
(Sec. 82(b)) government guarantees and other
c. Other Credit. Special credit instruments acceptable collaterals)
not otherwise re-discountable for 2. Subsequent tranches (vote of at
commercial and production credits. (Sec. least 5 members, the Monetary
82(c)) Board with indemnity undertaking
d. Advances. The BSP may grant and adequate security (Id.)
advances, not to exceed 80% of the
current market value, against the B. Selective regulation
following collaterals for fixed periods:
1. Gold coins or bullion Guiding principles of the Monetary Board
2. Securities issued by BSP and a. The supply, availability, and cost of
other recognized solvent domestic money are in accord with the needs of the
institutions; Philippine economy
3. Commercial and production credit b. Bank credit is not granted for speculative
instruments (maximum 180 days); purposes prejudicial to the national
4. Utilized portions of advances in interests, and,
overdraft commercial and c. Regulations shall be applied to all banks
production credit instruments; of the same category uniformly and
5. Government securities and without discrimination. (Sec. 104)
Negotiable bonds with maturity of
3 and 10 years, respectively. (Sec. i. Margin requirement against letters of credit
82(d))
Margin is a deposit of money made by the
Special Credit Operations purchaser or seller of goods. A lower margin
Non collateralized but with maturity not to exceed means the importer will only deposit a small
7 days and limited to the purpose of providing amount to enable him to access bank credit.
liquidity to the banking system in times of need. Higher margin means the importer will carry a
(Sec. 83) higher financing burden of the importation.
Emergency Credit Operations The Monetary Board may at any time prescribe
This is granted only to banks under the following minimum cash margins (as a percentage) for the
circumstances: opening of letters of credit and may relate the size
a. In periods of national and/or local of the required margin to the nature of the
emergency or of imminent financial panic transaction to be financed. (Sec. 105)
– when these directly threaten monetary
and financial stability; and ii. Required security against bank loans
b. During normal periods - To assist a bank
in a precarious financial condition or To promote liquidity and solvency of the banking
under serious financial pressures brought system, BSP may issue regulations on the
by unforeseen events, or events which, following:
though foreseeable, could not be a. Maximum permissible maturities of loans
prevented by the bank concerned. (Sec. and investments (short, medium, or long
84) term, but BSP issuances are guidelines,
not fixed limits).
Subject to compliance with the following b. Kind and amount of security (real estate,
conditions: chattels, intangibles) to be required
a. Bank is not insolvent against the various credit operations of
b. Secured by first class or acceptable banks. (Sec. 106)
collaterals
c. Limited to equivalent of 50% of deposits
d. Upon an affirmative vote of at least five
(5) Monetary Board members, and
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iii. Portfolio ceilings B. LAWS ON SECRECY OF BANK

DEPOSITS
To prevent or check an expansion of bank credit
(to prevent excessive credit risks concentration 1. PURPOSE
and diversify risks), an upper limit may be placed
on the following: R.A. No. 1405 (Bank Secrecy Law) covers
a. Amount of loans and investments which deposits in Peso while R.A. No. 6426 (Foreign
the banks may hold; or Currency Deposits Act) covers deposits in foreign
b. Rate of increase of such assets within currency. Its purpose is as follows:
specified periods of time. (Sec. 107) a. To give encouragement to the people to
deposit their money in banking
Note: Uniform application to all banks or specific institutions; and
categories without discrimination (NCBA, Sec. b. To discourage private hoarding so that
85, 84,96, 104 and 107). There is no retroactivity the same may be properly utilized by
– it can only be applied on the date of notification. banks in authorized loans to assist the
(Id.) economic development of the country.
(RA 1405, Sec. 1)
iv. Minimum capital ratios
State Policy
Monetary Board may (1) prescribe minimum risk- It is hereby declared the policy of the state to
based capital adequacy ratios based on protect and preserve the integrity and
internationally accepted standards and may alter confidentiality of bank accounts. (AMLA, Sec. 2)
said ratios whenever it deems necessary, and (2)
may require banks to hold capital beyond the Construction of confidentiality
minimum requirements commensurate to their If there are doubts in upholding the absolutely
risk profile. (Sec. 108) confidential nature of bank deposits against
affirming the authority to inquire into such
10. RATE OF EXCHANGE accounts, such doubt must be resolved in favor of
confidentiality. (Republic v. Eugenio, G.R. No.
Exchange rate. It is the price of a unit of foreign 174629, 2008)
exchange in terms of domestic currency (e.g., 1
US$ = Php 53).
2. PROHIBITED ACTS
The Monetary Board shall determine the
Peso Deposits
exchange rate policy of the country. (Sec. 74).
All deposits of whatever nature with the banks in
The present policy is a floating rate system, which
the Philippines, including investments in the
is market driven.
government bonds are considered absolutely
confidential and may not be examined, inquired,
or looked into by any person except as allowed
by law. (RA 1405, Sec. 2)
The following are liable under RA No. 1405:

a. Any person or government official who
examines, inquires, or looks into bank
deposits or government bond
investments in any instance not allowed
by law.
b. Any official or employee of the banking
institution who makes a disclosure
concerning bank deposits to another in
any instance not allowed by law (Id., Sec.
3); and
c. Any person who commits a violation of
any provision of this law. (Id., Sec. 5)
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Foreign Currency Deposits Note: Other funds or properties in the bank which
All foreign currency deposits are absolutely are not in the nature of deposits are still
confidential and cannot be examined, inquired, or confidential. No director, officer, employee, or
looked into by any person, government official, agent of any bank shall, without order of a court
bureau, or office, whether judicial or of competent jurisdiction, disclose to any
administrative or legislative, or any other private unauthorized person any information relative to
or public entity. (RA No. 6426, Sec. 8) the funds or properties in the custody of the bank
belonging to private individuals, corporations, or
The following are liable under RA No. 6426: any other entities. (GBL, Sec. 55(1)(b))
a. Any person or government official who
examines, inquires, or looks into foreign 4. EXCEPTIONS
currency deposits without written
permission of the depositor. (Id., Sec. 8) Grounds to allow examination of a bank
b. Anyone who shall attach, garnish, or account under Section 2 of RA No. 1405:
subject the foreign currency deposit to a. Where the depositor consents in
any other order or process of any court, writing.
legislative body, or other administrative
body. (Id.) Note: A waiver of rights (RA 1405) must
c. Any official or employee of the banking be voluntary, knowingly, intelligently, and
institution who makes a disclosure with sufficient awareness of the relevant
concerning bank deposits to another in circumstances and likely consequences.
any instance not allowed by law. (Id., There must be evidence to show an
Sec. 10) actual intention to relinquish the right.
d. Any person who commits a violation of Mere silence on the part of the holder of
any provision of this law as well as the right should not be construed as a
regulation of the Monetary Board surrender thereof. (Doña Adela Export
pursuant to this law. (Id.) International, Inc. v. TIDCORP, G.R. No.
201931, 2015)
3. DEPOSITS COVERED
Examples of waiver: Waiver in case of
Peso Deposits. All (peso) deposits of whatever DOSRI loans (NCBA, Sec. 26) and
nature with banks or banking institutions in the waiver of a taxpayer in case of
Philippines including trust accounts. (Ejercito v. compromise of tax liability. (Tax Code,
Sandiganbayan, G.R. No. 157294-95, 2006) Sec. 6[f])
Deposits refer to money or funds placed in a b. Impeachment Cases. It is necessary

bank which can be withdrawn on depositor’s that there be an order issued by the
order or demand. It is characterized as being in impeachment court or by its authorized
the nature of a simple loan and creates a creditor- officer to allow examination.
debtor relationship between the depositor and the
bank. (NCC, Art. 1980) While trust funds are It is limited to Peso deposits, as it is not
different, by jurisprudence, this is included in the an exemption to the absolute
broad category of deposits under RA 1405. confidentiality of foreign currency
deposits under RA 6426. (Philippine
Investment in bonds issued by the Government Savings Bank v. Senate, G.R. No.
of the Philippines, its political subdivisions, and its 200238, 2012)
instrumentalities. (RA 1405, Sec. 2)
c. By Court Order in cases of;
Foreign currency deposits (RA No. 6426) and 1. Bribery
deposits in offshore banking units (PD No. 1246, 2. Dereliction of duty of public
Sec. 8) are considered as absolutely confidential. officials
RA No. 6426 only provided for written permission
of the depositor as an exception. However, other d. Money invested or deposited is
exceptions evolved by jurisprudence and subject of litigation (RA 1405 – An Act
statutes. Prohibiting Disclosure of or Inquiry into
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Deposits with any Banking Institution, 3. A taxpayer, information on whose

Sec. 2). account is requested by a foreign
tax authority. (NIRC, Sec. 6(f))
Fishing for information as to the amount of
damages it can recover does not fall within the c. Unclaimed balances. Disclosure to the
exception. Since the subject matter of the dispute Treasurer of the Philippines for dormant
is not the money deposited in the drawer's deposits for at least 10 years. (Act 3936,
account, it does not, by itself, warrant the Sec. 2)
examination of the bank deposits. (Union Bank
vs. CA, GR No. 134699, 1999) d. BSP periodic or special examination.
To ensure compliance of the covered
The subject matter of the action is to be institution with the Anti Money
determined from the indictment that charges Laundering Act. (NCBA, Sec. 25; RA
respondent with the offense, and not from the 9160 – Anti-Money Laundering Act
evidence sought. The information charges (AMLA), Sec. 11)
qualified theft. There was no mention of the
supposed bank account in which the funds Annual testing solely limited to the
represented by the checks have allegedly been determination of the existence and true
kept to allow testimony on the bank account. identity of the owners of the accounts.
(BSB Group vs. Go, GR No. 168644, 2010) (AMLA, Sec. 9[a])
e. Human Security Act (RA 9372). After

Inquiry into the whereabouts of the amount
determining existence of probable cause,
converted necessarily extends to whatever is
concealed (being in the name of persons other the Court of Appeals may authorize
than the one responsible for the illegal examination of and gathering of
information on deposits, placements,
acquisition) inasmuch as the case is aimed at
recovering the amount converted. (Mellon Bank trust accounts, assets, and records in a
v. Magsino, G.R. No. 71479, 1990) bank or financial institution; (RA 9372,
Sec. 27) of the following:
1. A person charged with or
Additional exceptions to the Secrecy of Bank suspected of the crime of terrorism
Deposits Act or conspiracy to commit terrorism;
a. Violations of Anti-Graft and Corrupt 2. Any judicially declared and
Practices Act. Section 8 of RA 3019 outlawed terrorist organizations,
directs that bank deposits shall be taken associations, or group of persons;
into consideration in its enforcement, or
notwithstanding any provision of the law 3. Any member of such organization,
to the contrary. (PNB v. Gancayco, GR. association, or group of persons in
No. L-18343, 1965) a bank or financial institution and
the gathering of any relevant
The Courts are authorized to examine information about the same from
bank deposits of spouses and unmarried said bank or financial institution.
children of government officials found to (RA 9372, Sec. 28)
have unexplained wealth under RA 3019
– Anti-Graft and Corrupt Practices Act. f. Anti-Money Laundering Act (AMLA).
(RA 3019, Sec. 8) Upon order of a competent court in cases
of violation of the AMLA where there is
b. Commissioner of Internal Revenue probable cause of money laundering,
(CIR). The CIR can inquire into the bank except that no court order is required in
accounts of the following taxpayers: cases of:
1. A decedent to determine his gross 1. Kidnapping for ransom
estate; 2. Drug trafficking
2. Any taxpayer who has filed an 3. Hijacking, destructive arson, and
application for compromise of his murder including those
tax liability on the ground of perpetrated by terrorists against
financial incapacity; and
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non-combatants and similar and their subsidiaries and affiliates

targets. (AMLA, Sec. 11) concerning:
1. Any property or funds that are in
g. Plunder. Sec. 1(d) and 4 of the Plunder any way related to financing of
Law (RA 7080). terrorism or acts of terrorism; or
2. Any property or funds of any
Plunder (RA 7080, Sec. 2), which is person or persons in relation to
amassing or accumulating ill-gotten whom there is probable cause to
wealth by series of overt or criminal acts, believe that such person or
is also analogous to bribery. Therefore, persons are committing or
the exception to R.A. 1405 applicable in attempting or conspiring to commit
cases of bribery must also apply to cases or participating in or facilitating the
of plunder. (Ejercito v. Sandiganbayan, financing of terrorism or acts of
G.R. Nos. 157294-95, 2006) terrorism. (RA 10168, Sec. 10)
h. Unsafe and unsound banking k. Bank Resolution. When there is a failure

practices. BSP and PDIC may inquire of Prompt Corrective Action as declared
into bank deposits (both Peso and by the Monetary Board due to capital
Foreign Currency Deposits) and all deficiency, the PDIC or its duly
information related thereto if there is a authorized officers or employers may
finding of unsafe or unsound banking examine, inquire, or look at the deposit
practice. (New PDIC Charter, Sec. 9) records of the bank. (New PDIC Charter,
Sec. 11[c])
i. In-Camera Inspection. The
Ombudsman is granted the express The information cannot be shared by
powers to examine and have access to PDIC to other persons, including the
bank accounts and records. (RA 6770 – BSP.
Ombudsman Act, Sec. 15)
l. Presidential Commission on Good
Requisites: Governance (PCGG). Investigation by
1. Pending case before a court of the PCGG to recover ill-gotten wealth
competent jurisdiction; (EO 1, Sec. 3[e])
2. Account must be clearly identified;
3. The inspection is limited to the m. Commission on Audit (COA). Audit on
subject matter of the pending case; government deposits by the COA. (1987
4. The bank personnel and the Constitution, Art. IX (D), Sec. 2[1])
account holder must be notified to
be present during the inspection, Grounds for Disclosure of Foreign Currency
and such inspection may cover Deposits.
only the account identified in the a. Upon written permission of depositor
pending case. (Marquez v. b. Under Other Laws (as discussed)
Desierto, G.R. 135882, 2001) 1. CIR. (NIRC, Sec. 6[f])
2. AMLC – with our without a court
Note: An investigation by the Office of the order under the AMLA and
Ombudsman is not a pending litigation to Terrorism Financing Prevention
allow examination of a bank account. and Suppression Act. (AMLA,
(Marquez v. Desierto, G.R. No. 135882, Sec. 11; RA 10168, Sec. 10)
2001) 3. BSP in limited examination to
ensure compliance of supervised
j. Terrorism Financing Prevention and institutions to AMLA. (AMLA,
Suppression Act (RA 10168). The Anti- Sec. 11)
Money Laundering Council (AMLC), 4. PDIC in banking resolution when
without a court order, is authorized to there is failure of PCA. (New
inquire into or examine bank deposits PDIC Charter, Sec. 11[c])
and investments with any banking
institution or non-bank financial institution
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5. BSP and PDIC when there is a 6. PENALTIES FOR VIOLATION

finding of unsafe or unsound
banking practice. (Id., Sec. 8) Bank Secrecy Law
6. COA and PCGG. (1987 Imprisonment of not more than five (5) years, or
Constitution, Art. IX (D), Sec. a fine of not more than twenty thousand pesos
2(1); EO 1, Sec. 3[e]) (Php 20,000), or both, at the discretion of the
court. (RA 1405, Sec. 5)
c. Jurisprudence (equity). The following
exceptions are provided on grounds of Foreign Currency Deposits Act
equity. Imprisonment of not less than one (1) year but not
1. Account of non-resident alien more than five (5) years, or fine not less than five
found guilty of raping a minor thousand pesos (Php 5000) but not more than
was allowed on the basis of twenty five thousand pesos (Php 20,000.) or both.
equity. (Salvacion v. Central (RA 6426, Sec. 10)
Bank of the Philippines, G.R.
94723, 1997)
2. A co-payee of a check who filed
a suit for recovery of a sum of
money was considered as a
depositor because of the
distinctive circumstances of the
case. (China Banking
Corporation v. Court of Appeals,
G.R. 14068, 2006)
5. GARNISHMENT OF DEPOSITS,
INCLUDING FOREIGN DEPOSITS
Peso deposits
RA 1405 does not preclude deposits from being
garnished to ensure satisfaction of a judgment.
There is no real inquiry in such a case, and if the
existence of the deposit is disclosed, the
disclosure is purely incidental to the execution
process. (China Bank v. Ortega, G.R. L-34964,
1973)
Foreign currency deposits

Anyone who shall attach, garnish, or subject this
to order or process of any court, legislative body,
government agency or other administrative body
shall be held liable. (RA 6426, Sec. 8)
Note: Jurisprudence created 2 exceptions on

ground of equity as discussed earlier.
Note: Deposits maintained by banks with the

BSP as part of their reserve requirements shall be
exempt from attachment, garnishments, or any
other order or process of any court, government
agency, or any other administrative body issued
to satisfy the claim of a party other than the
Government, or its political subdivisions, or
instrumentalities. (NCBA, Sec. 103)
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C. GENERAL BANKING ACT b. Discounting and negotiating promissory

notes, drafts, bills of exchange, and other
1. DEFINITION AND CLASSIFICATION OF evidence of debt;
BANKS c. Accepting or creating demand deposits;
d. Receiving other types of deposits and
Banks deposit substitutes;
Entities engaged in the lending of funds obtained e. Buying and selling foreign exchange and
in the form of deposits. (GBL, Sec. 3.1) gold or silver bullion;
f. Acquiring marketable bonds and other
Note: Banks have a primary franchise from the debt securities; and
Securities and Exchange Commission (SEC) and g. Extending credit, subject to such rules as
a secondary banking franchise from the BSP. Its the Monetary Board may promulgate.
corporate powers are exercised within its banking (Sec. 29)
license.
Unlike Universal Banks, Commercial Banks can
Elements invest only in allied enterprises (bank-related
a. Engaged in lending of funds activities), which may be financial or non-
b. Obtained in the form of deposits financial. (Secs. 30, 31, and 32)
c. From the public, which shall mean 20 or
more persons Thrift Banks
They are organized for the purpose of, among
How Banks are Structured other things, accumulating savings of depositors
General Rule: Banks are corporations. (Sec. and investing them with capital loans, financing
8[a]) However, cooperative banks may also be homebuilding, providing short term capital,
formed under the Cooperative Code, but it has to medium and long term financing for small and
secure a secondary franchise from the BSP to medium enterprises and individuals engaged in
engage in banking. (RA 9520, Sec. 23[i]) agriculture, services, industry and housing. (RA
7906 - Thrift Banks Act, Sec. 3[a][1])
Classification of Banks
They include savings and mortgage banks,
Universal Banks private development banks, and stock savings
In addition to the powers authorized for a and loans associations organized under existing
commercial bank in Section 29, they shall have laws. (Id.)
the authority to exercise the powers of an
investment house as provided in existing laws Rural Banks
and the power to invest in non-allied enterprises Banks which are designed to make needed credit
as provided in this Act. (Sec. 23) available and readily accessible in the rural areas
on reasonable terms. (RA No. 7353 - Rural Act,
Investment House Sec. 2)
It is an intermediary between security issuers and
investors. It engages in underwriting of securities, Cooperative Banks
among other things. (PD 129, Sec. 2) Once organized, the majority shares of which is
owned and controlled by cooperatives, primarily
Non-allied enterprises to provide financial and credit services to
They are non-bank related activities (e.g., cooperatives and their members. (RA 9520 –
agriculture, mining, manufacturing, public utilities, Philippine Cooperative Code, Art. 2)
etc.). (MORB – Manual of Regulations for Banks,
Appendix 19) Islamic Banks
Created by Congress to promote and accelerate
Commercial Banks socio-economic development of the Autonomous
They shall have, in addition to the general powers Region by performing banking, financing, and
incident to corporations: investment operations and to establish and
a. All such powers as may be necessary to participate in agricultural, commercial, and
carry on the business of commercial industrial ventures based on the Islamic concept
banking such as accepting drafts and of banking. (RA 6848 – Charter of the Al-Amanah
issuing letters of credit;
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Islamic Investment Bank of the Philippines, Sec. for the borrower's own account, for the purpose
3) of relending or purchasing of receivables and
other obligations. (NCBA, Sec. 95)
Islamic banking is based on the Islamic concept
of banking: risk sharing rather than speculation. The phrase “obtaining funds from the public”
Essentially, this is based on basic principles and shall mean borrowing from twenty (20) or more
rulings of Sharia, or Islamic law. interest (riba) is lenders at any one time. (Id.)
prohibited. (RA 11439 – An Act Providing for the
Regulation and Organization of Islamic Banks, For this purpose, “lenders” shall refer to
Sec. 2[a][4]) individuals and corporate entities that are not
acting as financial intermediaries, subject to
Note: There are two existing laws on Islamic the safeguards and regulations issued by the
Banks, (1) RA No. 6848, and (2) R.A. No. 11439. Monetary Board. (Id.)
The latter law is a legal framework which allows
the creation of Islamic banks in the Philippines. Note: The definition of deposit substitutes in the
banking laws was brought about by an
Foreign Banks observation that banks and non-bank financial
A foreign bank is a banking corporation formed, intermediaries have increasingly resorted to
organized or existing under any law other than issuing a variety of debt instruments, other than
those of the Republic of the Philippines. (RA bank deposits, to obtain funds from the public.
11232 – Revised Corporation Code, Sec. 140) (BDO v. RCBC, G.R. No. 198756, 2016)
Foreign banks are allowed to enter the Philippine Under the NIRC, deposit substitutes include not
banking system under any of the following only the issuances and sales of banks and quasi-
modes: banks for relending or purchasing receivables
a. Acquiring, purchasing, or owning up to and other similar obligations, but also debt
100% of the voting stock of an existing instruments issued by commercial, industrial, and
bank; other non-financial companies to finance their
b. Investing in up to 100% of the voting own needs or the needs of their agents or
stock of a new banking subsidiary dealers. (Id.)
incorporated under the laws of the To determine whether the financial assets are
Philippines; or deposit substitutes, the “20 or more individual or
c. Establishing branches with full banking corporate lenders” rule must apply. (Id.)
authority. (RA 10641 – An Act Allowing
the Full Entry of Foreign Banks in the When the Government Securities Eligible Dealer
Philippines, Sec. 2) (GSED) sells the government securities to 20 or
more investors, the government securities are
Other Classification of Banks as determined deemed to be in the nature of a deposit substitute.
by the Monetary Board (Sec. 3) (BDO v. Republic, G.R. No. 198756, 2016)
2. DISTINCTION OF BANKS FROM QUASI- Trust Entities

BANKS AND TRUST ENTITIES A stock corporation, or a person duly authorized
by the Monetary Board to engage in trust
Quasi-Banks business, and act as a trustee, administer any
Refer to entities engaged in the borrowing of trust or hold property in trust or on deposit, for
funds through the issuance, endorsement, or use, benefit or behoof of another (GBL. Sec. 79)
assignment with recourse or acceptance of
deposit substitutes as defined in NCBA, Sec. 95 Bank, Quasi-Bank, and Trust Entity
for purposes of relending or purchasing of BANK QUASI-BANK TRUST
receivables and other receivables. (Sec. 4[3]) ENTITY
Entities Entities Entities
Deposit Substitutes engaged in engaged in the engaged in
An alternative form of obtaining funds from the the lending of borrowing of trust,
public, other than deposits, through the issuance, funds funds through investment
endorsement, or acceptance of debt instruments obtained in the issuance or management,
acceptance of and fiduciary
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the form of deposit business in aid of any political party or candidate or

deposits. substitutes for methodology. for purposes of partisan political activity;
the purpose of j. To establish pension, retirement, and
relending or other plans for the benefit of its directors,
purchasing trustees, officers, and employees; and
receivables or k. To exercise such other powers as may be
other essential or necessary to carry out its
obligations. purpose or purposes as stated in the
articles of incorporation. (RA 11232, Sec.
3. BANK POWERS AND LIABILITIES 35)
B. Banking and incidental powers

A. Corporate powers
Operations and activities of banks shall be
As banks are required to organize as stock
subject to BSP supervision, which shall include:
corporations, they shall have the powers
a. Issuance of rules of conduct or the
enumerated under Sec. 35 of the Revised
establishment of standards of operation
Corporation Code:
for uniform application to all institutions or
a. To sue and be sued in its corporate
functions covered;
name;
b. Conduct of examination to determine
b. To have perpetual existence unless the
compliance with laws and regulations;
certificate of incorporation provides
c. Oversee compliance with laws and
otherwise;
regulations;
c. To adopt and use a corporate seal;
d. Regular investigation (not oftener than
d. To amend its articles of incorporation in
once a year) to determine whether it is
accordance with the provisions of this
conducting its business on safe or sound
Code;
basis;
e. To adopt by-laws, not contrary to law,
e. Inquire into solvency and liquidity of the
morals, or public policy, and to amend or
institution; or
repeal the same in accordance with this
f. Enforce prompt corrective action. (Sec.
Code;
4)
f. In case of stock corporations, to issue or
sell sticks to subscribers and to sell
Examination by BSP
treasury stocks in accordance with the
When examining a bank, BSP shall have the
provisions of this Code; and to admit
authority to examine an enterprise that is wholly
members to the corporation if it be a non-
or majority-owned or controlled by the bank. (Sec.
stock corporation;
7)
g. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage
BSP Authority Over Quasi-Banks and Trust
and otherwise deal with such real and
Entities
personal property, including securities
The BSP shall also have supervision over the
and bonds of other corporations, as the
operations of and exercise regulatory powers
transaction of the lawful business of the
over quasi-banks, trust entities and other financial
corporation may reasonably and
institutions which under special laws are subject
necessarily require, subject to the
to BSP supervision. (Sec. 4)
limitations prescribed by law and the
Constitution;
BSP Powers Policy Direction; Ratios,
h. To enter into partnership, joint venture,
Ceilings, and Limitations
merger, consolidation, or any other
The BSP shall provide policy direction in the
commercial agreement with natural and
areas of money, banking, and credit. Thus, the
juridical persons;
Monetary Board may do the following:
i. To make reasonable donations, including
a. Prescribe ratios, ceilings, limitations, or
those for the public welfare or for hospital,
other forms of regulation on the different
charitable, cultural, scientific, civic, or
types of accounts and practices of banks
similar purposes: Provided, That no
and quasi-banks which shall, to the
foreign corporation shall give donations
extent feasible, conform to internationally
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accepted standards, including those of 5. NATURE OF BANK FUNDS AND BANK

the BIS; and DEPOSITS
b. Exempt particular categories of
transactions from such ratios, ceilings By the nature of its business, banks derive its
and limitations, but not limited to funds principally from its deposit taking or quasi-
exceptional cases or to enable a bank or banking operations. It also gets funds from the
quasi-bank under rehabilitation or during public when it acts as a trust entity under Chapter
a merger or consolidation to continue in IX of the GBL.
business with safety to its creditors,
depositors and the general public. (Sec. Nature of Bank Funds
5) The bank can make use as its own, the money
deposited. (Tan Tiong Tick v. American
4. DILIGENCE REQUIRED OF BANKS IN Apothecaries, G.R. No. L-43682, 1938)
VIEW OF FIDUCIARY NATURE OF
BANKING Nature of Bank Deposits
Bank deposits are in the nature of irregular
Highest Degree of Diligence deposits. Fixed, savings, and current deposits of
The fiduciary nature of banking requires high money in banks and similar institutions shall be
standards of integrity and performance. (Sec. 2) governed by the provisions concerning simple
loans. (NCC, Art. 1980)
Fiduciary relationship
The bank’s obligation to observe high standards The fiduciary relationship does not "convert the
of integrity and performance is deemed written contract between the bank and its depositors
into every deposit agreement between a bank from a simple loan to a trust agreement, whether
and its depositor. (Philippine Banking Corp. v. express or implied." It simply means that the bank
CA, G.R. No. 127469, 2004) is obliged to observe "high standards of integrity
and performance" in complying with its
Banking is vested with public interest obligations under the contract of simple loan.
As a business affected with public interest and (Goyanko, Jr. v. UCPB, G.R. No. 179096, 2013)
because of the nature of its functions, the bank is
under obligation to treat the accounts of its Bank Deposit as a simple loan
depositors with meticulous care, always having in Bank acquires ownership of money deposited;
mind the fiduciary nature of their relationship. obligation to pay the amount, but no obligation to
(Simex International (Manila) Inc. v CA, G.R. No. return the same money. (Guingona, Jr. v. City
88013, 1990) Fiscal of Manila, G.R. No. L-60033, 1984)
Banks are expected to exercise the highest Payment to proper party-depositor (Fultron Iron
degree of diligence in the selection and Works Co. v. China Banking Corp., G.R. No.
supervision of their employees. By the very 32576, 1930)
nature of their work, the degree of responsibility,
care and trustworthiness expected of their Deposits are not preferred credits. (Central Bank
employees and officials is far greater than those v. Morfe, G.R. No. L-38427, 1975)
of ordinary clerks and employees. (Philippine
Commercial and International Bank v. CA, G.R. Bank has the right to set-off or compensation.
No. 121413, 2001) (Gullas v. Philippine National Bank, G.R. No.
4391, 1935)
Banking business is impressed with public
interest, of paramount importance thereto is the Kinds of Deposits
trust and confidence of the public in general, the a. Savings Deposits. They are interest
highest degree of diligence is expected, and high bearing deposits without a stated
standards of integrity and performance are even maturity.
required of it. (Bank of the Philippine Islands v. b. Negotiable Order of Withdrawal
Casa Montessori Internationale, G.R. No. (NOW). They are interest bearing deposit
149454, 2004) accounts that combine the payable on
demand feature and investment feature
of savings accounts.
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c. Time Deposits. They are issued for a

specific period of time (Sec. 216, MORB), In the exercise of this authority, the Monetary
and generally cannot legally be Board shall, to the extent feasible, conform to
withdrawn before maturity or within a internationally accepted standards, including
specified number of days. (BPI Family those of the Bank for International Settlements
Savings v. First Metro Investment, G.R. (BIS). (Sec. 34)
132390, 2004)
d. Demand Deposits. They are those B. Single borrower’s limit (SBL)
liabilities of the BSP and of other banks,
which are denominated in Philippine General Rule: The total amount of loans, credit
currency and are subject to payment in accommodations and guarantees that may be
legal tender upon demand by the extended by a bank to any person, partnership,
presentation of checks. Only banks duly association, corporation, or other entity shall not
authorized by the BSP may issue exceed 20% of the net worth of such bank. The
demand deposits. (NCBA, Sec. 59) basis for determining compliance with single
borrower limit is the total credit commitment of
Checks representing demand deposits do not the bank to the borrower. (Sec. 35.1)
have legal tender power and their acceptance in
the payment of debts, both public and private, is Exception: The SBL may be increased by an
at the option of the creditor. However, a check additional 10% of Net Worth of such bank
which has been cleared and credited to the provided the additional liabilities of any borrower
account of the creditor shall be equivalent to a are adequately secured by trust receipts,
delivery to the creditor of cash in an amount equal shipping documents, warehouse receipts, or
to the amount credited to his account. (NCBA, other similar documents transferring or securing
Sec. 60) title covering readily marketable, non-perishable
goods which must be fully covered by insurance.
6. GRANT OF LOANS AND SECURITY It shall include:
a. Direct liability of the maker or acceptor of
REQUIREMENTS
paper discounted with or sold to such
bank and the liability of a general
A. Ratio of net worth to total risk assets
endorser, drawer or guarantor who
obtains a loan or other credit
The Monetary Board shall prescribe the minimum
accommodation from or discounts paper
ratio which the net worth of a bank and its
with or sells papers to such bank;
subsidiaries must bear to its total risk assets
b. In the case of an individual who owns or
which may include contingent accounts. (Sec. 34)
controls a majority interest in a
corporation, partnership, association or
Risk-based Capital
any other entity, the liabilities of said
It is expressed as the percentage of qualifying
entities to such bank;
capital to risk-weighted assets.
c. In the case of a corporation, all liabilities
to such bank of all subsidiaries in which
Risk-weighted Assets
such corporation owns or controls a
These are assets of the bank weighted according
majority interest; and
to risks (e.g., cash is zero risk, while non-
d. In the case of a partnership, association,
performing loan is given a risk of 120%).
or other entity, the liabilities of the
members thereof to such bank. (Sec.
Capital
35.2)
----------- = Ratio (CAR)
Assets
Note: The Monetary Board has set the SBL at
25% (Sec. 303, MORB, but temporarily increased
Note: The existing Capital Adequacy Ratio (CAR)
to 30% for 6 months effective March 2020) of the
requirement is 10%. It is an indicator of a bank’s
net worth.
ability to absorb a reasonable amount of loss. The
minimum CAR requirement is a means to protect
bank’s depositors and promote stability in the
banking system at the same time.
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Exclusion from computation – non risk assets use the assets of the bank for their benefit. (Go v.
For purposes of SBL coverage, loans, and other BSP, G.R. No. 178429, 2009)
credit accommodations and guarantees shall
exclude those which are: General Prohibition: No director or officer of
a. Secured by obligations of the BSP or any bank shall, directly or indirectly, for himself
Philippine Government; or as the representative or agent of others:
b. Fully guaranteed by the Government as a. Borrow from such bank;
to the payment of principal and interest; b. Become a guarantor, endorser, or surety
c. Covered by assignment of deposits for loans from such bank to others; or
maintained in the lending bank and held c. Be an obligor or incur any contractual
in the Philippines; liability to the bank. (Sec. 36)
d. Under letters of credit, to the extent
covered by margin deposits; A stockholder to fall under this provision should
e. Those which the Monetary Board may, own at least 1% of the subscribed capital of the
from time to time, specify as non-risk bank. (MORB, Sec. 341[c])
items. (Sec. 35.5.)
An indirect borrowing includes one that is made
Inclusion of Parent Corporation by a third party, but the DOSRI has a stake in the
Even if a parent corporation, partnership, transaction; a case where the DOSRI acted for
association, entity, or an individual who owns or his own benefit, using the name of an
controls a majority interest in such entities has no unsuspecting person and using dummies to
liability to the bank, the Monetary Board may circumvent the requirements of the law. (Soriano
prescribe the combination of the liabilities of v. BSP, G.R. No. 162336, 2010)
subsidiary corporations or members of the
partnership, association, entity or such individual Related Interest is considered as indirect
under certain circumstances, including but not borrowing or the Directors, Officers and
limited to any of the following situations: Stockholders.
a. Parent corporation, partnership, a. Spouse or relative within the first degree
association, entity, or individual (including adoption)
guarantees the repayment of the b. Partnership where the spouse or relative
liabilities; is a general partner
b. Liabilities were incurred for the c. Co-ownership of the property mortgaged
accommodation of the parent corporation to secure the loan or other credit
or another subsidiary or of the accommodations
partnership, association, or entity or such d. Interlocking directorship or officership
individual; or between the bank and the borrower
c. Subsidiaries though separate entities e. Corporation at least 20% of the capital
operate merely as departments or stock or equity is owned by DOS of the
divisions of a single entity. (Sec. 35.4) lending bank. (MORB, Sec. 341[e])
C. Restrictions on bank exposure to Exception: The director or officer may do so,

directors, officers, stockholders, and their provided the following requirements are complied
related interests with:
a. Written approval of the majority of all the
Principles directors of the bank, excluding the
The Monetary Board is granted the authority to director borrowing and recorded in the
regulate the amount of loans and credit books of the bank. (Sec. 36)
accommodations extended to DOSRI. (Sec. 36) b. The reportorial requirement where
such approval should be entered upon
The prohibition on DOSRI loans is intended as a the records of the corporation, and a copy
protection against over-borrowing of bank funds of the entry be transmitted to the
by bank’s DOSRI, as such over-borrowings may appropriate supervising department of
lead to bank failures. (Soriano v. BSP, G.R. No. the BSP. (Id.; Go v. BSP, GR No.
162336, 2010) Banks are not created for the 178429, 2009)
benefit of their directors and officers, they cannot c. Ceiling requirement. The limit on the
amount of loans and credit
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accommodations that can be extended to The violation consists in the failure to observe and
the bank’s DOSRI is equivalent to their comply with procedural, reportorial, or ceiling
respective unencumbered deposits and requirements prescribed by law in the grant of a
book value of their paid-in capital loan to a director, officer, stockholder and other
contribution in the bank, excluding the related interests in the bank. The elements of
following: abuse of confidence, deceit, fraud or false
1. Secured by assets considered as pretenses, and damage, which are essential to
non-risk by the Monetary Board; the prosecution for estafa, are not elements of a
2. In the form of fringe benefits; or DOSRI violation. (Soriano vs BSP, G.R. Nos.
3. Extended by a cooperative bank to 159517-18, 2009)
its cooperative shareholders. (Id.)
Thus, a person be held liable both for estafa
d. Terms. Not less favorable to the bank through falsification of commercial documents
than those offered to others. (Id.) and violation of Sec. 83 of the GBL (DOSRI) for a
e. Waiver of Secrecy. DOSRI loans are single transaction.
also subject to the waiver of secrecy of
bank deposits. (NCBA, Sec. 26) Administrative: removal. After due notice to the
board of directors of the bank, the office of any
Requisites of a DOSRI loan: bank director or officer who violates the
a. Borrower is a director, officer or provisions of this Section may be declared
stockholder of a bank; vacant.
b. He contracts any loan or financial
accommodation; D. Prohibited acts of borrowers
c. Loan or financial accommodation is from:
1. his bank or No borrower of a bank shall engage in these
2. a bank that is a subsidiary of a prohibited transactions:
bank holding company of which a. Fraudulently overvalue property offered
both his bank and the lending bank as security for a loan or other credit
are subsidiaries or accommodation from the bank;
3. a bank in which a controlling b. Furnish false, make misrepresentation,
proportion of the shares is owned or suppress material facts in the loan
by the same interest that owns a application for the purpose of obtaining,
controlling proportion of the shares renewing, or increasing a loan or other
of his bank; and credit accommodation or extending its
d. The loan or financial accommodation of period;
the director, officer or stockholder, singly c. Attempt to defraud the bank in the event
or with that of his related interest, is in of a court action to recover a loan or other
excess of 5% of the capital and surplus of credit accommodation; or
the lending bank or in the maximum d. Offer any director, officer, employee, or
amount permitted by law (Sec. 36), agent of a bank any gift, fee, commission,
whichever is lower. or any other form of compensation in
order to influence them in approving a
Waiver of Secrecy of Bank Deposits loan or other credit accommodation.
If the loan is a DOSRI loan, the lending bank shall (Sec. 55.2
require the director, officer, or stockholder to
waive the secrecy or confidentiality of his E. Floating interest rates and escalation
deposits of whatever nature in all banks in the clauses
Philippines (NCBA, Sec. 26)
Floating Rate of Interest
Offenses While it may be acceptable, for practical reasons
Criminal. Failure to comply with each given the fluctuating economic conditions, for
requirement is already a violation of DOSRI Rules banks to stipulate that interest rates on a loan not
(prosecution of 3 offenses), and violation of each be fixed and instead be made dependent upon
requirement is an offense in itself. (Go v. BSP, prevailing market conditions, there should always
GR No. 178429, 2009) be a reference rate upon which to peg such
variable interest rates. (Consolidated Bank and
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Trust Corporation (Solid Bank) v. CA, G.R. No. False statement

114286, 2001) The willful making of a false or misleading
statement on a material fact to the Monetary
Note: Benchmark interest rates are the reference Board or to the examiners of the BSP shall be
rate to peg the rate (e.g. Interbank Call Loan punished by a fine of not less than P100,000 nor
Rate, BSP rates, Government securities rates, more than P2,000,000 or by imprisonment of not
treasury rate benchmark, PHP BVAL rates). more than five (5) years, or both, at the discretion
of the court. (NCBA, Sec. 35)
Escalation Clause
It refers to stipulations allowing an increase in the Violation of the NCBA and other banking laws,
interest rate agreed upon by the contracting rules, regulations, orders, or instructions
parties. They are valid stipulations in commercial
contracts to maintain fiscal stability and to retain The persons responsible for the following
the value of money in long term contracts. violations shall be punished by a fine of not less
than P50,000 nor more than P200,000 or by
It has to comply with the principles on mutuality of imprisonment of not less than two (2) years nor
contracts. The contract must bind both more than ten (10) years, or both, at the discretion
contracting parties; its validity or compliance of the court:
cannot be left to the will of one of them. (NCC, a. When a bank or quasi-bank, including
Art. 1308) their subsidiaries and affiliates, engages
in allied activities or other entity which
The bank cannot be given an unbridled right to under this Act or special laws is subject
adjust the interest independently and upwardly. to BSP supervision; or
Such would negate the mutuality of contracts. b. When any person or entity willfully
(Floirendo v. Metropolitan Bank, G.R. No. violates this Act or other pertinent
148325, 2007) banking laws being enforced or
implemented by the BSP or any order,
If a provision neither states an increase nor a instruction, rule, or regulation issued by
decrease in interest rate, but said clause simply the Monetary Board. (NCBA, Sec. 36)
states that the interest rate should be based on
the prevailing market rate, it violates the mutuality B. Suspension or removal of director or
of contracts. (Polotan Sr. v. Court of Appeals, officer
G.R. No. 119379, 1998)
If the offender is a director or officer of a bank,
7. PENALTIES FOR VIOLATIONS quasi-bank, or trust entity, the Monetary Board
may also suspend or remove such director or
A. Fine, imprisonment officer who violated the provisions of the GBL.
(Sec. 66)
Refusal to make reports or permit
examination C. Dissolution of bank
The willful refusal to file the required report or
permit any lawful examination into the affairs of If the violation is committed by a corporation, such
such institution, as required in writing by the corporation may be dissolved by quo warranto
Monetary Board or the head of the supervising proceedings instituted by the Solicitor General
and examining department, shall subject its (Id.)
officer, owner, agent, manager, director, or
officer-in-charge to a fine not less than P50,000
nor more than P2,000,000 or by imprisonment of
not less than one (1) year nor more than five (5)
years, or both, at the court’s discretion. (NCBA,
Sec. 34)
Note: This applies to affiliate companies whose

transactions are subject to examination under this
Act.
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D. PHILIPPINE DEPOSIT INSURANCE the privileges granted to it by law may be

CORPORATION ACT exercised and enjoyed;
g. To exercise all powers specifically
1. BASIC POLICY granted by the provisions of this Act, and
such incidental powers as shall be
The Philippine Deposit Insurance Corporation necessary to carry on the powers so
(PDIC) shall promote and safeguard the interests granted;
of the depositing public by providing insurance h. To conduct examination of banks with
coverage on all insured deposits and helping prior approval of the Monetary Board;
maintain a sound and stable banking system. i. To act as receiver;
(New PDIC Charter, Sec. 1) j. To prescribe such rules and regulations
as it may deem necessary to carry out the
2. POWERS AND FUNCTIONS OF THE provisions of this Act;
k. The PDIC may establish its own
PHILIPPINE DEPOSIT INSURANCE
provident fund which shall consist of
CORPORATION; PROHIBITIONS contributions made by both by PDIC and
by its officers and employees to a
PDIC Board of Directors common fund for the payment of benefits
The powers and functions of the PDIC shall be to such officers or employees or their
vested in and exercised by a Board of Directors heirs;
which shall be composed of 7 members. (Sec. 3) l. To compromise, condone, or release, in
whole or in part, any claim or settled
Composition liability to the PDIC, regardless of the
7 members, appointed by the President of the amount involved, under such terms and
Philippines, for a term of 6 years with 1 conditions as may be imposed by the
reappointment: Board of Directors to protect the interest
a. Ex officio Chairman: Secretary of of PDIC, and to write off PDIC’s
Finance receivables and assets which are no
b. Ex officio Member: BSP Governor longer recoverable or receivable;
c. President and Vice Chairman: Appointed m. To determine qualified interested
by the President of the Philippines, to acquirers or investors for any of the
serve a full-time basis. modes of resolution or liquidation of
d. 4 Members from the private sector to be banks;
appointed by the President of the n. To determine the appropriate resolution
Philippines. (Id.) method and to implement the same for a
bank subject of resolution; and
Powers of PDIC o. To determine the appropriate mode of
The PDIC as a corporate body shall have the liquidation of a closed bank and to
following powers: implement the same. (Sec. 9)
a. To adopt and use a corporate seal;
b. To have succession until dissolved by an Prohibitions
Act of Congress; Personnel of the PDIC are prohibited from:
c. To make contracts; a. Being an officer, director, consultant,
d. To sue and be sued, complain, and employee or stockholder, directly or
defend, in any court of law in the indirectly, of any bank or banking
Philippines; institution except as otherwise provided
e. To appoint such officers and employees in this Act;
as are not otherwise provided for in this b. Receiving any gift or thing of value from
Act, to define their duties, fix their any officer, director or employee thereof:
compensation, require bonds, and fix c. Revealing in any manner, except under
penalty thereof, and to dismiss them for order of the court or authorized herein in
cause; such condition or business of any such
f. To prescribe by-laws consistent with law, institution. The prohibition shall not be
regulating the manner in which its held to apply to the giving of information
general business may be conducted, and to the Board of Directors or to any person
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authorized by either of them in writing to C. Deposit accounts not entitled to

receive such information. (Sec. 10[e]) payment
Borrowing from any bank or banking institution by PDIC shall not pay deposit insurance for the
examiners and other personnel of the following accounts or transactions, whether
examination departments of PDIC shall be denominated, documented, recorded, or booked
prohibited only with respect to the particular as deposit by the bank:
institution in which they are assigned or are a. Investment products such as bonds and
conducting an examination. (Sec. 9) securities, trust accounts, and other
similar instruments;
Borrowing from any bank or banking institution by b. Deposit accounts or transactions which
personnel of other departments, offices, or units are unfunded, fictitious or fraudulent;
of the PDIC shall be prohibited during the period c. Deposit accounts or transactions
that a transaction of such institution with the PDIC constituting, and/or emanating from,
is being evaluated, processed, or acted upon by unsafe and unsound banking practice/s,
such personnel. (Sec. 9) as determined by PDIC, in consultation
with the BSP, after due notice and
3. CONCEPT OF INSURED DEPOSITS hearing, and publication of a cease and
desist order issued by PDIC against such
Insured deposit deposit accounts or transactions; and
It is the amount due to any bona fide depositor for d. Deposits that are determined to be the
legitimate deposits in an insured bank as of the proceeds of an unlawful activity as
date of closure but not to exceed P500,000. (Sec. defined under AMLA. (Sec.5[g])
5[j])
if such recognition would increase the aggregate
Note: This amount may be increased if there are amount of the insured deposits in such closed
conditions which threaten the monetary and bank, neither PDIC nor such other insured bank
financial stability of the banking system that may shall be required to recognize any person as the
have systemic consequences. There has to be a owner of any portion of a deposit whose name or
unanimous approval by the Board of Directors, interest is not disclosed on the records of the
chaired by the Secretary of Finance, and closed bank. (Sec. 21[c])
approved by the President of the Philippines. (Id.)
Pending the determination and payment of the
4. LIABILITY TO DEPOSITORS depositor’s liability as a stockholder of the closed
bank, or of any liability to said bank or its receiver
A. Deposit liabilities required to be insured which is not offset against a claim due from the
with Philippine Deposit Insurance bank, PDIC may withhold payment of a portion of
the insured deposit due to it as payment of such
Corporation liability. (Sec. 16[e])
The deposit liabilities of any bank, which is D. Extent of liability
engaged in the business of receiving deposits or
which thereafter may engage in the business of The maximum deposit insurance coverage is
receiving deposits, shall be insured with the P500,000.00 per depositor, per bank. (Sec. 3)
PDIC. (Sec. 6)
E. Determination of insured deposits
B. Commencement of liability
In determining such amount due to any depositor,
The PDIC shall commence the determination of there shall be added together all deposits in the
insured deposits due the depositors of a closed bank maintained in the same right and capacity
bank upon its actual takeover of the closed bank. for his or her benefit either in his or her own name
It shall give notice to the depositors of the closed or in the name of others. (Sec. 5[j])
bank of the insured deposits due them by
whatever means deemed appropriate by the
Board of Directors. (Sec. 21[a])
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F. Calculation of liability National Government in the order of preference

under Article 2244 of the NCC. (Id.)
i. Per depositor, per capacity rule
vi. Failure to settle claim of insured depositor
All deposit accounts by a depositor in a closed
bank maintained in the same right and capacity If there is failure to settle the claim for insured
shall be added together. (Id.) deposit within six (6) months from the date of filing
and such failure was due to grave abuse of
ii. Joint accounts discretion, gross negligence, bad faith, or malice,
the responsible PDIC directors, officers, or
A joint account, regardless of whether the employees shall, upon conviction, be subject to
conjunction ‘and’, ‘or’, ‘and/or’ is used, shall be imprisonment from six (6) months to one (1) year.
insured separately from any individually-owned (Sec. 19)
deposit account. (Id.)
Note: The period shall not apply if the validity of
If the account is held jointly by two or more natural the claim requires the resolution of issues of facts
persons, or by two or more juridical persons or and or law by another office, body, or agency, or
entities, the maximum insured deposit shall be by the PDIC together with such office, body, or
divided into as many equal shares as there are agency. (Id.)
individuals, juridical persons or entities, unless a
different sharing is stipulated in the document of vii. Failure of depositor to claim insured
deposit. deposits
If the account is held by a juridical person or entity Unless otherwise waived by PDIC, if the
jointly with one or more natural persons, the depositor of the closed bank shall fail to claim his
maximum insured shall be presumed to belong insured deposits within two (2) years from actual
entirely to such juridical person or entity. (Id.) takeover of the closed bank by the receiver or
does not enforce his claim within two (2) years, all
Note: The aggregate of the interest of each co- rights with respect to the insured deposit shall be
owner over several joint accounts, whether barred.
owned by the same or different combinations of (Sec. 21[e])
individuals, juridical persons, or entities, shall
likewise be subject to the maximum insured (a) Examination of banks and deposit
deposit of P500,000. (Id.) accounts
iii. Mode of payment The PDIC as a body corporate shall have the
power to conduct examination of banks with prior
It shall be paid either (1) by cash or (2) by making approval of the Monetary Board. (Sec. 9.8)
available to each depositor a transferred deposit
in another insured bank. (Sec. 19) Note: No examination can be conducted within
twelve (12) months from the last examination
iv. Effect of payment of insured deposits date.
The PDIC, upon payment of any depositor, shall The PDIC may, in coordination with the BSP,
be subrogated to all the rights of the depositor conduct a special examination as the Board of
against the closed bank to the extent of such Directors, by an affirmative vote of a majority of
payment. (Sec. 20) all of its members, if there is a threatened or
impending closure of a bank. (Id.)
v. Payment of insured deposits as preferred
credit Notwithstanding the provisions of RA 1405, as
amended, RA 6426, as amended, RA 8791, and
All payments by the PDIC of insured deposits in other laws, the PDIC and/or the BSP, may inquire
closed banks partake of the nature of public into or examine deposit accounts and all
funds, and as such, must be considered a information related thereto in case there is a
preferred credit similar to taxes due to the finding of unsafe or unsound banking practice.
(Id.)
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5. CONCEPT OF BANK RESOLUTION

To avoid overlapping of efforts, the examination
shall maximize the efficient use of the relevant Resolution
reports, information, and findings of the BSP, Resolution refers to the actions undertaken by the
which it shall make available to the Corporation. PDIC to:
(Id.) a. Protect depositors, creditors, and the
Deposit Insurance Fund;
(b) Prohibition against splitting of deposits b. Safeguard the continuity of essential
banking services or maintain financial
Splitting of deposits occurs whenever a deposit stability; and
account with an outstanding balance of more than c. Prevent deterioration or dissipation of
the statutory maximum amount of insured deposit bank assets. (Sec. 5[s])
maintained under the name of natural or juridical
persons is broken down and transferred into 2 or Grounds for Resolution
more accounts in the name/s of natural or juridical The PDIC, in coordination with the BSP, may
persons or entities who have no beneficial commence the resolution of a bank upon:
ownership on transferred deposits in their names a. Failure of Prompt Corrective Action
within 120 days immediately preceding or during (PCA) as declared by the Monetary
a bank-declared bank holiday, or immediately Board; or
preceding a closure order issued by the Monetary b. Request by a bank to be placed under
Board. It is for the purpose of availing the resolution. (Sec. 11[a][1][2])
maximum deposit insurance coverage. (Sec.
26[e]) The PDIC shall inform the bank of its eligibility for
entry into resolution. (Sec. 11)
(c) Prohibition against issuances of
temporary restraining orders Obligations of stockholders, directors,
officers, or employees of the bank
No court, except the Court of Appeals, shall issue a. Ensure bank compliance with the terms
any temporary restraining order, preliminary and conditions prescribed by the PDIC
injunction, or preliminary mandatory injunction for resolution of the bank;
against the PDIC for any action under the PDIC b. With PDIC’s consent, engage an
Charter. (Sec. 27) independent appraiser or auditor to
determine the valuation of the bank
This prohibition shall apply in all cases, disputes consistent with generally accepted
or controversies instituted by a private party, the valuation standards;
insured bank, or any shareholder of the insured c. Ensure prudent management and
bank. (Id.) administration of the bank’s assets,
liabilities, and records; and
Supreme Court d. Cooperate with the PDIC in the conduct
The Supreme Court may issue a restraining order or exercise of any or all its authorities
or injunction when the matter is of extreme under this Act and honor in good faith its
urgency involving a constitutional issue, such that commitment or undertaking with the
unless a temporary restraining order is issued, PDIC on the resolution of the bank. (Sec.
grave injustice and irreparable injury will arise. 11[d])
The applicant shall file a bond in an amount to be
fixed by the Supreme Court and such bond shall Within a period of 180 days from a bank’s entry
accrue in favor of the PDIC if the court should into resolution, the PDIC, through the affirmative
finally decide that the applicant was not entitled to vote of at least 5 members of the board, shall
the relief sought. (Id.) determine whether the bank may be resolved
through (1) purchase of all its assets and
Any restraining order or injunction issued in assumption of all its liabilities, (2) merger or
violation of this Section is void and of no force and consolidation with, or (3) acquisition, by a
effect and any judge who has issued the same qualified investor. (Sec. 11[e])
shall suffer the penalty of suspension of at least
60 days without pay. (Id.) Upon a determination by the PDIC that the bank
may not be resolved, the Monetary Board may act
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in accordance with the receivership and bank in their possession, custody,

liquidation proceedings under NCBA, Sec. 30. administration, or management. (Id.)
6. ROLE OF THE PHILIPPINE DEPOSIT d. When the circumstances so warrant, the

INSURANCE CORPORATION IN RELATION local government unit and law
enforcement agencies concerned shall,
TO BANKS IN DISTRESS
upon request, immediately provide
assistance to the receiver during the
A. Closure and takeover service of notice of closure and actual
takeover operations to ensure the orderly
Whenever a bank is ordered closed by the
conduct thereof. (Sec. 14[d])
Monetary Board, the PDIC shall be designated as
receiver and it shall proceed with the takeover B. Conservatorship
and liquidation of the closed bank in accordance
with the PDIC Charter. (Sec. 12[a]) A conservator is appointed by the Monetary
Board based on competence and knowledge in
Notice of Closure and Takeover Activities bank operations and management. (NCBA, Sec.
a. Upon the designation of the PDIC as 29) There is no express provision providing for
receiver, it shall serve a notice of closure the appointment of PDIC as conservator.
to the highest-ranking officer of the bank
present in the bank premise, or in the Banks closed by the Monetary Board shall no
absence of such officer, post the notice longer be rehabilitated. The PDIC, as receiver,
of closure in the bank premises of on its shall immediately proceed with the takeover and
main entrance. (New PDIC Charter, Sec. liquidation. (NCBA, Sec. 39; New PDIC Charter,
14[a]) Sec. 12[a])
Note: The closure of the bank shall be C. Receivership
deemed effective upon the service of the
notice of closure. Thereafter, the receiver Authorities of a Receiver
shall take over the bank and exercise the In addition to its powers as receiver under existing
powers of the receiver. (Sec. 14[a]) laws, the PDIC is also empowered to do the
following:
b. The receiver shall have authority to use a. Represent and act for and on behalf of
reasonable force, including the authority the closed bank;
to force open the premises of the bank,
and exercise such acts necessary to take A closed bank under receivership can
actual physical possession and custody only sue or be sued through its receiver,
of the bank and all its assets, records, the Philippine Deposit Insurance
documents, and take charge of its affairs Corporation (PDIC). Thus, a bank under
upon the service of the notice of closure. receivership cannot file a case without
(Sec. 14[b]) PDIC’s authority. (Banco Filipino Savings
and Mortgage Bank v. BSP, G.R. No.
c. Directors, officers, employees, or agents 200678, 2018)
of a bank hold money and other assets of
the bank in trust or under administration b. Gather and take charge of all the assets,
or management by them for the bank in records, and affairs of the closed bank,
their fiduciary capacity. (Sec. 14[c]) and administer the same for the benefit
of the creditors;
Upon service of notice of closure to the c. Convert the assets of the closed bank to
bank, all directors, officers, employees, cash or other forms of liquid assets, as
or agents of the closed bank shall have far as practicable;
the duty to immediately account for, d. Bring suits to enforce liabilities of the
surrender, and turn over to the receiver, directors, officers, employees, agents of
and provide information relative to the the closed bank and other entities related
assets, records, and affairs of the closed or connected to the closed bank or to
collect, recover, and preserve all assets,
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including assets over which the bank has

equitable interest; Note: Payment of these fees, including
e. Appoint or hire persons or entities of any unpaid advances under the
recognized competence in banking, immediately preceding paragraph, shall
finance, asset management, or remedial be subject to approval by the liquidation
management, as its deputies, assistant, court.
or agents;
f. Appoint or hire persons or entities of n. Distribute the available assets of the
recognized competence in forensic and closed bank, in cash or in kind, to its
fraud investigations; creditors in accordance with the Rules on
g. Pay accrued utilities, rentals, and Concurrence and Preference of Credits
salaries of personnel of the closed bank under the NCC or other laws;
for a period not exceeding three (3) o. Dispose records of the closed bank that
months, from available funds of the are no longer needed in the liquidation in
closed bank; accordance with the guidelines set by the
h. Collect loans and other claims of the PDIC, notwithstanding the laws on
closed bank and modify, compromise, or archival period and disposal of records;
restructure the terms and conditions of and
such loans or claims as may be deemed p. Exercise inherent and necessary powers
advantageous to the interests of the for the effective discharge of its duties as
creditors of the closed bank; receiver. (Sec. 13[b])
i. Hire or retain private counsel;
j. Borrow or obtain a loan, or mortgage, Surplus Dividends
pledge, or encumber any asset of the After the payment of all liabilities and claims
closed bank, when necessary to (1) against the closed bank, the receiver shall pay
preserve or prevent dissipation of its surplus, if any, dividends at the legal rate of
assets, (2) redeem its foreclosed assets, interest from date of takeover to date of
or (3) minimize losses to its depositors distribution to creditors and claimants of the
and creditors; closed bank in accordance with the Rules on
k. If the stipulated interest rate on deposits Concurrence and Preference of Credits under the
is unusually high compared with Civil Code or other laws before distribution to the
prevailing applicable interest rates, the shareholders of the closed bank. (Sec. 13[c])
receiver may reduce the rate to a
reasonable rate; D. Liquidation
Note: Any modifications or reductions The PDIC, as receiver is also liquidator. PDIC is
shall apply only to earned or unpaid authorized to adopt and implement without need
interest. of consent of the stockholders, BOD, creditors,
and depositors of the closed bank, any or a
l. Utilize available funds of the bank, combination of the following modes of liquidation:
including funds generated by the receiver a. Conventional liquidation; and
from the conversion of assets to pay for b. Purchase of assets and/or liabilities (Sec.
reasonable costs and expenses incurred 13[a])
for the preservation of the assets and
liquidation of the closed bank, without Modes of liquidation under the New PDIC
need for approval of the liquidation court; Charter
a. Conventional Liquidation. The assets
Note: For banks with insufficient funds, gathered by the receiver shall be
the PDIC is authorized to advance the evaluated and verified as to their
foregoing costs and expenses, and existence, ownership, condition, and
collect payments, as and when funds other factors to determine their realizable
become available. value. (Sec. 16)
m. Charge reasonable fees for the b. Purchase of Assets and/or

liquidation of the bank from the assets of Assumption of Liabilities. The receiver
the bank; shall have the authority to facilitate and
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implement the purchase of the assets of The powers, voting rights, functions, and
the closed bank and the assumption of its duties, as well as the allowances,
liabilities by another insured bank, remuneration and perquisites of the
without need for approval of the directors, officers, or stockholders (DOS)
liquidation court. It shall be exercised in of such bank are terminated upon its
accordance with the Rules on closure.
Concurrence and Preference of Credits
under the NCC or other laws, subject to DOS shall be barred from interfering in
such terms and conditions as the PDIC any way with the assets, records, and
may prescribe. (Sec. 15) affairs of the bank. (Sec. 13[e][2])
The disposition of the branch licenses Note: The receiver shall exercise all
and other bank licenses of the closed authorities as may be required to
bank shall be subject to the approval of facilitate the liquidation of the closed
the BSP. (Id.) bank for the benefit of all its creditors.
(Id.)
Note: Such action of the receiver to
determine whether a bank may be c. On the assets. Upon service of closure,
subject of a purchase of assets and all the assets of the closed bank shall be
assumption of liabilities transactions shall deemed in custodia legis in the hands of
be final and executory and may not be set the receiver, and as such, these assets
aside by any court. may not be subject to attachment,
garnishment, execution, levy or any other
Effects of Bank Liquidation court processes.
The placement of a bank under liquidation shall
have the following effects: A judge, officer of the court or any person
a. On the corporate franchise or who shall issue, order, process or cause
existence. Upon placement by the the issuance or implementation of the
Monetary Board of a bank under garnishment order, levy, attachment, or
liquidation, it shall continue as a body execution, shall be liable
corporate until the termination of the
winding up period. (Sec. 13[e][1]) Provided: collaterals securing the loans
and advances granted by the BSP shall
Note: Winding up period is 6 months from not be included in the assets of the closed
the date of publication of notice of the bank for distribution to other creditors
approval by the court of the final asset
distribution plan of the closed bank. (Sec. Provided, further: the proceeds in excess
1[c]) of the amount secured shall be returned
by the BSP to the receiver. (Sec. 13[e][3])
Such continuation as a body corporate
shall only be for the purpose of Note: Any preliminary attachment or
liquidating, settling, and closing its garnishment on any of the assets of the
assets. closed bank existing at the time of closure
shall not give any preference to the
The receiver shall represent the closed attaching or garnishing party. Upon
bank in all cases by or against the closed motion of the receiver, the preliminary
bank and prosecute and defend suits by attachment or garnishment shall be lifted
or against it. (Sec. 13[e][1]) and/or discharged.
Note: In no case shall the bank be d. On labor relations. The employer-

reopened and permitted to resume employee relationship between the
baking business after being placed under closed bank and its employees shall be
liquidation. (Sec. 13[e][1]) deemed terminated upon service of the
notice of closure of the bank.
b. On the Powers and Functions of its
directors, officers, and stockholders.
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Payment of separation pay, or benefits

provided for by law shall be made from i. On actions pending for or against the
available assets of the bank in closed bank
accordance with the Rules on
Concurrence and Preference of Credits General Rule: Actions pending for or
under the Civil Code or other laws. (Sec. against the closed bank in any court or
13[e][4]) quasi-judicial body shall, upon motion of
the receiver, be suspended for a period
e. On contractual obligations. Receiver not exceeding 180 days and referred to
may cancel, terminate, rescind, or mandatory mediation.
repudiate any contract of the closed bank
that is not necessary for the orderly Exception: Actions pending before the
liquidation of the bank, or is grossly Supreme Court. (Sec. 13[e][9])
disadvantageous to the closed bank, or
for any ground provided by law. (Sec. j. On final decisions against the closed
13[e][5]) bank. Execution and enforcement of a
final decision of a court other than the
f. On interest payments. The liability of a liquidation court against the assets of a
bank to pay interest on deposits and all closed bank shall be stayed.
other obligations as of closure shall
cease upon its closure without prejudice Prevailing party shall file the final
to NCBA, Sec. 85. decision as a claim with the liquidation
court and settle in accordance with the
Provided: The receiver shall have the Rules on Concurrence and Preference of
authority, without need for approval of Credits under the Civil Code or other
the liquidation court, to assign, as laws. (Sec. 13[e][10])
payment to secured creditors, the bank
assets serving as collaterals to their k. On docket and other court fees.
respective loans up to the extent of the Payment of docket and other court fees
outstanding obligations including relating to all cases or actions filed by the
interests as of date of closure (valuation receiver with any judicial or quasi- judicial
based on the prevailing market value of bodies shall be deferred until the action is
the collaterals). (Sec. 13([e][6]) terminated with finality
Note: The BSP shall collect interest and Any such fees shall constitute as a first
other appropriate charges on all loans lien on any judgment in favor of the
and advances it extends, the closure, closed bank or in case of unfavorable
receivership, or liquidation of the debtor- judgment, such fees shall be paid in
institution notwithstanding. (NCBA, Sec. liquidation costs and expenses during the
85) distribution of the assets. (Sec. 13[e][11])
g. On liability for penalties and l. On assets, records, and documents of

surcharges for later payment and non- the bank. All assets, records, and
payment of taxes. From the time of documents in the possession of the
closure, the closed bank shall not be closed bank at the time of its closure are
liable for the payment of penalties and presumed held by the bank in the concept
surcharges arising from the late payment of an owner. (Sec. 13[e][12])
or non-payment of real property tax,
capital gains tax, transfer tax and similar Assets and documents of the closed
charges. (Sec. 13[e][7]) bank shall retain their private nature even
if administered by the receiver. (Sec.
h. On bank charges and fees on 13[e][14])
services. Receiver may impose charges
and fees for services rendered after bank ————- end of topic ————-
closure such as the execution of pertinent
deeds and certifications. (Sec. 13[e][8])
Page 237 of 393

INTELLECTUAL
PROPERTY
Commercial Law
ATENEO CENTRAL
VII. INTELLECTUAL PROPERTY a. Dominancy Test

b. Holistic Test
c. Idem Sonans
7. Well-Known Marks
8. Rights Conferred by Registration
VII. INTELLECTUAL PROPERTY
9. Use by Third Parties of Names, Etc.
A. INTELLECTUAL PROPERTY RIGHTS IN
Similar to Registered Mark
GENERAL
10. Infringement and Remedies
1. Intellectual Property Rights
a. Trademark Infringement
2. Differences Between Copyright,
b. Damages
Trademarks, and Patents
c. Requirement of Notice
3. Technology Transfer Arrangement
d. Penalties
11. Unfair Competition
B. PATENTS
12. Registration of Marks Under the
1. Patentable Invention
Madrid Protocol
2. Non-Patentable Invention
a. Coverage
3. Ownership of a Patent
b. Rights Conferred
a. Right to a Patent
c. Requirements for Registration
b. First-to-File Rule
d. Term of Protection
c. Invention Created Pursuant to
a Commission
D. COPYRIGHT
d. Right of Priority
1. Basic Principles
4. Grounds for Cancellation of a Patent
2. Copyrightable Works
5. Remedy of the True and Actual
a. Original Works
Inventor
b. Derivative Works
6. Rights Conferred by a Patent
3. Non-copyrightable works
7. Limitations of Patent Rights
4. Rights of copyright owner
a. Prior User
5. Rules on ownership of copyright
b. Use by the Government
6. Limitations on copyright
8. Patent Infringement
a. Fair use
a. Tests in Patent Infringement
7. Copyright infringement
i. Literal Infringement
a. Remedies
ii. Doctrine of
b. Criminal penalties
Equivalents
b. Civil and Criminal Action
c. Prescriptive Period
d. Defenses in Action for
Infringement
9. Licensing
a. Voluntary
b. Compulsory
10. Assignment and Transmission of
Rights
C. TRADEMARKS
1. Definition of Marks, Collective Marks,
and Trade Names
2. Acquisition of Ownership of Mark
3. Acquisition of Ownership of Trade
Name
4. Non-Registrable Marks
5. Prior Use of Mark as a Requirement
6. Tests to Determine Confusing
Similarity Between Marks
Page 239 of 393

ATENEO CENTRAL
A. Intellectual Property RIGHTS IN 2. To guarantee that those

GENERAL articles come up to a
certain standard of quality
1. INTELLECTUAL PROPERTY RIGHTS 3. To advertise the articles
which they symbolize
The State recognizes that an effective intellectual 1. To foster and reward
and industrial property system is vital to the invention;
development of domestic and creative activity, 2. To promote disclosures of
facilitates transfer of technology, attracts foreign inventions to stimulate
investments, and ensures market access for our Patents further innovation
products. The use of intellectual property bears 3. To ensure that ideas in the
a social function. To this end, the State shall public domain remain there
promote the diffusion of knowledge and for the free use of the
information for the promotion of national public
development and progress and the common
SUBJECT MATTER
good. (Sec. 2, IP Code)
Original intellectual creations in
Copyright the literary and artistic domain
All agreements concerning industrial property are
(literary and artistic works)
intimately connected with economic
Any visible sign capable of
development. Industrial property encourages Trademarks
distinguishing the goods
investments in new ideas and inventions and
A product, process or any
stimulates creative efforts for the satisfaction of
Patents improvement thereof which is a
human needs. They speed up transfer of
technical solution of a problem
technology and industrialization, and thereby
ELEMENTS
bring about social and economic progress.
(Mirpuri v. Court of Appeals, G.R. No. 114508, 1. Literary or artistic work
1999). 2. Independently created
Copyright (originality)
Intellectual property protection is merely a means 3. Involves minimal or a
towards the end of making society benefit from modicum of creativity
the creation of its men and women of talent and 1. Visible sign
genius. This is the essence of intellectual 2. Capable of distinguishing
Trademarks
property laws, and it explains why certain [distinctive] the goods or
products of ingenuity that are concealed from the services of an enterprise
public are outside the pale of protection afforded 1. Technical solution of a
by the law. It also explains why the author or the problem in a field of human
creator enjoys no more rights than are consistent activity
with public welfare. (ABS-CBN Broadcasting Patents 2. Must be new (novelty)
Corp. v. Philippine Multi-Media System, Inc., G.R. 3. Involves an inventive step;
Nos. 175769-70, 2009). (non-obvious)
4. Industrially applicable
WHEN PROTECTION BEGINS
2. DIFFERENCES BETWEEN COPYRIGHT,
Upon creation (but registration
TRADEMARKS, AND PATENTS
needed only to recover
Copyright
RATIONALE damages in cases of
1. To promote creativity infringement)
Copyright 2. To encourage creation of Upon grant of trademark
Trademarks
works registration
1. To indicate origin or Patents Upon grant of patent
Trademarks ownership of the articles to TERM OF PROTECTION
which they are attached
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Generally, during the life of the inventive step and is (c) industrially applicable
Copyright author and for 50 years after shall be patentable. It may be, or may relate to, a
his death [life + 50] product, or process, or an improvement of any of
10 years, renewable for periods the foregoing. (Sec. 21, IP Code)
of 10 years after the expiration
Trademarks A. Novelty
of the original term (perpetual
protection as long as renewed)
An invention shall not be considered new if it
Patents 20 years from grant
forms part of a prior art. (Sec. 23, IP Code).
Novelty is an essential requisite of patentability of
3. TECHNOLOGY TRANSFER an invention or discovery. An invention is not new
ARRANGEMENT if it has been disclosed or used in public, or sold
in the market before the patent application for the
Contracts or agreements involving the transfer of
invention is filed. (Manzano v. Court of Appeals,
systematic knowledge for the manufacture of a
G.R. No. 113388, 1997).
product, the application of a process, or rendering
of a service including management contracts; and
Prior Art – It consists of:
the transfer, assignment or licensing of all forms
a. Everything which has been made available to
of intellectual property rights, including licensing
the public anywhere in the world, before the
of computer software except computer software
filing date or the priority date of the
developed for mass market. (Sec. 4, IP Code)
application claiming the invention; and
b. The whole contents of an application for a
B. PATENTS patent, utility model, or industrial design
registration, published in accordance with
A patent is a grant issued by the Intellectual
this Act, filed or effective in the Philippines,
Property Office of the Philippines (IPOPHL).
with a filing or priority date that is earlier than
Through the patent, a patent holder is given the
the filing or priority date of the application:
exclusive right to exclude others from making,
Provided
using, importing, and selling the patented
i. An application which has validly
innovation for a limited period of time.
claimed the filing date of an earlier
application shall be prior art with
The validity of the patent issued by the Philippines
effect as of the filing date of such
Patent Office and the question over the
earlier application;
inventiveness, novelty, and usefulness of the
ii. The applicant or the inventor
improved process therein specified and
identified in both applications are not
described are matters which are better
one and the same. (Sec. 24, IP
determined by the Philippines Patent Office. The
Code)
technical staff of the Philippines Patent Office,
composed of experts in their field, have, by the B. Inventive Step
issuance of the patent in question, accepted the
thinness of the private respondent's new tiles as An invention involves an inventive step if, having
a discovery. There is a presumption that the regard to prior art, it is not obvious to a person
Philippines Patent Office has correctly skilled in the art at the time of the filing date or
determined the patentability of the improvement priority date of the application claiming the
by the private respondent of the process in invention. (Sec. 26.1, IP Code)
question. (Aguas v. De Leon, G.R. No. L-32160,
1982) Person Skilled in the Art (POSITA)
A hypothetical person presumed to be an
1. PATENTABLE INVENTION ordinary practitioner aware of what was common
general knowledge in the art at the relevant date.
Any technical solution of a problem in any field of He or she is also presumed to have:
human activity which is (a) new, involves an (b)
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1. knowledge of all references that are considered to be the same substance, unless
sufficiently related to one another and to the they differ significantly in properties with
pertinent art; regard to efficacy;
2. knowledge of all arts reasonably pertinent to
the particular problems with which the For drugs and medicines, the following are
inventor was involved; and unpatentable:
3. normal means and capacity for routine work
and experimentation at his or her disposal. a. Discovery of a new form or new
property of a known substance UNLESS
In the case of drugs and medicines, there is no it results in the enhancement of the
inventive step if the invention results from: substance’s efficacy;
1. the mere discovery of a new form or new b. Discovery of any new property or use
property of a known substance which does of a known substance; and
not result in the enhancement of the known c. Mere use of a known process UNLESS
efficacy of that substance, such process results in a new product
2. the mere discovery of any new property or that employs at least one new reactant.
new use for a known substance, or
3. the mere use of a known process unless such 2. Schemes, rules and methods of performing
known process results in a new product that mental acts, playing games or doing
employs at least one new reactant. (Sec. business, and programs for computers;
26.2, IP Code)
General Rule: Computer programs are
C. Industrial Applicability subjects of copyright.
An invention that can be produced and used in Exceptions: The computer program is still
any industry shall be industrially applicable. (Sec. subject of copyright protection; in addition,
27, IP Code). Industrial applicability refers to an the machine or article described below may
invention’s real-life benefit and practical use. be patentable if the computer program:
(1) is implemented by a particular machine in
2. NON-PATENTABLE INVENTIONS a non-conventional and non-trivial
manner, or
The following shall be excluded from patent (2) transforms an article from one state to
protection: another, then it may be patentable.
1. Discoveries, scientific theories and 3. Methods for treatment of the human or animal
mathematical methods, and in the case of body by surgery or therapy and diagnostic
drugs and medicines, the mere discovery of methods practiced on the human or animal
a new form or new property of a known body;
substance which does not result in the
enhancement of the known efficacy of that Note: This prohibition, however, does not
substance, or the mere discovery of any new apply to products and compositions for use in
property or new use for a known substance, any of these methods.
or the mere use of a known process unless
such known process results in a new product 4. Plant varieties or animal breeds or essentially
that employs at least one new reactant. biological process for the production of plants
or animals;
For the purpose of this clause, salts, esters,
ethers, polymorphs, metabolites, pure form, Note: This provision shall not apply to micro-
particle size, isomers, mixtures of isomers, organisms and non-biological and
complexes, combinations, and other microbiological processes. Further,
derivatives of a known substance shall be Congress may enact a law providing sui
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generis protection of plant varieties and employee’s regular duties UNLESS there
animal breeds and a system of community is an agreement to the contrary.
intellectual rights protection.
Right of Priority
Note: Congress has already enacted the An application for patent filed by any person who
Plan Variety Protection Act which grants a has previously applied for the same invention in
Certificate of Plant Variety Protection for another country which by treaty, convention, or
varieties that are: (a) new, (b) distinct, (c) law affords similar privileges to Filipino citizens,
uniform, and (d) stable. (Sec. 4, Plant shall be considered as filed as of the date of filing
Variety Protection Act) the foreign application, provided that:
5. Aesthetic creations; and 1. The local application expressly claims
6. Anything which is contrary to public order or priority;
morality. (Sec. 22, IP Code) 2. It is filed within twelve (12) months from
the date the earliest foreign application
3. OWNERSHIP OF A PATENT was filed; and
3. A certified copy of the foreign application
Term of Patent together with an English translation is
The term of a patent shall be 20 years from the filed within six (6) months from the date
filing date of the application. (Sec. 54, IP Code) of filing in the Philippines.
Right to a Patent 4. GROUNDS FOR CANCELLATION OF A

The right to a patent belongs to the inventor, his PATENT
heirs, or assigns. When two (2) or more persons
have jointly made an invention, the right to a Any interested person may, upon payment of the
patent shall belong to them jointly. (Sec. 28, IP required fee, petition to cancel the patent or any
Code) claim thereof, or parts of the claim, on any of the
following grounds:
First-to-File Rule 1. That what is claimed as the invention is
If two (2) or more persons have made the not new or patentable;
invention separately and independently of each 2. That the patent does not disclose the
other, the right to the patent shall belong to the invention in a manner sufficiently clear
person who filed an application for such and complete for it to be carried out by
invention, or where two or more applications are any person skilled in the art; or
filed for the same invention, to the applicant who 3. That the patent is contrary to public order
has the earliest filing date or the earliest priority or morality.
date. (Sec. 29, IP Code)
Note: Where the grounds for cancellation relate
Invention Created Pursuant to a Commission to some of the claims or parts of the claim,
The person who commissions the work shall own cancellation may be effected to such extent only.
the patent, unless otherwise provided in the
contract. (Sec. 30, IP Code) 5. REMEDY OF THE TRUE AND ACTUAL
INVENTOR
If an employee made the invention in the course
of his regular employment, the patent shall If a person, who was deprived of the patent
belong to: without his consent or through fraud, is declared
1. The employee, the inventive activity is by final court order or decision to be the true and
not part of his regular duties (even if the actual inventor, the court shall order for his
employee uses the time, facilities, and substitution as patentee, or at the option of the
materials of the employer); true inventor, cancel the patent, and award actual
2. The employer, if the invention is the and other damages in his favor if warranted by
result of the performance of the the circumstances. (Sec. 68, IP Code)
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without proportionally dividing proceeds

The remedies of the true and actual inventor are: therewith. (Sec. 107, IP Code)
(a) Substitution as patentee, and
(b) Cancellation of the patent. 7. LIMITATIONS OF PATENT RIGHTS
In both remedies, damages may be awarded.
The patentee has no right to prevent third parties
Note: There must first be a final court order in the following circumstances:
declaring that he is the true and actual inventor. 1. Using a patented product which has been put
on the market in the Philippines by the owner
Patent Application by Persons Not Having the of the product, or with his express consent,
Right to a Patent insofar as such use is performed after that
If a person other than the applicant is declared by product has been so put on the said market.
final court order or decision as having the right to
the patent, such person may, within three (3) Note: With regard to drugs and medicines,
months after the decision has become final: the limitation on patent rights shall apply after
(a) Prosecute the application as his own a drug or medicine has been introduced in the
application in place of the applicant; Philippines or anywhere else in the world.
(b) File a new patent application in respect The right to import the drugs and medicines
of the same invention; shall be available to any government agency
(c) Request that the application be refused; or any private third party.
or (d) Seek cancellation of the patent, if
one has already been issued. (Sec. 67, 2. Where the act is done privately and on a non-
IP Code) commercial scale or for a non-commercial
purpose, and the economic interests of the
6. RIGHTS CONFERRED BY A PATENT patentee are not significantly prejudiced;
3. Where the act consists of making or using
A patent shall confer on its owner the following exclusively for experimental use of the
exclusive rights: invention for scientific purposes or
1. Where the subject matter of a patent is a educational purposes and such other
product, to restrain, prohibit and prevent activities directly related to such scientific or
any unauthorized person or entity from educational experimental use;
making, using, offering for sale, selling or 4. In the case of drugs and medicines, where
importing that product; the act includes testing, using, making or
2. Where the subject matter of a patent is a selling the invention including any data
process, to restrain, prevent or prohibit related thereto, solely for purposes
any unauthorized person or entity from reasonably related to the development and
using the process, and from submission of information and issuance of
manufacturing, dealing in, using, selling approvals by government regulatory
or offering for sale, or importing any agencies required under any law of the
product obtained directly or indirectly Philippines or of another country that
from such process. regulates the manufacture, construction, use
or sale of any product;
Rights of Joint Owners 5. Where the act consists of the preparation for
If two or more persons own patent and invention individual cases, in a pharmacy or by a
covered thereby, each of the joint owners shall be medical professional, of a medicine in
entitled to personally make, use, sell or import the accordance with a medical prescription or
invention for his own profit. Provided, neither of acts concerning the medicine so prepared;
joint owners shall be entitled to grant licenses or and
to assign his right, title or interest or part thereof 6. Where the invention is used in any ship,
without consent of other owner or owners, or vessel, aircraft, or land vehicle of any other
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country entering the territory of the 8. PATENT INFRINGEMENT

Philippines temporarily or accidentally.
Consists of the following acts:
Note: Such invention must be used (1) making, using, offering for sale, selling,
exclusively for the needs of the ship, vessel, or importing a patented product or a
aircraft, or land vehicle and not used for the product obtained directly or indirectly
manufacturing of anything to be sold within from a patented process; or
the Philippines. (2) use of a patented process without the
authorization of the patentee constitutes
A. Prior User patent infringement.
Prior User Notes:

Any prior user, who, in good faith was using the To be able to effectively and legally preclude
invention or has undertaken serious preparations others from copying and profiting from the
to use the invention in his enterprise or business, invention, a patent is a primordial requirement.
before the filing date or priority date of the No patent, no protection. (Pearl & Dean (Phil.) v.
application on which a patent is granted, shall Shoemart, G.R. No. 148222, 2003)
have the right to continue the use thereof within
the territory where the patent produces its effect. There can be no infringement of a patent until a
The right of prior user may only be transferred or patent has been issued, since whatever right one
assigned together with enterprise or business, or has to the invention covered by the patent arises
with the part of his enterprise or business in which alone from the grant of patent. (Creser Precision
use or preparations for use have been made. Systems, Inc. v. Court of Appeals, G.R. No.
118708, 1998)
B. Use by the Government
In order to infringe a patent, a machine or device
A Government agency or third person authorized
must perform the same function, or accomplish
by the Government may exploit the invention
the same result by identical or substantially
even without agreement of the patent owner
identical means and the principle or mode of
where:
operation must be substantially the same. (Del
1. The public interest, in particular, national
Rosario v. Court of Appeals, G.R. No. 115106,
security, nutrition, health or the development
1996)
of other sectors, as determined by the
appropriate agency of the government, so
However: The exclusive right of a patentee to
require; or
make, use and sell a patented product, article or
2. A judicial or administrative body has
process exists only during the term of the patent.
determined that the manner of exploitation,
(Phil Pharmawealth, Inc. v. Pfizer, Inc., G.R. No.
by the owner of the patent or his licensee, is
167715, 2010)
anti- competitive; or
3. In the case of drugs and medicines, there is
A. Tests in Patent Infringement
a national emergency or other circumstance
of extreme urgency requiring the use of the 1. Literal Infringement
invention; or Resort must be had to the words of the claim. If
4. In the case of drugs and medicines, there is accused matter clearly falls within the claim, then
a public non- commercial use of the patent by there is literal infringement.
the patentee, without satisfactory reason; or
5. In the case of drugs and medicines, the To determine whether the particular item falls
demand for the patented article in the within the literal meaning of the patent claims, the
Philippines is not being met to an adequate Court
extent and on reasonable terms, as a. Compares the claims of the patent and
determined by the Secretary of the the accused product within the overall
Department of Health.
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context of the claims and specifications,

and Note: This criminal action is without prejudice to
b. Determines whether there is exact the institution of a civil action for damages,
identity of all material elements. (Godines
v. Court of Appeals, G.R. No. 97343, The criminal action herein provided shall
1993) prescribe in three (3) years from date of the
commission of the crime. (Sec. 84, IP Code)
2. Doctrine of Equivalents
Infringement also occurs when a device The burden of proof to substantiate a charge for
appropriates a prior invention by incorporating its patent infringement rests on the plaintiff. (Smith
innovative concept and, albeit with some Kline Beckman Corp. v. Court of Appeals, G.R.
modification and change, performs substantially No. 126627, 2003)
the same function in substantially the same way
to achieve substantially the same result. (Smith Infringement Action by a Foreign National
Kline Beckman Corp. v. Court of Appeals, G.R. Any foreign national or juridical entity who meets
No. 126627, 2003) the requirements of Section 3 (Rule on
Reciprocity) and not engaged in business in the
Under the doctrine of equivalents, there is still Philippines, to which a patent has been granted
patent infringement when: or assigned under this Act, may bring an action
a. There is an appropriation of the inventive for infringement of patent, whether or not it is
step of a prior invention; licensed to do business in the Philippines under
b. The subsequent invention has been existing law. (Sec. 77, IP Code).
modified or changed; and
c. Despite such changes, the subsequent 1. Civil Action
invention performs substantially the Any patentee, or anyone possessing any right,
same function in substantially the same title or interest in and to the patented invention,
way to achieve substantially the same whose rights have been infringed, may bring a
result. civil action before a court of competent
jurisdiction, to recover from the infringer such
Rationale: Such imitation would leave room for damages sustained thereby, plus attorney’s fees
the unscrupulous copyist to make unimportant and other expenses of litigation, and to secure an
and insubstantial changes and substitutions in injunction for the protection of his rights. (Sec. 76,
the patent which, though adding nothing, would IP Code).
be enough to take the copied matter outside the
claim, and hence outside the reach of the law. Civil remedies for infringement:
(Godines v. Court of Appeals, G.R. No. 97343, (1) recovery of damages, attorney’s fees,
1993) and litigation costs; and
(2) injunction.
B. Civil and Criminal Action
Rules on Civil Remedies
Criminal Action for Repetition of Infringement 1. If the damages are inadequate or cannot
If infringement is repeated by the infringer or by be readily ascertained with reasonable
anyone in connivance with him after finality of the certainty, the court may award by way of
judgment of the court against the infringer, the damages a sum equivalent to reasonable
offenders shall be criminally liable therefor and, royalty.
upon conviction, shall suffer imprisonment for the 2. The court may award damages in a sum
period of not less than six (6) months but not more above the amount found as actual
than three (3) years and/or a fine of not less than damages sustained.
One hundred thousand pesos (P100,000) but not
more than Three hundred thousand pesos Note: The amount may award an amount
(P300,000), at the discretion of the court. more than the actual damages but must
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not exceed three (3) times the amount of from date of the commission of the crime.
actual damages. (Sec. 84, IP Code)
3. The court may order that the infringing D. Defenses in Action for Infringement
goods, materials and implements
predominantly used in the infringement In an action for infringement, the defendant may
be destroyed without compensation. show the invalidity of the patent, or any claim
4. Damages cannot be recovered for acts of thereof, on any of the following grounds:
infringement committed before the a. That what is claimed as the invention is
infringer had known, or had reasonable not new or patentable;
grounds to know of the patent. b. That the patent does not disclose the
invention in a manner sufficiently
Note: It is presumed that the infringer clear and complete for it to be carried
had known of the patent if the words out by any person skilled in the art; or
“Philippine Patent” and the number of the c. That the patent is contrary to public
patent appear on the patented product or order or morality.
on the container or package or the
advertising material of the patented Note: These are the same grounds for the
product or process. cancellation of a patent.
Contributory Infringer – jointly and severally 9. LICENSING

liable with the infringer if he:
a. actively induces the infringement of a A. Voluntary Licensing
patent; or
To encourage the transfer and dissemination of
b. provides the infringer with a component
technology, prevent or control practices and
of a patented product or of a product
conditions that may constitute an abuse of
produced by a patented process knowing
intellectual property rights having an adverse
it to be used for infringing the patented
effect on competition and trade.
invention.
All technology transfer arrangements must
2. Criminal Action
comply with the provisions of the IP Code.
If infringement is repeated by the infringer or by
anyone in connivance with him after finality of the
Prohibited Clauses
judgment against the infringer, the offenders
The following provisions shall be deemed prima
shall, without prejudice to the institution of a civil
facie to have an adverse effect on competition
action for damages, be criminally liable. Upon
and trade:
conviction, the offenders shall suffer:
1. Those which impose upon the licensee the
a. imprisonment for the period of not less
obligation to acquire from a specific source
than six months but not more than three
capital goods, intermediate products, raw
years, and/or
materials, and other technologies, or of
b. a fine of not less than P100,000 but not
permanently employing personnel indicated
more than P300,000.
by the licensor;
C. Prescriptive Period 2. Those pursuant to which the licensee
reserves the right to fix the sale or resale
1. No damages can be recovered for acts of prices of the products manufactured on the
infringement committed more than four (4) basis of the license;
years before the institution of the action for 3. Those that contain restrictions regarding the
infringement. (Sec. 79, IP Code) volume and structure of production;
2. The criminal action for repetition of
infringement shall prescribe in three (3) years
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4. Those that prohibit the use of competitive

technologies in a non-exclusive technology Mandatory Provisions
transfer arrangement; The following provisions shall be included in all
5. Those that establish full or partial purchase voluntary license contracts:
option in favor of the licensor; 1. That the laws of the Philippines shall govern
6. Those that obligate the licensee to transfer the interpretation of the agreement and in the
for free to the licensor the inventions or event of litigation, the venue shall be the
improvements that may be obtained through proper court in the place where the licensee
the use of the licensed technology; has its principal office;
7. Those that require payment of royalties to the 2. That continued access to improvements in
owners of patents for patents which are not techniques and processes related to the
used; technology shall be made available during
8. Those that prohibit the licensee to export the the period of the technology transfer
licensed product unless justified for the arrangement;
protection of the legitimate interest of the 3. That, in the event the technology transfer
licensor such as exports to countries where arrangement shall provide for arbitration, the
exclusive licenses to manufacture and/or Procedure of Arbitration of the Arbitration
distribute the licensed product(s) have Law of the Philippines or the Arbitration Law
already been granted; of the United Nations Commission on
9. Those which restrict the use of the International Trade Law (UNCITRAL) or the
technology supplied after the expiration of the Rules of Conciliation and Arbitration of the
technology transfer arrangement, except in International Chamber of Commerce shall
cases of early termination of the technology apply and the venue of arbitration shall be the
transfer arrangement due to reason(s) Philippines or any neutral country; and
attributable to the licensee; 4. That the Philippine taxes on all payments
10. Those which require payments for patents relating to the technology transfer
and other industrial property rights after their arrangement shall be borne by the licensor.
expiration or termination of the technology
transfer arrangement; Rights of Licensor
11. Those which require that the technology Absent a contrary provision in technology transfer
recipient shall not contest the validity of any arrangement, the grant of a license shall not
of the patents of the technology supplier; prevent the licensor from granting further licenses
12. Those which restrict the research and to third persons nor from exploiting the subject
development activities of the licensee matter of the technology transfer arrangement
designed to absorb and adapt the transferred himself.
technology to local conditions or to initiate
research and development programs in Rights of Licensee
connection with new products, processes or The licensee shall be entitled to exploit the
equipment; subject matter of the technology transfer
13. Those which prevent the licensee from arrangement during the whole term of the
adapting the imported technology to local technology transfer arrangement.
conditions, or introducing innovation to it, as
long as it does not impair the standards Non-Registration
prescribed by the licensor; and Technology transfer arrangements that conform
14. Those which exempt the licensor from liability with the previous requirements need not be
for non-fulfillment of his responsibilities under registered with the Documentation, Information
the technology transfer arrangement and/or and Technology Transfer Bureau (DITTB). Non-
liability arising from third party suits brought conformance, however, shall automatically
about by the use of the licensed product or render the technology transfer arrangement
the licensed technology. unenforceable, unless the technology transfer
15. Other clauses with equivalent effects. agreement is considered as an exceptional case.
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Use of Invention by Government

Exceptional Cases A Government agency or third person authorized
Non-conformance with the requirements in a by the Government may exploit the invention
voluntary licensing contract may be allowed even without agreement of the patent owner
where, after evaluation by the DITTB, substantial where:
benefits will accrue to the economy such as in the a) The public interest, in particular, national
following exceptional or meritorious cases: security, nutrition, health or the
1. High technology content, development of other sectors, as
2. Increase in foreign exchange earnings, determined by the appropriate agency of
3. Employment generation, the government, so requires; or
4. Regional dispersal of industries and/or, b) A judicial or administrative body has
5. Substitution with or use of local raw determined that the manner of
materials, or exploitation, by the owner of the patent or
6. Registered companies with pioneer his licensee is anti-competitive; or
status. c) In the case of drugs and medicines, there
is a national emergency or other
B. Compulsory Licensing circumstance of extreme urgency
requiring the use of the invention; or
The Director of Legal Affairs may grant license to d) In the case of drugs and medicines, there
exploit patented invention, even without is public non-commercial use of the
agreement of patent owner, in favor of any person patent by the patentee, without
who has shown his capability to exploit invention, satisfactory reason; or
under any of the following circumstances: e) In the case of drugs and medicines, the
1. National emergency or other demand for the patented article in the
circumstances of extreme urgency; or Philippines is not being met to an
2. Where public interest, in particular, adequate extent and on reasonable
national security, nutrition, health or terms, as determined by the Secretary of
development of other vital sectors of the Department of Health. (Sec. 74.1, IP
national economy as determined by the Code)
appropriate agency of the Government,
so requires; or Terms and Conditions of the Compulsory
3. Where a judicial or administrative body License
has determined that manner of 1. The scope and duration of such license
exploitation by patent owner or his shall be limited to the purpose for which
licensee is anti-competitive; or it was authorized;
4. In case of public non-commercial use of 2. The license shall be non-exclusive;
patent by patentee, without satisfactory 3. The license shall be non-assignable,
reason; or except with that part of the enterprise or
5. If patented invention is not being worked business with which the invention is
in Philippines on commercial scale, being exploited;
although not capable of being worked, 4. Use of the subject matter of the license
without satisfactory reason: Provided, shall be devoted predominantly for the
that importation of patented article shall supply of the Philippine market;
constitute working or using the patent; or
6. Where the demand for patented drugs Note: This shall not apply where the
and medicines is not being met to an grant of the license is based on the
adequate extent and on reasonable ground that the patentee’s manner of
terms, as determined by the Secretary of exploiting the patent is determined by
the Department of Health. (Sec. 96, IP judicial or administrative process to be
Code) anti-competitive.
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5. The license may be terminated upon entire patent and invention, in which event the
proper showing that circumstances which parties become joint owners thereof. An
led to its grant have ceased to exist and assignment may be limited to a specified territory.
are unlikely to recur; (Sec. 104, IP Code)
6. The patentee shall be paid adequate
remuneration taking into account the Form of Assignment
economic value of the grant or The assignment must be in writing,
authorization. (Sec. 100, IP Code) acknowledged before a notary public or other
officer authorized to administer oath or perform
Amendment, Cancellation, Surrender of notarial acts, and certified under the hand and
Compulsory License official seal of the notary or such other officer.
Upon request of patentee, or licensee, Director of (Sec. 105, IP Code)
Legal Affairs may amend decision granting
compulsory license, upon proper showing of new Requirements for Recording of Assignment
facts or circumstances justifying such a. It must be in writing and accompanied by
amendment; or may cancel compulsory license if: an English translation, if it is in a
1. Ground for grant of compulsory license language other than English or Filipino;
no longer exists and is unlikely to recur; b. It must be notarized;
2. Licensee has neither begun to supply c. It must be accompanied by an
domestic market nor made serious appointment of a resident agent, if the
preparation therefore; or assignee is not residing in the
3. Licensee not complied with prescribed Philippines;
terms of license. (Sec. 101, IP Code) d. It must identify the letters patent involved
by number and date and give the name
Licensee’s Exemption from Liability of the owner of the patent and the title of
Any person who works a patented product, the invention. In the case of an
substance and/or process under a compulsory application for a patent, it should state the
license, shall be free from any liability for application number and the filing date of
infringement. In case of voluntary licensing, it the application and give the name of the
must be proven that no collusion with licensor applicant and the title of the invention. If
existed. This is without prejudice to rightful patent the assignment was executed
owner to recover from licensor whatever he may concurrently with or subsequent to the
receive as royalties under the license. (Sec. 102, execution of the application but before
IP Code) the application is filed or before its
application number is ascertained, it
10. ASSIGNMENT AND TRANSMISSION OF should adequately identify the application
RIGHTS by its date of execution, the name of the
applicant, and the title of the invention.
Patent owners shall also have the right to assign, e. It must be accompanied by the required
transfer by succession the patent, and conclude fees.
licensing contracts for the same.
Note: Patents or applications for patents and

invention to which they relate, shall be protected
in the same way as the rights of other property
under the Civil Code. (Sec. 103, IP Code)
Assignment of Inventions
An assignment may be of the entire right, title or
interest in and to the patent and the invention
covered thereby, or of an undivided share of the
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C. TRADEMARKS Spectrum of Distinctiveness of Trademark

(Zantarain’s Inc. v. Old Grove Smokehouse, 698
Modern authorities on trademark law view F.2d 786, 1983) (from weakest to strongest)
trademarks as performing three distinct functions: 1. Generic – refers to a particular genus or
(1) they indicate origin or ownership of the articles class of which an individual article or service
to which they are attached; is a member (e.g. escalator, cellophane, etc.)
(2) they guarantee that those articles come up to a. It can never attain trademark
a certain standard of quality; and protection.
(3) they advertise the articles they symbolize. b. If a registered trademark becomes
(Mirpuri v. Court of Appeals, G.R. No. 114508, generic as to a particular product or
1999) service, the mark’s registration is
subject to cancellation.
1. DEFINITIONS OF MARKS, COLLECTIVE 2. Descriptive – identifies a characteristic or
MARKS, AND TRADE NAMES quality of an article or service such as its
color, odor, function, dimensions, or
Mark ingredients
Any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of General Rule: It is not ordinarily protectable
an enterprise and shall include a stamped or as a trademark because, like a generic term,
marked container of goods. (Sec. 121.1, IP Code) it belongs to the public domain. (Ong Ai Gui
v. Director of Patents, G.R. No. L-6235, 1955)
Collective Mark
Any visible sign designated as such in the Exception: When the doctrine of secondary
application for registration and capable of meaning applies in such a way that it has
distinguishing the origin or any other common acquired a secondary meaning in the minds
characteristic, including the quality of goods or of the consumers. (Sec. 123.2)
services of different enterprises which use the
sign under the control of the registered owner of 3. Suggestive – requires the consumer to
the collective mark. (Sec. 121.2, IP Code) exercise the imagination in order to draw a
conclusion as to the nature of the goods or
Trade Name services
Any name or designation identifying or 4. Arbitrary or Fanciful – bear no relationship
distinguishing an enterprise (Sec. 121.3, IP to the products or services to which they are
Code); applied; protectable without proof of
secondary meaning (e.g. Adidas, Rolex, etc.)
A name or designation may not be used as a
trade name if, by its nature or the use to which 2. ACQUISITION OF OWNERSHIP OF A
such name or designation may be put: MARK
1. It is contrary to public order or morals;
2. It is liable to deceive trade circles or the The rights in a mark shall be acquired through
public as to the nature of the enterprise registration made validly in accordance with the
identified by that name; or provisions of this law. (Zuneca Pharmaceutical v.
3. It is similar to a mark or a trade name Natrapharm, Inc., G.R. No. 211850, 2020)
owned by another person and its use
would likely mislead the public. Note: Any person who shall procure registration
in the Office of a mark by a false or fraudulent
A trade name refers to the business and its declaration or representation, whether oral or in
goodwill; a trademark refers to the goods. (Canon writing, or by any false means, shall be liable in a
Kabushiki Kaisha v. Court of Appeals, G.R. No. civil action by any person injured thereby for any
120900, 2000) damages sustained in consequence thereof.
(Sec. 162, IP Code)
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NOTE: Proof of substantially exclusive

The registration of trademark under the law is and continuous commercial use in the
required to give notice to the entire world that a Philippines for five (5) years before the
mark has already been registered. The failure to date on which the claim of distinctiveness
give notice of registration bars recovery of is made is prima facie evidence of
damages for trademark infringement, without distinctiveness. (Sec. 123.2, IP Code)
prejudice to other causes of action based on other
laws. (Cagayan Valley Enterprises, Inc. v. Court Duration and Renewal
of Appeals, G.R. No. 78413, 1989) A certificate of registration shall remain in force
for 10 years: Provided, That the registrant shall
The owner of the registered mark shall not be file a declaration of actual use and evidence to
entitled to recover profits or damages in any suit that effect, or shall show valid reasons based on
for infringement, unless the acts have been the existence of obstacles to such use, as
committed with knowledge that such limitation is prescribed by the Regulations, within 1 year from
likely to cause confusion, to cause mistake, or to the fifth anniversary of the date of the registration
deceive. Such knowledge is presumed if the of the mark. Otherwise, the mark shall be
registrant gives notice that his mark is registered removed from the Register by the Office.
by displaying with the mark the words “Registered
Mark” or the letter R within a circle or if the A certificate of registration may be renewed for
defendant had otherwise actual notice of the periods of 10 years at its expiration upon payment
registration. (Sec. 158, IP Code) of the prescribed fee and upon filing of a request.
Doctrine of Secondary Meaning 3. ACQUISITION OF OWNERSHIP OF

A word or phrase originally incapable of exclusive TRADE NAME
appropriation with reference to an article in the
market (because it is geographically or otherwise Notwithstanding any laws or regulations providing
descriptive) might nevertheless have been used for any obligation to register trade names, such
for so long and so exclusively by one producer names shall be protected, even prior to or without
with reference to his article that, in the trade and registration, against any unlawful act committed
to that branch of the purchasing public, the word by third parties. (Sec. 165.2.a, IP Code)
or phrase has come to mean that the article was
his property. (Pearl & Dean (Phil.) v. Shoemart, In particular, any subsequent use of the trade
G.R. No. 148222, 2003) name by a third party, whether as a trade name
or a mark or collective mark, or any such use of a
Secondary meaning is established when a similar trade name or mark, likely to mislead the
descriptive mark no longer causes the public to public, shall be deemed unlawful. (Sec. 165.2.b,
associate the goods with a particular place but to IP Code)
associate the goods with a particular source.
(Shang Properties Realty Corp. v. St. Francis Doctrine of Secondary Meaning Applicable to
Development Corp., G.R. No. 190706, 2014) Trade Names
The doctrine’s application has been extended to
Requirements for a Geographically- corporate names since the right to use a
descriptive Mark to Acquire Secondary corporate name to the exclusion of others is
Meaning based upon the same principle which underlies
1. The secondary meaning must have the right to use a particular trademark or
arisen as a result of substantial tradename. (Lyceum of the Philippines, Inc. v.
commercial use of a mark in the Court of Appeals, G.R. No. 101897, 1993)
Philippines; and
2. Such use must result in the
distinctiveness of the mark insofar as the
goods or the products are concerned.
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4. NON-REGISTRABLE MARKS considered well-known in accordance

with the preceding paragraph, which is
A mark cannot be registered if it: registered in the Philippines with respect
a. Consists of immoral, deceptive or to goods or services which are not similar
scandalous matter, or matter which may to those with respect to which registration
disparage or falsely suggest a is applied for.
connection with persons, living or dead,
institutions, beliefs, or national symbols, Note: Under this provision, (i) the use of
or bring them into contempt or disrepute; the mark in relation to those goods or
b. Consists of the flag or coat of arms or services must indicate a connection
other insignia of the Philippines or any of between those goods or services, and
its political subdivisions, or of any foreign the owner of the registered mark; and (ii)
nation, or any simulation thereof; the interests of the owner of the
c. Consists of a name, portrait or signature registered mark are likely to be damaged
identifying a particular living individual by such use.
except by his written consent, or the
name, signature, or portrait of a g. Is likely to mislead the public, particularly
deceased President of the Philippines, as to the nature, quality, characteristics
during the life of his widow, if any, except or geographical origin of the goods or
by written consent of the widow; services;
d. Is identical with a registered mark h. Consists exclusively of signs that are
belonging to a different proprietor or a generic for the goods or services that
mark with an earlier filing or priority date, they seek to identify;
in respect of: i. Consists exclusively of signs or of
i. The same goods or services, or indications that have become customary
ii. Closely related goods or or usual to designate the goods or
services, or services in everyday language or in bona
iii. If it nearly resembles such a fide and established trade practice;
mark as to be likely to deceive or j. Consists exclusively of signs or of
cause confusion; indications that may serve in trade to
e. Is identical with, or confusingly similar to, designate the kind, quality, quantity,
or constitutes a translation of a mark intended purpose, value, geographical
which is considered by the competent origin, time or production of the goods or
authority of the Philippines to be well- rendering of the services, or other
known internationally and in the characteristics of the goods or services;
Philippines, whether or not it is registered k. Consists of shapes that may be
here, as being already the mark of a necessitated by technical factors or by
person other than the applicant for the nature of the goods themselves or
registration, and used for identical or factors that affect their intrinsic value;
similar goods or services; l. Consists of color alone, unless defined
by a given form; or
Note: In determining whether a mark is m. Is contrary to public order or morality.
well-known, account shall be taken of the (Sec. 123.1, IP Code)
knowledge of the relevant sector of the
public, rather than of the public at large, 5. PRIOR USE OF MARK AS
including knowledge in the Philippines
REQUIREMENT
which has been obtained as a result of
the promotion of the mark. Under Trademark Law (old rule): The rights to
a trademark were acquired through a “first-to-
f. Is identical with, or confusingly similar to, use” system. (Sec. 5, Republic Act No. 166)
or constitutes a translation of a mark
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Under the IP Code (new rule): The rights in a public or to deceive

mark shall be acquired through registration made consumers.
validly in accordance with the provisions of this (Citigroup v Citystate, G.R. No. 205409, 2018)
law. (Sec. 122, IP Code)
Idem Sonans
Prior use no longer determines the acquisition of Literally “same sound” in Latin; an identity of
ownership of a mark in light of the adoption of the sound in the pronunciation of words or names.
rule that ownership of a mark is acquired through
registration made validly in accordance with the As to the syllabication and sound of the two trade-
provisions of the IP Code. (Zuneca names “Sapolin” and “Lusolin” being used for
Pharmaceutical v. Natrapharm, Inc., G.R. No. paints, it seems plain that whoever hears or sees
211850, 2020) them cannot but think of paints of the same kind
and make. (Sapolin Co., Inc. v. Germann & Co.,
6. TESTS TO DETERMINE CONFUSING Ltd., G.R. No. 45502, 1939).
SIMILARITY BETWEEN MARKS
Two letters of “SALONPAS” are missing in
To aid in determining the similarity and likelihood “LIONPAS”: the first letter a and the letter s. Be
of confusion between marks, our jurisprudence that as it may, when the two words are
has developed two (2) tests: the dominancy test pronounced, the sound effects are confusingly
and the holistic test. similar. And where goods are advertised over the
radio, similarity in sound is of especial. The
Dominancy Test Holistic Test importance of this rule is emphasized by the
Focuses on the Entails a increase of radio advertising in which we are
similarity of the consideration of the deprived of the help of our eyes and must depend
prevalent features of entirety of the marks entirely on the ear. “SALONPAS” and
the competing as applied to the “LIONPAS”, when spoken, sound very much
trademarks that might products, including alike. Similarity of sound is sufficient ground for
cause confusion and the labels and this Court to rule that the two marks are
deception, thus packaging, in confusingly similar when applied to merchandise
constituting determining confusing of the same descriptive properties. (Marvex
infringement. similarity. Commericial Co., Inc. v. Petra Hawpia & Co.,
G.R. No. L-19297, 1966)
If the competing The discerning eye of
trademark contains the observer must The determining point in trademark infringement
the main, essential, focus not only on the is a likelihood of confusion. The fact that
and dominant predominant words CEEGEEFER is idem sonans for CHERIFER is
features of another, but also on the other enough to violate respondent's right to protect its
and confusion or features appearing on trademark, CHERIFER. (Latest SC decision is
deception is likely to both marks in order Prosel v. Tynor, G.R. No. 248021, 2020)
result, infringement that the observer may
occurs. Exact draw his conclusion 7. WELL-KNOWN MARKS
duplication or whether one is
imitation is not confusingly similar to The countries of the Union undertake, ex officio if
required. the other. their legislation so permits, or at the request of an
interested party, to refuse or to cancel the
The question is registration, and to prohibit the use, of a
whether the use of the trademark which constitutes a reproduction, an
marks involved is imitation, or a translation, liable to create
likely to cause confusion, of a mark considered by the
confusion or mistake competent authority of the country of registration
in the mind of the or use to be well known in that country as being
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already the mark of a person entitled to the of Well-Known Marks cited with approval
benefits of this Convention and used for identical in Sehwani v. In-N-Out)
or similar goods. These provisions shall also
apply when the essential part of the mark Criteria for determining whether a mark is well-
constitutes a reproduction of any such well- known:
known mark or an imitation liable to create 1. Duration, extent and geographical area
confusion therewith. (Art. 6bis, Paris Convention) of any use of the mark, in particular, the
duration, extent and geographical area of
Note: The essential requirement under this any promotion of the mark, including
Article is that the trademark to be protected must advertising or publicity and the
be “well-known” in the country where protection is presentation, at fairs or exhibitions, of the
sought. The power to determine whether a goods and/or services to which the mark
trademark is well-known lies in the “competent applies;
authority of the country of registration or use.” 2. Market share, in the Philippines and in
This competent authority would be either the other countries, of the goods and/or
registering authority, if it has the power to decide services to which the mark applies;
this, or the courts of the country in question if the 3. Degree of the inherent or acquired
issue comes before a court. (Sehwani, Inc. v. In- distinction of the mark;
N-Out Burger, Inc., G.R. No. 171053, 2007) 4. Quality-image or reputation acquired by
the mark;
The question of whether or not respondent's 5. Extent to which the mark has been
trademarks are considered “well-known” is registered in the world;
factual in nature, involving as it does the 6. Exclusivity of registration attained by the
appreciation of evidence adduced before the mark in the world;
BLA-IPO. The settled rule is that the factual 7. Extent to which the mark has been used
findings of quasi-judicial agencies, like the IPO, in the world;
which have acquired expertise because their 8. Exclusivity of use attained by the mark in
jurisdiction is confined to specific matters, are the world;
generally accorded not only respect, but, at times, 9. Commercial value attributed to the mark
even finality if such findings are supported by in the world;
substantial evidence. (Sehwani, Inc. v. In-N-Out 10. Record of successful protection of the
Burger, Inc., G.R. No. 171053, 2007) rights in the mark;
11. Outcome of litigations dealing with the
Factors Which Shall Not be Required in issue of whether the mark is a well-known
Determining Whether a Mark is a Well-known mark; and
Mark: 12. Presence or absence of identical or
1. that the mark has been used in, or that similar marks validly registered for or
the mark has been registered, or that an used on identical or similar goods or
application for registration of the mark services and owned by persons other
has been filed in or in respect of the than the person claiming that his mark is
Member State; a well-known mark.
2. that the mark is well known in, or that the
mark has been registered, or that an (Rule 102, Rules and Regulations On
application for registration of the mark Trademarks, Servicemarks, Tradenames
has been filed in or in respect of, any and Marked or Stamped Containers)
jurisdiction other than the Member State;
3. that the mark is well known by the public
at large in the Member State. (Part I, Art.
2.3, 1999 Joint Recommendation
Concerning Provisions on the Protection
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8. RIGHTS CONFERRED BY 9. USE BY THIRD PARTIES OF NAMES,

REGISTRATION ETC. SIMILAR TO REGISTERED MARK
The owner of a registered mark shall have the Registration of the mark shall not confer on the
exclusive right: registered owner the right to preclude third parties
1. to prevent all third parties not having the from using bona fide their names, addresses,
owner’s consent pseudonyms, a geographical name, or exact
2. from using in the course of trade identical indications concerning the kind, quality, quantity,
or similar signs or containers for goods or destination, value, place of origin, or time of
services which are identical or similar to production or of supply, of their goods or services:
those in respect of which the trademark Provided, that such use
is registered 1. Is confined to the purposes of mere
3. where such use would result in a identification or information, and
likelihood of confusion. 2. Cannot mislead the public as to the
source of the goods or services. (Sec.
Note: In case of the use of an identical sign for 148, IP Code)
identical goods or services, a likelihood of
confusion shall be presumed. (Sec. 147.1, IP 10. INFRINGEMENT AND REMEDIES
Code)
A. Trademark Infringement
The exclusive right of the owner of a well-known
mark which is registered in the Philippines, shall A person shall be liable for trademark
extend to goods and services which are not infringement if, without the consent of the owner
similar to those in respect of which the mark is of the registered mark, he:
registered, Provided: i. Uses in commerce any reproduction
1. That the use of that mark in relation to or colorable imitation of a registered
those goods or services would indicate a mark or the same container or a
connection between those goods or dominant feature thereof in
services and the owner of the registered connection with the sale, offering for
mark; and sale, distribution, advertising of any
2. That the interests of the owner of the goods or services which is likely to
registered mark are likely to be damaged cause confusion, or to cause
by such use. (Sec. 147.2, IP Code) mistake, or to deceive;
Note: This includes other preparatory

The ownership of a trademark or tradename is a steps necessary to carry out the sale of
property right that the owner is entitled to protect. any goods or services.
However, when a trademark is used by a party for
a product in which the other party does not deal, ii. Reproduces or colorably imitates a
the use of the same trademark on the latter's registered mark or a dominant
product cannot be validly objected to. (Canon feature thereof and applies such
Kabushiki Kaisha v. Court of Appeals, G.R. No. reproduction or colorable imitation to
120900, 2000) signs, packages, or advertisements
intended to be used in commerce
upon or in connection with the sale,
offering for sale, distribution, or
advertising of goods or services
which likely to cause confusion, or to
cause mistake, or to deceive.
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Note: It is immaterial that there was no actual The general impression of the ordinary purchaser
sale of goods or services using the infringing buying under the normally prevalent conditions in
material as long as the acts mentioned were trade and giving the attention such purchasers
actually committed. (Sec. 155, IP Code) usually give in buying that class of goods, is the
touchstone. (Del Monte Corp v. Court of Appeals,
The “likelihood of confusion” is the gravamen of G.R. No. 78325, 1990)
trademark infringement. But likelihood of
confusion is a relative concept, the particular, and Right of Foreign Corporation to Sue in
sometimes peculiar, circumstances of each case Trademark or Service Mark Enforcement
being determinative of its existence. Thus, in Action
trademark infringement cases, more than in other Any foreign national or juridical person who
kinds of litigation, precedents must be evaluated meets the requirements of Section 3 of the IP
in the light of each particular case. (Philip Morris, Code and does not engage in business in the
Inc. v. Fortune Tobacco Corp., G.R. No. 158589, Philippines may bring a civil or administrative
2006) action hereunder for opposition, cancellation,
infringement, unfair competition, or false
To establish trademark infringement, the designation of origin and false description,
following elements must be shown: whether or not it is licensed to do business in the
i. The validity of plaintiff’s mark; Philippines under existing laws. (Sec. 160, IP
ii. The plaintiff’s ownership of the mark; Code)
and
iii. The use of the mark or its colorable Limitations to Actions for Infringement
imitation by the alleged infringer 1. A registered mark shall have no effect
results in “likelihood of confusion.” against any person who, in good faith,
(McDonald's Corp. v. L.C. Big Mak before the filing date or the priority date,
Burger, Inc., G.R. No. 143993, 2004) was using the mark for the purposes of
his business or enterprise.
The phrase “colorable imitation” denotes such a
“close or ingenious imitation as to be calculated Note: Such right may only be transferred
to deceive ordinary persons, or such a or assigned together with his enterprise
resemblance to the original as to deceive an or business or with that part of his
ordinary purchaser giving such attention as a enterprise or business in which the mark
purchaser usually gives, and to cause him to is used.
purchase the one supposing it to be the other”.
(Etepha, A.G. v. Director of Patents, G.R. No. L- Note: cf. (Zuneca v. Natrapharm, G.R.
20635, 1966) No. 211850, 2020 - wherein the SC held
that the first to file rule shall prevail
The use of an identical or colorable imitation of a against a user of a mark in good faith.)
registered trademark by a person for the same
goods or services or closely related goods or 2. Where an infringer who is engaged solely
services of another party constitutes in the business of printing the mark or
infringement. It is a form of unfair competition other infringing materials for others is an
because there is an attempt to get a free ride on innocent infringer, the owner of the right
the reputation and selling power of another infringed shall be entitled as against such
manufacturer by passing of one’s goods as infringer only to an injunction against
identical or produced by the same manufacturer future printing.
as those carrying the other mark (brand). 3. Where the infringement complained of is
(Commissioner of Internal Revenue v. San contained in or is part of paid
Miguel Corp., G.R. Nos. 205045 & 205723, 2017) advertisement in a periodical or in an
electronic communication, the remedies
of the owner of the right infringed as
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against the publisher or distributor of C. Damages; Requirement of Notice

periodical or electronic communication
shall be limited to an injunction against In any suit for infringement, the owner of the
the presentation of such advertising registered mark shall not be entitled to recover
matter in future issues. profits or damages UNLESS the acts have been
committed with knowledge that such imitation is
Note: This shall apply only to innocent likely to cause confusion, or to cause mistake, or
infringers. to deceive. Such knowledge is presumed if:
1. The registrant gives notice that his mark
4. There shall be no infringement of is registered by displaying with the mark
trademarks or tradenames of imported or the words “Registered Mark” or the letter
sold drugs and medicines as well as R within a circle, or
imported or sold off-patent drugs and 2. The defendant had otherwise actual
medicines PROVIDED, the marks notice of the registration. (Sec. 158, IP
appearing thereon have been registered Code)
marks that have not been tampered or
unlawfully modified. D. Penalties
B. Damages Independent of the civil and administrative

sanctions imposed by law, a criminal penalty of
The owner of a registered mark may recover imprisonment from 2 to 5 years and a fine ranging
damages from any person who infringes his from P50,000 to P200,000 shall be imposed on
rights. The measure of the damages suffered any person who is found guilty of committing any
shall be either: of the acts of trademark infringement, unfair
1. The reasonable profit which the competition, or false description or
complaining party would have made had representation. (Sec. 170, IP Code)
the defendant not infringed his rights, or
2. The profit which the defendant actually Power of Court to Order Infringing Material
made out of the infringement. Destroyed
In any action involving a violation of a right of the
If the measure of damages cannot be readily owner of the registered mark, the court may order
ascertained with reasonable certainty, the court that goods found to be infringing be disposed of
may award as damages a reasonable percentage outside the channels of commerce in such a
based upon the amount of gross sales of the manner as to avoid any harm caused to the right
defendant or the value of the services in holder or destroyed without compensation of any
connection with which the mark or trade name sort. (Sec. 157.1, IP Code)
was used in the infringement of the rights of the
complaining party. (Sec. 156.1, IP Code) 11. UNFAIR COMPETITION
Note: Where there was actual intent to mislead A person who has identified in the mind of the
the public or to defraud the complainant, the court public the goods he manufactures or deals in, his
may double the amount of damages to be business or services from those of others,
awarded. (Sec. 156.3, IP Code) whether or not a registered mark is employed,
has a property right in the goodwill of the said
On application of the complainant, the court may goods, business or services so identified, which
impound during the pendency of the action, sales will be protected in the same manner as other
invoices and other documents evidencing sales. property rights. (Sec. 168.1, IP Code)
(Sec. 156.2, IP Code)
Any person who shall employ deception or any
other means contrary to good faith by which he
shall pass off the goods manufactured by him or
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in which he deals, or his business, or services for the effect is to pass off on the public the goods of
those of the one having established such one man as the goods of another. It is not
goodwill, or who shall commit any acts calculated necessary that any particular means should be
to produce said result, shall be guilty of unfair used to this end. (Mighty Corp. v. E. & J. Gallo
competition. (Sec. 168.2, IP Code) Winery, G.R. No. 154342, 2004)
Any conduct the end and probable effect of which Trademark Unfair
is to deceive the public or pass off the goods or Infringement Competition
business of a person as that for another Passing off of
Unauthorized
constitutes actionable unfair competition. one’s goods
Essence use of a
(Alhambra Cigar vs. Mojica, G.R. No. L-8937, as those of
trademark
1914) another
Fraudulent
Essentially, what the law punishes is the act of Unnecessary Essential
Intent
giving one’s goods the general appearance of the Prior Prerequisite
goods of another, which would likely mislead the Unnecessary
Registration to the action
buyer into believing that such goods belong to the
latter. (Manuel C. Espiritu et. al. v. Petron Corp. 12. REGISTRATION OF MARKS UNDER
et. al., G.R. No. 170891, 2009)
THE MADRID PROTOCOL
The “true test” of unfair competition is whether the The Madrid Protocol provides a cost-effective and
acts of the defendant have the intent of deceiving efficient way for trademark holders to ensure
or are calculated to deceive the ordinary buyer protection for their marks in multiple countries
making his purchases under the ordinary through the filing of one application with a single
conditions of the particular trade to which the office, in one language, with one set of fees, in
controversy relates. One of the essential one currency. The Philippines acceded to the
requisites in an action to restrain unfair Madrid Protocol with effect on July 25, 2012.
competition is proof of fraud; the intent to deceive,
actual or probable must be shown before the right A. Coverage
to recover can exist. (Superior Commercial
Enterprises v. Kunnan Enterprises Ltd., et. al., An international application may be filed only by
G.R. No. 169974, 2010) a natural person or a legal entity having an
industrial or commercial establishment in, or
Trademark Infringement vs. Unfair being domiciled in, or a national of, the
Competition Philippines.
The law on unfair competition is broader and
more inclusive than the law on trademark An international mark registered under the Madrid
infringement. Trademark infringement is more System can only be protected within the
limited, but it recognizes a more exclusive right territories of State parties to the Madrid Union.
derived from the trademark adoption and
registration by the person whose goods or The protection resulting from any international
business is first associated with it. The law on registration effected under the Madrid Protocol
trademarks is a specialized subject distinct from before the date of entry into force of the
the law on unfair competition, although the two Philippines cannot be extended to it. International
subjects are entwined with each other and are registrations with dates prior to July 25, 2012 are
dealt with together in the IP Code. not allowed.
Hence, even if one fails to establish his exclusive B. Rights Conferred

property right to a trademark, he may still obtain
From the date of the international registration, the
relief on the ground of his competitor's unfairness
protection of the mark in each of the designated
or fraud. Conduct constitutes unfair competition if
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Contracting Parties is the same as if the mark had Minimum requirements to submit an
been the subject of an application for registration international application
filed directly with the Office of that Contracting 1. Name, address, and contact details of the
Party. applicant or the address and contact details
of the applicant’s representative, if any;
An international registration is, therefore, 2. The Designated Contracting Parties;
equivalent to a bundle of national registrations. 3. Reproduction of the mark; and
4. Indication of the goods and services for which
Limitations: registration of the mark is sought.
Although an international registration is a single 5. Payment of the following fees:
registration: a. Basic fee;
1. Protection may be refused by some of the b. Complementary fee in respect of
designated Contracting Parties, or the each designated Contracting Party
protection may be limited or renounced for which no individual fee is payable;
with respect to only some of the c. Supplementary fee in respect of each
designated Contracting Parties. class of goods and services beyond
2. It may also be invalidated with respect to the third
one or more of the designated
Contracting Parties. Note: No supplementary fee is payable
3. Any action for infringement of an where all the designations are ones in
international registration must be brought respect of which an individual fee has to
separately in each of the Contracting be paid.
Parties concerned.
D. Term of Protection
C. Requirements for Registration
An international registration is effective for 10
A mark may be the subject of an international years. It may be renewed for further periods of 10
application only if it has already been registered, years on payment of the prescribed fees.
or if its registration has been applied for in the
IPOPHL to be able to file an international The international registration may be renewed in
application. This is called the Basic Registration respect of all the designated Contracting Parties
or Basic Application, as the case may be. or in respect of only some of them.
An international application must be presented to Note: It may not be renewed in respect of only
the International Bureau through the IPOPHL. An some of the goods and services recorded in the
international application which is presented direct International Register. If the holder wishes to
to the International Bureau by the applicant will remove some of the goods and services from the
not be considered as such and will be returned to international registration, he must separately
the sender. request cancellation in respect of those goods
and services.
The Philippines, as an office of origin, has
designated the English language for the filing of The method of registration through the IPOPHL,
international applications and any as laid down by the IP Code, is distinct and
communications for transmittal to the separate from the method of registration through
International Bureau through the IPOPHL. All the WIPO, as set in the Madrid Protocol.
other documents required to be submitted directly Comparing the two methods of registration
to the IPOPHL by the applicant must also be in despite their being governed by two separate
English. systems of registration is thus misplaced. (IPAP
v. Sec. Ochoa, G.R. No. 204605, 2016)
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D. COPYRIGHT without copying that selection or arrangement

from another work), and that it display some
1. BASIC PRINCIPLES minimal level of creativity. (Feist Publications, Inc.
v. Rural Telephone Service Co., Inc., 499 U.S.
Copyright is not primarily about providing the 340, 1991)
strongest possible protection for copyright
owners so that they have the highest possible Note: The requisite level of creativity is extremely
incentive to create more works. The control given low; even a slight amount will suffice.
to copyright owners is only a means to an end:
the promotion of knowledge and learning. The Authorship
goal of copyright is to promote creativity and An author is “he to whom anything owes its origin;
encourage creation of works. (ABS-CBN Corp. v. originator; maker; one who completes a work of
Gozon, G.R. No. 195956, 2015) science or literature.” (Burrow-Giles Lithographic
Company v. Sarony, 111 U.S. 53, 1884)
The copyright for a work is acquired by an
intellectual creator from the moment of creation Note: The author must be a natural person. (Sec.
even in the absence of registration and deposit 171.1, IP Code)
(Columbia Pictures v. CA, G.R. No. 110318,
1996)
2. COPYRIGHTABLE WORKS
The focus of copyright is the usefulness of the A. Original Literary or Artistic Works
artistic design, and not its marketability. The
central inquiry is whether the article is a work of These are original intellectual creations in the
art. (Ching v. Salinas Sr., G.R. No. 161295, 2005) literary and artistic domain protected from the
moment of their creation and shall include in
Idea-Expression Dichotomy particular:
Unlike a patent, a copyright gives no exclusive a. Books, pamphlets, articles and other writings;
right to the art disclosed; protection is given only b. Periodicals and newspapers;
to the expression of the idea — not the idea itself. c. Lectures, sermons, addresses, dissertations
(Mazer v. Stein, 347 U.S. 201, 1954) prepared for oral delivery, whether or not
reduced in writing or other material form;
Purely Statutory Right d. Letters;
Copyright is purely a statutory right. Being a e. Dramatic or dramatico-musical compositions;
statutory grant, the rights are only such as the choreographic works or entertainment in
statute confers, and may be obtained and dumb shows;
enjoyed only with respect to the subjects and by f. Musical compositions, with or without words;
the persons, and on terms and conditions g. Works of drawing, painting, architecture,
specified in the statute. (Joaquin, Jr. v. Drilon, sculpture, engraving, lithography or other
G.R. No. 108946, 1999) works of art; models or designs for works of
art;
Originality
Originality is the sine qua non of copyright. If the Work of Architecture
basic design reflected in a work or art does not Copyright in a work of architecture shall
owe its origin to the putative copyright holder, include the right to control the erection of any
then that person must add something original to building which reproduces the whole or a
that design, and then only the original addition substantial part of the work either in its
may be copyrighted. (Meshwerks, Inc. v. Toyota original form or in any form recognizably
Motor Sales U.S.A., 528 F.3d 1258, 2008) derived from the original
Originality requires only that the author make the Note: The copyright in any such work shall
selection or arrangement independently (i.e., not include the right to control the
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reconstruction or rehabilitation in the same B. Derivative Works

style as the original of a building to which that
copyright relates. (Sec. 186, IP Code) The following derivative works shall be protected
by copyright:
h. Original ornamental designs or models for 1. Dramatizations, translations, adaptations,
articles of manufacture, whether or not abridgments, arrangements, and other
registrable as an industrial design, and other alterations of literary or artistic works; and
works of applied art; 2. Collections of literary, scholarly or artistic
i. Illustrations, maps, plans, sketches, charts works, and compilations of data and other
and three-dimensional works relative to materials which are original by reason of the
geography, topography, architecture or selection or coordination or arrangement of
science; their contents. (Sec. 173.1, IP Code)
j. Drawings or plastic works of a scientific or
technical character; Derivative works shall be protected as new
k. Photographic works including works works, provided however, that such new work:
produced by a process analogous to a. Shall not affect the force of any subsisting
photography; lantern slides; copyright upon the original works employed
l. Audiovisual works and cinematographic or any part thereof, or
works and works produced by a process b. Be construed to imply any right to such use
analogous to cinematography or any process of the original works, or to secure or extend
for making audio-visual recordings; copyright in such original works.
m. Pictorial illustrations and advertisements;
n. Computer programs; and Published Edition of Work
In addition to the right to publish granted by the
Computer author, his heirs, or assigns, the publisher shall
An electronic or similar device having have a copyright consisting merely of the right of
information-processing capabilities reproduction of the typographical arrangement of
the published edition of the work. (Sec. 174, IP
Computer Program Code)
A set of instructions expressed in words,
codes, schemes or in any other form, which 3. NON-COPYRIGHTABLE WORKS
is capable when incorporated in a medium
that the computer can read, or causing the No protection shall extend to any:
computer to perform or achieve a particular 1. Idea, procedure, system, method or
task or result. operation, concept, principle, discovery
or mere data [IPSMOC-PDD];
o. Other literary, scholarly, scientific and artistic 2. News of the day and other miscellaneous
works. facts having the character of mere items
of press information; or
(Sec. 172.1, IP Code) 3. Official text of a legislative, administrative
or legal nature, as well as any official
Note: Works are protected by the sole fact of their translation thereof. (Sec. 175, IP Code)
creation, irrespective of their mode or form of
expression, as well as of their content, quality and The expression of an idea is protected by
purpose. (Sec. 172.2, IP Code) copyright, not the idea itself.
It is axiomatic that copyright protection does not
extend to news "events" or the facts or ideas
which are the subject of news reports. But it is
equally well-settled that copyright protection does
extend to the reports themselves, as
distinguished from the substance of the
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information contained in the reports. Copyright of justice, before administrative

protects the manner of expression of news agencies, in deliberative assemblies, and
reports, "the particular form or collocation of in meetings of public character.
words in which the writer has communicated it."
Such protection extends to electronic news Note: The author of speeches, lectures,
reports as well as written reports. sermons, addresses, and dissertations
mentioned in the preceding paragraphs
The idea/expression dichotomy is a complex shall have the exclusive right of making a
matter if one is trying to determine whether a collection of his works.
certain material is a copy of another. This
dichotomy would be more relevant in Publication or republication by the government in
determining, for instance, whether a stage play a public document of any copyrighted work shall
was an infringement of an author’s book involving not be taken to cause any abridgment or
the same characters and setting. In this case, annulment of the copyright or to authorize any
however, respondents admitted that the material use or appropriation of such work without the
under review — which is the subject of the consent of the copyright owner. (Sec. 176.3, IP
controversy — is an exact copy of the original. Code)
Respondents did not subject ABS-CBN’s footage
to any editing of their own. The news footage did 4. RIGHTS OF COPYRIGHT OWNER
not undergo any transformation where there is a
need to track elements of the original. (ABS-CBN Copyright or Economic Rights
Corp. v. Gozon, G.R. No. 195956, 2015) Copyright or economic rights shall consist of the
exclusive right to carry out, authorize or prevent
Works of the Government the following acts:
A work of the Government is a work created by 1. Reproduction of the work or substantial
an officer or employee of the Philippine portion of the work;
Government or any of its subdivisions and
instrumentalities, including government-owned or Reproduction
controlled corporations as part of his regularly Making of 1 or more copies, temporary or
prescribed official duties. (Sec. 171.11, IP Code) permanent, in whole or in part, of a work
or a sound recording in any manner or
No copyright shall subsist in any work of the form
Government of the Philippines. However, the
Government is not precluded from receiving and 2. Dramatization, translation, adaptation,
holding copyrights transferred to it by abridgment, arrangement or other
assignment, bequest or otherwise. transformation of the work;
3. The first public distribution of the original
General Rule: Prior approval of the government and each copy of the work by sale or
agency or office wherein the work is created shall other forms of transfer of ownership;
be necessary for exploitation of such work for 4. Rental of the original or a copy of an
profit. audiovisual or cinematographic work, a
work embodied in a sound recording, a
Such agency or office may impose as a condition computer program, a compilation of data
the payment of royalties. and other materials or a musical work in
graphic form, irrespective of the
Exception: No prior approval or conditions shall ownership of the original or the copy
be required for the use of any purpose of: which is the subject of the rental;
1. Statutes, rules and regulations, or
2. Speeches, lectures, sermons, Rental
addresses, and dissertations, Transfer of the possession of the original
pronounced, read or rendered in courts or a copy of a work or a sound recording
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for a limited period of time, for profit- 5. RULES ON OWNERSHIP OF

making purposes COPYRIGHT
5. Public display of the original or a copy of Rules on Ownership

the work; Copyright ownership shall be governed by the
6. Public performance of the work; and following rules:
Definitions of Public Performance TYPE OF

OWNERSHIP
a. For Non-audiovisual work – WORK
reciting, playing, dancing, acting or Original
otherwise performing the work, either Literary and Copyright belongs to the
directly or by means of any device or Artistic author of the work.
process Works
b. For Audiovisual work – showing of  Co-authors shall be the
its images in sequence and the original owners of the
making of the sounds accompanying copyright.
it audible  In the absence of
c. For Sound recording – making the agreement, rights shall
recorded sounds audible at a place be governed by the rules
or at places where persons outside on co-ownership.
the normal circle of a family and that
Joint
family’s closest social acquaintances Note: If a work of joint
Authorship
are or can be present authorship consists of parts
that can be used separately
7. Other communication to the public of the and the author of each part
work, e.g. online/Internet. can be identified, the author
of each part shall be the
Communication to the public original owner of the
Any communication to the public, including copyright in the part that he
broadcasting, rebroadcasting, retransmitting has created.
by cable, broadcasting, and retransmitting by Copyright shall belong to:
satellite, and includes the making of a work 1. Employee: creation of
available to the public by wire or wireless the object of copyright is
means in such a way that members of the not a part of his regular
public may access these works from a place duties even if the
and time individually chosen by them employee uses the time,
facilities and materials of
Employee’s
the employer.
Work
2. Employer: work is the
result of the performance
of his regularly-assigned
duties, UNLESS there is
an agreement, express
or implied, to the
contrary
Ownership of the work
Independent belongs to the person other
Contractor’s than the employer who
Work commissioned the work and
who pays for it.
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Copyright remains with the The purpose and character requirement

creator, unless there is a is important in view of copyright’s goal to
written stipulation to the promote creativity and encourage
contrary. creation of works. Hence, commercial
 Copyright belongs to the use of the copyrighted work can be
producer, the author of weighed against fair use.
the scenario, the
composer of the music, The “transformative test” is generally
the film director, and the used in reviewing the purpose and
author of the work so character of the usage of the copyrighted
adapted. work. Courts must look into whether the
 The producer shall copy of the work adds “new expression,
exercise the copyright to meaning or message” to transform it into
Audiovisual
an extent required for the something else. (ABS-CBN Corp. v.
Work
exhibition of the work in Gozon, G.R. No. 195956, 2015)
any manner.
2. The nature of the copyrighted work;
Exception: Right to collect
performing license fees for If the nature of the work is more factual
the performance of musical than creative, then fair use will be
compositions, with or without weighed in favor of the user. (ABS-CBN
words, which are Corp. v. Gozon, G.R. No. 195956, 2015)
incorporated into the work
Copyright belongs to the 3. The amount and substantiality of the
writer subject to the portion used in relation to the copyrighted
provisions of Article 723 of work as a whole; and
the Civil Code wherein it
Letters provides that the court may An exact reproduction of a copyrighted
authorize their publication or work, compared to a small portion of it,
dissemination if the public can result in the conclusion that its use is
good or the interest of justice not fair.
so requires.
However, there may also be cases
6. LIMITATIONS ON COPYRIGHT where, though the entirety of the
copyrighted work is used without
A. Fair Use consent, its purpose determines that the
usage is still fair. For example, a parody
The fair use of a copyrighted work for criticism, using a substantial amount of
comment, news reporting, teaching including copyrighted work may be permissible as
limited number of copies for classroom use, fair use as opposed to a copy of a work
scholarship, research, and similar purposes is not produced purely for economic gain.
an infringement of copyright. (ABS-CBN Corp. v. Gozon, G.R. No.
195956, 2015)
In determining whether the use made of a work in
any particular case is fair use, the factors to be 4. The effect of the use upon the potential
considered shall include: [PuCha-Nat-Su-E] market for or value of the copyrighted
1. The purpose and character of the use, work. (Sec. 185.1, IP Code)
including whether such use is of a
commercial nature or is for non-profit If a court finds that the use had or will
educational purposes; have a negative impact on the
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copyrighted work's market, then the use a. Selling, letting for hire, or by way of trade
is deemed unfair. (ABS-CBN Corp. v. offering or exposing for sale, or hire, the
Gozon, G.R. No. 195956, 2015) article
b. Distributing the article for purpose of
Note: That a work is unpublished shall not by trade, or for any other purpose to an
extent that will prejudice the rights of the
itself bar a finding of fair use if such finding is
copyright owner in the work; or
made upon consideration of all the above factors. c. Trade exhibit of the article in public. (Sec.
(Sec. 185.2, IP Code) 217.3, IP Code)
Doctrine of Fair Use Copyright Infringement

Fair use is a privilege to use the copyrighted Infringement of a copyright is a trespass on a
material in a reasonable manner without the private domain owned and occupied by the owner
consent of the copyright owner or as copying the of the copyright, and, therefore, protected by law,
theme or ideas rather than their expression. Fair and infringement of copyright, or piracy, which is
use is an exception to the copyright owner’s a synonymous term in this connection, consists in
the doing by any person, without the consent of
monopoly of the use of the work to avoid stifling
the owner of the copyright, of anything the sole
the very creativity which that law is designed to right to do which is conferred by statute on the
foster. (ABS-CBN Corp. v. Gozon, G.R. No. owner of the copyright. (Columbia Pictures, Inc.
195956, 2015) v. Court of Appeals, G.R. No. 110318, 1996)
No question of fair or unfair use arises, however, Gravamen of Copyright Infringement

if no copying is proved to begin with. This is in The gravamen of copyright infringement is not
consonance with the principle that there can be merely the unauthorized “manufacturing” of
no infringement if there was no copying. It is only intellectual works but rather the unauthorized
where some form of copying has been shown that performance of any of the acts covered by Sec.
177 (economic rights). Hence, any person who
it becomes necessary to determine whether it has
performs any of the acts thereunder without
been carried to an “unfair,” that is, illegal, extent. obtaining the copyright owner’s prior consent
(Habana v. Robles, G.R. No. 131522, 1999) renders himself civilly and criminally liable for
copyright infringement. (NBI - Microsoft Corp. v.
7. COPYRIGHT INFRINGEMENT Hwang, G.R. No. 147043, 2005)
Any person infringes a right protected under the When Committed

IP Code when one: By any person who shall use original literary or
a. Directly commits an infringement (direct artistic works, or derivative works, without the
infringement); copyright owner’s consent in such a manner as to
b. Benefits from the infringing activity of violate the foregoing copy and economic rights.
another person who commits an For a claim of copyright infringement to prevail,
infringement if the person benefiting has the evidence on record must demonstrate:
been given notice of the infringing activity a. Ownership of a validly copyrighted
and has the right and ability to control the material by the complainant; and
activities of the other person (vicarious b. Infringement of the copyright by the
infringement); or respondent. (Olano v. Eng Co, G.R. No.
c. With knowledge of infringing activity, 195835, 2016)
induces, causes or materially contributes
to the infringing conduct of another The Intellectual Property Code is malum
(direct infringement). (Sec. 216, IP Code) prohibitum and prescribes a strict liability for
copyright infringement. Good faith, lack of
Also includes the act of any person who at the knowledge of the copyright, or lack of intent to
time when copyright subsists in a work has in his infringe is not a defense against copyright
possession an article which he known, or ought infringement. (ABS-CBN Corp. v. Gozon, G.R.
to know, to be an infringing copy of the work for No. 195956, 2015)
the purpose of:
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A. Remedies infringing copies of the work even in the event

of acquittal in a criminal case.
Any person infringing a right protected under the
IP Code shall be liable: Statutory Damages
a. To an injunction restraining such The copyright owner may elect, at any time before
infringement. final judgment is rendered, to recover instead of
actual damages and profits, an award of statutory
The court may also order the defendant to damages for all infringements involved in an
desist from an infringement to prevent the action in a sum equivalent to the filing fee of the
entry into the channels of commerce of infringement action but not less than P50,000.00.
imported goods that involve an infringement, In awarding statutory damages, the court may
immediately after customs clearance of such consider the following factors:
goods. 1. The nature and purpose of the infringing
act;
b. To pay to the copyright proprietor or his 2. The flagrancy of the infringement;
assigns or heirs such actual damages, 3. Whether the defendant acted in bad faith;
including legal costs and other expenses, as 4. The need for deterrence;
he may have incurred due to the infringement 5. Any loss that the plaintiff has suffered or
as well as the profits the infringer may have is likely to suffer by reason of the
made due to such infringement. infringement; and
6. Any benefit shown to have accrued to the
Note: In proving profits, the plaintiff shall be defendant by reason of the infringement.
required to prove sales only and the (Sec. 216.1, IP Code)
defendant shall be required to prove every
element of cost which he claims or, in lieu of B. Criminal Penalties
actual damages and profits, such damages
which, to the court, shall appear to be just and The copyright owner can file a criminal, civil or
shall not be regarded as penalty. administrative action for copyright infringement.
The amount of damages to be awarded shall Where Filed

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

insolvency. (Sec. 217.1, IP Code)
In Determining Number of Years of

Imprisonment and Amount of Fine
The court shall consider the value of the infringing
materials that the defendant has produced or
manufactured and the damage that the copyright
owner has suffered by reason of the infringement:
Provided, That the respective maximum penalty
stated in Section 217.1. (a), (b) and (c) herein for
the first, second, third and subsequent offense,
shall be imposed when the infringement is
committed by:
a. The circumvention of effective
technological measures;
b. The removal or alteration of any
electronic rights management
information from a copy of a work, sound
recording, or fixation of a performance,
by a person, knowingly and without
authority; or
c. The distribution, importation for
distribution, broadcast, or communication
to the public of works or copies of works,
by a person without authority, knowing
that electronic rights management
information has been removed or altered
without authority. (Sec. 217.2, IP Code)
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SPECIAL LAWS
Commercial Law
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VIII. SPECIAL LAWS c. Obligations Secured

d. Surety Distinguished From
Standby Letter of Credit
e. Surety Distinguished From
Guaranty
VII. SPECIAL LAWS
f. Surety Distinguished From
A. SECURED TRANSACTIONS
Joint and Solidary Obligations
1. Personal Property Securities Act
5. Letters of Credit
a. Definitions and Scope
a. Definition and Purpose
b. Asset-Specific Rules
b. Kinds of Letters of Credit
i. Future Property
c. Rule of Strict Compliance
ii. Rights to Proceeds and
d. Independence Principle
Commingled Funds
iii. Tangible Assets
Commingled in a Mass
iv. Accounts Receivables
c. Perfection of Security
Interests
d. Registration
e. Priority of Security Interests
f. Tangible Assets; Intangible
Assets
g. Enforcement of Security
Interests
h. Prior Interests and the
Transitional Period
2. Real Estate Mortgage Law
a. Definition and Characteristics
i. Obligations Secured by
Real Estate Mortgage
ii. Object of Real Estate
Mortgage
iii. Right to Alienate
Mortgage Credit
iv. Right to Alienate
Collateral
b. Essential Requisites
3. Guaranty
a. Nature and Extent of
Guaranty
i. Obligation Secured by
Guaranty
ii. Parties to a Guaranty
iii. Excussion
iv. Right to Protection
v. Right to Indemnification
vi. Right to Subrogation
vii. Rights of Co-Guarantors
b. Effects of Guaranty
c. Extinguishment of Guaranty
d. Legal and Judicial Bonds
4. Surety
a. Concept
b. Form of Surety
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A. SECURED TRANSACTIONS secured creditor with respect to the security,

without further consent from the grantor
1. PERSONAL PROPERTY SECURITIES
ACT With respect to rights to deposit account
It is an agreement in writing among the deposit-
A. DEFINITIONS AND SCOPE taking institution, the grantor, and the secured
creditor where the deposit-taking institution
Note: the PPSA repealed the following laws: agrees to follow the instructions from the
1. The Chattel Mortgage Law secured creditor with respect to the payment
2. Articles 2085-2123 (pledge), 2127 of funds credited to the deposit account
(mortgage extends to accessions), 2140- without further consent from the grantor.
2141 (chattel mortgage), 2241, 2243,
and 2246-2247 (preference of credits for With respect to commodity contracts
specific movable property) of the Civil It is an agreement in writing among the grantor,
Code secured creditor, and intermediary, according
3. Sec. 13 of the Financing Company Act of to which the commodity intermediary will
1998 (Registry of Deeds shall maintain a apply any value distributed by the secured
register of financial leases) creditor without further consent by the
4. Sec. 114-116 (recording and fees for commodity customer or grantor
recording of chattel mortgages), and
partially Sec. 10 (general function of the c. Grantor
Register of Deeds; insofar as
inconsistent with the PPSA) of the A grantor may be: (BuTTLGG)
Property Registration Decree (a) A Buyer or other Transferee of a collateral
5. Sec. 5(e) of the Land Transportation and that acquires it right subject to a security
Traffic Code (encumbrances of motor interest;
vehicles) (b) A Transferor in an outright transfer of an
accounts receivable; or
1. TERMS (c) A Lessee of Goods
(d) Grantor of security interest in collateral to
a. Commodity Contact secure its own obligation or of another
person;
A commodity futures contract, an option on a
commodity futures contract, a commodity d. Non-intermediated Securities
option, or another contract if the option is:
Such are:
1. Traded on or subject to the rules of a board
(a) securities other than those credited to a
of trade that has been designated as a
securities account; and
contract market for such a contract; or
(b) rights in securities resulting from the
2. Traded on a foreign commodity board of
credit of securities to a securities account
trade, exchange, or market, and is carried on
the books of a commodity intermediary for a
commodity customer; e. Notice
A statement of information that is registered in the
b. Control Agreement Registry relating to a security interest or lien.
With respect to securities The term “notice” includes:

It is an agreement in writing among the issuer or
(a) Initial notice;
the intermediary, the grantor, and the secured
(b) amendment notice;
creditor, according to which the intermediary
(c) termination notice;
agrees to follow the instructions of the
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f. Proceeds also provide for the language to be used.

Proceeds may be: (PPSA, Sec. 6)
(a) any property received upon sale, lease
or other disposition of collateral; or The security agreement may provide for the
creation of a security interest in a future
(b) whatever is collected on or distributed
property, but the security interest in that future
with respect to collateral;
property is created only when the grantor
(c) claims arising out of the loss or damage acquires rights in it or the power to encumber
to the collateral; it. (PPSA, Sec. 5(b))
(d) as well as a right to insurance payment
or other compensation for loss or A description of the collateral is sufficient if it
damage of the collateral reasonably identifies the collateral; a description
such as “all personal property”, “all equipment”,
g. Purchase Money Security Interest “all inventory”, or “all personal property within a
A security interest in goods taken by the seller to generic category” of the grantor shall be sufficient
secure the price or by a person who gives value
to enable the grantor to acquire the goods to the k. Writing
extent that the credit is used for that purpose For purposes of this act, “writing” includes
electronic records
h. Registry
The centralized and nationwide electronic registry 2. SCOPE
established in the Land Registration Authority
(LRA) where notice of a security interest and a GR: Applies to all transactions that secure an
lien in personal property may be registered obligation with a movable collateral
EXC:
i. Secured Creditor
(a) interests in aircrafts subject to the Civil
A person that has a security interest. Aviation Authority Act of 2008; and
For the purposes of registration and priority only: (b) interests in ships subject the Ship
(a) includes a buyer of account receivable and a Mortgage Decree of 1978(Sec. 4)
lessor of goods under an operating lease for
not less than one (1) year
B. ASSET-SPECIFIC RULES
j. Security Interest a. Future Property

A property right in collateral that secures
payment or other performance of an obligation, As to the creation of a security interest
regardless of whether the parties have A security agreement may provide for the
denominated it as a security interest, and creation of a security interest in a future property,
regardless of the type of asset, the status of the but the security interest in that property is created
grantor or secured creditor, or the nature of the only when the grantor acquires rights in it or
secured obligation; including the right of a buyer the power to encumber it.(Sec. 5b)
of accounts receivable and a lessor under an
operating lease for not less than one (1) year b. Rights to proceeds and comingled funds
These are the rules to be followed (Sec. 8):

A security interest is created by a security
(a) A security interest in personal property shall
agreement. (PPSA, Sec. 5(a))
extend to its identifiable or traceable proceeds.
A security agreement should be contained in a
written contract signedby the parties. It should
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(b) Where proceeds in the form of funds credited debtor of the receivable is required to make
to a deposit account or money are commingled payment.
with other funds or money:
d. Accounts receivable
i. The security interest shall extend to the
commingled money or funds, Section 3.08 Security Interest in Certain
notwithstanding that the proceeds have Accounts Receivable.
ceased to be identifiable to the extent A security interest in an account receivable shall
they remain traceable; be effective notwithstanding any agreement
between the grantor and the account debtor or
ii. The security interest in the commingled
any secured creditor limiting in any way the
funds or money shall be limited to the
grantor's right to create a security interest;
amount of the proceeds immediately
Provided: Nothing in this section affects the right
before they were commingled; and
of a buyer to create a security interest over the
iii. If at any time after the commingling, the account receivable. Provided, further: that any
balance credited to the deposit account release of information is subject to agreements
or the amount of the commingled money on confidentiality.
is less than the amount of the proceeds
Nothing in this section shall affect any obligation
immediately before they were
or liability of the grantor for breach of the
commingled, the security interest against
agreement in subsection (a).
the commingled funds or money shall be
limited to the lowest amount of the Any stipulation limiting the grantor's right to create
commingled funds or money between the a security interest shall be void.
time when the proceeds were
commingled and the time the security This section shall apply only to accounts
interest in the proceeds is claimed. receivable arising from:
i. A contract for the supply or lease of
c. Tangible assets commingled in a mass goods or services other than
financial services;
Section 3.07 of the IRR. Security Interest Over ii. A construction contract or contract
Tangible Assets Commingled in a Mass for the sale or lease of real property;
A security interest in a tangible asset that is and
commingled in a mass extends to the mass. iii. A contract for the sale, lease or
license of intellectual property.
A security interest that extends to a mass is
limited to the same proportion of the mass as the C. PERFECTION OF SECURITY
quantity of the encumbered asset bore to the INTERESTS
quantity of the entire mass immediately after the
commingling. SECTION 11. PERFECTION OF SECURITY
INTEREST.
Section 3.09 of the IRR. Protection of Account
Debtor A security interest shall be perfected when it has
Except as otherwise provided in the PPSA and been created and the secured creditor has taken
these Rules, the creation of a security interest in one of the actions in accordance with Section 12.
a receivable does not, without the consent of the
debtor of the receivable, affect its rights and Hence, to perfect a security interest, it must be
obligations, including the payment terms created then accompanied by either registration,
contained in the contract giving rise to the possession, or control; depending on the
receivable. A payment instruction may change collateral.
the person, address or account to which the
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On perfection, a security interest becomes so requests. A deposit-taking institution or an

effective against third parties. intermediary that has entered into such an
agreement shall not be required to confirm the
existence of the agreement to another person
SECTION 12. MEANS OF PERFECTION. unless requested to do so by the grantor.
A SECURITY INTEREST MAY BE
PERFECTED THROUGH THE FOLLOWING SECTION 14. PERFECTION IN PROCEEDS
MEANS: (RPC)
(a) Registration of a notice with the Registry; Upon disposition of collateral, a security
(b) Possession (actual or constructive) of the interest shall extend to proceeds of the
collateral by the secured creditor; and collateral without further act and be
(c) Control of investment property and deposit continuously perfected, if the proceeds are in the
account. form of money, accounts receivable,
negotiable instruments or deposit accounts.
A security interest in any tangible asset may be
perfected by registration or possession. A Upon disposition, if the proceeds are in a form
security interest in investment property and different from money, accounts receivable,
deposit account may be perfected by registration negotiable instruments or deposit accounts, the
or control. security interest in the proceeds must be
perfected by one of the means applicable to the
Perfection in Tangible v. Intangible Assets relevant type of collateral within fifteen (15) days
TANGIBLE ASSETS INTANGIBLE after the grantor receives such proceeds;
ASSETS otherwise, the security interest in such proceeds
May be perfected May be perfected shall not be effective against third parties.
through registration through registration
or possession or control.
(Please refer to SECTION 15. CHANGE IN MEANS OF
different modes of PERFECTION
perfection for specific
intangible assets) A security interest shall remain perfected despite
a change in the means for achieving perfection:
provided, that there was no time when the
SECTION 13. PERFECTION BY CONTROL security interest was not perfected.
A security interest in a deposit account or

SECTION 16. ASSIGNMENT OF SECURITY
investment property may be perfected by control
through: INTEREST
(a) The creation of the security interest in favor
If a secured creditor assigns a perfected security
of the deposit-taking institution or the
interest, an amendment notice may be registered
intermediary;
to reflect the assignment.
(b) The conclusion of a control agreement; or
(c) For an investment property that is an
electronic security not held with an D. REGISTRATION
intermediary, the notation of the security
interest in the books maintained by or on SECTION 26. ESTABLISHMENT OF
behalf of the issuer for the purpose of ELECTRONIC REGISTRY
recording the name of the holder of the
securities. The Registry shall be established in and
(d) Nothing in this Act shall require a deposit- administered by the LRA.
taking institution or an intermediary to enter
into a control agreement, even if the grantor
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The Registry shall provide electronic means for SECTION 29. ONE NOTICE SUFFICIENT
registration and searching of notices. FOR SECURITY INTERESTS UNDER
MULTIPLE SECURITY AGREEMENTS
SECTION 27. PUBLIC RECORD The registration of a single notice may relate to
security interests under one or more security
Information contained in a registered notice shall agreements.
be considered as a public record.
SECTION 30. EFFECTIVENESS OF NOTICE
Any person may search notices registered in the
Registry. As to the time of effectivity
A notice shall be effective at the time it is
SECTION 28. SUFFICIENCY OF NOTICE
discoverable on the records of the Registry.
An initial notice of security interest shall not be
As to its duration
rejected:
It is effective for the duration of the term indicated
(a) If it identifies the grantor by an
in the notice unless a continuation notice is
identification number, as further prescribed in
registered before the term lapses.
the regulations;
(b) If it identifies the secured creditor or an
As to substantial compliance
agent of the secured creditor by name;
A notice substantially complying with the
(c) If it provides an address for the grantor
requirements of the PPSA shall be effective
and secured creditor or its agent;
unless it is seriously misleading.
(d) If it describes the collateral: and
(e) If the prescribed fee has been tendered, or
A notice that may not be retrieved in a search of
an arrangement has been made for payment
the Registry against the correct identifier of the
of fees by other means.
grantor shall be ineffective with respect to that
grantor.
If the Registry rejects to register a notice, it shall
promptly communicate the fact of and reason for SECTION 31. SERIOUSLY MISLEADING
its rejection to the person who submitted the
NOTICE
notice.
A seriously misleading notice is one that doesn’t
Each grantor must authorize the registration of an
provide the grantor’s identification number.
initial notice by signing a security agreement or
otherwise in writing. SECTION 32. AMENDMENT OF NOTICE
A notice may be registered before a security A notice may be amended by the registration of
agreement is concluded. Once a security an amendment notice that:
agreement is concluded, the date of registration (a) Identifies the initial notice by its
of the notice shall be reckoned from the date the registration number; and
notice was registered. (b) Provides the new information.
A notice of lien may be registered by a lien holder Rules on amendment of the notice:
without the consent of the person against whom (a) Adding collateral that is not proceeds
the lien is sought to be enforced. must be authorized by the grantor in
writing.
(b) Adding a grantor must be authorized
by the added grantor in writing.
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Instances when a notice must be amended: (c) When the secured creditor has agreed
a) To continue the effectiveness of the to release part of the collateral
notice by filing an amendment notice that described in the notice
identifies the original by its registration (d) None Existence. When there is no
number. existing security agreement between the
b) When there is mistake; when the collateral secured creditor and the grantor.
described in the notice includes an item or
property which is not under the security SECTION 35. REGISTRY DUTIES
agreement. (Sec. 39)
c) When the secured creditor assigns a The following are the duties of the registry:
perfected security interest. (Sec. 16) (a) Assign a unique registration number;
(b) Create a record that bears the number
Other Rules assigned to the initial notice and the date
An amendment notice shall be effective only as and time of registration; and
to each secured creditor who authorizes it. (c) Maintain the record for public inspection.
(d) Index notices by the identification
An amendment notice that adds collateral or a number of the grantor and, for notices
grantor shall be effective as to the added containing a serial number of a motor
collateral or grantor from the date of its vehicle, by serial number.
registration. (e) Provide a copy of the electronic record of
the notice, including the registration
SECTION 33. CONTINUATION OF NOTICE number and the date and time of
registration to the person who submitted
Continuation of notice may be registered only it.
within six (6) months before the expiration of the (f) Maintain the capability to retrieve a
effective period of the notice. record by the identification number of the
grantor, and by serial number of a motor
SECTION 34. TERMINATION OF vehicle.
EFFECTIVENESS OF A NOTICE (g) Maintain records of lapsed notices for a
period of ten (10) years after the lapse.
The effectiveness of a notice may be terminated
by registering a termination notice that: The duties of the Registry shall be merely
(a) Identifies the initial notice by its administrative in nature. By registering a notice
registration number; and or refusing to register a notice, the Registry does
(b) Identifies each secured creditor who not determine the sufficiency, correctness,
authorizes the registration of the authenticity, or validity of any information
termination notice. contained in the notice.
A termination notice terminates effectiveness of SECTION 36. SEARCH OF REGISTRY

the notice as to each authorizing secured RECORDS AND CERTIFIED REPORT.
creditor.
The Registry shall communicate the following
Instances when a notice may be terminated information to any person who requests it:
(Sec. 39): (a) Whether there are any unlapsed
(a) When the obligation has been paid and notices in the Registry that indicate
there is no drag net clause the grantor's identification number or
(b) When the security interest is vehicle serial number that exactly
extinguished in accordance with this matches the relevant criterion
act provided by the searcher;
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(b) The registration number, and the date in a case of mistake or that was never a
and time of registration of each collateral under a security agreement
notice; and between the secured creditor and the
(c) All of the information contained in grantor
each notice.
SECTION 41. PROCEDURE FOR
If requested, the Registry shall issue a certified NONCOMPLIANCE WITH DEMAND
report of the results of a search that is an official
record of the Registry and shall be admissible into If the secured creditor fails to comply with the
evidence in judicial proceedings without extrinsic demand within fifteen working days after its
evidence of its authenticity. receipt, the person giving the demand under
Section 39 may ask the proper court to issue an
SECTION 37. DISCLOSURE OF order terminating or amending the notice as
INFORMATION. appropriate.
The secured creditor must provide to the grantor SECTION 42. COMPULSORY AMENDMENT
at its request: OR TERMINATION BY COURT ORDER
(a) The current amount of the unpaid
secured obligation; and The court may, on application by the grantor,
(b) A list of assets currently subject to a issue an order that the notice be terminated or
security interest. amended in accordance with the demand, which
order shall be conclusive and binding-on the
The secured creditor may require payment of a LRA
fee for each request made by the grantor in
subsection (a) in this section, but the grantor is Provided, That the secured creditor who
entitled to a reply without charge once every disagrees with the order of the court may appeal
six (6) months. the order.
A security interest in a deposit account shall The court may make any other order it deems
not: proper for the purpose of giving effect to an order
(a) Affect the rights and obligations of the under the previous paragraph.
deposit-taking institution without its
consent; or The LRA shall amend or terminate a notice in
(b) Require the deposit-taking institution to accordance with a court order as soon as
provide any information about the reasonably practicable after receiving the such.
deposit account to third parties.
SECTION 43. NO FEE FOR COMPLIANCE
SECTION 40. MATTERS THAT MAY BE OF DEMAND
REQUIRED BY DEMAND
A secured creditor shall not charge any fee for
Upon receipt of the demand for termination or compliance with a demand received under
amendment notice under Section 39, the secured section 39.
creditor must register such within fifteen working
days: SECTION 44. WHEN REGISTRATION AND
(a) Terminating the registration in case of SEARCH CONSTITUTES INTERFERENCE
performance of obligation, non-existence WITH PRIVACY OF INDIVIDUAL
of the security agreement, or
extinguishment of the security interest A person who submitted a notice for registration
under Section 39; or carried out a search of the Registry with a
(b) Amending the registration to release frivolous, malicious or criminal purpose or
some property that is no longer collateral
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intent shall be subject to civil and criminal F. TANGIBLE ASSETS; INTANGIBLE

penalties according to the relevant laws. ASSETS
E. PRIORITY OF SECURITY INTERESTS PRIORITY RULES FOR TANGIBLE ASSETS
Priority of interest is based on the date of SECTION 6.03 OF THE IRR - PRIORITY
perfection and not the date of creation. FOR TANGIBLE ASSETS EMBODIED IN
INSTRUMENTS.
PRIORITY OF INTEREST WITH RESPECT
TO SPECIFIC COLLATERAL Security Certificates
Goods Secured Creditor: Anyone
Secured Creditor: Person who provides services Mode of Perfection: Registration or Possession
or materials in the ordinary course of business Preference: Possession over Registration (Sec.
Mode of Perfection: Possession 18(e) of PPSA; Sec. 6.03(a) of IRR)
Preferred over: ALL until payment (Sec. 20)
Instruments or Negotiable Documents
Purchase Money Security Interest (PMSI) in Secured Creditor: Anyone
Equipment or its Proceeds Mode of Perfection: Registration or Possession
Secured Creditor: Unpaid seller Preference: Possession over Registration (Sec.
Mode of Perfection: Registration of notice within 19 of PPSA; Sec. 6.03(b) of IRR)
three business days after grantor obtains
possession Livestock
Preferred over: ALL (Sec. 23(a)) Secured Creditor: Persons who provide food or
medicine for the livestock (ex. Vet)
PMSI in Consumer Goods
Secured Creditor: Unpaid seller Mode of Perfection: Registration or Possession
Mode of Perfection: Registration of notice within PLUS written notice to holders of conflicting
three business days after grantor obtains interest before grantor obtains possession
possession Preferred over: ALL EXCEPT perfected PMSI
Preferred over: ALL (Sec. 23 (b)) over the livestock. (Sec. 24 of PPSA; Sec. 6.03(c)
of IRR)
PMSI in Livestock, Inventory, and Intellectual
Property PRIORITY RULES FOR INTANGIBLE
Secured Creditor: Unpaid seller ASSETS
Mode of Perfection:
a. When the grantor receives possession of SECTION 6.02 PRIORITY FOR
the inventory or livestock, or acquires the INVESTMENT PROPERTY AND DEPOSIT
rights in the intellectual property ACCOUNTS.
b. Registration or Control PLUS written
notice to holders of conflicting interest Deposit Account
before grantor obtains possession Secured Creditor: Deposit-taking Institution
Preferred over: ALL (Secs. 23(c); 24) (bank)
Mode of Perfection: Control or Possession
Preferred over: ALL(Sec. 13 of PPSA; Sec.
6.02(a) of IRR)
Deposit Account/Investment Account

Secured Creditor: Anyone, except deposit-taking
institution or intermediary
Mode of Perfection: Control
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Preferred over: Security interests perfected G. ENFORCEMENT OF SECURITY

through registration and control agreements INTERESTS
concluded at a later time. (Sec. 13 of PPSA; Sec.
6.02 (b) of IRR) SECTION 45. RIGHT OF REDEMPTION.
The order of priority among competing security Any person who is entitled to receive a notification
interests in a deposit account or investment of disposition under Sec. 51 is entitled to redeem
property that were perfected by the conclusion of the collateral by:
control agreements shall be determined on the (a) Paying; or
basis of the time of conclusion of the control (b) Performing the secured obligation in full,
agreements. (Sec. 6.02(c) of IRR) including the reasonable cost of enforcement.
Any rights to set-off that the deposit-taking The right of redemption may be exercised,
institution may have against a grantor's right to unless:
payment of funds credited to a deposit account (a) The person entitled to redeem has, after the
shall have priority over a security interest in the default, waived in writing the right to redeem
deposit account. (Sec. 6.02(d) of IRR) (waiver);
(b) The collateral is sold or otherwise disposed of,
Electronic Securities not held by acquired or collected by the secured creditor
intermediaries or until the conclusion of an agreement by the
Secured Creditor: Anyone secured creditor for that purpose
Mode of Perfection: Notation in the books (disposition); and
maintained by or on behalf of the issuer (c) The secured creditor has retained the
Preferred over: ALL (Sec. 6.02(e) of IRR) collateral (retention).
Electronic Securities not held by SECTION 46. RIGHT OF HIGHER-RANKING

intermediaries SECURED. CREDITOR TO TAKE OVER
Secured Creditor: Anyone ENFORCEMENT.
Preferred over: Security interests perfected Even if another secured creditor or a lien holder
through registration and control agreements has commenced enforcement, a secured
concluded at a later time. (Sec. 6.02(f) of IRR) creditor whose security-interest has priority
over that of the enforcing secured creditor or
Electronic Securities held by intermediaries lien holder shall be entitled to take over the
Secured Creditor: Anyone enforcement process.
Preferred over: Security interests in the same This right may be invoked before the collateral is
securities perfected by any other (Sec. 6.02(g) of sold or otherwise disposed of, or retained by the
IRR) secured creditor or until the conclusion of an
agreement by the secured creditor for that
The order of priority among competing security purpose.
interests in electronic securities not held with an
intermediary perfected by the conclusion of The right of the higher-ranking secured creditor to
control agreements is determined on the basis of take over shall include the right to enforce the
the time of conclusion of the control agreements. rights by any method available to a secured
(Sec. 6.02(h) of IRR) creditor under this Act.
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SECTION 47. EXPEDITED REPOSSESSION 4. Breach of the peace shall include

OF THE COLLATERAL. entering the private residence of the
grantor without permission, resorting
The secured creditor may take possession of the to physical violence or intimidation, or
collateral without judicial process if the security being accompanied by a law
agreement so stipulates: Provided, That enforcement officer when taking
possession can be taken without a breach of the possession or confronting the
peace. grantor.
(a) If the collateral is a fixture, the secured SECTION 48. RECOVERY IN SPECIAL
creditor, if it has priority over all owners and CASES.
mortgagees, may remove the fixture from the
real property to which it is affixed, while Upon default, the secured creditor, without
exercising due care. judicial process may:
(b) If, upon default, the secured creditor cannot (a) Instruct the account debtor to make payment
take possession of collateral without breach of to the secured creditor, and apply such to
the peace, the secured creditor may proceed satisfy the obligation secured by the security
as follows: interest after deducting the secured creditor’s
1. An expedited hearing upon reasonable collection expenses.
application for an order granting him
possession of the collateral. On request of the account debtor, the secured
creditor shall provide evidence of its security
The application shall include a interest to the account debtor when it delivers
statement by the secured creditor, the instruction to the account debtor;
under oath, verifying the existence of
the security agreement and (b) In a negotiable document that is perfected by
identifying at least one event of possession, proceed as to the negotiable
default by the debtor under the document or goods covered;
security agreement;
(c) In a deposit account maintained by the
2. The secured creditor shall provide the secured creditor, apply the balance of the deposit
debtor, grantor, and, if the collateral is account to the obligation secured; and
a fixture, any real estate mortgagee,
a copy of the application, including all (d) In other cases of security interest in a deposit
supporting documents and evidence account perfected by control, instruct the deposit-
for the order granting the secured taking institution to pay the balance of the deposit
creditor possession; and account to the secured creditor’s account.
3. He will be entitled to an order granting SECTION 49. RIGHT TO DISPOSE OF

possession of the collateral upon the COLLATERAL.
court finding that a default has
occurred and that the secured After default, a secured creditor may sell or
creditor has a right to take possession otherwise dispose of the collateral, publicly or
of the collateral. privately, in its present condition or following any
commercially reasonable preparation or
The court may direct the grantor to processing.
take such action as the court deems
necessary and appropriate so that the The secured creditor may buy the collateral but
secured creditor may take only if the collateral is of a kind that is customarily
possession of the collateral: sold on a recognized market or the subject of
widely distributed standard price quotations.
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SECTION 50. COMMERCIAL SECTION 52. APPLICATION OF

REASONABLENESS REQUIRED. PROCEEDS.
In disposing of collateral, the secured creditor The proceeds of disposition shall be applied in the
shall act in a commercially reasonable manner. following order:
It is commercially reasonable if collateral is (a) The reasonable expenses of taking,

disposed in conformity with commercial holding, preparing for disposition, and
practices among dealers in that type of property. disposing of the collateral, including
reasonable attorneys’ fees and legal
A disposition is not commercially unreasonable expenses incurred by the secured creditor;
merely because a better price could have been (b) The satisfaction of the obligation secured
obtained at a different time or by a different by the interest of the enforcing secured
method. creditor; and
(c) The satisfaction of obligations secured by
If a method of disposition has been approved in any subordinate security interest in the
any legal proceeding, it is conclusively collateral if a written demand and proof of the
commercially reasonable. interest are received before distribution of the
proceeds is completed.
SECTION 51. NOTIFICATION OF
DISPOSITION. The secured creditor shall account any surplus to
the grantor. Unless otherwise agreed, the debtor
Not later than ten days before disposition, the is liable for any deficiency.
secured creditor shall notify:
(a) The grantor; SECTION 53. RIGHTS OF BUYERS AND
(b) Any other secured creditor or lien holder OTHER THIRD PARTIES.
who, five days before the notification is sent
to the grantor, held a security interest or lien If a secured creditor sells the collateral, the buyer
in the collateral that was perfected by shall acquire the grantor’s right in the asset, free
registration; and of the rights of any secured creditor or lien holder.
(c) Any other person from whom the secured
creditor received notification of a claim in the If a secured creditor leases or licenses the
collateral if the notification was received collateral, the lessee or licensee shall be entitled
before the secured creditor gave notification to the benefit of the lease or license during its
to the grantor. term.
The grantor may waive the right to be notified. If a secured creditor sells, leases or licenses the
collateral in violationof this Chapter, the one who
A notification of disposition is sufficient if it acquires the collateral is entitled to the rights or
identifies the grantor and the secured creditor, benefits in the two previous paragraphs:Provided,
describes the collateral, states the method of that it had no knowledge of a violation of this
intended disposition, and the time and place of a Chapter.
public disposition or the time after which other
disposition is to be made. SECTION 54. RETENTION OF
COLLATERAL BY SECURED CREDITOR.
Sending a notification is not required if:
(a) the collateral is perishable; or After default, the secured creditor may propose to
(b) threatens to decline speedily in value; or the debtor and grantor to take all or part of the
(c) is of a type customarily sold on a recognized collateral in total or partial satisfaction of the
market. secured obligation, and shall send a proposal to:
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(a) The debtor and the grantor; Transitional period

(b) Any other secured creditor or lien holder who the period from the date of effectivity of the PPSA
perfected its security interest or lien by until the date when the Registry has been
registration, five days before the proposal is established and operational.
sent to the debtor and the grantor; and
(c) Any other person with an interest who has SECTION 56. CREATION OF PRIOR
given a written notification to the secured INTEREST.
creditor before the proposal is sent to the
debtor and the grantor. Creation of prior interest shall be determined by
prior laws.
The secured creditor may retain the collateral in
the case of: A prior interest remains effective between the
(a) A proposal for the acquisition of the collateral parties notwithstanding its creation did not
in full satisfaction of the obligation, unless comply with the creation requirements of the
the secured creditor receives an objection in PPSA.
writing from any person entitled to receive
such a proposal within twenty (20) days after SECTION 57. PERFECTION OF PRIOR
the proposal is sent; or INTEREST.
(b) A proposal for the acquisition of the collateral
in partial satisfaction of the secured A prior interest that was perfected under prior law
obligation, only if the secured creditor continues to be perfected under the PPSA until
receives the affirmative consent of each the earlier of:
addressee of the proposal in writing within (a) The time the prior interest would cease to
twenty (20) days after the proposal is sent. be perfected under prior law; and
(b) The beginning of full implementation of the
H. PRIOR INTEREST AND THE PPSA, which, under Section 10.03 of the
TRANSITIONAL PERIOD IRR, is conditioned upon the Registry being
established and operational.
SECTION 55. INTERPRETATION OF
TRANSITIONAL PROVISIONS. If the requirements for perfection under the PPSA
are satisfied before the time when theprior
Existing secured creditor interest ceases to be perfected under prior law,
a secured creditor with a prior security interest; the prior interest continues to be perfected under
the PPSA from the time when it was perfected
Prior law under the prior law.
any law that existed or was in force before the
effectivity of the PPSA If the requirements for perfection under the PPSA
are not satisfied before the time when the prior
Prior interest interest ceases to be perfected under prior law,
an interest created by an agreement or the prior interest is perfected only from the time it
transaction that was made or entered into before is perfected under the PPSA .
the effectivity of the PPSA and that had not been
terminated before such time. A written agreement between a grantor and a
secured creditor creating a prior interest is
It excludes a security interest that is renewed or sufficient to constitute authorization by the
extended by a security agreement or other grantor of the registration of a notice covering
transaction made or entered into on or after the assets described in that agreement under the
effectivity of the PPSA ; PPSA.
If a prior interest referred to in subsection (b) of

this section was perfected by the registration of a
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notice under prior law, the time of registration 2. REAL ESTATE MORTGAGE LAW
under the prior law shall be the time to be used
for purposes of applying the priority rules of the A. Definition and Characteristics
PPSA.
Real [Estate] Mortgage is a contract whereby
SECTION 58. PRIORITY OF PRIOR the debtor secures to the creditor the fulfillment of
INTEREST. a principal obligation, specially subjecting to such
security immovable property or real rights over
The priority of a prior interest as against the rights immovable property in case the principal
of a competing claimant is determined by the obligation is not complied with at the time
prior law if: stipulated. (Arts. 2124-2131)
(a) The security interest and the rights of all
competing claimant arose before the Kinds of Mortgage:
effectivity of the PPSA; and 1. Voluntary
(b) The priority status of these rights has 2. Legal
not changed since the effectivity of the 3. Equitable – one which, although it lacks
PPSA. the proper formalities of a mortgage
shows the intention of the parties to make
The priority status of a prior interest has changed the property as a security for a debt
only if: (governed by Civil Code, Arts. 1365,
(a) It was perfected when the PPSA took 1450, 1454, 1602, 1603, 1604 and 1607).
effect, but subsequently ceased to be
perfected; i. Obligations Secured by Real Estate
(b) It was not perfected under prior law, and Mortgage
was only perfected under the PPSA.
Necessity of a valid Principal Obligation
SECTION 59. ENFORCEMENT OF PRIOR A Mortgage, a purely accessory contract, like a
INTEREST. guarantee. They cannot exist without a valid
obligation. (Art. 2052 & 2086; Manila Surety &
If any step has been taken to enforce a prior Fidelity Co. v. Velayo, G.R. No. L-21069)
interest before the effectivity of the PPSA,
enforcement may continue under prior law or Voidable, Unenforceable, Natural Obligations
may proceed under the PPSA. A mortgage may secure the performance of a:
1. Valid Obligation
Subject to previous paragraph, prior law shall 2. Voidable Contract inasmuch as it is
apply to a matter that is the subject of binding, unless it is annulled by a proper
proceedings before a court before the effectivity action in court
of the PPSA. 3. Unenforceable Contract, as such
contract is not void
4. Civil Obligations
5. Pure and Conditional Obligations
(whether suspensive or resolutory)
6. Payment and Performance Obligations
7. Natural Obligation so that the creditor
may proceed against the guarantor
although he has no right of action against
the principal debtor for the reason that
the latter’s obligation is not civilly
enforceable.
a. When the debtor himself offers a
guaranty for his natural
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obligation, he impliedly General rule: Future property cannot be object of

recognizes his liability, thereby mortgage. (Dilag v. Heirs of Resurreccion, G.R.
transforming the obligation from No. 48941)
natural into a civil one.
In order to bring future property within the
Effect of Invalidity of Mortgage on Principal coverage of the mortgage, the mortgagor must
Obligation execute a mortgage supplement after the
1. Principal obligation remains valid. mortgagor acquires ownership of the properties
2. Mortgage deed remains as evidence of a or after those properties come into existence.
personal obligation. They must be registered with the relevant
Register of Deeds.
When a bank relied on a forged SPA, it has the
burden to prove its authenticity and due execution Exception: (After-Acquired Properties) A
as when there is a defect in the notarization of a stipulation subjecting to the mortgage lien,
document, the clear and convincing evidentiary improvements which the mortgagor may
standard normally attached to a duly-notarized subsequently acquire, install, or use in
document is dispensed with, and the measure to connection with the real property already
test the validity of such document is mortgaged belonging to the mortgagor is valid.
preponderance of evidence. (People’s Bank and Trust Co. v. Dahican Lumber
Co., G.R. No. L-17500, 1967)
However, where a mortgage is not valid due to a
forged SPA, the principal obligation which it Example: X owns a factory. In that factory, he
guarantees is not thereby rendered null and void. installed a machine and subsequently mortgaged
What is lost is merely the right to foreclose the it. The parties may validly stipulate that if the
mortgage as a special remedy for satisfying or original machine is replaced, the replacement
settling the indebtedness which is the principal shall be subject to the mortgage. The reason for
obligation. In case of nullity, the mortgage deed this is that after-acquired properties are
remains as evidence or proof of a personal understood to be replacements, as the original
obligation of the debtor and the amount due to the machine may be subject to wear and tear.
creditor may be enforced in an ordinary action.
The partial invalidity of the subject real estate Important Points
mortgage brought about by the forged status of 1. As a general rule, the mortgagor retains
the subject SPA would not, therefore, result into possession of the property. He may
the partial invalidation of the loan obligation deliver said property to the mortgagee
principally entered into by the parties; thus, without altering the nature of the contract
absent any cogent reason to hold otherwise, the of mortgage.
need for the recomputation of said loan obligation 2. It is not an essential requisite that the
should be dispensed with. (Rural Bank of principal of the mortgage credit bears
Cabadbaran, Inc. v. Melecio-Yap, G.R. No. interest, or that the interest as
178451, 2014) compensation for the use of the principal
and the enjoyment of its fruits be in the
ii. Object of Real Estate Mortgage form of a certain percent thereof.
Objects of Real Estate Mortgage: Effect of Mortgage

1. Immovables; and 1. Creates right in rem or real rights.
2. Alienable real rights in accordance with A lien inseparable from the property
the laws, imposed upon immovables. mortgaged, enforceable against the
(Art. 2124) whole world as long as it is registered.
If not registered, the third party must
know of the mortgage.
2. Creates merely an encumbrance.
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The law considers void any stipulation past obligation. (Panacan Lumber Co. v.
forbidding the owner from alienating the Solidbank Corp., G.R. No. 226272, 2020)
immovable mortgaged. (Art. 2130)
 The mortgagor’s default does not General rule: There must be a stipulation for the
operate to vest in the mortgagee the inclusion of future advancements.
ownership of the encumbered
property. Mortgage with a dragnet clause enables the
 His failure to redeem the property parties to provide continuous dealings, the nature
does not automatically vest or extent of which may not be known or
ownership of the property to the anticipated at the time. This allows them to avoid
mortgagee. the expense and inconvenience of executing a
new security on each new transaction.
Extent of Mortgage (I-GRAPE)
A real estate mortgage constituted on immovable A mortgage given to secure future advancements
property is not limited to the property itself but is a continuing security and is not discharged
also extends to its: by the repayment of the amount named in the
1. Accessions mortgage, until the full amount of the all the loans
2. Improvements or advancements is paid.
3. Growing fruits
4. Rents or income NOTE: A “blanket mortgage clause”, also
5. Proceeds of insurance should the known as a “dragnet clause” in American
property be destroyed. jurisprudence, is one which is specifically
6. Expropriation value of the property phrased to subsume all debts of past or future
should it be expropriated. (Art. 2127) origins. A mortgage which provides a dragnet
clause is in the nature of a continuing guaranty
To exclude them, it is necessary that there be an and constitutes an exception to the rule that an
express stipulation to that effect. But if the action to foreclose a mortgage must be limited to
mortgaged estate passes into the hands of a the amount mentioned in the mortgage contract.
third person, the mortgage does not extend to (PCSO vs. New Dagupan Metro Gas Corp., G.R.
any machinery, object, chattel or construction No. 173171, 2012)
which he may have brought or placed there and
which such third person may remove whenever it As a general rule, a mortgage liability is usually
is convenient for him to do so. limited to the amount mentioned in the contract.
However, the amounts named as consideration in
Mortgage to Secure Future Advancements a contract of mortgage do not limit the amount for
Blanket/Dragnet Clause - one which is which the mortgage may stand as security if from
specifically phrased to subsume all debts of past the four corners of the instrument the intent to
or future origin. It generally covers only future secure future and other indebtedness can be
obligations, unless the parties expressly provide gathered.(Ramos vs. PNB, G.R. No. 178218,
that past obligations are likewise covered. 2011)
 In a case where a Foreign Letter of Credit
(FLC) was executed prior to the In the absence of clear and supportive evidence
execution of a Promissory Note (PN) of a contrary intention, a mortgage containing a
secured by a Real Estate Mortgage dragnet clause will not be extended to cover
(REM), which covers the said PN and all future advances, unless the document evidencing
other loans or credit accommodations the subsequent advance refers to the mortgage
that may be granted to the debtor, such as providing security therefor.
REM with a dragnet clause cannot be
understood to cover the FLC, as no Reliance on the Security Test: Applies when
reference was made to it or to any other there is a dragnet clause in a mortgage contract
but there is a mortgage constituted on another
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property to secure a subsequent loan. When the iii. Right to Alienate Mortgage Credit
mortgagor takes another loan for which another
security was given it could not be inferred that Alienation or Assignment of Mortgage Credit
such loan was made in reliance solely on the The mortgage credit is a real right which may be
original security with the "dragnet clause," but alienated by the mortgagee without need to
rather, on the new security given. (See Prudential obtain the consent of the debtor (except if there is
Bank v. Alviar, G.R. No. 150197, 2005) a stipulation against alienation). Alienation of the
mortgage credit is valid even if it is not registered.
Scenario 1: Prudential Bank v. Alviar, G.R. No. Registration is necessary only to affect third
150197, 2005 persons.(Art. 2128)
3 Promissory Notes were executed in the
following order: NOTE: The sale or transfer of the mortgaged
1. PN 1 – secured by Real Estate Mortgage property cannot affect or release the mortgage;
(REM) with a dragnet clause thus, the purchaser or transferee is necessarily
2. PN 2 – secured by a foreign currency bound to acknowledge and respect the
deposit account encumbrance. (Garcia vs. Villar, G.R. No.
3. PN 3 – (not relevant, since this was not 158891, 2012)
the petitioners’ obligation) secured by
“Clean Phase out TOD 3923” and Laws Governing Mortgage
entered into on behalf of a different 1. New Civil Code
Corporation 2. P.D. 1529 or The Property Registration
Decree
The REM should be construed to cover PN 1 and 3. Revised Administrative Code
any other obligation incurred by the debtor not 4. R.A. 4882, as regards aliens becoming
covered by the security for PN 2. Hence, a mortgagee
foreclosure is improper on the ground of non- 5. R.A. 8791 General Banking Law
payment of PNs 2 and 3. It is, however, proper to
be seek foreclosure for non-payment of PN 1. iv. Right to Alienate Collateral
The law considers void any stipulation forbidding
Scenario 2: Philippine National Bank v. Heirs of the owner from alienating the immovable
Spouses Alonday, G.R. No. 171865, 2016 mortgaged. (Art. 2130)
2 Obligations with similarly worded Dragnet
clauses were entered into in the following order: Stipulation requiring mortgagee’s consent
1. Agricultural loan – secured by parcel of before alienation of Property vs. Right of First
land in Davao del Sur Refusal.
2. Commercial loan – secured by parcel of A stipulation prohibiting the mortgagor from
land in Davao City (no reference was selling his mortgage property without the consent
made to the prior Agricultural loan) of the mortgagee violates Art. 2130 of the New
Civil Code, since the mortgagee can simply
Security used for Commercial loan showed the withhold its consent and thereby, prevent the
intention to treat these loans as distinct from one mortgagor from selling the property.
another. The non-payment of the Agricultural loan
cannot be used as a ground to foreclose on both On the other hand, the right of first refusal has
the parcels of land, Since the land in Davao City long been recognized as valid in our jurisdiction.
was only intended to secure the Commercial (Litonjua v. L & R Corporation, G.R. No. 130722)
loan.
Foreclosure of Mortgage is the remedy
available to the mortgagee by which he subjects
the mortgaged property to the satisfaction of the
obligation to secure which the mortgage was
given.
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NOTE: A foreclosure sale retroacts to the date of In order that the debtor may be in default, it is
registration of the mortgage and that a person necessary that: (a) the obligation be demandable
who takes a mortgage in good faith and for and already liquidated; (b) the debtor delays
valuable consideration, the record showing clear performance; and (c) the creditor requires the
title to the mortgagor, will be protected against performance judicially or extrajudicially, unless
demand is not necessary. Thus, it is only when
equitable claims on the title in favor of third
demand to pay is unnecessary , or when required,
persons of which he had no actual or constructive such demand is made and subsequently refused
notice. (St. Dominic Corp., vs. IAC, G.R. Nos. that the mortgagor can be considered in default
70623 & L-48630, 1987) and the mortgagee obtains the right to file an
action to collect the debt or foreclose the
NOTE: In the case of Phil. Veterans Bank v. mortgage. (Maybank Philippines., Inc. v. Spouses
Monillas, the Supreme Court said that a Tarrosa, G.R. No. 213014, 2015)
mortgagee-bank who receives titles in their favor
as mortgagee, which titles showed neither vice The family home is exempt from execution,
nor infirmity, does not need to make any further forced sale or attachment, except for debts
investigation and may entirely rely on what is secured by mortgages on the premises before or
stated on said titles (Phil. Veterans Bank v. after such constitution. (Art. 155, Family Code;
Monillas, G.R. No. 167098, 2008). However, in Fortaleza vs. Lapitan, G.R. No. 178288, 2012;
the later case of Homeowner Savings and Loan Parcon-Song v Parcon, G.R. No. 199582. July 7,
Bank v. Felonia, the Supreme Court held that a 2020)
mortgagee-bank who was previously in good faith
at the time the mortgage was constituted Under the Rural Banks Act, the foreclosure of
(because at that point in time, there was no mortgages covering loans granted by rural banks
annotated notice of lis pendens on the title) may and executions of judgments thereon involving
not be a buyer in good faith by the time it real properties levied upon by a sheriff shall be
forecloses the property (because by then, a exempt from publication where the total amount
notice of lis pendens had already been of the loan, including interests due and unpaid,
annotated) (Homeowners Savings and Loan does not exceed P10,000.00. (Menzon v. Rural
Bank v. Felonia, G.R. No. 189477, 2014) Bank of Buenavista, Inc., G.R. 178031, 2013)
Mere inadequacy of the price obtained at the Judicial Foreclosure (J-PACE-AC) (Rule 68,
sheriff’s sale will not be sufficient to set aside the Rules of Court):
sale unless “the price is so inadequate as to 1. Judicial action for the purpose in the proper
shock the conscience of the court” taking into court which has jurisdiction over the area
consideration the peculiar circumstances wherein the real property involved or a
attendant thereto. (Sulit vs. CA, G.R. No. 119247, portion thereof is situated.
1997). 2. Court order to mortgagor to Pay mortgage
debt with interest and other charges within a
Absent an adverse claimant or any evidence to period of not less than 90 days nor more than
the contrary, all accessories and accessions 120 days from the entry of judgment; and
accruing or attached to the mortgaged property Sale to the highest bidder at public Auction,
are included in the mortgage contract and may should the mortgagor fail to pay at the time
thus also be foreclosed with the principal property directed.
in the case of nonpayment of the debt secured. 3. Confirmation of sale, which operates to divest
(PNB vs. Maranon, G.R. No. 189316, 2013) the rights of all parties in the action and to
vest their rights to the purchase, subject to
The action to recover a deficiency after the right of redemption allowed by law.
foreclosure prescribes after 10 years from the 4. Execution of judgment
time the right of action accrues (Arts.1142 & 5. Application of proceeds of sale to:
1144) a. Costs of the sale;
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b. Amount due the mortgagee; A creditor is not precluded from recovering any
c. Claims of junior encumbrances or unpaid balance on the principal obligation if the
persons holding subsequent mortgages extrajudicial foreclosure sale of the property
in the order of their priority; and subject of the real estate mortgage results in a
d. The balance, if any shall be paid to the deficiency. (BPI vs. Reyes, G.R. No. 182769,
mortgagor. 2012)
6. Sheriff’s Certificate of sale is executed,
acknowledged and recorded to complete the The mortgagee-bank has no right to include in the
foreclosure. foreclosure of the land the portion of the loan
separately secured by chattel mortgage. Where
Nature of Judicial Foreclosure Proceedings the bank collected the entire amount of the loan
1. Quasi in rem action; from the proceeds of the foreclosure sale,
2. Foreclosure is only the result or incident of including the portion that was not covered by the
the failure to pay debt; and foreclosure of the real estate mortgage, it must
3. Survives death of mortgagor. return the excess amount. (Rural Bank of Toboso
vs. Agtoto, G.R. Nos. 175697 & 176103, 2011)
Extra-judicial Foreclosure (governed by Act No.
3135, as amended) Procedure for Extra-judicial Foreclosure of
1. Express authority to sell is given to the Real Estate Mortgage (Act No. 3135)(Act No.
mortgagee; 1508, A.M. N0. 99-10-05-0; January 15,
2. Authority is not extinguished by death of 2000)(ARC-DIP-RET)
mortgagor or mortgagee; 1. Filing of Application before the Executive
3. Public sale should be made after proper Judge through the Clerk of Court;
notice (posting and publication); 2. Clerk of Court will examine whether the
4. Surplus proceeds of foreclosure sale belong Requirements of the law have been complied
to the mortgagor or his assigns; with, that is, whether the notice of sale has
5. Debtor has the right to redeem the property been posted for not less than 20 days in at
sold within 1 year from and after the date of least 3 public places of the municipality or city
sale;one year period is to be reckoned from where the property is situated, and if the
the registration of the sheriff's certificate of same is worth more than P400.00, that such
sale. notice has been published once a week for at
6. Remedy of party aggrieved by foreclosure is least 3 consecutive weeks in a newspaper of
a petition to set aside sale and cancellation of general circulation in the city or municipality;
writ of possession; 3. The Certificate of sale must be approved by
7. Republication is necessary for the validity of the Executive Judge;
a postponed foreclosure sale (parties have 4. In extrajudicial foreclosure of real mortgages
no right to waive the publication requirement). in Different locations covering one
indebtedness, only one filing fee
NOTE: Unless the parties stipulate, personal corresponding to such debt shall be
notice to the mortgagor in extrajudicial collected;
foreclosure proceedings is not necessary 5. The Clerk of Court shall Issue certificate of
because Section 31 of Act No. 3135 only requires payment indicating the amount of
posting of the notice of sale in three public places indebtedness, the filing fees collected, the
and the publication of that notice in a newspaper mortgages sought to be foreclosed, the
of general circulation. (Ramirez v. TMBC, G.R. description of the real estates and their
No. 198800, 2013) respective locations;
6. The notice of sale shall be Published in a
Extra-judicial foreclosure before a notary public is newspaper of general circulation;
valid under Act No. 3135. (Tagunicar v. Lorna 7. The application shall be Raffled among all
Express,G.R. No. 138592, 2006). sheriffs;
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8. After the redemption period has Expired, the expiration of the said period. (Spouses Gatuslao
Clerk of Court shall archive the records; and v. Yanson, G.R. No. 191540, 2015)
9. Previously, the rule was that no auction sale
shall be held unless there are at least Two Stipulation of Upset Price or “tipo”
participating bidders, otherwise the sale shall A stipulation of minimum price at which the
be postponed to another date. If on the new property shall be sold to become operative in the
date there shall not be at least 2 bidders, the event of a foreclosure sale at public auction is
sale shall then proceed. The names of the null and void, for the property must be sold to
bidders shall be reported by the Sheriff or the the highest bidder. (de Leon & de Leon, Jr, citing
Notary Public who conducted the sale to the Banco Espanol Filipino v. Donaldson, 5 Phil. 418)
Clerk of Court before the issuance of the
certificate of sale. On January 30, 2001, the Effect of inadequacy of price in foreclosure
Supreme Court issued a resolution sale
amending paragraph 5 of A.M. 99-10-05-0 1. Where there is right to redeem.
explicitly dispensing with the "two-bidder General rule: Inadequacy of price is
rule." immaterial because the judgment debtor
may redeem the property.
Right of mortgagee to recover deficiency Exception: The price is so inadequate as to
1. Mortgagee is entitled to recover deficiency. shock the conscience of the court taking into
2. If the deficiency is embodied in a judgment, it consideration the peculiar circumstances.
is referred to as deficiency judgment. 2. Property may be sold for less than its fair
3. Action for recovery of deficiency may be filed market value upon the theory that the lesser
even during redemption period. the price the easier for the owner to redeem.
4. Action to recover prescribes after 10 years
from the time the right of action accrues. The value of the mortgaged property has no
bearing on the bid price at the public auction,
NOTE: It is settled that if the proceeds of the sale provided that the public auction was regularly and
are insufficient to cover the debt in an extrajudicial honestly conducted.
foreclosure of mortgage, the mortgagee is
entitled to claim the deficiency from the debtor. Waiver of security by creditor
While Act. No. 3135 does not discuss the 1. Mortgagee may waive right to foreclose his
mortgagee’s right to recover the deficiency, mortgage and maintain a personal action for
neither does it contain any provision expressly or recovery of the indebtedness.
impliedly prohibiting recovery. (BPI vs. Avenido, 2. Remedies are alternative, not cumulative.
G.R. No. 175816, 2011) 3. Options of the mortgagee in case the debtor-
mortgagor dies:
Nature of power of foreclosure by a) To waive mortgage and claim entire debt
extrajudicial sale from the mortgagor’s estate as an
1. Conferred for mortgagee’s protection. ordinary claim;
2. An ancillary stipulation supported by the b) To judicially foreclose mortgage and
same cause or consideration for the prove any deficiency; or
mortgage. c) To rely on the mortgage exclusively
3. A prerogative of the mortgagee. without filing a claim for deficiency
After the expiration of the redemption period Redemption is a transaction by which the
without redemption having been made by mortgagor reacquires or buys back the property
petitioner, respondent became the owner thereof which may have passed under the mortgage or
and consolidation of title becomes a right. Being divests the property of the lien which the
already then the owner, respondent became mortgage may have created.
entitled to possession. Petitioner already lost his
possessory right over the property after the
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Kinds of Redemption The doctrine of indivisibility of mortgage does not

1. Equity of redemption: Right of the apply once the mortgage is extinguished by a
mortgagor to redeem the mortgaged property complete foreclosure thereof. Nothing in the law
after his default in the performance of the prohibits the piecemeal redemption of properties
conditions of the mortgage but before sold at one foreclosure proceedings.(Id).
confirmation of the sale.
a. Applies to judicial foreclosure of real The general rule in redemption is that it is not
mortgage and chattel mortgage sufficient that a person offering to redeem
foreclosure. manifests his desire to do so; The statement of
b. A second mortgagee acquires only the intention must be accompanied by an actual and
equity of redemption vested in the simultaneous tender of payment; In case of
mortgagor, and his rights are strictly disagreement over the redemption price, the
subordinate to the superior lien of the first redemptioner may preserve his right of
mortgagee. redemption through judicial action, which in every
case, must be file within the one-year period of
NOTE: Redemption of property where the redemption. (Torbela vs. Rosario, G.R. Nos.
mortgagee is a banking institution is allowed 140528 & 140553, 2011)
within 1 year from the date of the registration
of the confirmation of sale. The right of legal redemption must be exercised
within specified time limits. However, the
2. Right of redemption: right of the mortgagor statutory period of redemption can be extended
to redeem the property within a certain by agreement of the parties. (Republic vs.
period after it was sold for the satisfaction Marawi-Marantao General Hospital, G.R. No.
of the debt. 158920, 2012)
a. Applies only to extrajudicial foreclosure
of real mortgage. Period of Redemption
b. EXC: The right of redemption is also 1. Extra-judicial (Act No. 3135)
available in judicial foreclosure, in a. Natural person – 1 year from
cases where the mortgagee is a bank. registration of the certificate of sale with
(Section 47 of RA 8791 or the General Registry of Deeds.
Banking Law of 2000). b. Juridical person – same rule as natural
person
NOTE: The right of redemption, as long as within c. Juridical person (mortgagee is bank) –
the period prescribed, may be exercised 3 months after foreclosure or before
irrespective of whether or not the mortgagee has registration of certificate of foreclosure
subsequently conveyed the property to some whichever is earlier (General Banking
other party (Sta. Ignacia Rural Bank, Inc. v. CA, Law, Sec. 47)
G.R. No. 97872, 1994) EXTRAJUDICIAL
PERIODS OF
FORECLOSURE
REDEMPTION
The tender of redemption money may be made to Banks Non-Banks
the purchaser of the land or to the sheriff; If made Individual 1 year from 1 year from
to the sheriff, it is his duty to accept the tender debtors / registration registration
and execute the certificate of redemption. (Yap mortgagors of sale of sale
vs. Dy, Sr., G.R. Nos. 171868 & 171991, 2011). Juridical Until 1 year from
persons as registration registration
debtors / of certificate of sale
mortgagors of sale or
within 3
months from
sale
whichever is
earlier
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b. Interest at the rate specified in

2. Judicial – before confirmation of the sale by mortgage;
the court c. Cost and expenses incurred by bank
PERIODS OF JUDICIAL FORECLOSURE from sale and custody less income
REDEMPTION Banks Non-Banks derived
Individual 1 year from X [equity of
debtors / registration redemption NOTE: Redemption price in this case is reduced
mortgagors of sale only] by the income received from the property.
Juridical 1 year from X [equity of
persons as registration redemption Junior Mortgagees
debtors / of sale only] 1. After the foreclosure sale, there remains in
mortgagors the second mortgagee a mere right of
redemption. His remedy is limited to the right
NOTE: The registration of the sale is required to redeem by paying off the debt secured by
only in extra-judicial foreclosure sale because the first mortgage.
the date of the registration is the reckoning point 2. He is entitled to the payment of his credit the
for the exercise of the right of redemption. In excess of the proceeds of the auction sale.
contrast, the registration of the sale is 3. In case the credit of the first mortgagee has
superfluous in judicial foreclosure because only absorbed the entire proceeds of the sale, the
the equity of redemption is granted to the second mortgage is extinguished, since the
mortgagor, except in mortgages with banking mortgage cannot be enforced beyond the
institutions. (Robles v. Yapcinco, G.R. No. total value of the mortgaged property.
169568, 2014)
Mortgagee in Possession – one who has
NOTE: Allowing redemption after the lapse of the lawfully acquired actual or constructive
statutory period when the buyer at the foreclosure possession of the premises mortgaged to him,
sale does not object but even consents to the standing upon his rights as mortgagee and not
redemption, will uphold the policy of the law which claiming under another title, for the purpose of
is to aid rather than defeat the right of redemption enforcing his security upon such property or
(Ramirez v. CA, G.R. No. 98147, 1993). making its income help to pay his debt.
As a rule, the period of redemption is not tolled by NOTE: The rights of the first mortgage creditor or
the filing of a complaint or petition for annulment mortgage over the mortgaged properties are
of the mortgage and the foreclosure sale superior to those of a subsequent attaching
conducted pursuant to the said mortgage. creditor and other junior mortgagees. (Lee vs.
Bangkok Bank Public Company, Ltd. G.R. No.
Amount of the Redemption Price 173349, 2011)
1. Mortgagee is not a bank (Act No. 3135 in
relation to Sec. 28, Rule 39 of Rules of A mortgagor is allowed to take a second or
Court) subsequent mortgage on a property already
a. Purchase price of the property; mortgaged, subject to prior rights of the previous
b. 1% interest per month on the purchase mortgages. (Palada vs. Solidbank Corp., G.R.
price; No. 172227, 2011)
c. Taxes paid and amount of purchaser’s
prior lien, if any, with the same rate of Rights and Obligations of Mortgagee in
interest computed from the date of Possession
registration of sale, up to the time of 1. Similar to an antichresis creditor – entitled to
redemption. retain such possession until the
2. Mortgagee is a bank (Section 47, General indebtedness is satisfied and the property
Banking Act of 2000) redeemed.
a. Amount due under the mortgage deed;
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2. Without right to reimbursement for useful consolidated in the purchaser’s name, a writ of
expenses possession can be demanded as a matter of right.
(PBCom v. Yeung, G.R. No. 179691, 2013)
Right of Purchaser to Writ of Possession
Writ of Possession – order whereby the sheriff “Purchaser at the auction sale concerned
is commanded to place in possession of real or whether in a judicial or extrajudicial foreclosure
personal property the person entitled thereto shall have the right to enter upon and take
such as when a property is extrajudicially possession of such property immediately after the
foreclosed. date of the confirmation of the auction sale and
 The issuance of the writ of possession in an administer the same in accordance with law. Any
extrajudicial foreclosure is merely a petition in court to enjoin or restrain the conduct
ministerial function. of foreclosure proceedings instituted pursuant to
 The purchaser at the foreclosure sale is this provision shall be given due course only upon
entitled as of right to a writ of possession. the filing by the petitioner of a bond in an amount
fixed by the court conditioned that he will pay all
Before lapse of redemption period – file an ex the damages which the bank may suffer by the
parte application and file a bond enjoining or the restraint of the foreclosure
proceeding.” (The General Banking Law of 2000,
After lapse of redemption period – file an ex Section 47)
parte application and no need for a bond
If a bank filed the Sheriff’s Provisional Certificate
NOTE: In an extrajudicial foreclosure of real of Sale before the Registry of Deeds, and entries
property, when the foreclosed property is in the thereof were made in the Primary Entry Book, the
possession of a third party holding the same refusal of the Register to annotate said
adversely to the judgment obligor, the issuance registration on the titles to the properties should
by the trial court of a writ of possession in favor of not affect the bank’s right to possess the
the purchaser of said real property ceases to be properties. (Spouses Limso, Davao Sunrise, et.
ministerial and may no longer be done ex parte, al. v. PNB, G.R. No. 158622, 2016)
but for the exception to apply, the property need
not only be possessed by a third party, but also Redemption and repurchase distinguished
held by the third party adversely to the judgment The right to redeem becomes functus oficio at the
debtor. (BPI vs. Golden Power Diesel Sales end of the redemption period, and its exercise
Center, G.R. No. 176019, 2011) after the period is not really one of redemption but
a repurchase. Distinction must be made because
The implementation of a writ of possession redemption is by force of law; the purchaser at
issued pursuant to Act No. 3135 at the instance public auction is bound to accept redemption.
of the purchaser at the foreclosure sale of the Repurchase however of foreclosed property, after
mortgaged property in whose name the title has redemption period, imposes no such obligation.
been meanwhile consolidated cannot be After expiry, the purchaser may or may not re-sell
prevented by the injunctive writ. (UCPB v. the property but no law will compel him to do so.
Spouses Lumbo, G.R. No. 162757, 2013) And, he is not bound by the bid price; it is entirely
within his discretion to set a higher price, for after
The purchaser can demand possession of the all, the property already belongs to him as owner.
property even during the redemption period for as
long as he files an ex parte motion under oath and B. Essential Requisites
post a bond in accordance with Section 7 of Act.
Essential Requisites of Mortgage (FAVFAP):
No. 3135, as amended. Upon filing of the motion
1. Constituted to secure the Fulfillment of a
and the approval of the bond, the law also directs
principal obligation;
the court in express terms to issue the order of a
2. Mortgagor be the Absolute owner of the thing
writ of possession. When the redemption period
pledged or mortgaged;
has expired and title over the property has been
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 NOTE: Before partition of estate, each the mortgagor, only thereafter to learn that the
heir only has an undivided interest in the latter’s title was defective, being thus an innocent
estate and in each specific piece of mortgagee for value, his or her right or lien upon
property in the estate. Any mortgage on the land mortgaged must be respected and
said property undertaken by an heir is protected. (Mahinay vs. Gako, Jr., G.R. Nos.
valid, but only up the portion that may be 165338 & 179375, 2011)
allotted in partition to the heir (Rural Bank
of Cabadbaran, Inc. v. Melencio-Yap, BUT: A bank whose business is impressed with
G.R. No. 178451, 2014, reiterated in public interest is expected to exercise more care
Magsano v. Pangasinan Savings and and prudence in its dealings than a private
Loan Bank, G.R. No. 215038, 2016) individual, even in cases involving registered
3. Mortgagor has Free disposal of the property, lands. A bank cannot assume that, simply
and in the absence thereof, that he be legally because the title offered as security is on its face
authorized for the purpose; free of any encumbrances of lien, it is relieved of
 NOTE: If the property mortgaged was the responsibility of taking further steps to verify
subject to a conditional contract to sell at the title and inspect the properties to be
the time the mortgage was entered into, mortgaged.
which was annotated, such restrictions
do not divest the owner of his ownership In order for a mortgagee to invoke the doctrine of
right. At most, the restrictions merely mortgagee in good faith, the impostor must have
make the contract voidable by the person succeeded in obtaining a Torrens title in his name
in whose favor the restrictions were and thereafter in mortgaging the property. Where
made. (Vitug v. Abuda, G.R. No. 201264, the mortgagor is an impostor who only pretended
2106) to be the registered owner, and acting on such
4. Cannot exist without a Valid obligation; pretense, mortgaged the property to another, the
5. When the principal obligation becomes due, mortgagor evidently did not succeed in having the
the thing in which the mortgage consists may property titled in his or her name, and the
be Alienated for the payment to the creditor; mortgagee cannot rely on such pretense as what
and appears on the title is not the impostor's name but
6. Appears in a Public document duly recorded that of the registered owner. (Ruiz v. Dimailig,
in the Registry of Property to be [validly G.R. No. 204280, 2016)
constituted].
 If the instrument is not recorded, the BUT: SC has held in a case that while the bank
mortgage is nevertheless binding failed to exercise greater care in conducting the
between the parties. ocular inspection of the properties offered for
 NOTE: Under the Doctrine of “Mortgagee mortgage, its omission did not prejudice any
in Good Faith”, even if the mortgagor is innocent third parties because the cause of the
not the owner of the mortgaged property, mortgagors' defective title was the simulated sale
the mortgage contract and any between the buyer/mortgagor and seller (the
foreclosure sale arising therefrom are latter questioning the validity of the mortgage).
given effect by reason of public policy; Thus, no amount of diligence in the conduct of the
Even if the mortgagor is not the rightful ocular inspection could have led to the discovery
owner of, or does not have a valid title to, of the complicity between the ostensible
the mortgaged property, the mortgagee mortgagors/buyer and the true owners/seller. In
in good faith is, nonetheless, entitled to fine, the bank can hardly be deemed negligent.
protection. (Torbela vs. Rosario, G.R. Thus, the bank was considered as a mortgagee
Nos. 140528 &140553, 2011) in good faith (Philippine Banking Corporation v.
Dy, G.R. No. 183774, 2012)
When a mortgagee relies upon what appears on
the face of a Torrens title and lends money in all ALSO: SC has held that a bank should not
good faith on the basis of the title in the name of necessarily be made liable if it did not investigate
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or inspect the property. If the circumstances Essential Requisites Common to Contracts of

reveal that an investigation would still not yield a Mortgage: (FARVAS)
discovery of any anomaly, or anything that would 1. Constituted to Secure the fulfillment of a
arouse suspicion, the bank should not be liable. principal obligation;
Such is the case when the TCT is clean, bearing 2. Mortgagor be the Absolute owner of the
no annotations evidencing any trust, lien, or thing mortgaged;
encumbrance on the property, not forged or fake. 3. The persons constituting the mortgage
There is also no showing that the bank was aware have the Free disposal of their property,
of any defect or any other conflicting right on the and in the absence thereof, that they be
title when the property was mortgaged to it. In legally authorized for the purpose;
fact, the investigation of the property would still 4. Cannot exist without a Valid obligation;
fail to bring any doubt as to the validity of the TCT 5. Debtor Retains the ownership of the thing
(i.e., the title owners were in actual possession of given as a security; and
the property). (Parcon-Song v Parcon, G.R. No. 6. When the principal obligation becomes
199582. July 7, 2020) due, the thing in which the mortgage
consists may be Alienated for the
An entrustee under a trust receipt does not have payment to the creditor.
a right to mortgage the property held in trust. This
is because the entrustor, not the entrustee, is the NOTE: Third persons who are not parties to
owner of the property in trust. A mortgage must the principal obligation may secure the latter
be executed by the absolute owner of the chattels by mortgaging their own property (Art. 2085;
to be valid (DBP vs. Prudential Bank, 2005;Art. Chinabank vs. QBRO Fishing Enterprises,
2085 (2)). G.R. No. 184556, 2012)
Real estate mortgage over a conjugal property is Important Points

void if the non-contracting spouse did not give 1. Future property cannot be mortgaged.
consent (PNB v. Venancio Reyes, Jr., G.R. No. 2. Mortgage executed by one who is not the
212483, 2016) owner of the property mortgaged is without
legal existence and registration cannot
Legal Mortgage: The persons in whose favor the validate it.
law establishes a mortgage have no other right 3. Generally, mortgage of a conjugal
than to demand the execution and the recording property by one of the spouses without
of the document in which the mortgage is the consent of the other spouse is valid
formalized. only as to ½ of the entire property.
4. In case of property covered by Torrens
Incidents of Registration of Mortgage title, a mortgagee has the right to rely
1. Mortgagee entitled to registration of upon what appears in the certificate of
mortgage as a matter of right. title and does not have to inquire further.
2. Proceedings for registration do not determine However, a bank whose business is
validity of mortgage or its effect. impressed with public interest is expected
3. Registration is without prejudice to better to exercise more care and prudence in its
right of third parties. dealings than a private individual, even in
4. Mortgage deed once duly registered forms cases involving registered lands. A bank
part of the records for the registration of the cannot assume that, simply because the
property mortgaged. title offered as security is on its face free
5. Mortgage by surviving spouse of his/her of any encumbrances of lien, it is relieved
undivided share of conjugal property can be of the responsibility of taking further
registered. steps to verify the title and inspect the
properties to be mortgaged.
5. Mortgagor must have free disposal of
property.
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6. Thing mortgaged may be alienated by the

mortgagor. Prohibition against Pactum Commissorium
[NOTE: Removal, Sale or Pledge of  Stipulation is null and void - stipulation
Mortgaged Property. — The penalty or where thing mortgaged shall automatically
arresto mayor or a fine amounting to become the property of the creditor in the
twice the value of the property shall be event of nonpayment of the debt within the
imposed upon: term fixed.
i. Any person who shall knowingly  The essence of pactum commissorium is that
remove any personal property ownership of the security will pass to the
mortgaged under the Chattel creditor by the mere default of the debtor.
Mortgage Law to any province or (Spouses Solitarios v. Spouses Jaque, G.R.
city other than the one in which No. 199852, 2014)
it was located at the time of the
execution of the mortgage, Requisites of pactum commissorium:
without the written consent of 1. There should be a mortgage; and
the mortgagee, or his executors, 2. There should be a stipulation for an automatic
administrators or assigns. appropriation by the creditor of the property
ii. Any mortgagor who shall sell or in the event of nonpayment.(Pen v. Julian,
pledge personal property G.R. No. 160208, January 11, 2016)
already pledged, or any part
thereof, under the terms of the Effect on Security Contract: Nullity of the
Chattel Mortgage Law, without stipulation does not affect validity and efficacy of
the consent of the mortgagee the principal contract.
written on the back of the
mortgage and noted on the There is no automatic appropriation of the object
record thereof in the office of the of the contract of mortgage, as it takes the
register of deeds of the province intervention of the court to exact fulfillment of the
where such property is located. obligation. If something more is to be done, like
(Revised Penal Code, Art. 319)] the execution of the deed of assignment, there is
7. Creditor is not required to sue to enforce his no pactum commissorium (Uy Tong v. Court
credit. Appeals, G.R. No. 77465, 1988).
8. Mortgagor may be third person (i.e., not the
The Memorandum of Agreement and the Dacion
principal debtor).
in Payment Agreement contain no provisions for
9. The liability of an accommodation
foreclosure proceedings nor redemption. Under
mortgagor extends only to the property
the MOA, the failure by A to pay his debt within
pledged or mortgaged.
the one-year period gives B the right to enforce
10. Mortgage may be constituted on
the Dacion in Payment transferring to it
immovables only (Art. 2124)
ownership of A’s land. B, in effect, automatically
11. Delivery is not necessary for mortgage
acquires ownership of the properties upon A’s
12. The mortgage is not valid against 3rd
failure to pay his debt within the stipulated period
persons in good faith if not registered
(Sps. Ong v. Roban Lending Corporation, G.R.
(Art. 2125)
No.172592, July 9, 2008).
Right of Creditor Where Debtor Fails to
There is no automatic appropriation of the object
Comply With His Obligation
of the pledge upon maturity of the loan. The
1. Creditor is merely entitled to move for the sale
of the thing mortgaged with the formalities prohibition against pactum commissorium is
required by law in order to collect. intended to protect the debtor, pledgor or
2. Creditor cannot appropriate to himself the mortgagor against being over-reached by the
thing nor can he dispose of the same as creditor who holds a piece of property, the value
owner. of which is more valuable than the amount of the
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debt. Furthermore, when the security of the debt misuse the thing, the owner may ask that it
is also money deposited in a bank, the amount of be judicially or extra-judicially deposited.
which is less than the debt, it is not illegal for the c. May use the thing if it is necessary for the
creditor to encash the time deposit certificate to preservation of the thing (e.g. car has to be
pay the debtor’s obligation (Yau Chu v. Court of driven once in a while).
Appeals, G.R. No. 78159,1989). d. May either claim another thing in pledge or
demand immediate payment of the
Important Points principal obligation if he is deceived on the
1. Mortgage is indivisible. substance or quality of the thing.
Exceptions:
a. Where each one of several Legal Pledges
things guarantee determinate
1. Necessary expenses shall be refunded to
portion of credit.
every possessor, but only possessor in good
b. Where only portion of loan was
faith may retain the thing until he has been
released.
reimbursed.
Example: X borrowed 80k from the bank
2. Useful expenses shall be refunded only to the
and he mortgaged his 100 ha. property.
possessor in good faith with the same right of
Lender was only able to release 40k due
retention, the person who has defeated him
to CB restrictions. The Court held that the
in the possession having the option of
bank can only foreclose on 50% of the
refunding the amount of the expenses or of
mortgaged land (50 hectares) (Central
paying the increase in value which the thing
Bank v. CA, G.R. No. L-45710, 1985).
may have acquired and by reason thereof.
c. Where there was failure of
(Art. 546)
consideration.
3. He who has executed work upon a movable
2. The rule that real property, consisting of
has a right to retain it by way of pledge until
several lots which should be sold separately,
he is paid. (Art. 1731)
applies to sales in execution, and not to
4. The agent may retain the things which are the
foreclosure of mortgages.
objects of agency until the principal effects
3. [The mere embodiment of a real estate
the reimbursement and pays the indemnity.
mortgage and a chattel mortgage in one
(Art. 1914)
document does not have the effect of fusing
5. The laborer’s wages shall be a lien on the
both securities into an indivisible whole.
goods manufactured or the work done. (Art.
(PBCOM v. Macadaeg, 109 Phil. 981 (1960))]
1707)
4. Contract of mortgage may secure all kinds
6. Special Laws apply to pawnshops and
of obligation, be they pure or subject to a
establishments which are engaged in making
suspensive or resolutory condition.
loans secured by pledges. Provisions of the
5. A promise to constitute mortgage gives rise
Civil Code shall apply subsidiarily.
only to a personal right binding upon the
parties and creates no real right in the
After payment of the debt and expenses (after the
property. What exists is only a right of action
sale of the property subject of the legal pledge),
to compel the fulfillment of the promise, but
the remainder of the price of the sale shall be
there is no mortgage yet.
delivered to the obligor. (Art. 2121)
Debtor
A thing under a pledge by operation of law may
Owner bears the risk of loss of the property.
be sold only after demand of the amount for which
a. May bring the actions which pertain to the
the thing is retained. The public auction shall take
owner of the thing in order to recover it from
place within one month after such demand. If,
or defend it against a 3rd person.
without just grounds, the creditor does not cause
b. Cannot use the thing without the authority
the public sale to be held within such period, the
of the owner, and if he should do so, or
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debtor may require the return of the thing.(Art. 3. GUARANTY

2122)
A. Nature and Extent of Guaranty
CONVENTIONAL LEGAL PLEDGE
PLEDGE Guaranty – By guaranty, a person called the
guarantor, binds himself to the creditor, to fulfill
Created by agreement Created by operation of
the obligation of the principal debtor in case the
of the parties law
latter should fail to do so. It is a contract between
Debtor is not entitled to Debtor is entitled to the the guarantor and the creditor. (Art. 2047)
the excess of the excess of the proceeds
proceeds of the sale of the sale i. Obligation Secured by Guaranty
unless it is otherwise
agreed Characteristics of the contract
Creditor is not entitled to Creditor can recover the 1. Accessory – dependent for its existence
recover the deficiency in deficiency in the upon the principal obligation guaranteed
the proceeds of the sale proceeds of the sale by it hence if principal contract is void,
The parties agree on the There is no definite then guaranty is also void
period for the payment period for the payment
of the principal of the principal 2. Subsidiary and Conditional – takes
obligation. obligation. Thus, the effect only when the principal debtor fails
pledgee must make a in his obligation subject to limitation
demand for the payment 3. Unilateral –
of the amount due him. a. It gives rise only to a duty on the part
of the guarantor in relation to the
NOTE: In case of doubt as to whether a creditor and not vice versa
transaction is one of pledge or dacion en pago, b. It may be entered into even without
the presumption is that it is a pledge as this the intervention of the principal
involved a lesser transmission of rights and debtor.
interests. (Union Bank vs. Juniat, G.R. No.
171569, 2011)] 4. Distinct Person– a person cannot be the
personal guarantor of himself
 The liability of a guarantor is only
subsidiary, and all the properties of
the principal debtor must first be
exhausted before the guarantor may
be held answerable for the debt.
Thus, the creditor may hold the
guarantor liable only after judgment
has been obtained against the
principal debtor and the latter is
unable to pay. (Aglibot vs. Santia,
G.R. No. 185945, 2012)
Cause of Contract of Guaranty

1. Presence of cause which supports
principal obligation: Cause of the
contract is the same cause which
supports the obligation as to the principal
debtor. The consideration which supports
the obligation as to the principal debtor is
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a sufficient consideration to support the Examples:

obligation of a guarantor or surety. a. To secure the payment of a loan at
maturity – guarantee of the punctual
2. Absence of direct consideration or payment of a loan at maturity and all
benefit to guarantor: Guaranty or surety other obligations of indebtedness
agreement is regarded valid despite the b. To secure payment of any debt to be
absence of any direct consideration subsequently incurred –construed as
received by the guarantor or surety, such continuing when it is evident from the
consideration need not pass directly to terms that the object is to give a standing
the guarantor or surety; a consideration credit to the principal debtor to be used
moving to the principal will suffice. from time to time either indefinitely or until
a certain period, especially if the right to
Guaranty of Voidable, Unenforceable, And recall the guaranty is expressly reserved.
Natural Obligations(Art. 2052(2))
Guaranty of Conditional Obligations
A guaranty may secure the performance of: A guaranty may secure all kinds of obligations, be
1. Voidable contract – such contract is they pure or subject to a suspensive or resolutory
binding, unless it is annulled by a proper condition.
court action 1. Principal obligation subject to a
2. Unenforceable contract – because suspensive condition – the guarantor is
such contract is not void liable only after the fulfillment of the
3. Natural obligation – the creditor may condition.
proceed against the guarantor although 2. Principal obligation subject to a
he has no right of action against the resolutory condition – the happening of
principal debtor for the reason that the the condition extinguishes both the
latter’s obligation is not civilly principal obligation and the guaranty
enforceable.
 When the debtor himself offers a Guarantor’s Liability Cannot Exceed Principal
guaranty for his natural obligation, he Obligation (Art. 2054)
impliedly recognizes his liability,
thereby transforming the obligation General rule: Guaranty is a subsidiary and
from a natural into a civil one. accessory contract – guarantor cannot bind
himself for more than the principal debtor, both as
Guaranty of Future Debts(Art. 2053) regards the amount and the onerous nature of
contract
Continuing Guaranty or Suretyship:  If he does, his liability shall be reduced to
1. Not limited to a single transaction but the limits of that of the debtor.
which contemplates a future course of  But the guarantor may bind himself for
dealings, covering a series of less than that of the principal.
transactions generally for an indefinite
time or until revoked. Exceptions:
2. It is prospective in its operation and is 1. Interest, judicial costs, and attorney’s
generally intended to provide security fees as part of damages may be
with respect to future transactions. recovered – creditors may recover from
3. Future debts, even if the amount is not the surety as part of their damages the
yet known, may be guaranteed but there abovementioned fees even without
can be no claim against the guarantor stipulation and even if the surety would
until the amount of the debt is thereby become liable to pay more than
ascertained or fixed and demandable. the total amount stipulated in the bond.
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Reason: Surety is made to pay, not by agreement should be resolved in favor of the
reason of the contract, but by reason of guarantor or surety.
his failure to pay when demanded and 1. Liability for obligation stipulated –
for having compelled the creditor to guarantor is not liable for obligations
resort to the courts to obtain payment. assumed previous to the execution of
Interest runs from (demand): the guaranty unless an intent to be so
a. Filing of the complaint (upon judicial liable is clearly indicated.
demand); or 2. Liability of surety limited to a fixed
b. The time demand was made upon period – the surety must only be bound
the surety until the principal in the manner and to the extent, and
obligation is fully paid (upon extra- under the circumstances which are set
judicial demand) forth or which may be inferred from the
contract of guaranty or suretyship, and
2. Penalty may be provided – surety may no further.
be held liable for the penalty provided for 3. Liability of surety to expire on
in a bond for violation of the condition maturity of principal obligation – such
therein. stipulation is unfair and unreasonable for
it practically nullifies the nature of the
Principal’s Liability May Exceed Guarantor’s undertaking it had assumed.
Obligations
The amount specified in a surety bond as the Remedy of surety: Foreclose the counter-bond
surety’s obligation does not limit the extent of the put up by the principal debtor (if there is any)
damages that may be recovered from the
principal, the latter’s liability being governed by Securing non-performance In a case where a
the obligations he assumed under his contract. performance bond, which includes the face
amount to be paid in case of non-performance,
Guaranty Not Presumed (Art. 2055) was entered into by the parties, such surety bond
The assumption of guaranty must be expressed. is determined strictly in accordance with the
It cannot extend to more than what is stipulated particular terms and conditions set out in this
therein. bond. Hence, the face amount is not a maximum
potential liability, which may cover actual
Guaranty Covered by the Statute Of Frauds damages and costs for the non-completion of the
 Guaranty must not only be expressed but obligation. Rather, the entire face amount is
must so be reduced into writing. meant to be paid upon such non-performance.
 Hence, it shall be unenforceable by (FGU Insurance vs Roxas, G.R. No. 189526 and
action, unless the same or some note or 189656, August 9, 2017)
memorandum thereof be in writing, and
subscribed by the party charged, or by ii. Parties to a Guaranty
his agent; evidence, therefore, of the
Parties:
agreement cannot be received without
1. Creditor
the writing, or a secondary evidence of its
2. Guarantor
contents. (Macondray& Co., Inc. v.
3. Principal Debtor (sometimes)
Piñon, G.R. No. L-13817, 1961)
 It need not appear in a public document.
Qualifications of an Individual Guarantor
(Arts.2056-2057) (CSI)
Guaranty Strictly Construed
1. He possesses Integrity
Strictly construed against the creditor in favor of
2. He has the Capacity to bind himself
the guarantor and is not to be extended beyond
3. He has Sufficient property to answer for
its terms or specified limits. Doubt in the terms
the obligation which he guarantees
and conditions of the guaranty or suretyship
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Exception: When the creditor waives the because he considered the guarantor to
requirements. have the qualifications for the purpose.
Effect of Subsequent Loss of Required iii.Excussion

Qualifications
The qualifications need only be present at the Right of Guarantor to Benefit Of Excussion Or
time of the perfection of the contract. The Exhaustion(Art. 2058)
subsequent loss of the qualifications would not 1. Guarantor only secondarily liable –
extinguish the liability of the guarantor, nor will it guarantor binds himself to pay only in
extinguish the contract of guaranty. case the principal debtor should fail to do
so. If the principal debtor fulfills the
Remedy of creditor: Demand another guarantor obligation guaranteed, the guarantor is
with the proper qualifications. discharged from any responsibility.
Exception: Creditor may waive it if he chooses 2. All legal remedies against the debtor
and hold the guarantor to his bargain. to be first exhausted – to warrant
recourse against the guarantor for
Guarantor Convicted of a Crime Involving payment, it may not be sufficient that the
Dishonesty or Became Insolvent (Art. 2057): debtor appears insolvent. Such
1. Requires conviction in the first instance insolvency may be simulated.
of a crime involving dishonesty to have
the right to demand another. NOTE: Art. 2058 is not applicable to a contract of
2. Judicial declaration of insolvency is not suretyship.
necessary in order for the creditor to have
a right to demand another guarantor. Right of Creditor to secure Judgment against
Guarantor prior to exhaustion
The supervening incapacity of a guarantor does General rule: An ordinary personal guarantor
not terminate the guaranty for it merely gives the (NOT a pledgor or mortgagor), may demand
creditor the option to demand another guarantor. exhaustion of all the property of the debtor before
He is not bound to substitute the guarantor. he can be compelled to pay.
(Estate of Hemady v. Luzon Surety, G.R. No. L-
8437, 1956) Exception: The creditor may secure a judgment
against the guarantor, who shall be entitled to a
Selection of Guarantor deferment of the execution of said judgment
1. Specified person stipulated as against him, until after the properties of the
guarantor: Substitution of guarantor may principal debtor shall have been exhausted, to
not be demanded satisfy the latter’s obligation.
Reason: The selection of the guarantor
is: Exceptions to the Benefit of Excussion(Art.
a. A term of the agreement; 2059) (JAWS-IS-FUN)
b. As a party, the creditor is, 1. If the guarantor has expressly Waived it.
therefore, bound thereby.  Waiver is valid but it must be made in
express terms.
2. Guarantor selected by the principal
debtor: Debtor answers for the integrity, 2. If he has bound himself Solidarily with the
capacity, and solvency of the guarantor. debtor – liability assumed that of a surety
Guarantor becomes primarily liable
3. Guarantor personally designated by as a solidary co-debtor. In effect, he
the creditor: Responsibility for the renounces in the contract itself the
selection should fall upon the creditor benefit of exhaustion.
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3. In case of Insolvency of the debtor – 7. If he is a Judicial bondsman and sub-

guarantor guarantees the solvency of the surety(Art. 2084)– because he is
debtor solidarily liable.
If the debtor becomes insolvent, the
liability of the guarantor as the debtor 8. Where he has given a pledge or
cannot fulfill his obligation mortgage as a Special security.
4. When he (debtor) has Absconded, or NOTE: Article 2062 of the Civil Code provides
cannot be sued within the Philippines – that in every action by the creditor, which must be
the creditor is not required to go after a against the principal debtor alone, except in the
debtor who is hiding or cannot be sued in cases mentioned in article 2059, the former shall
our courts ask the court to notify the guarantor of the action.
The guarantor may appear so that he may, if he
Exception: Debtor has left a so desire, set up such defenses as are granted
manager or representative him by law. The benefit of excussion mentioned
in article 2058 shall always be unimpaired, even
5. If it may be presumed that a judicial if judgment should be rendered against the
action including execution on the principal debtor and the guarantor in case of
property of the principal debtor would not appearance by the latter.
result in the satisfaction of the obligation
– if such is the case, the guarantor can Duty of Creditor to Make Prior Demand For
no longer require the creditor to resort to Payment From Guarantor(Art. 2060)
all such remedies against the debtor as 1. When demand to be made – only after
the same would be but a Useless judgment on the debt for obviously the
formality. It is not necessary that the exhaustion of the principal’s property
debtor be judicially declared insolvent. cannot even begin to take place before
judgment has been obtained.
6. If he does Not comply with Art. 2060: In
order that the guarantor may make use of 2. Actual demand to be made – joining the
the benefit of excussion, he must: guarantor in the suit against the principal
a. Set it up against the creditor upon the debtor is not the demand intended by
latter’s demand for payment from law. There must be an actual demand
him; and not judicial demand.
b. Point out to the creditor:
i. Available property of the debtor – Duty of The Guarantor To Set Up Benefit Of
the guarantor should facilitate Excussion (Art. 2060)
the realization of the excussion As soon as he is required to pay, guarantor must
since he is the most interested in also point out to the creditor available property
its benefit. (not in litigation or encumbered) of the debtor
ii. Within the Philippine territory – within the Philippines.
excussion of property located
abroad would be a lengthy and Duty of The Creditor To Resort To All Legal
extremely difficult proceeding Remedies (Art. 2061)
and would not conform with the  After the guarantor has fulfilled the
purpose of the guaranty to conditions required for making use of the
provide the creditor with the benefit of exhaustion, it becomes the
means of obtaining the fulfillment duty of the creditor to exhaust all the
of the obligation. property of the debtor pointed out by the
Sufficient to cover the amount of guarantor
the debt.  If he fails to do so, he shall suffer the loss
but only to the extent of the value of the
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said property, for the insolvency of the

debtor. Effects of Compromise (Art. 2063)
 Resort to all legal remedies includes
accion pauliana and accion subrogatoria, Compromise – a contract whereby the parties,
among others. by making reciprocal concessions, avoid a
litigation or put an end to one already
Joinder of Guarantor and Principal As Parties commenced.
Defendant 1. Compromise between creditor and
principal debtor benefits the guarantor
General rule: The guarantor, not being a joint but does not prejudice him.
contractor with his principal, cannot be sued 2. Compromise between guarantor and the
with his principal. creditor benefits but does not prejudice
the principal debtor.
Exception: Where it would serve merely to
delay the ultimate accounting of the guarantor or Reason: A compromise binds only the parties
if no different result would be attained if the thereto and not third persons. Thus, it cannot
plaintiff were forced to institute separate actions prejudice the guarantor or debtor who was not
against the principal and the guarantors. party to the compromise. But if it benefits a third
person, then the compromise may bind that third
Procedure When Creditor Sues(Art. 2062) person.
1. Sent against the principal – The
guarantor cannot be sued with his Sub-Guarantor’s Right To Excussion (Art.
principal, much less alone, except in the 2064)
cases mentioned in Art. 2059 where Sub-guarantor enjoys the benefit of excussion
the guarantor is not entitled to the benefit with respect to:
of excussion. 1. Principal debtor; and
2. Guarantor
2. Notice to guarantor of the action –
guarantor must be notified so that he may Reason: He stands with respect to the guarantor
appear, if he so desires, and set up on the same footing as the latter does with
defenses he may want to offer respect to the principal debtor.
a. Guarantor appears – voluntary
appearance does not constitute a Benefit of Division Among Several
renunciation of his right to excussion. Guarantors (Art. 2065)
b. Guarantor does not appear – 1. In whose favor applicable - should there be
i. He cannot set up the defenses several guarantors of only one debtor and for the
which, by appearing are allowed same debt, the obligation to answer for the same
to him by law; and is divided among all.
ii. It may no longer be possible for
him to question the validity of the 2. Cannot be availed of if there are:
judgment rendered against the a. Two or more debtors of one debt, even if
debtor they be bound solidarily, each with
iii. But he may still invoke the different guarantors; or
benefit of excussion b. Two or more guarantors of the same
debtor but for different debts
3. Hearing before execution can be c. If any of the circumstances enumerated
issued against the guarantor – a in Art. 2059 should take place, as would
guarantor is entitled to be heard before the benefit of exhaustion of the debtor’s
an execution can be issued against him property.
where he is not a party in the case
involving his principal.
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3. Extent of liability of several guarantors – Exception: The guarantor cannot demand

joint obligation for reimbursement for litigation expenses,
when such expenses are due to its failure to
General rule: The obligation to answer for the fulfill its obligation to pay upon demand.
debt is divided among all of them. The (Tuason v. Machuca, G.R. No. L-22177,
guarantors are not liable to the creditor beyond 1924)
the shares which they are respectively bound to
pay. 4. Damages, if they are due.
Exception: Solidarity has been expressly Exceptions to Right to Indemnity or

stipulated. Reimbursement
1. Where the guaranty is constituted without
Benefit of Division among Several the knowledge or against the will of the
Guarantors: principal debtor, the guarantor can recover
In order that the guarantor may be entitled to the only insofar as the payment had been
benefit of division, it is not required that he point beneficial to the debtor
out the property of his co-guarantors. 2. Payment by a third person who does not
intend to be reimbursed by the debtor is
Reason: Obligation of the guarantor with respect deemed to be a donation, which, however,
to his co-guarantors is not subsidiary but direct requires the debtor’s consent. But the
and does not depend as to its origin on the payment is in any case valid as to the creditor
solvency or insolvency of the latter. who has accepted it (Art. 1238)
3. Waiver
v. Right to Indemnification
ART. 2066 ART. 2071
Right to Indemnity or Reimbursement (Art.
(RIGHT OF (RIGHT OF
2066) (DELT)
GUARANTOR TO GUARANTOR TO
1. Total amount of the debt - The guarantor has
REIMBURSEMENT PROCEED
no right to demand reimbursement until he AFTER PAYMENT) AGAINST DEBTOR
has actually paid the debt, unless by the EVEN BEFORE
terms of the contract, he is given the right PAYMENT)
before making payment.
Provides for the Provides for the
enforcement of the protection before he
2. Legal interest - It is immaterial that the debt rights of the has paid but after he
did not earn interest for the creditor, because guarantor against the has become liable –
the guarantor’s right to legal interest is debtor after he has gives a protective
granted by law by virtue of the payment he paid the debt – gives remedy before
has made, and is independent of the a right of action after payment
creditor’s right to claim interest which was payment
necessarily regulated by the stipulations Substantive right Preliminary remedy
between him and the debtor.
Gives a right of Remedy given seeks
3. Expenses incurred by the guarantor - The action, which, without to obtain from the
the provisions of the debtor “release from
expenses referred to are only those that the
other might be the guaranty or to
guarantor has to satisfy in accordance with
worthless demand a security
law as a consequence of the guaranty. These that shall protect him
expenses are limited to those incurred by the from any proceedings
guarantor after having notified the debtor that by the creditor and
payment has been demanded of him by the from the danger of
creditor. insolvency of the
debtor.”
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vi. Right to Subrogation Effect of Payment by Guarantor before

maturity(Art. 2069)
Guarantor’s Right to Subrogation(Art. 2067)
Subrogation transfers to the person subrogated, Debtor’s obligation with a period –
the credit with all the rights thereto appertaining demandable only when the day fixed comes.
either against the debtor or against third persons, 1. The guarantor who pays before maturity
be they guarantors or possessors of mortgages, is not entitled to reimbursement since
subject to stipulation in conventional subrogation. there is no necessity for accelerating
payment.
1. Accrual, basis, and nature of right –
right of subrogation is necessary to 2. A contract of guaranty being subsidiary
enable the guarantor to enforce the in character, the guarantor is not liable
indemnity given in Art. 2066 for the debt before it becomes due.
a. Arises by operation of law upon Exception: The debtor will be liable if the
payment by the guarantor payment was made:
b. It is not a contractual right a. With his consent; or
c. The guarantor is subrogated, by b. Subsequently ratified (express or
virtue of the payment, to the right of implied) by him
the creditor, not those of the debtor.
Effect of Repeat Payment by the Debtor(Art.
2. When right not available – since 2070)
subrogation is the means of effectuating
the right of the guarantor to be General rule: Before the guarantor pays the
reimbursed, it cannot therefore be creditor, he must first notify the debtor.
invoked in those cases where the  If he fails to give notice and the debtor
guarantor has no right to be repeats payment, the guarantor’s remedy
reimbursed. is to collect from the creditor
 No cause of action against the debtor for
Effect of Payment by Guarantor Without the return of the amount paid by him.
Notice to Debtor(Art. 2068)
 When the guarantor pays the creditor, Exception: The guarantor may still claim
but the debtor has already paid the latter, reimbursement from the debtor in spite of lack of
then the debtor can set up against the notice if the following conditions are present:
guarantor the defense of previous a. The creditor becomes insolvent
extinguishments of the obligation by b. That guarantor was prevented by a
payment. fortuitous event to advise the debtor of
 Hence, guarantor must notify the debtor the payment
before making payment. c. The guaranty is gratuitous
Reason: The guarantor cannot be allowed, Right of Guarantor to Proceed Against Debtor
through his own fault or negligence to prejudice Before Payment(Art. 2071)
or impair the rights or interests of the debtor.
General rule: Guarantor has no cause of action
NOTE: In case of an unenforceable contract, if against the debtor until after the former has paid
the debtor consents to the guarantor paying, the the obligation.
guarantor can seek reimbursement from the
debtor. If the debtor did not consent to the Exceptions: Art. 2071 enumerates instances
guarantor paying, the guarantor cannot seek when the guarantor may proceed against the
reimbursement from the guarantor. debtor even before the payment (ITS-PAID):
1. When he is Sued for the payment;
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2. In case of Insolvency of the principal vii. Rights of Co-Guarantors

debtor;
3. When the debtor has bound himself to Between Co-Guarantors Right to Contribution
relieve him from the guaranty within a of Guarantor Who Pays(Art. 2073)
specified period, and this Period has Presumption of joint liability of several
expired; guarantors when there are:
4. When the debt has become 1. Two or more guarantors
Demandable, by reason of the expiration 2. Same debtor
of the period for payment; 3. Same debt
5. After the lapse of Ten (10) years, when
the principal obligation has no fixed Effect: Each is bound to pay only his
period for its maturity, unless it be of such proportionate share.
nature that it cannot be extinguished
except within a period longer than ten Art. 2073 is applicable:
years; 1. When one guarantor has paid the debt to
6. If there are reasonable grounds to fear the creditor;
that the principal debtor intends to 2. Payment by such guarantor must have
Abscond; been made:
7. If the principal debtor is in imminent a. By virtue of a judicial demand
danger of becoming Insolvent. (benefit of division must have
ceased); or
Purpose: To enable the guarantor to take b. Because the principal debtor is
measures for the protection of his interest in view insolvent;
of the probability that he would be called upon to 3. Guarantor who paid is seeking
pay the debt. reimbursement from each of his co-
guarantors the share which is
Remedies Available: proportionately owing him.
1. To obtain release from the guaranty; or
2. To demand security that shall protect Effect of Insolvency of any Guarantor
him from: Follow the rule on solidary obligations: The
a. Any proceedings by the creditor; and share of the insolvent guarantor shall be borne by
b. Against the insolvency of the debtor. the others including the paying guarantor in the
same joint proportion.
NOTE: Guarantor’s remedies are alternative. He
has the right to choose which action to bring. Accrual and Basis of Right:
The right of reimbursement is acquired ipso jure
Suit by Guarantor against Creditor Before without need of any prior cession from the creditor
Payment by the guarantor.
The guarantor’s or surety’s action for release can
only be exercised against the principal debtor and Defenses Available to Co-Guarantors(Art.
not against the creditor. 2074)
General rule: All defenses which the debtor
Reason: The creditor cannot be compelled to would have interposed against the creditor (i.e.
release the guarantor before payment of his fraud, prescription, remission, illegality, etc.).
credit. Release of the guarantor imports an
extinction of his obligation to the creditor, Exception: Those which cannot be transmitted
connoting remission or a novation by subrogation for being purely personal to the debtor.
which requires the creditor’s assent.
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Liability of Sub-Guarantor in case of 1. The person who requested him to be a

Insolvency of Guarantor(Art. 2075) guarantor;
Sub-guarantor is liable to the co-guarantors in the 2. The debtor
same manner as the guarantor whom he
guaranteed in case of the insolvency of the Rights of the Guarantor against The Debtor
guarantor for whom he bound himself as sub- (SICS)
guarantor. 1. Indemnification
2. Benefit of Subrogation
B. Effects of Guaranty 3. Benefit of Compromise
4. Right to obtain or demand a Security under
Married woman as Guarantor (Art. 2049) (Art. 2071)
General rule: Married woman binds only her
separate property C. Extinguishment of Guaranty
Exceptions: Causes of Extinguishment of Guaranty (PaNo-

CoCo-LoCo-FRAP) (Art. 2076)
1. With her husband’s consent, binds the
community or conjugal partnership General rule: Guaranty being accessory, it is
property extinguished when principal obligation is
2. Without husband’s consent, in cases extinguished, the causes of which are:
provided by law, such as when the
1. Payment or performance;
guaranty has redounded to the benefit of
2. Loss of the thing due;
the family
3. Condonation or remission of the debt;
4. Confusion or merger of the rights of the
Guaranty Undertaken Without Knowledge of
creditor and debtor;
Debtor (Art. 2050)
5. Compensation; and
Rights of third persons who pay: 6. Novation
7. Other causes:
1. Payment without the knowledge or
a. Annulment;
against the will of the debtor:
b. Rescission;
a. Guarantor can recover only insofar as the
c. Fulfillment of a resolutory condition;
payment has been beneficial to the
d. Prescription
debtor (Art. 1236)
b. Guarantor cannot compel the creditor to
Exception: The guaranty itself may be directly
subrogate him in his rights (Art. 1237)
extinguished although the principal obligation still
2. Payment with knowledge or consent
remains such as in the case of the release of the
of the debtor: Subrogated to all the
guarantor made by the creditor.
rights which the creditor had against the
debtor (Art. 2067) Material Alteration of Principal Contract
Any agreement between the creditor and the
Double or Sub-Guaranty (Art. 2051(2))
principal debtor which essentially varies the terms
One constituted to guarantee the obligation of a of the principal contract without the consent of the
guarantor. It should not be confounded with surety, will release the surety from liability.
guaranty wherein several guarantors concur.
Such material alteration would constitute a
Guarantor of a Third Person at Request of novation or change of the principal contract,
Another (Art. 2072) which is consequently extinguished. Upon such
extinguishments, the accessory contract to
The guarantor who guarantees the debt of an
guaranty is also terminated and the guarantor
absentee at the request of another has a right to
cannot be held liable on the new contract to which
claim reimbursement, after satisfying the debt
he has not given his consent.
from:
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The liabilities of an insurer under the surety bond Release by Extension of Term Granted by
are not extinguished when the modifications in Creditor to Debtor (Art. 2079)
the principal contract do not substantially or
Release Without Consent of Guarantor:
materially alter the principal's obligations. The
Creditor grants an extension of time to the debtor
surety is jointly and severally liable with its
without the consent of the guarantor.
principal when the latter defaults from its
obligations under the principal contract (People's Effect: Guarantor is discharged from his
Trans-East Asia Insurance Corporation v. undertaking.
Doctors of New Millennium Holdings, Inc., G.R.
Reason: To avoid prejudice to the guarantor. The
No. 172404, 2014)
debtor may become insolvent during the
extension, thus depriving the guarantor of his
When Alteration Material
right to reimbursement.
Where such change will have the effect of making
It doesn’t matter if the extension is:
the obligation more onerous.
a. Prejudicial or not; or
1. Imposes a new obligation or added burden
b. For a long or short period of time.
on the party promising; or
2. Takes away some obligation already
imposed, changing the legal effect of NOTE: Consent of the Guarantor is a must.
the original contract and not merely the Extension must be based on some new
form thereof. agreement between the creditor and the principal
debtor by virtue of which the creditor deprives him
Release by Conveyance of Property (Art. 2077) of his claim.
General rule: Payment is made in money. 1. Where obligation payable in installments:
Exception: Any substitute paid in lieu of money Where a guarantor is liable for different
which is accepted by the creditor extinguishes payments.
the obligation and in consequence, the guaranty. General rule: An extension of time to one or
more will not affect the liability of the surety
 If the creditor accepts property in payment of for the others.
a debt from the debtor, the guarantor is
relieved from responsibility. This is also true Exception: When the unpaid balance has
even in case the creditor is subsequently become automatically due by virtue of an
evicted from the property. acceleration clause for failure to pay an
installment.
In case of eviction: Eviction revives the principal Effect of exception: The act of the creditor
obligation but not the guaranty. extending the payment of said installment,
Reason: The creditor’s action against the debtor without the guarantor’s consent, discharges
is for eviction and this is different from what the the guarantor.
guarantor guaranteed. Reason: The extension constitutes an
Release of Guarantor without Consent of extension of the payment of the whole
Others (Art. 2078) amount of the indebtedness
Effect: The release benefits all to the extent of 2. Where consent to an extension is waived
the share of the guarantor released. in advance by the guarantor or surety:
Such waiver is not contrary to law, nor to
Reason: A release made by the creditor in favor public policy
of one of the guarantors without the consent of
the others may prejudice the others should a Effect: Amounts to the guarantor’s or
guarantor become insolvent. surety’s consent to all the extensions
granted.
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NOTE: The mere failure or neglect on the part of Release when Guarantor cannot be
the creditor to enforce payment or to bring an Subrogated (Art. 2080)
action upon a credit, as soon as the same or any
 If there can be no subrogation because of the
part of it matures, does not constitute an
fault of the creditor, the guarantors are
extension of the term of the obligation, and
thereby released, even if the guarantors are
therefore, the liability of the guarantor is not
solidary.
extinguished
 If the creditor has acquired a lien upon the
property of a principal debtor, the creditor
In order to constitute an extension discharging
at once becomes charged with the duty of
a surety, it should appear that the extension was:
retaining such security, or maintaining such
(DEW)
lien in the interest of the surety, and any
1. For a Definite period
release or impairment of this security as a
2. Pursuant to an Enforceable agreement
primary resource of payment of a debt, will
between the principal and the creditor
discharge the surety to the extent of the value
3. Made Without the consent of the surety or
of the property or lien released for there
with a reservation of rights with respect to
immediately arises a trust relation between
him.
the parties, and the creditor as trustee is
 The contract must be one which precludes
bound to account to the surety for the value
the creditor from, or at least hinders him in,
of the security in his hands.
enforcing the principal contract within the
period during which he could otherwise have
Reason: The act of one cannot prejudice
enforced it, and precludes the surety from
another. It also avoids collusion between the
paying the debt.
creditor and the debtor or a third person.
 The law does not even grant the surety the
right to sue the creditor for delay, as Defenses Available to Guarantor against
protection against the risks of possible Creditor (Art. 2081)
insolvency of the debtor; but in view of the
General rule: All defenses, which pertain to the
efficacy of the action on the contract against
principal debtor and are inherent in the debt.
the surety, beginning with the date the
obligation becomes due, his vigilance must Exception: Those which are purely personal to
be exercised rather against the principal the debtor.
debtor.
D. Legal and Judicial Bonds
That an extension granted to the debtor by the
A judicial bondsman is a surety offered in virtue
creditor without the consent of the guarantor
of a provision of law or a judicial order, and he
extinguishes the guaranty, also applies to
must have the qualifications of a guarantor. (Art.
suretyship. The theory behind Art. 2079 is that an
2082).
extension of time given to the debtor by the
creditor without the surety’s consent would
deprive the surety of his right to pay the creditor If a person required to give a bond or surety is
and to be immediately subrogated to the unable to do so, he may give a mortgage
creditor’s remedies against the debtor upon the instead. (Art. 2083)
maturity date. The surety is entitled to protect
himself against the debtor’s insolvency during the
Note that a bondsman is a surety and cannot
extension. However, it must be stressed that Art.
avail of the benefit of excussion. (Art. 2084)
2079 will apply only if the extension is granted by
the creditor in favor of the debtor without the
guarantor’s/surety’s consent. (TIDC v. APC,
2014)
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4. SURETY – such agreement is enforceable and not

violative of any public policy
A. Concept a. Indemnity against loss – indemnitor will
not be liable until the person to be
A relation which exists where one person indemnified makes payment or sustains
(principal or obligor) has undertaken an
loss
obligation and another person (surety) is also
b. Indemnity against liability –
under a direct and primary obligation or other
duty to a third person (obligee), who is entitled indemnitor’s liability arises as soon as the
to but one performance, and as between the two liability of the person to be indemnified
who are bound, the one rather than the other has arisen without regard to whether or
should perform (De Leon, 2016, citing Agro not he has suffered actual loss
Conglomerates v. CA, 348 SCRA 450 (2000)) c. Such agreement valid - A stipulation in
an indemnity agreement providing that
It is a contractual relation resulting from an the indemnitor shall pay the surety as
agreement whereby one person (the surety) soon as the latter becomes liable to make
engages to be answerable to a third person (the payment to the creditor under the terms
obligee/creditor) for the debt, default, or of the bond, regardless of whether the
miscarriage of another (the principal or surety has made payment actually or
obligor/debtor). It involves 2 relationships; the not, is valid and enforceable, and in
principal relationship between the obligee and accordance therewith, the surety may
the obligor, and the accessory relationship demand from the indemnitor even before
between the principal (obligor) and the surety
the creditor has paid.
(De Leon, 2016, citing Garcia v. CA, 191 SCRA
493 (1990) and Visayan Surety v. CA, 364
SCRA 631 (2001)) Where the principal debtors are
simultaneously the same persons who
B. Form of Surety
executed the indemnity agreement, the
A contract of guaranty must be in writing to be position occupied by them is that of a
enforceable, since it is a “special promise to principal debtor and indemnitor at the
answer for the debt, default or miscarriage of same, and their liability being joint and
another.” (De Leon, 2016, at 320) several.
If the obligation is collateral to another If a corporation is being rehabilitated and a

agreement, and therefore the obligor is a surety, judicial stay order is issued enjoining the filing of
the promise must be in writing. (Sta. Maria, claims against the corporation, the corporation’s
Obligations and Contracts, 2017 ed., at 651, creditors can proceed against the sureties. The
citing Reiss v. Memije) judicial stay order does not cover claims against
sureties who are solidarily liable with the
However, a contract of guaranty (or surety) does corporation under rehabilitation. Actions against
not need to appear in a public document to be the sureties may proceed independently. (JAPRL
valid and enforceable. (De Leon, 2016, at 320) v. SBC,G.R. No. 190107, 2011)
C. Obligations Secured D. Surety Distinguished From Standby

Letter of Credit
Recovery of Surety Against Indemnitor (i.e.,
principal debtor) Even Before Payment Standby letters of credit (SBLCs) are primary and
1. Indemnity agreement is for the benefit not accessory obligations, while sureties are
of surety – not for the benefit of the accessory obligations that require a valid
creditor principal obligation. In a situation involving a
2. Indemnity agreement may be against SBLC, the payments made by the “principal
actual loss as well as potential liability debtor” cannot act to discharge the issuer of the
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SBLC from its own obligation to pay, even if the creditor proceeds
total payments would amount to more than the against him.
principal obligation. (Insular Bank of Asia & Not bound to take Held to know every
America v. IAC, 167 SCRA 450) notice of the non- default of the
performance of the principal.
E. Surety Distinguished From Guaranty principle
GUARANTY SURETYSHIP
F. Surety Distinguished From Joint and
Liability depends Assumes liability as a Solidary Obligations
upon an independent regular party to the
agreement to pay the undertaking In the case of joint and solidary debtors, Article
obligation if the 1217 makes plain that the solidary debtor who
principal debtor fails
effected the payment to the creditor “may claim
to do so
from his co-debtors only the share which
Engagement is a Charged as an corresponds to each, with the interest for the
collateral undertaking original promisor payment already made.” Such solidary debtor will
Secondarily liable – Primarily liable – not be able to recover from the co-debtors the full
he contracts to pay if, undertakes directly for amount already paid to the creditor, because the
by the use of due the payment without right to recovery extends only to the proportionate
diligence, the debt reference to the share of the other co-debtors, and not as to the
cannot be paid solvency of the particular proportional share of the solidary
principal, and is so debtor who has already paid. In contrast, even as
responsible at once the surety is solidarily bound with the principal
the latter makes
debtor to the creditor, the surety who does pay
default, without any
demand by the the creditor has the right to recover the full
creditor upon the amount paid, and not just any proportional share,
principal whatsoever from the principal debtor or debtors. Such right to
or any notice of full reimbursement falls within the other rights,
default actions, and benefits which pertain to the surety
by reason of the subsidiary obligation assumed
Only binds himself to Undertakes to pay if
pay if the principal the principal does not by the surety. (Escaño v. Ortigas, Jr., 526 SCRA
cannot or is unable to pay, without regard to 26, G.R. No. 151953, 29 June 2007)
pay his ability to do so
Insurer of the Insurer of the debt
solvency of the
debtor
Does not contract Pay the creditor
that the principal will without qualification
pay, but simply that if the principal debtor
he is able to do so does not pay. Hence,
the responsibility or
obligation assumed
by the surety is
greater or more
onerous than that of a
guarantor
Guarantor can avail of Surety cannot avail
the benefit of the benefit of
excussion and excussion and
division in case the division.
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5. LETTERS OF CREDIT whether the main contract is actually

accomplished or not. (Annotation, 228 SCRA
A. Definition and Purpose 378 (1993))
A letter from a merchant or a bank or banker in

one place, addressed to another, in another place Purpose of Letters of credit:
or country, requesting the other bank to pay a. As to the SELLER
money or deliver goods to a third party named  Insures to a seller payment of a
therein, the opening bank under taking to provide
definite amount upon
him the money for the goods or to repay him.
presentation of documents
 Enables the seller to release his
It is a letter requesting one person to make
inventory or stock in trade
advances to a third person on the credit of the
without seeking credit facilities
writer who assumes responsibility for payment of
from his own bank for the buyer
the debt therefor to the addressee
b. As to the BUYER
“A letter of credit is a financial device developed Gives the buyer the opportunity
by merchants as a convenient and relatively to levy goods even without
safe mode of dealing with sales of goods to money but on his credit
satisfy the seemingly irreconcilable interests of standing with the opening bank
a seller, who refuses to part with his goods
before he is paid, and a buyer, who wants to Parties to a Letter of Credit
have control of the goods before paying.”
Buyer (Applicant)
(Annotation, 228 SCRA 378 (1993), citing Bank
Procures the letter of credit and obliges
of America v. CA, 228 SCRA 357)
himself to reimburse the issuing bank
upon receipt of the document of title.
The buyer contacts a bank to issue a letter of
credit (LC) in favor of the seller so that, by virtue Issuing Bank
of the LC, the bank authorizes the seller to draw Undertakes to pay the seller upon receipt
drafts and engages to pay them upon of the draft and proper documents of titles
presentment with simultaneous tender of and to surrender the documents to the
documents required by the LC. Once the LC is buyer upon reimbursement. Issuing
established, the seller ships the goods to the bank’s obligation is solidary with that of
buyer and in the process secures shipping the buyer (Insular Bank v. IAC, G.R. No.
documents. To get paid, the seller executes a 74834, 1988).
draft and presents it together with the shipping
documents to the issuing bank. The issuing Note: Usually the issuing bank merely
bank redeems the draft and pays the seller if it substitutes its own promise to pay for that
finds that the documents submitted by the seller of its customer, who in turn promises to
conform with the LC. The bank then obtains pay the bank the amount of the credit and
possession of the documents. The transaction the fees mutually agreed upon. “Once the
is completed when the buyer reimburses the issuing bank shall have paid the
bank and acquires the documents entitling him beneficiary after the latter’s compliance
to the goods. The bank engages to pay the with the terms of the letters of credit, the
seller once the draft and appropriate shipping issuing bank is entitled to reimbursement
documents are presented; this arrangement for the amount it paid under the letter of
assures the seller of being paid, independently credit.” (Galvez and Guy v. CA and Asia
of any breach of the main sales contract. By United Bank, G.R. No. 187919, 2012).
this, the bank determines compliance with the
LC only by examining the shipping documents Seller (Beneficiary)
presented; it is precluded from determining Who in compliance with the contract of
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sale ships the goods to the buyer and paid (Code of Commerce, Art.
delivers the documents of title and draft 569, par. 1)
to the issuing bank to recover payment.  In case of revocation, he must
inform the bearer and the
The Number of Parties May Include: person to whom it is
1. Advising (Notifying) Bank addressed (Code of
May be utilized to convey to the Commerce, Art. 570)
seller the existence of the credit, but 2. BEARER of letter of credit
does not assure that the issuing  Pay the amount received
bank will pay and may refuse to without delay (Code of
accept the drafts without being Commerce, Art. 571, par. 1)
liable (Bank of America v. CA, G.R. 3. NOTIFYING BANK
No. 105395, 1993)  To notify and/or transmit the
2. Confirming Bank documentary of credit to the
Which will lend credence to the seller-beneficiary
letter of credit issued by a lesser  Assumes no liability
known issuing bank; the confirming 4. NEGOTIATING BANK
bank is directly liable to pay the  Buys/discounts a draft under
seller-beneficiary the letter of credit
3. Paying Bank  Liability depends upon the
Which undertakes to encash the negotiation
drafts drawn by the exporter/seller o Before negotiation, it has no
4. Negotiating Bank liability with respect to the
Instead of going to the place of the seller
issuing bank to claim payment, the o After negotiation, there is a
buyer may approach the negotiating contractual relationship
bank to have the draft discounted; prevailing between the
Its liability is dependent upon the negotiating and the seller
stage of the negotiation – if before 5. CONFIRMING BANK
negotiation, no liability (Charles Lee  Assumes a direct obligation to
v. CA, G.R. No. 117913, 2002). the seller
Rights and Obligations of the Parties

Nature or Legal Relations Arising From
Letters of Credit:
Rights of the Parties
It may be made conditional, but for purposes of
 The person paying shall have the
protecting the banking and mercantile
right to demand proof of identity of
community, all conditions must be complied with,
the person in whose favor the letter
however onerous. It is unaffected by any breach
of credit was issued (Code of
of contract on the part of the seller or the buyer or
Commerce, Art. 569(3))
by any controversy which may arise between the
 In case of non-payment, person to
buyer and seller or by any other transactions
whom the letter of credit is
between the buyer and the seller (NAMARCO v.
addressed may institute an action
Atlas Trading, G.R. No. 21911, 1967).
involving execution (Code of
Commerce, Art. 571(2)).
When Letter of Credit Considered
Obligations of the Parties Consummated Contract:
1. DRAWER of the letter of credit It is the date of payment if the amount of the
foreign currency to the creditor in his country by
 Liable to the person on whom
the agent or correspondent bank in the country of
it was issued for the amount
the debtor that turns from executory to executed
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or consummated contract. It is not the date of opening of the letter of credit and the
payment by the debtor to the bank in his country beneficiary must be obtained before
of the amount of foreign exchange sold that it may be revoked. This gives the
makes the contract executed or consummated, seller certainty of payment.
because the bank may grant the debtor extension
of time to pay such debt (BelmanCompania v. CB Issuing bank may not, without the
of the Philippines, G.R. No. L-10195, 1958). consent of the beneficiary (seller)
and the applicant (buyer), revoke his
B. Kinds of Letters of Credit undertaking under the letter
Commercial Letter of Credit 3. According to Obligation

An instrument by which a bank, for the account of b) Unconfirmed Letter of Credit
the buyer, gives formal evidence to a seller, of its The notifying bank is requested
willingness to permit him, the seller, to draw bills merely to act as the medium through
against it, on certain terms, and stipulates in legal which the opening bank’s obligation
form that all such bills will be honored. is transmitted to the beneficiary. Its
letter of advice shall guarantee the
1. According to Methods of Transmission authenticity of the message it is
a) Circular Letter of Credit transmitting on behalf of the opening
It is addressed to persons in general bank.
in which the opening bank
undertakes to honor the beneficiary’s c) Confirmed Letter of Credit
drafts under certain stipulated The notifying bank gives an absolute
conditions. This may either be mailed assurance that the opening bank’s
or by the issuing bank to the obligation will be performed.
beneficiary or delivered by the
issuing bank to the accredited buyer, Irrevocable v. Confirmed Letters of Credit
to be mailed by him to the
IRREVOCABLE CONFIRMED
beneficiary.
LETTERS OF LETTERS OF
CREDIT CREDIT
b) Specially Advised Letter of Credit
Refers to the duration Refers to the kind of
It is transmitted to the beneficiary by of the letter of credit obligation assumed by
the opening bank through the the correspondent
medium of its correspondent in the bank
vicinity of the beneficiary. The issuing bank The correspondent
made no reservation bank gives an
2. According to Duration of his right to revoke. absolute assurance
a) Revocable Letter of Credit Hence, it cannot do that it will undertake
The opening bank leaves the so without the the issuing bank’s
duration of the credit open for consent of the obligation as its own
beneficiary. according to the terms
subsequent consideration and thus
and conditions of the
reserves the right to withdraw from
credit
the transaction by stating that it is
“good as cancelled” or good until a 4. According to Method of Payment
stipulated date “unless sooner a) Negotiation
revoked”. The beneficiary is to draw his drafts
in a foreign currency either in the
c) Irrevocable Letter of Credit opening foreign bank or in another
The issuing bank does not reserve its opening foreign bank, which drafts so
right to revoke the credit. The drawn the beneficiary may sell to the
consent of the party who sought the notifying bank or any other bank in
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his locality. The beneficiary b) Reimbursement

negotiates his foreign currency drafts Occasionally, the opening bank
drawn under the credit to the bank in doesn’t have an account with the
his locality offering him the best rate. correspondent it chooses as a paying
bank or, having an account, may
b) Straight prefer not to have it debited. In the
The beneficiary is paid by a bank latter case, the paying bank will draw
local to him and designated by the a draft for the amount of its payment,
opening bank. The drafts are usually with commission and interest for the
drawn in the currency of the period elapsing until reimbursement,
beneficiary. either on the opening bank or the
correspondent with which the
Sight and Acceptance Letter of opening bank carries an account.
Credit
Under a sight credit, the 6. According to Provision for Renewal
beneficiary’s drafts are drawn a) Revolving Credits
payable at sight. Once paid, the The opening bank who may be
drafts serve simply as receipts for willing to finance aggregate
payment and are without value for shipments which will exceed the
any other purpose. amount of credit is willing to have
outstanding at one time for the
In an acceptance credit, it is accredited buyer.
stipulated that the drafts be drawn at
time, for acceptance, upon some A single commercial letter of credit
well-reputed bank in a center of may be given a life sufficient to cover
international finance. This is used if the period of time necessary to
the accredited buyer and the opening complete the transaction, with the
bank want to use the drafts as a restriction that the amount shall not
means by which to obtain funds for exceed the limit set.
financing the transaction in a
discount market. The draft is There should be a proviso that, upon
discounted after acceptance and the notice from the opening bank that
beneficiary is placed in funds. The any draft which the beneficiary has
accredited buyer need not furnish drawn within that limit has been paid
funds to pay the draft until its and retired by the accredited buyer,
maturity. the like sum becomes available to
the beneficiary.
5. According to Method of Reimbursement
a) Simple b) Cumulative
A letter of credit where an opening Amounts not used in one month are
bank instructing a correspondent to available in succeeding months.
act as the paying bank carries an
account in the currency to be paid c) Non-Cumulative
with the paying bank. The amount of Amounts unused during the month
payment made to the beneficiary and lapses.
the paying bank’s commission for the
service performed is debited to his 7. According to Source of Payment
account. a) Local Currency
A credit that stipulates that drafts are
to be drawn in the currency of the
domicile of the beneficiary.
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undetermined amounts, but within a

a) Foreign Currency maximum of limits of which has to be
A credit which stipulates that drafts stated exactly
are to be drawn in a foreign currency,
whether that of the accredited buyer Contents of Letters of Credit (SAINTS-SCOE)
or not. a. Signature of the writer
b. Name of the individual or concern for
Commercial v. Standby Letters of Credit whose account it is issued
COMMERCIAL STANDBY LETTERS c. The approximate value of the goods
LETTERS OF CREDIT OF CREDIT to be shipped and the general nature
NATURE of the goods
A payment mechanism A security mechanism d. The issuance of the drafts which the
– payable upon – it is payable to seller seller must draw and the name of the
presentation by seller- upon certification of a bank on which the drafts are to be
beneficiary of party’s non- drawn
documents showing performance of an e. The terms of sale
that he has complied agreement.
f. A statement as to whether the drafts
with sales agreement.
are to be drawn for 100% of the cost
DOCUMENTATION
Seller-beneficiary must Seller-beneficiary must of the merchandise or for a lesser
show documents that show that applicant has percentage
he has performed his NOT performed his g. The shipping route
contract contract. h. The exact shipping and other
CERTIFICATION documents which must be attached
Seller-beneficiary need Seller-beneficiary must to the drafts of the seller
not make any certify obligor has not i. The outside date of the shipment and
certification. performed his contract. the outside date by which the seller
is to negotiate his drafts to which the
Traveler’s Letter of Credit specified documents are attached
A letter from a bank addressed to one or more j. Clear indication upon the part of the
of its correspondents stating that drafts up to issuing bank that the seller’s drafts
a certain sum drawn by the beneficiary will be will be duly honored
honored by the bank.
C. Rule of Strict Compliance
Note:
 The purpose of a traveler’s letter of credit “It is a settled rule in commercial transactions
is to provide the traveler with funds en involving letters of credit that the documents
route tendered must strictly conform to the terms of
the letter of credit. The tender of documents by
 OR just bring a credit card.
the beneficiary (seller) must include all documents
required by the letter. A correspondent bank which
Specially Advised Letter of Credit
departs from what has been stipulated under the
It is addressed to only one bank. letter of credit, as when it accept a faulty tender,
acts on its own risks and it may not thereafter be
Circular Letter of Credit able to recover from the buyer or the issuing bank,
It is addressed to a number of as the case may be, the money thus paid to the
correspondents. beneficiary. Thus the rule of strict compliance…
Under the foregoing provisions of the U.C.P., the
Essential Conditions (Art. 568) bank may only negotiate, accept or pay, if the
a. To be issued in favor of a definite documents tendered to it are on their face in
person accordance with the terms and conditions of the
b. To be limited to a fixed and specified documentary credit. And since a correspondent
amount, or to one or more bank, like the petitioner, principally deals only with
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documents, the absence of any document Independent Nature of a Letter of Credit May
required in the documentary credit justifies the Be:
refusal by the correspondent bank to negotiate, a. In toto where the credit is independent
accept or pay the beneficiary, as it is not its from the justification aspect and is a
obligation to look beyond the documents. It merely separate obligation from the underlying
has to rely on the completeness of the documents agreement like for instance a typical
tendered by the beneficiary.” (Feati Bank v. CA, standby; or
196 SCRA 576 (1991))
b. Only as to the justification aspect like in
commercial letter of credit or repayment
D. Independence Principle
standby, which is identical with the
In a letter of credit, transaction means that a bank, obligations under the underlying
in determining compliance with the terms of a agreement (Transfield Philippines v.
letter of credit, is required to examine only the Luzon Hydro Corp., GR No. 146717,
shipping documents presented by the seller and 2004).
is precluded from determining whether or not the
main contract is actually accomplished or not. In letters of credit transactions, fraud is an
exception to the independent Principle. Fraud
“What characterizes letters of credit, as can also justify the issuance of an injunction
distinguished from other accessory contracts, is against payment.
the engagement of the issuing bank to pay the
seller once the draft and the required shipping The requirements for such injunction to the
documents are presented to it. In turn, this issue are the following: (PAI)
arrangement assures the seller of prompt 1. there is clear Proof of fraud;
payment, independent of any breach of the main 2. the fraud constitutes fraudulent Abuse of
sales contract. By this so-called “independence the independent purpose of the letter of
principle,” the bank determines compliance with
credit and not only fraud under the main
the letter of credit only by examining the shipping
agreement; and
documents presented; it is precluded from
3. Irreparable Injury might follow if
determining whether the main contract is actually
injunction is not granted or the recovery
accomplished or not.” (Bank of America v. CA, 228
SCRA 357 (1993)) of damages would be seriously damaged
(Transfield Philippines v. Luzon Hydro
Corp., G.R. No. 146717, 2004).
The independence principle is for the benefit of
both the issuing bank and the beneficiary. Upon --------end of topic --------
submission of the required documents for the
drawing down of the letter of credit, it is
“ministerial” on the bank to honor the credit.
(Transfield Phils. v. Luzon Hydro, 443 SCRA 307
(2004)
Three Distinct and Independent Contracts in a

Letter of Credit
a. Sale between the seller and the buyer;
b. Contract of buyer with issuing bank; and
c. The letter of credit itself, wherein the
bank promises to pay pursuant to the
terms and conditions of the letters of
credit. This assures seller of prompt
payment, independent of any breach of
the main sales contract.
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VII. SPECIAL LAWS B. TRUTH IN LENDING ACT

B. TRUTH IN LENDING ACT
1. Purpose 1. PURPOSE
2. Obligation of Creditors to Person to
Whom Credit is Extended “It is hereby declared to be the policy of the State
3. Covered and Excluded Transactions to protect the citizens from a lack of awareness of
4. Consequences of Non-Compliance the cost of credit to the user by assuring a full
With Obligation disclosure of such costs with a view of preventing
the uninformed cost of credit to the detriment of
the national economy.” (Sec. 2, RA 3765)
In short, protect citizens from uninformed use of

credit by requiring disclosure by the lenders of all
finance charges in relation to said credit
(including not only interest, but also fees, service
charges, discounts, and other charges as may be
prescribed by the Monetary Board).
2.OBLIGATION OF CREDITORS TO
PERSON TO WHOM CREDIT IS EXTENDED
Prior to the consummation of the transaction,

the creditor must furnish a disclosure statement
to the person to whom credit is extended, which
contains the following information:
1. The cash price or delivered price to the
property or service to be acquired;
2. The amounts, if any, to be credited as
down payment and/or trade-in;
3. The difference between the amounts
set forth under clauses (1) and (2);
4. The charges, individually itemized,
which are paid or to be paid by such
person in connection with the
transaction but which are not incident to
the extension of credit;
5. The total amount to be financed;
6. The finance charge expressed in terms of
pesos and centavos; and
7. The percentage that the finance bears to
the total amount to be financed
expressed as a simple annual rate on the
outstanding unpaid balance of the
obligation (Sec. 2, RA 3765)
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3. COVERED AND EXCLUDED installment buyer.” (International

TRANSACTIONS Harvester Macleod, Inc. v. Medina, Jr., 183
SCRA 485 (1990))
Covered transactions:
1. Any loan, mortgage, deed of trust, Banks and non-bank financial
advance, or discount; intermediaries authorized to engage in
2. Any conditional sales contract; quasi-banking functions are required to
3. Any contract to sell, or sale or contract of strictly adhere to the Truth in Lending Act.
sale of property or services, either for (Consolidated Bank v. CA, 246 SCRA 193
present or future delivery, under which (1995))
part or all of the price is payable
subsequent to the making of such sale or 4. CONSEQUENCES OF NON-
contract;
COMPLIANCE WITH OBLIGATION
4. Any rental-purchase contract;
5. Any contract or arrangement for the hire, Civil liability: P100 or an amount equal to twice
bailment, or leasing of property; the finance charge required by the creditor,
whichever is higher, except that the liability
6. Any option, demand, lien, pledge, or
should not exceed P2,000. The action to
other claim against, or for the delivery of,
recover this penalty may be brought within 1
property or money;
year from the transaction. The creditor shall
7. Any purchase, or other acquisition of, or also be liable for reasonable attorney’s fees
any credit upon the security of, any and court costs, as determined by the court
obligation of claim arising out of any of
the foregoing;
Criminal liability: fine of P1,000 to P5,000, or
8. Any transaction or series of transactions
imprisonment of 6 months to 1 year, or both.
having a similar purpose or effect (Sec.
3(2), RA 3765) (Sec. 6, RA 3765)
Done by:
Any person engaged in the business of --------end of topic --------
extending credit (including any person
who as a regular business practice makes
loans or sells or rents property or services
on a time, credit, or instalment basis, either
as principal or as agent) who requires as
an incident to the extension of credit, the
payment of a finance charge (Sec. 3(3),
RA 3765)
“In a financing transaction under RA 3765,

there are 3 parties involved, namely: (1)
the installment buyer, (2) the seller, and (3)
the financing company. The buyer
executes a note or notes for the unpaid
balance of the price of the thing purchased
by him on installment. The seller assigns
the notes or discounts them with a
financing company which is subrogated in
the place of the seller, as creditor of the
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VIII. SPECIAL LAWS C. ANTI-MONEY LAUNDERING ACT

C. ANTI-MONEY LAUNDERING ACT
1. Policy 1. POLICY
2. Covered institutions and their
obligations The law declares that it is the policy of the State
3. Covered and suspicious transactions to:
4. Money laundering; how committed; 1. Protect and preserve the integrity and
unlawful practices or predicate crimes confidentiality of bank accounts;
5. Anti-Money Laundering Council; 2. Ensure that the Philippines shall not be used
functions as a money laundering site for the proceeds
6. Safe harbor provision of any unlawful activity; and
7. Application for freeze orders 3. Extent cooperation in transnational
a. Who may apply
investigations and prosecutions of persons
b. Effectivity
involved in money laundering acts wherever
c. Duties of covered institutions
8. Authority to inquire into bank deposits committed. (R.A. No. 9160, Section 2)
a. Forfeiture provisions
b. Mutual assistance among states
2. COVERED INSTITUTIONS AND
OBLIGATIONS
COVERED INSTITUTIONS
1. Supervised or regulated by the Bangko

Sentral ng Pilipinas Banks, non-banks,
quasi-banks, trust entities, foreign exchange
dealers, pawnshops, money changers,
remittance, and transfer companies and
other similar entities and all other persons
and their subsidiaries and affiliates
2. Supervised or regulated by the Insurance
Commission: Insurance companies, pre-
need companies, and all other person (e.g.,
insurance agents and brokers, professional
reinsurers, reinsurance brokers, holding
companies and systems, mutual benefit
associations and their subsidiaries and
affiliates);
3. Supervised or regulated by the Securities
and Exchange Commission
a. Securities dealers, brokers,
salesmen, investment houses, and
other similar persons managing
securities or rendering services as
investment agent, advisor, or
consultant;
b. Mutual funds, close-end investment
companies, common trust funds, and
other similar persons; and
c. Other entities administering or
otherwise dealing in currency,
commodities, or other financial
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derivatives based thereon, valuable a. They are acting as independent

objects, cash substitutes, and other legal professionals
similar monetary instruments or b. Authorized to practice in the
property Philippines; and
4. Jewelry dealers who deal with precious c. They are subject to the
metals, and precious stones for transactions provisions of their respective
in excess of One Million Pesos codes of conduct and/or
(P1,000,000.00); professional responsibility or any
5. Company service providers which, as a of its amendments. (R.A. No.
business, provide any of the following 9160, Section 3[a], as amended
services to third parties: by R.A. No. 10365)
a. Acting as a formation agent of
juridical persons; They shall be excluded from the coverage of the
b. Acting as (or arranging for another Anti-Money Laundering Act in relation to
information concerning their clients or where the
person to act as) a director or
disclosure of information would compromise
corporate secretary of a company, a client confidences or the attorney-client
partner of a partnership, or a similar relationship.
position in relation to other juridical
persons; 7. Casinos, including internet and ship-based
c. Providing a registered office, casinos with respect to their casino cash
business address or transactions related to their gaming
accommodation, correspondence or operations. (Sec. 3[a][8], RA No. 9160, as
administrative address for a amended)
company, a partnership or any other
legal person or arrangement; and OBLIGATIONS OF COVERED PERSONS
d. Acting as (or arranging for another
Persons and institutions covered by the Anti-
person to act as) a nominee
Money Laundering Act are subject to the
shareholder for another person; and following obligations:
6. Persons who provide for any of the following
services: a. Customer Identification (“Know Your
a. Managing of client money, securities, Client”) - covered and institutions shall:
or other assets; ● Establish and record the true identity
b. Management of bank, savings, or of its clients based on official
securities account; documents;
c. Organization or contribution for the ● Maintain a system of verifying the
creation, operation, or management true identity of their clients
of companies; and ● For corporate clients, require a
d. Creation, operation or management system of verifying their legal
of juridical persons or arrangements, existence and organizational
and buying and selling business structure, as well as authority and
entities. (R.A. No. 9160, Section 3[a], identification of all persons
as amended by R.A. No. 10365) purporting to act on their behalf;
● Absolutely prohibit anonymous
Lawyers and accountants are not considered as accounts, accounts under fictitious
covered persons if they render services under names, and all other similar
item 6 provided the following requisites are
accounts;
present.
● Allow peso and foreign currency
non-checking numbered
accounts.
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The BSP may conduct annual testing solely ● For closed accounts, covered
limited to the determination of the existence and institutions and persons shall
true identity of the owners of such accounts. (R.A. preserve and store the records on
No. 9160, Section 9[a])
customer identification, account files,
b. Reporting of Covered and Suspicious and business correspondence for at
Transactions least five (5) years from the dates
● Covered institutions and persons when they were closed. (R.A. No.
shall report to the Anti-Money 9160, Section 9[b])
Laundering Council (AMLC) all
3. COVERED AND SUSPICIOUS
covered transactions and
TRANSACTIONS
suspicious transactions within five
(5) working days from occurrence “Transaction” Refers to any act establishing any
thereof, unless the AMLC prescribes right or obligation or giving rise to any contractual
a different period not exceeding or legal relationship between the parties. It also
fifteen (15) working days (R.A. No. includes any movement of funds by any means
9160, Section 9[c], as amended by with a covered person.
R.A. No. 10365);
“Covered Transactions” are transactions in
● A transaction should be reported as cash or other equivalent monetary instrument
a suspicious transaction if the involving a total amount in excess of Five
transaction in question is determined Hundred Thousand Pesos (P500,000.00) within
to be both a covered and suspicious one (1) banking day. (R.A. No. 9160, Section 3[b],
transaction (R.A. No. 9160, Section 9 as amended by R.A. No. 9194)
[c], as amended by R.A. No. 9194);
“Suspicious Transactions” are transactions
with covered institutions, regardless of the
Confidentiality and liability
amount involved, where any of the following
When reporting covered or suspicious
circumstances exist:
transactions, covered institutions and persons
1. There is no underlying legal or trade
are prohibited from communicating, directly or
indirectly, in any manner or by any other means, obligation;
to any person or entity, or the media, the fact that 2. The client is not properly identified;
a covered or suspicious transaction report has 3. The amount involved is not commensurate
been or about to be reported, the contents with the business or financial capacity of the
thereof, or any other information in relation client;
thereto. (R.A. No. 9160, Section 9 [c], as
4. Taking into account all known circumstances,
amended by R.A. No. 9194)
it may be perceived that the client’s
Neither may such reporting be published or aired transaction is structured in order to avoid
in any manner or form by the mass media, being the subject of reporting requirements
electronic mail, or other similar devices. (R.A. No. under the Anti-Money Laundering Act;
9160, Section 9[c], as amended by R.A. No. 5. Any circumstance relating to the transaction
10365) which is observed to deviate from the profile
of the client and/or the client’s past
In case of violation, the concerned officer and
employee and media shall be held criminally transactions with the covered institution;
liable. (R.A. No. 9160, Section 9 [c], as amended 6. The transaction is in any way related to an
by R.A. No. 9194 and R.A. No. 10365) unlawful activity or offense under the Anti-
Money Laundering Act that is about to be, is
c. Record Keeping being, or has been committed; or
● Covered institutions and persons 7. Any transaction that is similar or analogous to
shall maintain and safely store all any of the foregoing. (R.A. No. 9160, Section
records of transactions for five (5) 3[b-1], as amended by R.A. No. 9194)
years from the dates of transactions;
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Failing to file a report as a Money Laundering

4. MONEY LAUNDERING; HOW Offense.
Any covered institution or person who, knowing
COMMITTED; UNLAWFUL PRACTICES OR
that a covered or suspicious transaction is
PREDICATE CRIMES required under the Anti-Money Laundering Act to
be reported to the Anti-Money Laundering
Money Laundering is a crime whereby the Council, fails to do so. (R.A. No. 9160, Section 4,
proceeds of an unlawful activity are transacted, as amended by R.A. No. 9194 and R.A. No.
thereby making them appear to have originated 10365)
from legitimate sources. (R.A. No. 9160, Section
4) “Monetary Instrument” refers to proceeds of, or
instruments related to an unlawful activity. This
Persons liable for Money Laundering: may refer to any of the following:
1. Any person; or 1. Coins or currency of legal tender of the
2. Any person employed with a covered Philippines, or of any other country;
institution 2. Drafts, checks, and notes;
3. Securities or negotiable instruments, bonds,
Elements:
commercial papers, deposit certificates, trust
1. The monetary instrument or property
certificates, custodial receipts, or deposit
represents, involves or relates to the
substitute instruments, trading orders,
proceeds of any unlawful activity;
transaction tickets and confirmations of sale
2. Knowledge of the offender that the
or investments and money market
monetary instrument or property
instruments; and
represents, involves or relates to the
4. Other similar instruments where title thereto
proceeds of the unlawful activity;
passes to another by endorsement,
3. The offender commits any of the
assignment, or delivery. (R.A. No. 9160,
following:
Section 3[c])
(a) Transacts said monetary instrument or
“Unlawful Activity” refers to any act, omission,
property;
or series or combination thereof involving or
(b) Converts, transfers, disposes of, moves, having any direct relation to the following:
acquires, possesses or uses said 1. Kidnapping under ransom;
monetary instrument or property; 2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and
(c) Conceals or disguises the true nature, 16 of the Comprehensive Dangerous Drugs
source, location, disposition, movement, Act;
or ownership of or rights with respect to 3. Section 3, paragraphs B, C, E, G, H, and I of
said monetary instrument or property; the Anti-Graft and Corrupt Practices Act;
(d) Attempts or conspires to commit money 4. Plunder;
laundering offenses referred to in 5. Robbery and Extortion;
paragraphs (a), (b), and (c); 6. Jueteng and Masiao punished as Illegal
(e) Aids, abets, assists in or counsels the Gambling;
commission of the money laundering 7. Piracy on the high seas;
offenses referred to in paragraphs (a), 8. Qualified Theft;
(b), and (c) above; and 9. Swindling and Other Forms of Swindling;
(f) Performs or fails to perform any act as a 10. Smuggling;
result of which he/she facilitates the 11. Violations of the Electronic Commerce Act;
offense of money laundering referred to 12. Hijacking and other violations of the Anti-
in paragraphs (a), (b), and (c) above. Hijacking Law and Destructive Arson and
(R.A. No. 9160, Section 4, as amended Murder;
by R.A. No. 9194 and R.A. No. 10365) 13. Terrorism and Conspiracy to Commit
Terrorism
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14. Financing of Terrorism and offenses 5. ANTI-MONEY LAUNDERING COUNCIL;

punishable under the Terrorism Financing FUNCTIONS
Prevention and Suppression Act;
15. Bribery and Corruption of Public Officers; The Anti-Money Laundering Act created the entity
16. Frauds and Illegal Exactions and known as the Anti-Money Laundering Council
(AMLC). The AMLC is composed of:
Transactions; 1. Governor of Bangko Sentral ng Pilipinas as
17. Malversation of Public Funds and Property; its Chairman;
18. Forgeries and Counterfeiting;
2. The Commissioner of the Insurance
19. Violations of the Anti-Trafficking in Persons Commission as a member;
Act; 3. The Chairman of the Securities and
20. Violations of the Revised Forestry Code of Exchange Commission as a member. (R.A.
the Philippines; No. 9160, Section 7, as amended by R.A. No.
21. Violations of the Philippine Fisheries Code; 9194 and R.A. No. 10365)
22. Violations of the Philippine Mining Act;
23. Violations of the Wildlife Resources The AMLC has the following functions:
Conservation and Protection Act; 1. Require and receive covered or suspicious
24. Violations of the National Caves and Cave transaction reports from covered institutions
Resources Management Protection Act; and persons (R.A. No. 9160, Section 7, as
25. Violations of the Anti-Carnapping Act; amended by R.A. No. 9194);
26. Violations of the Decree Codifying the Laws 2. Issue orders addressed to the appropriate
on Illegal/Unlawful Possession, Manufacture, Supervising Authority or the covered
Dealing in, Acquisition or Disposition of institution to determine the true identity of the
Firearms, Ammunition or Explosives; owner of any monetary instrument or property
27. Violations of the Anti-Fencing Law; subject to a covered transaction or suspicious
28. Violations of the Migrant and Overseas transaction report or request for assistance
Workers Filipinos Act; from a foreign State, or believed by the
29. Violations of the Intellectual Property Code; AMLC, on the basis of substantial evidence,
30. Violations of the Anti-Photo and Video to be, in whole or in part, wherever located,
Voyeurism Act; representing, involving, or related to, directly
31. Violations of the Anti-Child Pornography Act; or indirectly, in any manner or by any means,
32. Violations of the Special Protection of the proceeds from an unlawful activity R.A.
Children Against Abuse, Exploitation, and No. 9160, Section 7, as amended by R.A. No.
Discrimination; 9194;
33. Fraudulent practices and other violations of 3. Institute civil forfeiture proceedings and all
the Securities Regulation Code; other remedial proceedings through the
34. Felonies and offenses of a similar nature that Office of the Solicitor General (R.A. No. 9160,
are punishable under the penal laws of other Section 7);
countries. (R.A. No. 9160, Section 3[i], as 4. Cause the filing of complaints with the
amended by R.A. No. 9194 and R.A. No. Department of Justice or the Ombudsman for
10365) the prosecution of money laundering
offenses;
5. Investigate suspicious transactions and
covered transactions deemed suspicious
after an investigation by the AMLC, money
laundering activities, and other violations of
the AMLA (R.A. No. 9160, Section 7, as
amended by R.A. No. 9194);
6. Apply before the Court of Appeals, ex parte
for the freezing of any monetary instrument or
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property alleged to be laundered, proceeds 6. SAFE HARBOR PROVISION

from, or instrumentalities used or intended to
be used in any unlawful activity (R.A. No. No administrative, criminal, or civil proceedings
9160, Section 7, as amended by R.A. No. shall lie against any person for having made a
covered transaction report or suspicious
10365); transaction report in the regular performance of
7. Implement such measures as may be his/her duties in good faith, whether or not such
necessary and justified under the AMLA to reporting results in any criminal prosecution
counteract money laundering (R.A. No. 9160, under the Anti-Money Laundering Act or any
Section 7); other law. (Revised IRR of R.A. No. 9194, Rule
8. Receive and take action in respect of, any 9.c.5)
request from foreign states for assistance in
Exemption from Bank Secrecy Laws. When
their own anti-money laundering operations reporting covered or suspicious transactions to
(R.A. No. 9160, Section 7); the AMLC, covered persons and their officers and
9. Develop educational programs on the employees shall not be deemed to have violated
pernicious effects of money laundering, the RA No. 1405 (Secrecy of Bank Deposits), as
methods and techniques used in money amended, RA No. 6426 (Foreign Currency
laundering, the viable means of preventing Deposits Act) and RA No. 8791 (General Banking
Law), and other similar laws, provided that
money laundering and the effective ways of
confidentiality is observed. (Sec. 9[c], RA No.
prosecuting and punishing offenders (R.A. 9160, as amended)
No. 9160, Section 7);
10. Enlist the assistance of any branch, 7. APPLICATION FOR FREEZE ORDERS
department, bureau, office, agency, or
instrumentality of the government, including Definition and Purpose. A freeze order is an
government-owned and controlled extra-ordinary and interim relief issued by the
corporations, in undertaking any and all anti- Court of Appeals to prevent the dissipation,
removal, or disposal of properties that are
money laundering operations, which may
suspected to be the proceeds of, or related to,
include the use of its personnel, facilities and unlawful activities as defined in the AMLA. Its
resources for the more resolute prevention, primary purpose is to temporarily preserve
detection, and investigation of money monetary instruments or money that are in any
laundering offenses and prosecution of way related to an unlawful activity or money
offenders (R.A. No. 9160, Section 7); laundering, by preventing the owner from using
11. Impose administrative sanctions for the them during the duration of the freeze order. The
relief is preemptive in character, meant to
violation of laws, rules, regulations and prevent the owner from disposing his property
orders, and resolutions issued pursuant and thwarting the State’s effort in building its case
thereto R.A. No. 9160, Section 7, as and eventually filing civil forfeiture proceedings
amended by R.A. No. 9194); and/or prosecuting the owner (Ret. Lt. Gen.
12. Require the Land Registration Authority and Jacinto C. Ligot et. Al. vs. Republic of the
all its Registries of Deeds to submit to the Philippines, GR No. 176944, March 6, 2013).
Exception. The AMLC has authority to issue an
AMLC reports on all real estate transactions
ex parte freeze order, either under its own
involving an amount in excess of Five initiative or of the Anti-Terrorism Council, property
Hundred Thousand Pesos (P500,000.00) or funds related to financing of terrorism or
within fifteen (15) days from the date of the terrorist acts or property or funds of any person,
registration of the transaction, in a form to be terrorist organization or association of group of
prescribed by the AMLC. The AMLC may persons. (Sec. 11, RA No. 10168 [2012])
also require the Land Registration Authority
a. Requisites
and all its Registries of Deeds to submit
copies of relevant documents of all real 1. Upon a verified ex parte petition filed by the
estate transactions. (R.A. No. 9160, Section AMLC with the CA; and
7, as amended by R.A. No. 10365)
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2. Determination that probable cause exists that c. Duties of covered institutions

any monetary instrument or property is in any
way related to an unlawful activity. (R.A. No. In relation to Freeze Orders, the covered
institutions and persons have the following duties:
9160, Section 10, as amended by R.A. No.
1. Implement freeze order. Upon receipt the
9194, R.A. No. 10167, and R.A. No. 10365).
covered institution shall immediately freeze
⮚ Probable cause is the sufficiency of the
the monetary instrument or property and
relation between the unlawful activity and
desist from and not allow any transaction,
the property or monetary instrument
withdrawal, transfer, removal, conversion,
(Subido Law Offices vs. Court of
other movement, or concealment thereof.
Appeals, GR 216914, December 6,
2. Freeze and report related accounts.
2016) It's different from the probable
3. Furnish copy of freeze order to owner or
cause for the institution of criminal action.
holder.
⮚ No prior criminal charge, pendency of a
4. Submit the written detailed return. To the
case, or conviction for an unlawful activity
Court of Appeals and AMLC, within twenty-
is necessary for the commencement or
four (24) hours from receipt of the freeze
the resolution of a petition for freeze
order, a detailed written return which shall
order. (Rule 10 [Section 1(2), 2018 AMLA
include:
IRR)
a. Account numbers and/or description
of the monetary instruments,
b. Effectivity
property or proceeds involved;
● The Freeze Order shall be effective b. Names of the account owners or
immediately for a period of 20 days. The CA holders;
shall conduct a summary hearing within the c. The value of the monetary
period to determine whether to modify, lift or instrument, property, or related
extend the period. The total period of the accounts as of the time they were
Freeze Order shall not exceed six (6) months. frozen;
● Once the six months has lapsed, the freeze d. All relevant information as to the
order is deemed ipso facto lifted. nature of the monetary instrument,
property or instruments;
Exceptions: e. Any information on the related
⮚ When a money laundering complaint has accounts pertaining to the monetary
already been filed against the person whose instrument or property subject of the
monetary instrument or property was frozen, freeze order; and
or f. The date and the time when the
⮚ A petition for civil forfeiture against the frozen freeze order was served;
monetary instrument or property was filed 5. Freeze all related accounts upon the receipt
(Rule 10, Sec. 2.10[a], 2018 AMLA IRR). of the freeze orders and upon the verification
⮚ If an asset preservation order is issued by of the covered institution that these are
the RTC having jurisdiction over these cases, accounts related to the monetary instrument
the freeze order shall remain effective until or property subject of the freeze order. (Rule
the money laundering case is terminated or 10, Sec. 4, 2018 AMLA IRR).
an asset preservation order is issued,
respectively (R.A. No. 9160, Section 10, as
amended by R.A. No. 9194, R.A. No. 10167,
and R.A. No. 10365)
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8. AUTHORITY TO INQUIRE INTO BANK To ensure compliance with the AMLA, the
DEPOSITS Bangko Sentral ng Pilipinas may, in the course of
a periodic or special examination, check the
The Anti-Money Laundering Council may inquire compliance of a covered institution with the
into or examine any particular deposit or requirements of the AMLA and its implementing
investment, including related accounts, with any rules and regulations. (R.A. No. 9160, Section 11,
banking institution or non-bank financial as amended by R.A. No. 9194 and R.A. No.
institution upon order of any competent court. 10167)
(R.A. No. 9160, Section 11, as amended by R.A.
No. 9194 and R.A. No. 10167) a. Forfeiture Provisions
The term “related accounts” shall refer to (a) Civil Forfeiture

accounts, the funds and sources of which
originated from and/or materially linked to the Any monetary instrument or property can be the
monetary instrument(s) or property(ies) subject of subject of a civil forfeiture. This forfeiture can only
the freeze order(s). (R.A. No. 9160, Section 11, be availed upon:
as amended by R.A. No. 9194 and R.A. No. 1. The determination by the Anti-Money
10167) Laundering Council that probable cause
exists that any monetary instrument or
The order of the competent court must be based property is in any way related to an unlawful
on:
1. An ex parte application in cases of violations activity or a money laundering offense; and
2. A verified ex parte petition for forfeiture filed
of the Anti-Money Laundering Act; and
2. Probable cause that the deposits or through the Office of the Solicitor General.
investments, including related accounts
The Rules of Court on Civil Forfeiture shall apply.
involved, are related to an unlawful activity.
(R.A. No. 9160, Section 11, as amended by The forfeiture shall include those monetary
R.A. No. 9194 and R.A. No. 10167) instrument or property having an equivalent value
to that of the monetary instrument or property
No court order shall be required in the following found to be related in any way to the unlawful
cases: activity or money laundering offense, when the
1. Kidnapping for ransom; latter:
2. Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 1. Cannot be located despite the exercise of
16 of the Comprehensive Dangerous Drugs due diligence;
Act; 2. Has been substantially altered, destroyed,
3. Hijacking and other violations of the Anti- diminished in value, or otherwise rendered
Hijacking Law and Destructive Arson and worthless by any act or omission;
Murder; 3. Has been concealed, removed, converted, or
4. Felonies similar to those previously otherwise transferred;
mentioned which are punishable in other 4. Is located outside the Philippines or has been
countries; placed or brought outside the jurisdiction of
5. Terrorism and conspiracy to commit terrorism the court;
(R.A. No. 9160, Section 11, as amended by 5. Has been commingled with other monetary
R.A. No. 9194 and R.A. No. 10167) instrument or property belonging to either the
offender himself or a third person or entity,
The Court of Appeals shall act on the application thereby rendering the same difficult to identify
to inquire into or examine any depositor or or be segregated for purposes of forfeiture.
investment with any banking institution or non- (R.A. No. 9160, Section 12[a], as amended
bank financial institution within twenty-four (24) by R.A. No. 10365)
hours from the filing of the application. (R.A. No.
9160, Section 11, as amended by R.A. No. 9194
and R.A. No. 10167)
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(b) Claim on Forfeited Assets The principles of mutuality and reciprocity shall,
for this purpose, be at all times recognized. (R.A.
When the court has issued an order of forfeiture No. 9160, Section 13[a])
of the monetary instrument or property in a
criminal prosecution for any money laundering (b) Powers of the AMLC to Act on a Request for
offense, the offender or any other interested Assistance from a Foreign State
person may apply for a declaration that the
instrument or property legitimately belongs to The AMLC may execute a request for assistance
him/her and for the segregation or exclusion of from a foreign State by:
the instrument or property. The claim on forfeited 1. Tracking down, freezing, restraining and
assets should be: seizing assets alleged to be proceeds of any
1. Instituted through a verified petition;
unlawful activity under the procedures laid
2. Filed with the court which rendered the
down by the Anti-Money Laundering Act;
judgement of forfeiture;
2. Giving information needed by the foreign
3. Filed within fifteen (15) days from the date of
State within the procedures laid down in Anti-
the finality of the order of forfeiture.
Money Laundering Act; and
3. Apply for an order of forfeiture of any
The order of forfeiture shall become final and
executory if a petition for the claim of forfeited monetary instrument or property in the court.
assets is not filed within fifteen days.
The court shall not issue an order of forfeiture
This rule shall apply in both civil and criminal unless the application is accompanied by:
forfeitures. (R.A. No. 9160, Section 12[b], as 1. An authenticated copy of the order in the
amended by R.A. No. 10365) court of the requesting State ordering the
forfeiture of said monetary instrument or
(c) Payment in Lieu of Forfeiture property of a person who has been convicted
of a money laundering offense in the
If the court has issued an order of forfeiture of the requesting State; and
monetary instrument or property subject to a
2. A certification or affidavit of a competent
money laundering offense AND said order cannot
be enforced due to the same circumstances that officer of the requesting State stating that the
allow the forfeiture of related monetary conviction and the order of forfeiture are final
instruments and property, the court may order the and that no further appeal lies in respect of
convicted offender to pay an amount equal to the either. (R.A. No. 9160, Section 13[b])
value of the said monetary instrument or property.
(c) Obtaining Assistance from Foreign States
This also applies in both criminal and civil
forfeitures. (R.A. No. 9160, Section 12[c], as The AMLC may make a request to any foreign
amended by R.A. No. 10365) State for assistance in:
1. Tracking down, freezing, restraining, and
b. Mutual assistance among States
seizing assets alleged to be proceeds of any
(a) Request for assistance from a Foreign State unlawful activity;
2. Obtaining information that it needs relating to
Where a foreign State makes a request for any covered transaction, money laundering
assistance in the investigation and prosecution of offense, or any other matter directly or
a money laundering offense, the Anti-Money indirectly related thereto;
Laundering Council may: 3. To the extent allowed by the law of the foreign
1. May execute the request; or
State, applying with the proper court therein
2. Refuse to execute the same and inform the
for an order to enter any premises belonging
foreign State of any valid reason for not
to or in the possession or control of, any or all
executing the request or for delaying the
of the persons named in said request, and/or
execution thereof.
search any or all such persons named therein
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and/or remove any document, material, or information, document, material, or object

object named in such request. The which may be of assistance to the
documents accompanying the request in investigation or prosecution;
support of the application have to be duly 5. Ask from the covered institution concerned
authenticated in accordance with the any information, document, material, or
applicable law or regulation of the foreign object which may be of assistance to the
State; investigation or prosecution;
4. Applying for an order of forfeiture of any 6. Specify the manner in which and to whom
monetary instrument or property in the proper said information, document, material, or
court in the foreign State. The application is object obtained pursuant to said request, is to
accompanied by an authenticated order of be produced;
the trial court ordering the forfeiture of said 7. Give all particulars necessary for the
monetary instrument or property of a issuance by the court in the requested State
convicted offender and an affidavit of a clerk of the writs, orders, and processes needed by
of court stating that the conviction and the the requesting State; and
order of forfeiture are final and that no further 8. Contain such other information as may assist
appeal lies in respect of either. (R.A. No. in the execution of the request. (R.A. No.
9160, Section 13[c]) 9160, Section 13[e])
(d) Limitations on Request for Mutual Assistance (f) Authentication of Documents
The AMLC may refuse to comply with any request A document is authenticated if the same is:
for assistance where the action sought by the 1. Signed or certified by a judge, magistrate, or
contract: equivalent officer in or of, the requesting
1. Contravenes any provision of the State; and
Constitution; or 2. Authenticated by the oath of affirmation of a
2. The execution of a request is likely to witness or sealed with an official or public
prejudice the national interest of the seal of a minister, Secretary of State, or
Philippines unless there is a treaty between officer in or of, the government of the
the Philippines and the requesting State requesting State, or of the person
relating to the provision of assistance in administering the government or a
relation to money laundering offenses. (R.A. department of the requesting territory,
No. 9160, Section 13[d]) protectorate, or colony.
(e) Requirements for Requests for Mutual The certificate of authentication may also be
Assistance from Foreign States made by the secretary of the embassy or legation,
consul general, consul, vice consul, consular
A request for mutual assistance from a foreign agent, or any officer in the foreign service of the
State must: Philippines stationed in the foreign State in which
1. Confirm that an investigation or prosecution the record is kept, and authenticated by the seal
is being conducted in respect of a money of his office. (R.A. No. 9160, Section 13[f])
launderer named therein or he/she has been
(g) Extradition
convicted of any money laundering offense;
2. State the grounds on which any person is
The Philippines shall negotiate for the inclusion of
being investigated or prosecuted for money money laundering offenses among extraditable
laundering or the details of his/her conviction; offenses in all future treaties. (R.A. No. 9160,
3. Give sufficient particulars as to the identity of Section 13[g])
said person;
4. Give particulars sufficient to identify any
covered institution believed to have any
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VIII. SPECIAL LAWS D. FOREIGN INVESTMENTS ACT

D. FOREIGN INVESTMENTS ACT
1. Policy of the law 1. POLICY OF THE LAW
2. Definition of terms
a. Foreign investment It is the policy of the State to attract, promote and
b. "Doing business" in the Philippines welcome productive investments from foreign
c. Export enterprise individuals, partnerships, corporations and
governments, including their political subdivisions
d. Domestic market enterprise
in activities which significantly contribute to
3. Registration of investments of non-
national industrialization and socioeconomic
Philippine nationals development to the extent that foreign investment
4. Foreign investments in export is allowed in such activity by the Constitution and
enterprises relevant laws. (Sec. 1)9
5. Foreign investments in domestic
market enterprises 2. DEFINITION OF TERMS
6. Foreign Investment Negative List
A. Foreign Investment
"Foreign Investment" shall mean as equity

investment made by a non- Philippine national in
the form of foreign exchange and/or other assets
actually transferred to the Philippines and duly
registered with the Central Bank which shall
assess and appraise the value of such assets
other than foreign exchange (Sec. 3[c])
Provided, however, that for purposes of

determining foreign ownership, peso investments
made by non-Philippine nationals shall be
considered;
Provided, further, that only foreign investments in

the form of foreign exchange and/or other assets
actually transferred to the Philippines and duly
registered with the Central Bank (CB) and profits
derived therefrom can be repatriated;
(Implementing Rules and Regulations of RA 7042
[as amended by RA 8179 July 9, 1996] Rule 1 §1
[g])
“Foreign Corporation”
1. A corporation formed, organized or
existing under any law other than those
of the Philippines, and
2. whose laws allow Filipino citizens and
corporations to do business in its own
country or state – reciprocity clause.
(Revised Corporation Code, Sec. 140)
Note: The Reciprocity clause does not affect the

status of the foreign corporation. It merely
emphasizes the policy of granting access to
9For purposes of this part of the reviewer, unless Investments Act of 1991 (RA 9042) as amended by RA
otherwise specified, all references refer to the Foreign 8179 (hereinafter FIA)
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foreign corporations whose home state also 5. Marketing control and sales
grants access to Filipino citizens and promotion;
corporations. 6. Training and personnel
management;
Branch office 7. Logistics services;
8. Research and development
- Carries out the business activities of the services, and product
head office and derives income from the development;
host country. (Implementing Rules and 9. Technical support and
Regulations of RA 7042, Rule 1 §1 [c]). maintenance;
Representative or liaison office 10. Data processing and
communication;
- It deals directly with the clients of the 11. Business development.
parent company but does not derive
income from the host country and is fully Taxation of Income: General Rules
subsidized by its head office.
- It undertakes activities such as but not Domestic Branch Regional
limited to information dissemination and Subsidiary Office HQ
promotion of the company’s products as Taxed on Only Philippine Not allowed
well as quality control of products. worldwide source income to generate
(Implementing Rules and Regulations of income is taxed income
RA 7042, Rule 1 §1 [c]).
Dividends Branch profit Not subject
paid are remittances to local
Regional or Area Headquarters (RHQ) taxed are taxed taxes and
- An office whose purpose is to act as an VAT
administrative branch of a multinational
company engaged in international trade “Philippine National” refers to:
which principally serves as a supervision,
communications and coordination center 1. A citizen of the Philippines, or
for its subsidiaries, branches or affiliates 2. A domestic partnership or association
in the Asia-Pacific Region and other wholly owned by citizens of the
foreign markets (R.A. 8756 §2 [2]) Philippines; or
- It does not earn or derive income in the 3. A corporation
Philippines; (R.A. 8756 §2 [2] ; National a. organized under the laws of
Internal Revenue Code, §22 [D]) the Philippines
b. of which at least sixty percent
Regional Operating Headquarters (ROHQ) (60%) of the capital stock
- A foreign business entity which is allowed outstanding and entitled to
to derive income in the Philippines by vote is owned and held by
performing qualifying services to its citizens of the Philippines or
affiliates, subsidiaries or branches in the 4. A corporation
Philippines, in the Asia-Pacific Region a. organized abroad and
and in other foreign markets. (R.A. 8756 b. registered as doing business
§2 [3]) in the Philippines under the
- ROHQs will be allowed to derive income Corporation Code
by performing the following qualifying c. of which one hundred percent
services: (100%) of the capital stock
1. General administration and outstanding and entitled to
planning; vote is wholly owned by
2. Business planning and Filipinos (mere legal title is not
coordination; enough, there should be
3. Sourcing/procurement of raw beneficial ownership)
materials and components; 5. A trustee of funds for pension or other
4. Corporate finance advisory employee retirement or separation
services; benefits,
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a. trustee must be a Philippine longer necessary to conduct any

national and further inquiry as to the ownership of
b. at least sixty percent (60%) of the shareholders of the investing
the fund will accrue to the corporation since the entire company
benefit of Philippine nationals. at least 60% Filipino owned is already
(Sec. 3[a]) considered a Filipino entity.
● However, a Filipino entity (60% Filipino-
Three rules in Determining the Nationality of owned) is not qualified to invest in or
Corporations with Foreign Equity: enter into a joint venture agreement with
Incorporation Test and Control Test: corporations or partnerships, the capital
or ownership of which, under the
Incorporation Test – the nationality of a Constitution or special laws, are limited
corporation depends on the state under which exclusively to Filipino citizens.
laws it is incorporated. This is regardless of the ● The shares of former Filipino citizens
nationality of its stockholders who became citizens of foreign countries
but who reacquired Philippine citizenship
Control Test -– the nationality of the corporation under the RA 9225 (Citizenship
depends upon the nationality of the controlling Retention and Reacquisition Act of 2003”
stockholders are considered as Filipino Investments.
While the incorporation test serves as the primary In order to determine the nationality of a
test under Philippine jurisdiction, the “control corporation, the following steps should apply:
test” and, in appropriate cases, the “grandfather
rule” is applied to determine compliance with 1st Step: The nationality of a corporation is
the Constitution and other laws on nationality determined by the country under whose laws it is
requirements. incorporated (Place of Incorporation Test).
Grandfather Rule – the combined totals in the 2nd Step: If the corporation is applying for a (2nd)
investing corporation and the investee franchise for public utility and etc. which requires
corporation must be traced (i.e. “grandfathered”) a certain percentage of control of stock, the Test
to determine the total percentage of Filipino of Controlling Ownership would be applied.
ownership.
3rd step: If there is doubt as to the domestic
All covered corporations shall, at all times, control of the percentage of stock in a corporation
observe the constitutional or statutory ownership with corporate stockholders, Grandfather test
requirement. For purposes of determining would be applied (Narra Nickel Mining and
compliance therewith, the required percentage of Development Corp. v. Redmont Consolidated
Filipino ownership shall be applied to BOTH (a) Mines Corp.,722 SCRA 382 [2014]).
the total number of outstanding shares of stock
entitled to vote in the election of directors AND (b) The issue in the case of Gamboa v. Teves is the
the total number of outstanding shares of stock, proper interpretation of the word “capital” in
whether or not entitled to vote in the election of Section 11, Article 12 of the 1987 Constitution.
directors. (Section 2, SEC Memorandum Circular For a corporation to be granted authority to
No. 08-13 dated May 20, 2013) operate a public utility, at least sixty percent
(60%) of the capital must be Filipino. The Court
Basis of Computation of 60-40 percentage holds that the term capital must be interpreted to
requirement refer to shares of stock entitled to vote in the
election of directors. Sixty percent (60%) of
● Under existing laws, the basis is the total capital must assume a controlling interest over
number of outstanding capital stock, the company.(Gamboa v. Finance Secretary
irrespective of the amount of the par Margarito Teves, 652 SCRA 690 [2011], .G.R.
value of the shares. No. 176579, June 28, 2011)
● Under the Control Test, once it is
established that the corporation is at The 60-40 ownership requirement applies not
least 60% owned by Filipinos, it is no only to voting control, but also to beneficial control
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of the corporation. Both the Voting Control Test the Constitution. The right to the dividends, jus
and the Beneficial Ownership Test must be fruendi—a right emanating from ownership of that
applied to determine whether a corporation is “specific stock” necessary accrues to its Filipino
Filipino.(Gamboa v. Finance Secretary Margarito “beneficial owner.” (Roy III v. Herbosa, G.R. No.
Teves 682 SCRA 397 [October 9,2012]) 207246 (Resolution), 18 April 2017.)
All covered corporations shall, at all times,

observe the constitutional or statutory ownership The Anti-Dummy Law confines the number of
requirement. For purposes of determining foreign directors in the board in proportion to their
compliance therewith, the required percentage of allowable participation or share in the capital.
Filipino ownership shall be applied to BOTH (a) (SEC-OGC Opinion No. 24-18 dated December
the total number of outstanding shares of stock 20, 2018)
entitled to vote in the election of directors; AND
(b) the total number of outstanding shares of 1987 Constitution
stock, whether or not entitled to vote in the ● Filipino First Policy - In the grant of rights
election of directors. (Section 2, SEC and concessions covering the national
Memorandum Circular No. 08-13 dated May 20, economy and patrimony, the State shall
2013) give preference to qualified Filipinos (Art.
XII, Sec 10, 1987 Constitution)
Petitioners in Roy v. Herbosa alleged that SEC- ● The control and administration of
MC No. 8 is in violation of the Supreme Court’s educational institutions shall be vested in
ruling in Gamboa v. Teves. The Court upheld the citizens of the Philippines. (Art. XIV. Sec.
validity of SEC-MC No. 8. The Gamboa decision 4, [2], 1987 Constitution)
held that what the Constitution requires is that full ● Educational institutions, shall be
and legal beneficial ownership of 60% of owned solely by citizens of the
outstanding capital stock, coupled with 60% of Philippines or corporations or
voting rights, must rest in the hands of Filipinos, associations at least sixty per centum of
which is precisely what SEC-MC No. 8 requires. the capital of which is owned by such
In constructing beneficial ownership, the IRR of citizens.
the FIA and the IRR of the Securities and o exce: those established by
Regulation Code both provide that such requires religious groups and mission
voting rights. If a Filipino has voting power, or boards,
investment power (can dispose), or both, he is o The Congress may, however,
considered the beneficial owner. (Roy III v. require increased Filipino equity
Herbosa, G.R. No. 207246, November 22, 2016) participation in all educational
institutions. (Art. XIV. Sec. 4, [2],
1987 Constitution)
The definition of “beneficial owner or beneficial ● Mass Media - The ownership and
ownership in the SRC-IRR, which is in management shall be limited to citizens
consonance with the concept of “full beneficial of the Philippines, or to corporations,
ownership” in the FIA-IRR, is relevant in resolving cooperatives or associations, wholly-
only the question of who is the beneficial owner owned and managed by such citizens.
or has beneficial ownership of each “specific (Article XVI Section 11 [1], 1987
stock” of the public utility whose stocks are under Constitution)
review. If the Filipino has the voting power of the ● Public utility- Any form of authorization
“specific stock”, i.e., he can vote the stock or for the operation of a shall be granted
direct another to vote for him, or the Filipino has only to citizens of the Philippines or to
the investment power over the “specific stock”, corporations or associations organized
under the laws of the Philippines, at least
i.e., he can dispose of that “specific stock” or
sixty per centum of whose capital is
direct another to vote or dispose it for him, then owned by such citizens. (Article XII,
such Filipino is the “beneficial owner” of that Section 11, 1987 Constitution)
“specific stock.” Being considered Filipino, that o The right to operate a public
“specific stock” is then to be counted as part of utility may exist independently
the 60% Filipino ownership requirement under and separately from the
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ownership of the facilities G.R. Nos. 89095 &

thereof. Operation of public utility 89555 November 6,
must be granted only to 1989)
Philippine citizens but ownership
of the structure may not B. Doing Business in the Philippines
necessarily be limited to Filipinos
(Tatad v. Garcia, G.R. No. “Doing business” shall include:
114222, April 6, 1995) 1. soliciting orders, service contracts,
● Natural Resources - The exploration, opening offices, whether called “liaison”
development, and utilization of natural offices or branches;
resources shall be under the full control 2. appointing representatives or distributors
and supervision of the State. The State who are:
may directly undertake such activities, or a. domiciled in the Philippines or
it may enter into co-production, joint b. Staying in the country for a
venture, or production-sharing period totaling 180 days or more
agreements with Filipino citizens, or in a calendar year
corporations or associations at least 60 3. participating in the management,
per centum of whose capital is owned by supervision or control of any domestic
such citizens. The foreign investor is business, firm, entity or corporation in the
limited to passive participation. Philippines; and
o The President may enter into 4. any other act or acts that imply a
agreements with foreign-owned continuity of commercial dealings (Sec. 3
corporations involving either [d])
technical or financial assistance
for large-scale exploration,
development, and utilization of “Doing business” shall NOT include:
minerals, petroleum, and other 1. Mere investment as a shareholder in
mineral oils. Foreign investors, domestic corporations
through (Financial/Technical 2. Exercise of rights of such investor
Assistance Agreements) FTAAs, (shareholder)
are limited only to providing: 3. Having a nominee director or officer to
▪ Technical assistance for represent the foreign investor's interest in
highly technical the domestic corporation
enterprises 4. Appointing a distributor domiciled in the
▪ Financial assistance for Philippines which transacts business in
large-scale enterprises its own name and account
(La Bugal Bl’aan Tribal 5. Publication of a general advertisement
Association Inc. v. 6. Maintaining a stock of goods in the
Ramos, G.R. No. Philippines solely for the purpose of
127882, December 1, having the same processed by another
2004) entity in the Philippines
● Practice of Professions - Foreigners 7. Consignment by a foreign entity of
practicing professions in the Philippines – equipment with a local company to be
a regulated activity. used in the processing of products for
o But mere investment in a export
corporation (eg: foreign doctors 8. Collecting information in the Philippines
investing in a domestic hospital 9. Performing services auxiliary to an
corporation) is not deemed to be existing isolated contract of sale which
a practice of profession. are NOT on a continuing basis
▪ Nonetheless, public (Implementing Rules and Regulations of
hospitals are considered RA 7042, Rule 1 §1 [f]).
public utilities thus
ownership is still
regulated. (Crisostomo
v. Securities and
Exchange Commission,
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Test to determine if a corporation is doing business in the Philippines, it needs no

business in the Philippines is expressed in the license to sue before Philippine courts
leading case of Mentholatum Co. v. Mangaliman including on an isolated transaction
which is sometimes referred to as the “Twin 3. If a foreign corporation does business in
Characterization Test” the Philippines without a license, a
● Twin Characterization Test – doing Philippine citizen which has contracted
business implies a continuity of with said corporation may be estopped
commercial dealings and arrangements from challenging the foreign
and contemplates to that extent the corporation's capacity to sue.
performance of acts or works or he NOTE: The estoppel doctrine is an
exercise of some of the functions exception to the general rule but is
normally incident to, and in progressive relevant only when a foreign corporation
prosecution of, the purpose and object of is the plaintiff.
its organization. 4. If a foreign corporation does business in
● This test includes “Substance Test” and the Philippines with the required license,
“Continuity Test” it can sue before Philippine courts on any
● GR: The acts of the foreign corporation transaction.
doing business should be distinguished
from a single or isolated business Note: Subsequent acquisition of the license will
transactions or occasional, incidental, cure the lack of capacity at the time of the
and casual transactions that do not come execution of the contract. The requirement of a
within the meaning of the law. license is not meant to put foreign corporations at
o XPN: Where a single transaction a disadvantage. Rather, the doctrine of lack of
is NOT merely incidental or capacity to sue is based on considerations of
casual but indicates the foreign sound public policy (Eriks PTE Ltd. v. Court of
corporation’s intent to do Appeals, G.R. No. 118843, February 6, 1997)
business in the Philippines, said
single transaction constitutes To constitute “doing business”, the activity to be
“doing” business in the undertaken is one that is for profit-making.
Philippines. (Agilent v. Integrated Silicon, G.R. No. 154618,
● No general rule or governing principles April 14, 2004)
can be laid down as to what constitutes
“doing business” (case to case basis) For purposes of having summons served on a
● A foreign corporation is “doing business” foreign corporation, it is sufficient that it be
when it has entered the State by its alleged that the foreign corporation is doing
agents and is there engaged in carrying business in the Philippines. (Alfred Hahn v. Court
on and transacting through them some of Appeals, G.R. No. 113074 January 22, 1997)
substantial part of its ordinary or
customary business, usually continuous The mere act of exporting from one's own country
in the sense that it may be distinguished without doing any specific commercial acts within
from merely casual, sporadic or the territory of the importing country cannot be
occasional transactions and isolated deemed as doing business in the importing
acts. country (B Van Zuiden v GTVL Manufacturing
● The element of continuity is important Industries. G.R. No. 147905, May 28, 2007)
for a foreign corporation to be deemed
doing business in the Philippines. A series of separate deliveries for one single
● Actual Transaction of Business order is considered as an isolated transaction.
Required. However, a series of commercial dealings
(unique and independent from one another)
License and Capacity to Sue signifies an intent to do business in the
1. If a foreign corporation does business in Philippines. A grant of a 90-day credit term is
the Philippines without a license, it proof of an intention to continue transacting with
cannot sue before Philippine courts and the domestic client. (Eriks PTE Ltd. v. Court of
administrative agencies. (Revised Appeals, G.R. No. 118843. February 6, 1997)
Corporation Code, Sec. 150)
2. If a foreign corporation is NOT doing A foreign corporation doing business in the
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Philippines without a license may sue in

Philippine courts a Philippine citizen or entity that
May Sue May be Sued
had contracted with and benefited from it.
(European Resources and Technologies Inc. and Doing No No License:
Delfin J. Wenceslao v. Ingenieuburo Birkhahn + Business License: YES
Nolte, G.R. No. 159586, July 26, 2004) NO
With License:
A foreign entity bringing an action to protect a With YES
trademark right needs no license to do business License:
in order to access the domestic courts because it YES
does not seek to enforce any contractual right Isolated YES GR: NO – no
arising from any business transaction. (General Transaction jurisdiction
Garments Corporation v. Director of Patents, over foreign
G.R. No. L-24295 September 30, 1971) corp.
EXC: consent
Where a single act or transaction of a foreign through a
corporation is not merely incidental or casual but contractual
is of such character as distinctly to indicate a stipulation
purpose on the part of the foreign corporation to
do other business in the state, such act will be C. Export enterprise
considered as constituting doing business. (Litton
Mills v. Court of Appeals, G.R. No. 94980. May “Export enterprise” shall mean:
15, 1996) 1. an enterprise wherein a manufacturer,
processor or service (including tourism)
Capacity to sue is a personal qualification, thus if enterprise exports sixty percent (60%) or
successor in interest of the disqualified entity is more of its output, or
qualified to sue, then the restriction does not 2. Wherein a trader purchases products
apply (Lorenz Shipping v. Chubb & Sons, G.R. domestically and exports sixty percent
No. 147724 June 8, 2004) (60%) or more of such purchases. (Sec.
3[e], Implementing Rules and
Regulations of RA 7042 as amended]
A letter of intent to enter a bid is not an act Rule 1 §1 (g)]
sufficient enough to constitute an intent to do
business. A bidder must win the bid first before D. Domestic Market Enterprise
acquiring a license. (Steelcase Inc v Design
International Selections, G.R. No. 171995, April “Domestic Market Enterprise” shall mean:
18, 2012) 1. an enterprise which produces goods for
sale, or renders services to the domestic
A foreign entity may bring an action in Philippine market entirely or
courts to enforce an insurance policy, executed 2. if exporting a portion of its output fails to
abroad, even if it has no license to do business consistently export at least sixty percent
since such insurance contract did not arise from (60%) thereof; (Sec 3[f])
a business transaction done here in the
Philippines. (Universal Shipping Lines, Inc. v A domestic market enterprise may change its
IAC ) status to export enterprise if over a three (3) year
period it consistently exports in each year thereof
sixty per cent (60%) or more of its output.
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3. REGISTRATION OF INVESTMENTS OF b. Applications for clearances from

NON-PHILIPPINE NATIONALS the Department of National
Defense (DND) or Philippine
A Non-Philippine national may do business or National Police (PNP) for
invest in a domestic enterprise up to one hundred defense-related activities, or the
percent (100%) of its capital, provided: DOST for investments involving
1. It is investing in a domestic market advanced technology shall be
enterprise in areas outside the FINL; decided upon by said agencies
2. It is investing in an export enterprise within fifteen (15) working days.
whose products and services do not fall (Implementing Rules and
within Lists A and B (except for defense- Regulations of R.A. 7042, IRR of
related activities, which may be approved RA 7042, [1991])
pursuant to Section 8(b)(1) of the Act) of 3. Approval. Within fifteen (15) working
the FINL. days from official acceptance of an
3. As required by laws, the existing country application, the SEC or BTRCP shall act
or state of the applicant must also allow on the same. Otherwise, the application
Filipino citizens and corporations to do shall be considered as automatically
business therein. (Rule VI, Implementing approved if it is not acted upon within said
Rules and Regulations of R.A. 7042, IRR period for a cause not attributable to the
of RA 7042, [1991]) applicant. (Implementing Rules and
Regulations of R.A. 7042, IRR of RA
STEPS IN THE REGISTRATION OF 7042, [1991])
INVESTMENTS OF NON-PHILIPPINE
NATIONALS STEP 2. Registration with the SEC.
An application form together with the following
documents shall be submitted to the SEC.
STEP 1. Application
1. New domestic corporation or a
1. Filing of Application.
partnership:
a. Foreign corporation, domestic
a. Articles of
corporations or partnerships
Incorporation/Partnership
which are non-Philippine
b. Name Verification Slip
nationals.- applications for
c. Bank Certificate of Deposit
registration shall be filed with the
SEC. d. ACR/ICR, SIRV (Special
Investors Resident Visa), Visa
b. Single proprietorships,
#13 of the alien subscribers
applications for Metro Manila
e. Proof of Inward Remittance (for
shall be filed with the BTRCP or
the DTI-National Capital non-resident aliens)
Region. 2. Foreign corporation
c. In the provinces, applications a. Name verification slip
may be filed with the extension b. Board Resolution authorizing the
offices of the SEC for establishment of an office in the
corporations/partnerships and Philippines;
the provincial offices of the DTI c. Financial statements for the
for sole proprietorships. immediately preceding year at
2. Pre-Processing of Documents - Pre- the time of filing of the
processing of documents shall be application, certified by an
undertaken to assist the investor in independent Certified Public
determining the completeness of his Accountant of the home country.
documents. d. Certified copies of the Articles of
a. All applications are considered Incorporation/Partnership with
officially accepted only upon an English translation thereof if
submission of complete in a foreign language.
documents to either the SEC or e. Proof of inward remittance such
BTRCP. as bank certificate of inward
remittance or credit advices.
(Implementing Rules and
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Regulations of R.A. 7042, IRR of Regulations of RA 7042 (as amended by RA 8179

RA 7042, [1991]) July 9, 1996) Rule VI §1)
3. Additional requirements to be submitted
to the : SEC STEPS IN THE REGISTRATION OF EXPORT
a. Clearance from the DND or PNP ENTERPRISES
(for enterprises wishing to
engage in defense-related STEP 1. Export enterprises which are non-
activities) Philippine nationals shall register with BOI and
b. Certificate from the DOST that submit the reports that may be required to ensure
the investment involves continuing compliance of the export enterprise
advanced technology shall be with its export requirement. (Sec 6)
submitted (for small and
medium-sized domestic market
STEP 2. BOI shall advise SEC or BTRCP, as the
enterprises with paid-in equity
case may be, of any export enterprise that fails to
capital less than the equivalent
meet the export ratio requirement. (Sec 6)
of US$500,000) (Implementing
Rules and Regulations of R.A.
7042, IRR of RA 7042, [1991]) STEP 3. The SEC or BTRCP shall thereupon
4. Application Fee order the non-complying export enterprise to
reduce its sales to the domestic market to not
more than forty percent (40%) of its total
STEP 3. Registration with the BTRCP Bureau
production; failure to comply with such SEC or
of Trade Regulation and Consumer Protection
BTRCP order, without justifiable reason, shall
Department of Trade and Industry (BTRCP-
subject the enterprise to cancellation of SEC or
DTI)
BTRCP registration, and/or the penalties
1. As required by existing laws and provided in Section 14 hereof. (Sec 6)
regulations, BTRCP Form No. 17 and
accompanying documents shall be
submitted to BTRCP. 5. FOREIGN INVESTMENTS IN DOMESTIC
2. All documents executed abroad should MARKET ENTERPRISES
be authenticated by the Philippine
Embassy or Consular Office. Non-Philippine nationals may own up to one
3. Application Fee. A reasonable hundred percent (100%) of domestic market
application fee to be determined by enterprises unless foreign ownership therein is
BTRCP shall be collected from each prohibited or limited by existing law or the Foreign
applicant. Investment Negative List under Section 8 hereof.
4. Upon fulfilment of all BTRCP-DTI
requirements and favorable evaluation A domestic market enterprise may change its
by DTI, the Certificate of Registration for status to export enterprise if over a three (3) year
Sole Proprietorship shall be issued by period it consistently exports in each year thereof
DTI. In case of disapproval, DTI shall also sixty per cent (60%) or more of its output. (Sec.
inform the applicant in writing of the 7)
reasons for the disapproval of the
registration. (Implementing Rules and
Regulations of R.A. 7042, IRR of RA At its option, a domestic market enterprise may
7042, [1991]) change its status to an export enterprise if, over
the last three (3) years, it consistently exported in
each year thereof sixty percent (60%) or more of
4. FOREIGN INVESTMENTS IN EXPORT its output. (Implementing Rules and Regulations
ENTERPRISES of R.A. 7042, IRR of RA 7042, [1991])
Foreign equity participation in export

enterprises shall be allowed up to one hundred
percent (100%) provided that the products and
services of such enterprises do not fall within Lists
A and B of the FINL. (Implementing Rules and
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6. FOREIGN INVESTMENT NEGATIVE LIST the Department of Science and

Technology; or
“Foreign Investments Negative List” or b. they employ at least fifty (50)
“Negative List” shall mean a list of areas of direct employees (Sec.8)
economic activity whose foreign ownership is
limited to a maximum of forty percent (40%) of the Advanced technology should be:
equity capital of the enterprises engaged therein. 1. Necessary for the development
(Sec 3[g]) of certain industries;
2. Subject to guidelines of the
Department of Science and
The Foreign Investment Negative List shall have Technology; and
two (2) components lists; A, and B. 3. Appropriate and adaptable to
a) List A shall enumerate the areas of activities local conditions, such that it can
reserved to Philippine nationals by mandate of be eventually be transferred and
the Constitution and specific laws. applied to available indigenous
b) List B shall contain the areas of activities and technology. (Implementing Rules
enterprises regulated pursuant to law: and Regulations of RA 7042 [as
1. Defense-related activities, requiring amended by RA 8179 July 9,
prior clearance and authorization from 1996] Rule 1 §1 [o])
Department of National Defense (DND)
to engage in such activity, such as the Steps to Amend List B [R-E-A-P]:
manufacture, repair, storage and/or 1.) Recommendation of the
distribution of firearms, ammunition, - Secretary of National Defense, or the
lethal weapons, military ordinance, - Secretary of Health, or the
explosives, pyrotechnics and similar - Secretary of Education, Culture and
materials; unless such manufacturing or Sports,
repair activity is specifically authorized, 2.) Endorsement by the NEDA,
with a substantial export component, to a 3.) Approval by the President, and
non-Philippine national by the Secretary 4.) Promulgation by a Presidential Proclamation.
of National Defense; or (Sec.8)
2. Activities that have implications on Foreign Investment Negative Lists shall become
public health and morals, such as the: effective fifteen (15) days after publication in a
newspaper of general circulation in the
a. manufacture and distribution of Philippines: Provided, however, That each
dangerous drugs; Foreign Investment Negative List shall be
b. all forms of gambling; nightclubs, prospective in operation and shall in no way affect
bars, beerhouses, dance halls; foreign investment existing on the date of its
publication. (Sec.8)
c. sauna and steam bathhouses
and massage clinics.
Amendments to List B after promulgation and
3. GR: Small and medium-sized publication of the first Regular Foreign
domestic market enterprises, with Investment Negative List at the end of the
paid-in equity capital less than the transitory period shall not be made more often
equivalent two hundred thousand US than once every two (2) years. (Sec.8)
dollars (US$200,000) are reserved to
Philippine nationals.
Exception: A small and medium-sized ----end of topic----
domestic market enterprise with paid-in
equity capital less than the equivalent
one hundred thousand US dollars
(US$100,000) shall be allowed to non-
Philippine nationals if:
a. it involves advanced
technology* as determined by
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VII. SPECIAL LAWS E. INSOLVENCY LAWS

E. INSOLVENCY LAWS
1. Concurrence and Preference of 1. CONCURRENCE AND PREFERENCE OF
Credits
CREDITS
a. Meaning of Concurrence and
Preference
b. Exempt Properties A. Meaning of Concurrence and Preference
c. Classification of Credits
d. Order of Preference of Concurrence of Credit implies possession by
Credits two or more creditors of equal rights or privileges
2. Financial Rehabilitation and over the same property or all of the property of a
Insolvency Act of 2010 debtor.
a. Definition of Insolvency
b. Suspension of Payments
Preference of Credit is the right held by a
c. Rehabilitation
i. Types creditor to be preferred in the payment of his
ii. Commencement claim above others out of the debtor’s assets.
Order  Preference creates no interest or lien on the
iii. Stay or Suspension property, but merely a preference to the
Order application of the proceeds.
iv. Rehabilitation
 The right of preference can be made effective
Receiver
v. Management only by being asserted and maintained.
Committee Otherwise, it is lost.
vi. Rehabilitation Plan
vii. Cram Down Effect General Provisions
d. Liquidation 1. The debtor is liable with all his property,
i. Types
present and future, for the fulfillment of his
ii. Conversion of
Rehabilitation to obligations, subjects to exemptions provided
Liquidation by law.
Proceedings
iii. Liquidation Order B. Exempt Properties
iv. Rights of Secured
Creditors 1. Types of Property
v. Liquidator a. Present property
vi. Determination of i. Family home (Arts. 152, 153 & 155)
Claims
ii. Right to receive support as well as
vii. Liquidation of Plan
money or property obtained by such
support shall not be levied upon on
attachment or execution (Art. 205)
iii. Sec. 13, Rule 39, Rules of Court
(Ordinary tools, lettered
gravestones, necessary clothing,
etc.);
iv. Conveyance and encumbrance
made by persons belonging to the
so-called “non-Christian tribes,”
when proper, shall not be valid
unless duly approved by the Director
of the Bureau of non-Christian tribes.
(Sec. 118, the Public Land Act, (C.A.
No. 141, as amended))
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b. Property in custodia legis and of public upon the immovable own, when approved by
domain. sold; the court;
2. Insolvency shall be governed by the Financial (3) Claims of laborers, (2) Credits for services
Rehabilitation and Insolvency Act (RA No. masons, mechanics rendered the insolvent by
10142). The FRIA repealed the Insolvency and other workmen, as employees, laborers, or
well as of architects, household helpers for one
Act (Section 148, FRIA)
engineers and year preceding the
contractors, engaged commencement of the
3. Exemption of conjugal property or absolute in the construction, proceedings in
community or property provided that: reconstruction or insolvency;
a. Partnership or community subsists; repair of buildings,
b. Obligations of the insolvent spouse canals or other works, (3) Expenses during the
have not redounded to the benefit of upon said buildings, last illness of the debtor or
the family; canals or other works; of his or her spouse and
children under his or her
4. If there is co-ownership, and one of the co- (4) Claims of parental authority, if they
owners is the insolvent debtor, his undivided furnishers of materials have no property of their
used in the own;
share or interest in the property shall be
construction,
possessed by the assignee in insolvency reconstruction, or (4) Compensation due the
proceedings because it is part of his assets. repair of buildings, laborers or their
canals or other works, dependents under laws
5. Property held by the insolvent debtor as a upon said buildings, providing for indemnity for
trustee of an express or implied trust, shall be canals or other works; damages in cases of labor
excluded from the insolvency proceedings. accident, or illness
(5) Mortgage credits resulting from the nature
C. Classification of Credits recorded in the of the employment;
Registry of Property,
1. Special preferred credits (Arts. 2241 and upon the real estate (5) Credits and
2242) mortgaged; advancements made to
a. Considered as mortgages or pledges of the debtor for support of
real or personal property or liens within (6) Expenses for the himself or herself, and
the purview of legal provisions governing preservation or family, during the last year
insolvency. improvement of real preceding the insolvency;
b. Taxes due to the State shall first be property when the law
authorizes (6) Support during the
satisfied.
reimbursement, upon insolvency proceedings,
the immovable and for three months
2. Ordinary preferred credits (Art. 2242) - preserved or thereafter;
preferred in the order given by law improved;
(7) Fines and civil
(7) Credits annotated indemnification arising
3. Common credits (Art. 2245) - credits of any in the Registry of from a criminal offense;
other kind or class, or by any other right or Property, in virtue of a
title not comprised in Arts. 2241-2244 shall judicial order, by
(8) Legal expenses, and
enjoy no preference attachments or
expenses incurred in the
executions, upon the
administration of the
ARTICLE 2242 ARTICLE 2244 property affected, and
insolvent's estate for the
(1) Taxes due upon the (1) Proper funeral only as to later credits;
common interest of the
land or building; expenses for the debtor, creditors, when properly
or children under his or (8) Claims of co-heirs authorized and approved
(2) For the unpaid price her parental authority who for warranty in the by the court;
of real property sold, have no property of their partition of an
immovable among
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them, upon the real (9) Taxes and 2. If there are 2 or more credits with respect to
property thus divided; assessments due the the same specific movable property, they
national government, shall be satisfied pro rata, after the payment
(9) Claims of donors or other than those of duties, taxes and fees due the State or any
real property for mentioned in articles
subdivision thereof
pecuniary charges or 2241, No. 1, and 2242,
other conditions No. 1;
imposed upon the 3. Those credits which enjoy preference in
donee, upon the (10) Taxes and relation to specific real property or real
immovable donated; assessments due any rights, exclude all others to the extent of the
province, other than those value of the immovable or real right to which
(10) Credits of referred to in articles
the preference refers.
insurers, upon the 2241, No. 1, and 2242,
property insured, for No. 1;
the insurance premium 4. If there are 2 or more credits with respect to
for two years. (11) Taxes and the same specific real property or real
assessments due any city rights, they shall be satisfied pro rata, after
or municipality, other than the payment of the taxes and assessment of
those indicated in articles
the taxes and assessments upon the
2241, No. 1, and 2242,
immovable property or real right.
No. 1;
(12) Damages for death or 5. The excess, if any, after the payment of the
personal injuries caused credits which enjoy preference with respect to
by a quasi-delict; specific property, real or personal, shall be
added to the free property which the debtor
(13) Gifts due to public may have, for the payment of other credits.
and private institutions of
charity or beneficence;
6. Those credits which do not enjoy any
(14) Credits, which, preference with respect to specific property,
without special privilege, and those which enjoy preference, as to the
appear in (a) a public amount not paid, shall be satisfied according
instrument; or (b) in a final to the following rules:
judgment, if they have  Order established by Art. 2244;
been the subject of
o Credits for services rendered by
litigation. These credits
shall have preference employees or laborers to the debtor
among themselves in the shall enjoy first preference under
order of priority of the Article 2244. (FRIA, Section 133)
dates of the instruments  Common credits referred to in Art. 2245
and of the judgments, shall be paid pro rata regardless of dates.
respectively.
NOTE: Preference of mortgage credits is

determined by the priority of registration,
D. Order of Preference of Credits following the maxim “prior tempore potior jure”
(He who is first in time is preferred in right).
1. Credits which enjoy preference with respect
to specific movables, exclude all others to
the extent of the value of the personal The preference under Article 110 of the Labor
property to which the preference refers. Code when not falling under Articles 2241 and
2242 of the Civil Code and not attached to any
specific property is an ordinary preferred credit
although its impact is to move it from the second
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priority to first priority in the order of preference 2. FINANCIAL REHABILITATION AND

established by Article 2244 (DBP v. NLRC, G.R. INSOLVENCY ACT OF 2010
No. 86932 June 27, 1990).
Nature of FRIA Proceedings:
The “complementary-contracts-construed 1. In Rem – Jurisdiction over all persons
together” doctrine means that an accessory affected by the proceedings shall be
contract must be read together with the principal considered as acquired upon publication of
agreement. (PBC vs. Lim,G.R. No. 158138, the notice of the commencement of the
2005) proceedings in any newspaper of general
Pertinent Rules under the FRIA circulation in the Philippines as prescribed
under the Supreme Court rules of
Under the FRIA, the assets of an insolvent debtor procedure
are divided among its creditors by following the
2. Summary
following rules:
3. Non-adversarial (Sec. 3, RA 10142)
General Rule: The assets of the insolvent debtor
shall be divided among the creditors in
accordance with the Liquidation Plan submitted Note: the principle of res judicata applies to
by the Liquidator and approved by the Court. The rehabilitation proceedings. The element of
rules on concurrence and preference of credits identity of parties only requires substantial
under the NCC and other relevant laws shall be identity of parties. Thus, if there was already a
observed in the Liquidation Plan. previous decision involving one creditor and
one debtor which was decided with finality, and
Exception: Unless a preferred creditor voluntarily there is another claim involving a different
waives his preferred right. (R.A. No. 10142, Sec. creditor litigating the same matter as the
133). previous decision, the previous decision is res
judicata and should apply to the second claim.
(Pryce Corp. v. Chinabank, G.R. No. 172302,
18 Feb. 2014)
Debtors
The term “debtor” shall refer to (PICS):
a. Partnership duly registered with the SEC;
b. Individual debtor who has become insolvent;
c. Corporation duly organized and existing
under Philippine laws; or
d. Sole Proprietorship registered with the DTI
(FRIA, Sec. 4[k])
Note: An individual debtor shall refer to a natural

person who is a resident and citizen of the
Philippines that has become insolvent (FRIA,
Sec. 4[o])
Note: A debtor may file for rehabilitation despite

having already defaulted on its obligations to its
creditor. If thepetition for rehabilitation is sufficient
and the rehabilitation plan feasible, rehabilitation
should proceed. (Metrobank v. Liberty
Corrugated, G.R. No. 184317, 25 Jan. 2017)
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Coverage: Proceedings Covered By FRIA

Included: DEBTOR PROCEEDING
1. Juridical and natural persons who are Sole Voluntary Rehabilitation
debtors (Sec. 4(k), RA 10142) Proprietorship (FRIA, Sec. 12);
2. Government FIs and GOCCs (last Partnership Involuntary Rehabilitation
paragraph of Sec. 5, RA 10142) Corporation (FRIA, Sec. 13);
3. Foreign corporations undergoing rehab Pre-Negotiated Rehabilitation
proceedings abroad but also doing (FRIA, Sec. 76);
business in the country (Sec. 139-142, RA Voluntary Liquidation (FRIA,
10142) Sec. 90);
Involuntary Liquidation (FRIA,
Excluded (Sec. 5, RA 10142): Sec. 91)
Individual Suspension of Payment
1. Banks
Debtor (FRIA, Sec. 94)
2. Insurance companies Voluntary Liquidation (FRIA,
3. Pre-need companies Sec. 103)
4. National and local government agencies Involuntary Liquidation (FRIA,
and units Sec. 105)
Creditors and Claims Covered By FRIA A. Definition of Insolvency
Insolvent shall refer to the financial condition of

Creditor
a debtor that is generally unable to pay its or his
A natural or juridical person which has a claim
liabilities as they fall due in the ordinary course
against the debtor that arose on or before the
of business or has liabilities that are greater
commencement date (FRIA, Sec. 4[h])
than its or his assets. (Sec. 4(p), RA 10142)
Claim
All claims or demands of whatever nature or Ground: An individual debtor possesses
character against the debtor or its property, sufficient property to cover all his debts but
whether for money or otherwise, liquidated or foresees the impossibility of meeting them when
unliquidated, fixed or contingent, matured or they respectively fall due (Sec. 94, RA 10142)
unmatured, disputed or undisputed, including,
B. Suspension of Payments
but not limited to:
A Stay or Suspension Order has the following
(1) All claims of the government, whether effects:
national or local, including taxes, tariffs and a. Suspend all actions or proceedings, in court
customs duties; and or otherwise, for the enforcement of claims
against the debtor;
(2) Claims against directors and officers of the b. Suspend all actions to enforce any judgment,
debtor arising from acts done in the attachment or other provisional remedies
discharge of their functions falling within the against the debtor;
scope of their authority. This inclusion does c. Prohibit the debtor from selling, encumbering,
not prohibit the creditors or third parties from transferring or disposing in any manner any
filing cases against the directors and officers of its properties except in the ordinary course
acting in their personal capacities of business; and
d. Prohibit the debtor from making any payment
of its liabilities outstanding as of the
commencement date except as may be
provided herein. (FR Rules, Rule 1, Sec. 5[r])
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The issuance of the Commencement Order and meeting of the creditors, all the rights which the
the Suspension or Stay Order, and any other creditors had against the individual debtor before
provision of the Act, shall not in any way diminish the agreement shall revest in them, and the
or impair the security or lien of a secured creditor, individual debtor may be subject to insolvency
or the value of his lien or security, except that his proceedings. (Sec. 102, RA 10142)
right to enforce the security or lien may be
suspended during the term of the Stay Order. The The Stay or Suspension Order does not apply
court may allow the enforcement of the security in the following cases:
or lien if the property is not necessary for the a. Cases already pending appeal in the
rehabilitation of the debtor. (FR Rules, Rule 2, Supreme Court as of commencement date
Sec. 59) Provided, That any final and executory
judgment arising from such appeal shall be
Procedure in suspension of payment: referred to the court for appropriate action;
An individual debtor who, possessing sufficient b. Subject to the discretion of the court, to cases
property to cover all his debts but foreseeing the pending or filed at a specialized court or
impossibility of meeting them when they quasi-judicial agency which, upon
respectively fall due, may file a verified petition determination by the court is capable of
that he be declared in the state of suspension of resolving the claim more quickly, fairly and
payments by the court of the province or city in efficiently than the court: Provided, That any
which he has resided for six (6) months prior to final and executory judgment of such court or
the filing of his petition. He shall attach to his agency shall be referred to the court and shall
petition, as a minimum: be treated as a non-disputed claim;
a. a schedule of debts and liabilities; c. Enforcement of claims against sureties and
b. an inventory of assets; and other persons solidarily liable with the debtor,
c. a proposed agreement with his and third party or accommodation
creditors. (Sec. 94, RA 10142) mortgagors as well as issuers of letters of
credit, unless the property subject of the third
The manner of approval of the proposed party or accommodation mortgage is
agreement is as follows: necessary for the rehabilitation of the debtor
1. The presence of creditors holding claims as determined by the court upon
amounting to at least three-fifths (3/5) of the recommendation by the rehabilitation
liabilities shall be necessary for holding a meeting receiver;
(Sec. 96, RA 10142). d. Any form of action of customers or clients of
2. To form a majority, it is necessary: a securities market participant to recover or
a. that two-thirds (2/3) of the creditors otherwise claim moneys and securities
voting unite upon the same proposition; entrusted to the latter in the ordinary course
and of the latter's business as well as any action
b. that the claims represented by said of such securities market participant or the
majority vote amount to at least three- appropriate regulatory agency or self-
fifths (3/5) of the total liabilities of the regulatory organization to pay or settle such
debtor mentioned in the petition; (Sec. 97 claims or liabilities;
(d), RA 10142). e. Actions of a licensed broker or dealer to sell
pledged securities of a debtor pursuant to a
The suspension order shall lapse when three (3) securities pledge or margin agreement for the
months shall have passed without the proposed settlement of securities transactions in
agreement being accepted by the creditors or as accordance with the provisions of the
soon as such agreement is denied. (Sec. 96, RA Securities Regulation Code and its
10142) implementing rules and regulations;
f. Clearing and settlement of financial
If the individual debtor fails, wholly or in part, to transactions through the facilities of a
perform the agreement decided upon at the clearing agency or similar entities duly
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authorized, registered and/or recognized by St. Michael Medical Center, G.R. No. 205469,
the appropriate regulatory agency like the 2015)
Bangko Sentral ng Pilipinas (BSP) and the
SEC as well as any form of actions of such i. Types
agencies or entities to reimburse themselves
for any transactions settled for the debtor; 1. Court-supervised rehabilitation
and
a. Voluntary (aka debtor-initiated)
g. Any criminal action against individual debtor
(Sec. 12, RA 10142)
or owner, partner, director or officer of a
debtor shall not be affected by any Filed by:
proceeding commend under this Act. (FR  If sole proprietorship, owner
Rules, Rule 2, Sec. 10)  If partnership, majority of
partners
Note: there is no need for a hearing before the  If corporation, majority of
issuance of a stay order. The Interim Rules only directors/trustees, authorized by
require an initial hearing before the court will give 2/3 of stockholders/members
due course to or dismiss a petition. Nevertheless,
neither do the Interim Rules prohibit the holding Ground: insolvent and may be
of a hearing before the issuance of a stay order. rehabilitated
Thus, the trial court has ample discretion to call a
Note: the venue for a petition for
hearing prior to the issuance of a stay order, so voluntary insolvency proceeding is
long as said hearing is held within the 5-day the CFI of the province or city where
period from the filing of the petition. (Pryce Corp. the insolvent debtor resides, as
v. Chinabank, G.R. No. 172302, 18 Feb. 2014) stated in the Articles of
Incorporation. However, when it is
C. Rehabilitation uncontroverted that the insolvent
corporation abandoned the old
Rehabilitation shall refer to the restoration of principal office, the corporation is
the debtor to a condition of successful considered a resident of the city
operation and solvency, if it is shown that its where its actual principal office is
continuance of operation is economically currently found. (Pilipinas Shell
feasible and its creditors can recover by way of Petroleum Corp. v. Royal Ferry
the present value of payments projected in the Services, Inc., G.R. No. 188146, 1
Feb. 2017)
plan, more if the debtor continues as a going
concern than if it is immediately liquidated.
Initiation of Voluntary Proceedings
(Sec. 4(gg), RA 10142)
Who may Petition for Voluntary Rehabilitation
Rehabilitation contemplates a continuance of 1. The owner in case of a sole proprietorship, or
corporate life and activities in an effort to restore 2. A majority of the partners in case of a
and reinstate the corporation to its former position partnership, or
of successful operation and solvency (Wonder 3. A majority vote of the board of directors or
Book Corporation v. Phil. Bank of trustees and authorized by the vote of the
Communications, G.R. No. 187316, 2012) stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, in stock
The basic issues in rehabilitation proceedings corporations, or of the members, in case of
concern the viability and desirability of continuing non-stock corporation
the business operations of distressed
corporations, all with a view of effectively An insolvent debtor may initiate voluntary
restoring to a state of solvency or to its former proceedings under this Act by filing a petition for
healthy financial condition through the adoption of rehabilitation with the court and on the grounds
a rehabilitation plan (BPI Family Savings Bank v. hereinafter specifically provided.
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A group of debtors shall refer to: h. A Rehabilitation Plan;

(1) corporations that are financially related to one i. The names of at least 3 nominees to the
another as parent corporations, subsidiaries position of rehabilitation receiver; and
or affiliates; j. Other documents required to be filed with
(2) partnerships that are owned more than fifty the petition pursuant to this Act and the
percent (50%) by the same person; and rules of procedure as may be
(3) single proprietorships that are owned by the promulgated by the Supreme Court.
same person. When the petition covers a
group of debtors, all reference under these
rules to debtor shall include and apply to the b. Involuntary (aka creditor-initiated)
group of debtors (FRIA, Sec. 4[n]) (Sec. 13 & 14, RA 10142)
Filed by: any creditor or group of

Grounds for Voluntary Rehabilitation
creditors with a claim of at least
A group of debtors may jointly file for P1,000,000 or at least 25% of
rehabilitation when: subscribed capital stock or
a. One or more of its members foresee the partners’ contributions, whichever
impossibility of meeting debts when they is higher
respectively fall due, and
b. The financial distress would likely adversely Ground:
affect the financial condition and/or  The creditors’ due and
operations of the other members of the group demandable claims have not
and/or the participation of the other members been paid for at least 60 days or
that the debtor has failed
of the group is essential under the terms and
generally to meet its liabilities as
conditions of the proposed Rehabilitation
they fall due; or
Plan. (FR Rules, Rule 2, Sec. 1)  A creditor, other than the
petitioners, has initiated
Petition for Voluntary Proceedings foreclosure proceedings against
The petition shall be verified to establish the the debtor that will prevent the
insolvency of the debtor and the viability of its debtor from paying its debts as
rehabilitation, and include, whether as an they become due or will render it
attachment or as part of the body of the petition, insolvent
as a minimum the following:  Note: the creditors must
a. Identification of the debtor, its principal establish that the debtor may be
activities and its addresses; rehabilitated
b. Statement of the fact of and the cause of
Initiation of Involuntary Proceedings
the debtor's insolvency or inability to pay
its obligations as they become due;
Who may petition for involuntary proceedings
c. The specific relief sought pursuant to this
1. Any creditor or group of creditors with a claim
Act;
of, or the aggregate of whose claims is, whichever
d. The grounds upon which the petition is
of is higher of:
based;
a. At least Php1,000,000.00; or
e. Other information that may be required
b. At least 25% of the subscribed capital stock or
under this Act depending on the form of
partners' contributions (FR Rules, Rule 2, Sec.
relief requested;
4)
f. Schedule of the debtor's debts and
liabilities including a list of creditors with
their addresses, amounts of claims and
collaterals, or securities, if any;
g. An inventory of all its assets including
receivables and claims against third
parties;
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Circumstances Necessary to Start Involuntary the RTC having jurisdiction over the place in
Proceedings which the insolvent debtor resides or has its
These proceedings may be initiated against the principal place of business (FR Rules, Rule 4,
debtor by filing a petition for rehabilitation with the Sec. 8)
court if:
a. There is no genuine issue of fact on law on Action on the Petition
the claim/s of the petitioner/s, and that the 1. If the court finds the petition to be substantial
due and demandable payments thereon have in form and substance, the commencement
not been made for at least 60 days or that the order shall be issued within 5 working days
debtor has failed generally to meet its from its filing
liabilities as they fall due; or
b. A creditor, other than the petitioner/s, has 2. If found deficient within the same period, the
initiated foreclosure proceedings against the court may give 5 working days from receipt of
debtor that will prevent the debtor from the notice of order to satisfy the deficiency.
paying its debts as they become due or will
render it insolvent. (FR Rules, Rule 2, Sec. 5) 3. The court shall dismiss the petition if the
deficiency is not complied within the extended
Petition for Involuntary Proceedings 5-day period (FR Rules, Rule 2, Sec. 7)
The creditor/s' petition for rehabilitation shall be
verified to establish the substantial likelihood that 2. Pre-negotiated rehabilitation (Sec. 76,
the debtor may be rehabilitated, and include: RA 10142)
a. Identification of the debtor its principal
activities and its address; Filed by:
 An insolvent debtor, by itself or jointly
b. The circumstances sufficient to support a
with any of its creditors
petition to initiate involuntary rehabilitation
proceedings under Section 13 of this Act;
Note: must be approved/endorsed by:
c. The specific relief sought under this Act;
 Creditors holding at least 2/3 of total
d. A Rehabilitation Plan;
liabilities of the debtor;
e. The names of at least 3 nominees to the
 Secured creditors holding more than
position of rehabilitation receiver;
50% of total secured claims; and
f. Other information that may be required under
 Unsecured creditors holding more than
this Act depending on the form of relief
50% of total unsecured claims
requested; and
g. Other documents required to be filed with the
Pre-Negotiated Rehabilitation Plans, when
petition pursuant to this Act and the rules of
approved by the court, have the same legal effect
procedure as may be promulgated by the
as confirmation of a judicially supervised plan.
Supreme Court.
(Sec. 82, FRIA)
Common Provisions to Voluntary and
Pre-Negotiated Rehabilitation Petition
Involuntary Proceedings
An insolvent debtor, by itself or jointly with any of
its creditors, may file a verified petition with the
Venue
court for the approval of a pre-negotiated
RTC having jurisdiction over the principal office of
Rehabilitation Plan which has been endorsed or
the debtor as specified in its articles of
approved by creditors holding at least two-thirds
incorporation or partnership or in its registration
(2/3) of the total liabilities of the debtor, including
papers with the DTI in cases of sole
secured creditors holding more than 50% of the
proprietorship (FR Rules, Rule 1, Sec. 6)
total secured claims of the debtor and unsecured
creditors holding more than 50% of the total
Note: The petition for court assistance to execute
unsecured claims of the debtor.
or implement either a standstill agreement or out
of court restructuring agreement may be filed with
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The petition shall include as a minimum: Approval of the Pre-Negotiated Plan

a. Schedule of the debtor's debts and liabilities; Within 10 days from the date of the second
b. Inventory of the debtor's assets; publication of the Order, the court shall approve
c. The pre-negotiated Rehabilitation Plan, the Rehabilitation Plan unless a creditor or other
including the names of at least 3 qualified interested party submits an objection to it in
nominees for rehabilitation receiver; and accordance with the next succeeding section.
d. Summary of disputed claims against the (Sec. 78, FRIA)
debtor and a report on the provisioning of
funds to account for appropriate payments Objections to the Pre-Negotiated Plan
should any such claims be ruled valid or their Any creditor or other interested party may submit
amounts adjusted. (Sec. 76, FRIA) to the court a verified objection to the petition or
the Rehabilitation Plan not later than 8 days from
If Petition Deemed Sufficient the date of the second publication of the Order.
Within five (5) working days, and after
determination that the petition is sufficient in form The grounds for objection are limited to the
and substance, the court shall issue an Order following:
which shall; a. Allegations in the petition or the
a. Identify the debtor, its principal business of Rehabilitation Plan or the attachments
activity/ies and its principal place of business; thereto are materially false or misleading;
b. Declare that the debtor is under rehabilitation; b. Majority of any class of creditors do not in fact
c. Summarize the grounds for the filling of the support the Rehabilitation Plan;
petition; c. The Rehabilitation Plan fails to accurately
d. Direct the publication of the Order in a account for a claim against the debtor and the
newspaper of general circulation in the claim in not categorically declared as a
Philippines once a week for at least 2 contested claim; or
consecutive weeks, with the first publication d. Support of the creditors, or any of them was
to be made within 7 days from the time of its induced by fraud.
issuance;
e. Direct the service by personal delivery of a Copies of any objection to the petition of the
copy of the petition on each creditor who is Rehabilitation Plan shall be served on the debtor,
not a petitioner holding at least 10% of the the rehabilitation receiver (if applicable), the
total liabilities of the debtor, as determined in secured creditor with the largest claim and who
the schedule attached to the petition, within 3 supports the Rehabilitation Plan, and the
days; unsecured creditor with the largest claim and who
f. State that copies of the petition and the supports the Rehabilitation Plan. (Sec. 79, FRIA)
Rehabilitation Plan are available for
examination and copying by any interested 3. Out-of-Court or Informal Restructuring
party; Agreements or Rehabilitation Plans
g. State that creditors and other interested (Sec. 83-89, RA 10142)
parties opposing the petition or Rehabilitation
Must be approved by creditors
Plan may file their objections or comments representing at least: (Sec. 84)
thereto within a period of not later than 20  85% of total liabilities, secured
days from the second publication of the and unsecured, of the debtor;
Order;  67% of secured obligations of
h. Appoint a rehabilitation receiver, if provided the debtor; and
for in the Plan; and
 75% of unsecured obligations
i. Include a Suspension or Stay Order as
of the debtor; and
described in this Act. (Sec. 77, FRIA)
Note: debtor must agree to the
plan
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Standstill period: (Sec. 85) d. State the legal effects of the Commencement
May be agreed upon by the Order;
parties pending negotiation and e. Declare that the debtor is under rehabilitation;
finalization of the plan; f. Direct the publication of the Commencement
Shall cover not only the Order in a newspaper of general circulation in
negotiating parties but also all
the Philippines once a week for at least 2
other creditors;
consecutive weeks, with the first publication
Requirements: to be made within 7 days from the time of its
 Approved by creditors issuance;
representing more than g. If the petitioner is the debtor direct the service
50% of total liabilities; by personal delivery of a copy of the petition
 Notice is published in a on each creditor holding at least 10% of the
newspaper of general total liabilities of the debtor as determined
circulation in the Phils. once from the schedule attached to the petition
a week for 2 consecutive within 5 days; if the petitioner/s is/are
weeks; and creditor/s, direct the service by personal
Standstill period does not delivery of a copy of the petition on the debtor
exceed 120 days from date of within 5 days;
effectivity h. Appoint a rehabilitation receiver who may or
not be from among the nominees of the
For an out-of-court or informal
petitioner/s and who shall exercise such
restructuring/workout agreement or
powers and duties defined in this Act as well
Rehabilitation Plan to qualify, it must meet the
as the procedural rules that the Supreme
following minimum requirements:
Court will promulgate;
a. Debtor must agree to the out-of-court or
i. Summarize the requirements and deadlines
informal restructuring/workout
for creditors to establish their claims against
agreement or Rehabilitation Plan;
the debtor and direct all creditors to their
b. Approved by creditors representing at
claims with the court at least 5 days before
least 67% of the secured obligations of
the initial hearing;
the debtor;
j. Direct Bureau of internal Revenue (BIR) to
c. Approved by creditors represent at least
file and serve on the debtor its comment on
75% of the unsecured obligations of the
or opposition to the petition or its claim/s
debtor; and
against the debtor under such procedures as
d. Approved by creditors holding at least
the Supreme Court provide;
85% of the total liabilities, secured and
k. Prohibit the debtor's suppliers of goods or
unsecured, of the debtor. (Sec. 84, FRIA)
services from withholding the supply of goods
ii. Commencement Order and services in the ordinary course of
business for as long as the debtor makes
payments for the services or goods supplied
Rehabilitation proceedings commence upon the
after the issuance of the Commencement
issuance of the Commencement Order. The
Order;
Commencement Order contains the following:
l. Authorize the payment of administrative
expenses as they become due;
a. Identify the debtor, its principal business or
m. Set the case for initial hearing, which shall not
activity/ies and its principal place of business;
be more than 40 days from the date of filing
b. Summarize the ground/s for initiating the
of the petition for the purpose of determining
proceedings;
whether there is substantial likelihood for the
c. State the relief sought under this Act and any
debtor to be rehabilitated;
requirement or procedure particular to the
n. Make available copies of the petition and
relief sought;
rehabilitation plan for examination and
copying by any interested party;
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o. Indicate the location or locations at which Effectivity and Duration of the

documents regarding the debtor and the Commencement Order
proceedings under Act may be reviewed and The Commencement Order shall be effective for
copied; the duration of the rehabilitation proceedings,
p. State that any creditor or debtor who is not unless:
the petitioner, may submit the name or 1. Earlier lifted by the court;
nominate any other qualified person to the 2. The Rehabilitation Plan is seasonably
position of rehabilitation receiver at least 5 confirmed or approved; or
days before the initial hearing; 3. The Rehabilitation proceedings are ordered
q. Include a Stay or Suspension Order. (FRIA, terminated by the court FR Rules, Rule 2,
Sec. 16) Sec. 11)
Effects of the Commencement Order iii. Stay or Suspension Order

a. Vest the rehabilitation with all the powers and
functions provided for this Act, such as the Effects: (Sec. 16(q), RA 10142)
right to review and obtain records to which 1. Suspend all actions or proceedings, in
the debtor's management and directors have court or otherwise, for the enforcement
access, including bank accounts or whatever of claims against the debtor;
nature of the debtor subject to the approval 2. Suspend all actions to enforce any
by the court of the performance bond filed by judgment, attachment or other
the rehabilitation receiver; provisional remedies against the
b. Prohibit or otherwise serve as the legal basis debtor;
rendering null and void the results of any
3. Prohibit the debtor from selling,
extrajudicial activity or process to seize
encumbrancing, transferring or
property, sell encumbered property, or
otherwise attempt to collection or enforce a disposing in any manner any of its
properties (except in the ordinary
claim against the debtor after
commencement date unless otherwise course of business); and
allowed in this Act, subject to the provisions 4. Prohibit the debtor from making any
of Section 50 hereof; payment of its liabilities outstanding as
c. Exempt the debtor from liability for taxes and of the commencement date (except as
fees, including penalties, interests, and may be provided in the order)
charges due to the government;
d. Serve as the legal basis for rendering null and Effect of violation: debtor shall be liable for
void any setoff after the commencement date double the value of the property sold,
of any debt owed to the debtor by any of the embezzled, or disposed of or double the
debtor's creditors; transaction involved (Sec. 10, RA 10142)
e. Serve as the legal basis for rendering null and
void the perfection of any lien against the Exceptions to stay order: (Sec. 18, RA 10142)
debtor's property after the commencement
1. Cases already pending in the SC as of
date; and
the commencement date;
f. Consolidate the resolution of all legal
proceedings by and against the debtor to the 2. Cases pending or filed at a specialized
court; provided, however, that the court may court or quasi-judicial agency;
allow the continuation of cases on other 3. Enforcement actions against:
courts where the debtor had initiated the suit. a. sureties and other persons
(FR Rules, Rule 2, Sec. 9) solidarily liable with the debtor
b. third party or accommodation
mortgagors
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- unless the property subject of To allow such other actions to continue would
the third party or only add to the burden of the management
accommodation mortgagor is committee or rehabilitation receiver, whose
necessary for the rehabilitation time, effort and resources would be wasted in
of the debtor, as determined by defending claims against the corporation
the court upon instead of being directed toward its restructuring
recommendation of the and rehabilitation.”
rehabilitation receiver
c. issuers of letters of credit
iv. Rehabilitation Receiver
4. Any action of customers/clients of a Rehabilitation Receiver
securities market participant to recover The person or persons, natural or juridical,
money/securities entrusted to the latter appointed as such by the court pursuant to this
in the ordinary course of business, and Act and which shall be entrusted with such
any action of such securities market powers and duties as set forth herein. (FR Rules,
participant or the appropriate regulatory Rule 1, Sec. 5[p])
agency/self-regulatory organization to
pay or settle such claims or liabilities; Minimum Qualifications of a Rehabilitation
5. Actions of a licensed broker/dealer to Receiver
sell pledged securities of a debtor,
pursuant to a securities pledge or If the rehabilitation receiver is a natural
margin agreement for the settlement of person:
securities transactions; a. Citizen of the Philippines or a resident of the
6. Clearing and settlement of financial Philippines in the 6 months prior to
transactions through the facilities of a nomination;
clearing agency or similar entity duly b. Not been earlier dismissed as a rehabilitation
authorized, registered and/or receiver;
recognized by the appropriate c. As far as practicable, has expertise and
regulatory agency (like BSP, SEC, etc.) acumen to manage and operate a business
as well as any form of actions of such similar in size and complexity of that of the
agencies to reimburse themselves for debtor;
any transactions settled by the debtor; d. Has a general familiarity with the rights of
and creditors subject to suspension of payment or
7. Criminal actions against the individual rehabilitation and a general understanding of
debtor or owner, partner, director, or the duties and obligations of a rehabilitation
officer of the debtor. receiver;
e. Of good moral character and with
acknowledged integrity, impartiality and
What is the rationale of the Stay Order? (Bar independence;
2006) f. No conflict of interest;
“The justification for the suspension of actions g. Has an operating knowledge in
or claims, without distinction, pending management, finance, and rehabilitation of
rehabilitation proceedings is to enable the distressed companies; and
management committee or rehabilitation h. Willing and able to file a bond in such amount
receiver to effectively exercise its/his powers as determined by the court FR Rules, Rule 2,
free from any judicial or extra-judicial Sec. 21[A])
interference that might unduly hinder or prevent
the "rescue" of the debtor company. The conflict of interest requirement may be
waived, expressly or impliedly, by a party who
may be prejudiced thereby. (FRIA, Sec. 29[d])
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If the rehabilitation receiver is a juridical

person: Principal Duties of the Rehabilitation Receiver
a. Duly authorized to do business in the a. Preserving and maximizing the value of the
Philippines for at least six (6) years prior to its assets of the debtor during the proceedings;
appointment; b. Determining the viability of the rehabilitation;
b. Good standing as certified by the appropriate c. Preparing and recommending a
regulatory agency/ies; Rehabilitation Plan to the court; and
c. No conflict of interest; Implementing the approved Rehabilitation
d. Not been earlier dismissed as a rehabilitation Plan (FR Rules, Rule 2, Sec. 26)
receiver;
e. Must submit the name of the person Removal of a Rehabilitation Receiver
designated to discharge the responsibilities The rehabilitation receiver may be removed at
and powers of a rehabilitation receiver and any time by the court, either motuproprio or upon
the names of the employees and other motion by any creditor/s holding more than 50%
persons authorized to assist the designated of the total obligations of the debtor (FR Rules,
representative, together with a sworn Rule 2, Sec. 27)
certification that these persons possess the
qualifications and none of the Grounds for Removal
disqualifications required from natural a. Incompetence, gross negligence, failure to
persons; perform or failure to exercise the proper
f. Must submit a sworn undertaking, duly degree of care in the performance of his
approved in accordance with law, binding duties and powers;
itself to be solidarily liable with the persons b. Lack of a particular or specialized
designated by it to discharge the functions competency required by the specific case;
and responsibilities of a rehabilitation c. Illegal acts or conduct in the performance of
receiver; his duties and powers;
g. Willing and able to file a bond in such amount d. Lack of qualification or presence of any
as may be determined by the court; disqualification;
h. Not disqualified to discharge the duties of a e. Conflict of interest that arises after his
rehabilitation receiver under the Constitution appointment;
and other relevant laws (FR Rules, Rule 2, f. Manifest lack of independence that is
Sec. 21) detrimental to the general body of the
stakeholders;
Additional Requirements for Representatives g. Failure, without just cause, to perform any of
of Juridical Persons his powers and functions under these Rules;
a. Duly designated and authorized to act for and or
on behalf of the juridical entity; h. Any of the grounds for removing a trustee
b. Must be a director, officer, stockholder or under the general principles of trusts.
partner of the juridical entity; and
c. Must submit a sworn undertaking that he Cases of Conflict of Interest
shall be solidarily liable with his firm for all the An individual shall be deemed to have a conflict
obligations and responsibilities of a of interest if he is so situated as to be materially
rehabilitation receiver. (FR Rules, Rule 2, influenced in the exercise of his judgment for or
Sec. 21) against any party to the proceedings. Without
limiting the generality of the foregoing, an
Other qualifications and disqualifications of the individual shall be deemed to have a conflict of
rehabilitation receiver shall be set forth in interest if:
procedural rules, taking into consideration the a. He is a creditor, owner, partner or stockholder
nature of the business of the debtor and the need of the debtor;
to protect the interest of all stakeholders b. He is engaged in a line of business which
concerned. competes with that of the debtor;
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c. He is, or was, within 5 years from the filing of (A) Actual or imminent danger of dissipation, loss,
the petition, a director, officer, owner, partner wastage or destruction of the debtor's assets or
or employee of the debtor or any of the other properties; or
creditors, or the auditor or accountant of the (B) Paralyzation of the business operations of the
debtor; debtor; or
d. He is, or was, within 2 years from the filing of (C) Gross mismanagement of the debtor, fraud or
the petition, an underwriter of the outstanding other wrongful conduct on the part of, or gross or
securities of the debtor; willful violation of the Act by the existing
e. is related by consanguinity or affinity within management of the debtor or the owner, partner,
the fourth civil degree to any individual director, officer or representative/s in
creditor, owner/s of a sale proprietorship- management of the debtor.
debtor, partners of a partnership-debtor or to
any stockholder, director, officer, employee In case the court appoints the rehabilitation
or underwriter of a corporation-debtor; or receiver to assume the management of the
f. He has any other direct or indirect material debtor, the court may:
interest in the debtor or any of the creditors.
(FR Rules, Rule 2, Sec. 22) (1) Require the rehabilitation receiver to post an
additional bond;
Any rehabilitation receiver, member of the (2) Authorize him to engage the services or to
management committee or persons employed or employ persons or entities to assist him in the
contracted by them possessing any conflict of discharge of his managerial functions; and
interest shall make the appropriate disclosure (3) Authorize a commensurate increase in his
either to the court or to the creditors in case of compensation.
out-of-court rehabilitation proceedings. Any party
to the proceeding adversely affected by the Rules and Liability on Conflicting Decisions
appointment of any person with a conflict of In case the rehabilitation receiver is a juridical
interest to any of the positions enumerated above person, the acts of its designated representative
may however waive his right to object to such shall be presumed to be carried out in accordance
appointment and, if the waiver is unreasonably with the authority vested in him by the juridical
withheld, the court may disregard the conflict of entity which he represents.
interest, taking into account the general interest In case of conflict, the decision of the governing
of the stakeholders. body of the juridical entity shall prevail.
Management of Debtor’s Business However, the rehabilitation receiver and its

General Rule: The management of the juridical representative/s shall remain solidarily liable for
debtor shall remain with existing management. all obligations and responsibilities, subject to the
right of withdrawal prior to the implementation of
Exception: Displacement of Existing the disputed decision.
Management by the Rehabilitation Committee
Note: Upon assumption of management, the
Upon motion of any interested party and within receiver shall exercise the same powers granted
the soonest possible time, the court may appoint under Sec. 26 in addition to the powers granted
and direct the rehabilitation receiver to assume to the management committee (FR Rules, Rule 2,
the powers of management of the debtor, or Sec. 32)
appoint a management committee that will
undertake the management of the debtor, upon
clear and convincing evidence of any of the
following circumstances:
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v. Management Committee necessary to perform its functions and duties

as management committee;
Role of the Management Committee e. Report to the court any material adverse
1. Take custody of and control all assets owned change in the business of the entity under
or possessed by the debtor; management;
2. Take the place of the management and f. Evaluate the existing equity, capital, assets
governing body of the debtor; and and liabilities, earnings, and operations of the
3. Assume the powers, rights and responsibilities entity under management;
of the debtor (FR Rules, Rule 2, Sec. 33) g. Determine and recommend to the court the
best way to salvage and protect the interest
Note: A majority of all members shall be of the creditors, stockholders and the general
necessary for the management committee to act public, including the rehabilitation of the entity
or make a decision (FR Rules, Rule 2, Sec. 35) under management;
h. Prohibit and report to the court any
Composition of the Management Committee encumbrance, transfer, or disposition of the
The management committee shall be composed debtor’s property outside of the ordinary
of three qualified members appointed by the course of business or beyond what is allowed
court, as follows: by the court
a. Nominated by the debtor; i. Prohibit and report to the court payments
b. Nominated by the creditor/s holding more made outside the ordinary course of
than 50% of the total obligations of the business;
debtor; j. Have unlimited access to the employees,
c. A chairman nominated by the first and premises, books, records and financial
second members within 10 days from the documents of the entity under management
appointment (FR Rules, Rule 2, Sec. 34) during business hours;
k. Inspect, copy, photocopy or photograph any
The management committee may overrule or document, paper, book, account or letter,
revoke the actions of the previous management whether in the possession of the entity or
or governing body of the debtor (FR Rules, Rule other persons, that pertain to the business of
2, Sec. 33) the debtor;
l. Gain entry into any property owned by the
Powers and Duties of the Committee entity under management for the purposes of
The specific powers and duties of the inspecting, measuring, surveying, or taking
management committee, whose members shall photos or videos of any designated relevant
also be considered as officers of the court, are the object or operation thereon;
following: m. Bring to the attention of the court any material
a. Investigate the acts, conduct, properties, change affecting the entity’s ability to meet its
liabilities, and financial condition of the obligations;
corporation, association or partnership under n. Take the appropriate steps to modify, nullify,
management; or revoke transactions coming to its
b. Examine under oath the directors and officers knowledge which it deems detrimental or
of the entity and any other witnesses that the prejudicial to the interest of the entity under
committee may deem appropriate; management;
c. Report to the court any ascertained fact o. Recommend the termination of the
pertaining to the causes of the problems, proceedings and the dissolution of the entity
fraud, misconduct, mismanagement and if it determines that the continuance in
irregularities committed by any other person; business of such entity will no longer work to
d. Use the services of or employ such person or the best interest of the stakeholders and
persons, such as lawyers, accountants, creditors;
auditors, appraisers and staff as are p. Apply to the court for any order or directive
that it may deem necessary or desirable to
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aid it in the exercise of its powers and Confirmation of Plan Notwithstanding

performance of its duties and functions, Rejection
including the power to examine parties and Notwithstanding the rejection of the Rehabilitation
witnesses under oath; and Plan, the court may, motu proprio or upon motion
q. Exercise such other powers as the court may, of any interested party within ten (10) days from
from time to time confer upon it. notice of the rejection of the Rehabilitation Plan,
(FR Rules, Rule 2, Sec. 33) confirm the Plan if all of the following
circumstances are present:
Qualifications of Members of the Management
Committee a. The Rehabilitation Plan complies with the
Same as with rehabilitation receivers (FR Rules, requirements specified in the FRIA and the
Rule 2, Sec. 36) FR Rules;
b. The rehabilitation receiver recommends the
Immunity from Suit confirmation of the Rehabilitation Plan;
The rehabilitation receiver, the members of the c. The shareholders, owners or partners of the
management committee, and all persons they juridical debtor lose at least their controlling
engage shall not be subject to any action, claim interest as a result of the Rehabilitation Plan;
or demand for any act or omission in good faith in and
the exercise of their powers and functions (FR d. The Rehabilitation Plan would likely provide
Rules, Rule 2, Sec. 38) the objecting class of creditors with
compensation, which has a net present value
vi. Rehabilitation Plan greater than that which they would have
received if the debtor were under liquidation.
Rehabilitation Plan (FR Rules, Rule 2, Sec. 62)
A plan by which the financial well-being and
viability of an insolvent debtor can be restored The rehabilitation receiver shall submit the
using various means including, but not limited to, approved Plan to the court for confirmation.
debt forgiveness, debt rescheduling, Within five (5) days from receipt of the
reorganization or quasi- reorganization, dacion Rehabilitation Plan, the court shall notify the
en pago, debt-equity conversion and sale of the creditors that the Rehabilitation Plan has been
business (or parts of it) as a going concern, or submitted for confirmation. (FR Rules, Rule 2,
setting-up of new business entity, or other similar Sec. 63)
arrangements as may be approved by the court
or creditors. (FRIA, Sec. 4[ii]) Objections by creditors may be filed 20 days from
notice (FR Rules, Rule 2, Sec. 64).
Approval of the Rehabilitation Plan
Within 20 days from notice to creditors and Grounds for Objection on the Rehabilitation
stakeholders, the creditors shall be convened for Plan
purposes of voting on the approval of the a. The creditors' support was induced by
Rehabilitation Plan. The Plan shall be deemed fraud;
rejected unless approved by all classes of b. The documents or data relied upon in the
creditors. (FRIA, Sec. 64) Rehabilitation Plan are materially false or
misleading; or
The Plan is deemed to have been approved by a c. The Rehabilitation Plan is in fact not
class of creditors if members of the said class supported by the voting creditors. (FR
holding more than 50% of the total class vote in Rules, Rule 2, Sec. 64)
favor of the plan (FR Rules, Rule 2, Sec. 62)
Confirmation of the Rehabilitation Plan
The court shall issue an order confirming the
Rehabilitation Plan in any of the following
instances:
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a. No objections are filed within the twenty b. Compare the amounts expected to be
(20)-day period from receipt of notice received by the creditors under the
from the court that a Rehabilitation Plan Rehabilitation Plan with those that they will
has been submitted to court; receive if liquidation ensues within the next
b. The court finds the objections lacking in 120 days;
merit; c. Contain information sufficient to give the
c. The basis for the objection has been various classes of creditors a reasonable
cured; or basis for determining whether supporting the
d. The debtor has complied with the order Plan is in their financial interest when
to cure the objection. compared to the immediate liquidation of the
debtor, including any reduction of principal
The court may confirm the Rehabilitation Plan interest and penalties payable to the
notwithstanding unresolved disputes over claims creditors;
if the Rehabilitation Plan has made adequate d. Establish classes of voting creditors;
provisions for paying such claims. e. Establish subclasses of voting creditors if
prior approval has been granted by the court;
If the court finds that there is no substantial f. Indicate how the insolvent debtor will be
likelihood that the debtor can be rehabilitated, it rehabilitated including, but not limited to, debt
shall not confirm the Rehabilitation Plan and, forgiveness, debt rescheduling,
instead, declare a failure of rehabilitation. reorganization or quasi- reorganization,
dacion en pago, debt-equity conversion and
The court shall have the power to approve or sale of the business (or parts of it) as a going
implement the Rehabilitation Plan despite the concern, or setting-up of a new business
lack of approval, or objection from the owners, entity or other similar arrangements as may
partners or stockholders of the insolvent debtor: be necessary to restore the financial well-
provided, that the terms thereof are necessary to being and viability of the insolvent debtor;
restore the financial well-being and viability of the g. Specify the treatment of each class or
insolvent debtor. subclass described in subsections (d) and
(e);
The order confirming the Rehabilitation Plan shall h. Provide for equal treatment of all claims
specify the portions approved by the court and the within the same class or subclass, unless a
portions rejected during consideration or cured by particular creditor voluntarily agrees to less
the rehabilitation receiver. (FR Rules, Rule 2, favorable treatment;
Sec. 66) i. Ensure that the payments made under the
plan follow the priority established under the
The approval of the Rehabilitation Plan shall not provisions of the Civil Code on concurrence
affect the rights of creditors to pursue separate and preference of credits and other
actions against general partners of a partnership applicable laws;
to the extent they are liable under relevant j. Maintain the security interest of secured
legislation for the debts thereof. (FR Rules, Rule creditors and preserve the liquidation value of
2, Sec. 68) the security unless such has been waived or
modified voluntarily;
Amounts of any indebtedness or obligations k. Disclose all payments to creditors for pre-
reduced or forgiven in connection with a Plan's commencement debts made during the
approval shall not be subject to any tax. (FR proceedings and the justifications thereof;
Rules, Rule 2, Sec. 69) l. Describe the disputed claims and the
provisioning of funds to account for
Minimum Contents of a Rehabilitation Plan appropriate payments should the claim be
a. Specify the underlying assumptions, the ruled valid or its amount adjusted;
financial goals and the procedures proposed m. Identify the debtor's role in the
to accomplish such goals; implementation of the Plan;
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n. State any rehabilitation covenants of the realistic assumptions and goals. (Viva
debtor, the breach of which shall be Shippings Lines v. Keppel Philippines Mining,
considered a material breach of the Plan; G.R. No. 177382, 2016)
o. Identify those responsible for the future
management of the debtor and the Characteristics of a rehabilitation plan that is
supervision and implementation of the Plan, infeasible:
their affiliation with the debtor and their a. The absence of a sound and workable
remuneration; business plan;
p. Address the treatment of claims arising after b. Baseless and unexplained assumptions,
the confirmation of the Rehabilitation Plan; targets and goals;
q. Require the debtor and its counter-parties to c. Speculative capital infusion or complete lack
adhere to the terms of all contracts that the thereof for the execution of the business plan;
debtor has chosen to confirm; d. Cash flow cannot sustain daily operations;
r. Arrange for the payment of all outstanding and
administrative expenses as a condition to the e. Negative net worth and the assets are near
Plan's approval unless such condition has full depreciation or fully depreciated (Viva
been waived in writing by the creditors Shippings Lines v. Keppel Philippines Mining,
concerned; G.R. No. 177382, 2016)
s. Arrange for the payment of all outstanding
taxes and assessments, or an adjusted vii. Cram Down Effect
amount pursuant to a compromise settlement
with the BlR Or other applicable tax Two Aspects of the Cram Down Power of The
authorities; Rehabilitation Court
t. Include a certified copy of a certificate of tax a. Approval despite opposition; and
clearance or evidence of a compromise b. Binding effect of the approved plan
settlement with the BIR;
u. Include a valid and binding resolution of a Cram-Down
meeting of the debtor's stockholders to The power of the rehabilitation court to approve
increase the shares by the required amount and implement a rehabilitation plan
in cases where the Plan contemplates an notwithstanding the objection of the majority of
additional issuance of shares by the debtor; creditors. The “cram-down” clause is necessary
v. State the compensation and status, if any, of to curb the majority creditors’ natural tendency to
the rehabilitation receiver after the approval dictate their own terms and conditions to the
of the Plan; and rehabilitation, absent due regard to the greater
w. Contain provisions for conciliation and/or long-term benefit of all stakeholders. Otherwise
mediation as a prerequisite to court stated, it forces the creditors to accept the terms
assistance or intervention in the event of any and conditions of the rehabilitation plan,
disagreement in the interpretation or preferring long-term viability over immediate but
implementation of the Rehabilitation Plan. incomplete recovery. (Bank of the Philippine
Islands vs. Sarabia Manor Hotel Corporation, GR
Characteristics of an economically feasible No. 175844, 2013)
rehabilitation plan:
a. The debtor has assets that can generate The Court may approve a rehabilitation plan over
more cash if used in its daily operations than the objection of the creditors, if, in its judgment,
if sold; the rehabilitation of the debtors is feasible and the
b. Liquidity issues can be addressed by a opposition of the creditors is manifestly
practicable business plan that will generate unreasonable. The criteria for manifest
enough cash to sustain daily operations; unreasonableness are:
c. The debtor has a definite source of financing
for the proper and full implementation of a
Rehabilitation Plan that is anchored on
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a. The rehabilitation plan complies with the

requirements specified in Section 18 of Rule Party Applicant
3, A.M. No. 00-8-10-SC; An insolvent debtor may apply for liquidation by
b. The rehabilitation plan would provide the filing a petition for liquidation
objecting class of creditors with payments
whose present value projected in the plan Where to file the application
would be greater than that which they would RTC which has jurisdiction over its principal office
have received if the assets of the debtor were as specified in its articles of incorporation or
sold by a liquidator within a six (6)month partnership. Where the principal office of the
period from the date of filing of the petition; corporation or partnership as registered with the
and Securities and Exchange Commission (SEC) is in
c. The rehabilitation receiver has recommended Metro Manila, the petition must be filed in the RTC
approval of the plan. (Victorio-Aquino v. Court of the city or municipality where the head
Pacific Plans, G.R. No. 193108, 2014) office is located.
Effects of Confirmation of Rehabilitation Plan Petition for Voluntary Liquidation

a. The Plan and its provisions shall bind the The petition shall be verified, shall establish the
debtor and all persons who may be affected insolvency of the debtor and shall indicate the
thereby, including the creditors, whether or names of at least 3 nominees to the position of
not such persons have participated in the liquidator.
proceedings or opposed the Plan or whether
or not their claims have been scheduled; It shall include, as minimum attachments, the
b. The debtor shall comply with the provisions of following:
the Plan and shall take all actions necessary a. Certificate attesting to the holding of a
to carry them out; meeting of the Board of Directors of a stock
c. Payments shall be made to the creditors in corporation or the Board of Trustees of a non-
accordance with the provisions of the Plan; stock corporation, as the case may be, called
d. Contracts and other arrangements between for the purpose and the approval during the
the debtor and its creditors shall remain valid meeting of a resolution to file the petition,
and continue to apply to the extent that they signed by the secretary of the meeting and at
do not conflict with the provisions of the Plan; least a majority of the members of the Board
e. Any compromises on amounts or present during the meeting;
rescheduling of timing of payments by the b. Certificate attesting to the holding of a
debtor shall be binding on the creditors meeting of the stockholders, members or
regardless of whether or not the Plan is partners comprising the debtor, as the case
successfully implemented; and may be, called for the purpose and the
f. Claims arising after the approval of the Plan approval during the meeting of a resolution to
that are otherwise not treated by the Plan are file the petition by the stockholders holding at
not subject to any Suspension Order. (FR least two-thirds (2/3) of the outstanding
Rules, Rule 2, Sec. 67) capital stock of the stock corporation, or two-
thirds (2/3) of the members or partners in
case of a non-stock corporation, association
d. Liquidation or partnership, as the case may be, signed by
the chairman and the secretary of the
i. Types meeting
c. Schedule of the debtor's debts and liabilities
a. Kinds of Debtors including a list of creditors with their
addresses, amounts of claims and
i. Juridical Debtors collaterals, or securities, if any;
1. Voluntary Liquidation
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d. Inventory of all its assets including b. There is no substantial likelihood that the
receivables and claims against third parties; debtor may be rehabilitated
and
e. Schedule of current income and expenditures The petition shall also include information to the
within three (3) months prior to the filing of the best knowledge of the petitioners on:
petition; a. The schedule of debts and liabilities,
f. List of all properties acquired by the debtor in including a list of its known creditors with their
the immediately preceding two (2) years; addresses, amounts of claims and
g. List of all properties sold, disposed of, or collaterals, or securities, if any;
donated by the debtor in the immediately b. The debtor's assets, including receivables
preceding two (2) years; and claims against third parties; and
h. Schedule of the debtor's executory contracts c. Audited financial statements of the debtor for
and unexpired leases; the immediately preceding three (3) years.
i. Audited financial statements of the debtor for (FLSP Rules, Rule 2, Sec. 4)
the immediately preceding three (3) years;
and The petitioners shall post a bond in an amount at
j. Income tax return of the debtor for the least equal in value to the aggregate of their
immediately preceding year claims, conditioned upon payment to the debtor
of all expenses and damages it may incur by
2. Involuntary Liquidation reason of the filing of the petition if the same is
later denied or dismissed by the court, or
Party Applicant to Petition for Liquidation withdrawn by the petitioners without the consent
The applicants must be made up of 3 or more of the debtor. (FLSP Rules, Rule 2, Sec. 5)
creditors whose claim(s) is/are:
a. At least P1,000,000; or ii. Individual Debtors
b. At least 25% of the subscribed capital
stock or partners’ contributions (FLSP 1. Suspension of Payments
Rules, Rule 2, Sec. 4)
Party Applicant
Where to file the Petition An individual debtor who, possessing sufficient
RTC which has jurisdiction over its principal office property to cover all his debts but foreseeing the
as specified in its articles of incorporation or impossibility of meeting them when they
partnership. Where the principal office of the respectively fall due, may file a verified petition
corporation or partnership as registered with the that he be declared in the state of suspension of
Securities and Exchange Commission (SEC) is in payments by the court of the province or city in
Metro Manila, the petition must be filed in the RTC which he has resides for six (6) months prior to
Court of the city or municipality where the head the filing of his petition. (FLSP Rules, Rule 3, Sec.
office is located. 1)
Petition for Involuntary Liquidation Petition for Suspension of Payments

The motion shall be verified, shall indicate the The petition shall indicate the names of at least 3
names of at least 3 nominees to the position of nominees to the position of commissioner and
liquidator, and must show that: shall include, as minimum attachments, the
a. There is no genuine issue of fact or law on following:
the claims/s of the petitioner/s, and that the a. Schedule of debts and liabilities, including a
due and demandable payments thereon have list of creditors with their addresses, amount
not been made for at least one hundred of claims and collaterals, if any;
eighty (180) days or that the debtor has failed b. Inventory of all the debtor's assets, including
generally to meet its liabilities as they fall due; receivables and claims against third parties;
and
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c. Schedule of current income and expenditures the ordinary operations of commerce or of

within three (3) months prior to the filing of the industry in which the petitioning individual
petition; debtor is engaged so long as the proceedings
d. Income tax return of the debtor for the relative to the suspension of payments are
immediately preceding year; pending;
e. List of all properties acquired by the debtor in g. Prohibiting the individual debtor from making
the immediately preceding two (2) years; any payment outside of the necessary or
f. List of all properties sold, disposed of, or legitimate expenses of his business or
donated by the debtor in the immediately industry, so long as the proceedings relative
preceding two (2) years; to the suspension of payments are pending;
g. Schedule of the debtor's executory contracts and
and unexpired leases; and h. Appointing a commissioner to preside over
h. Proposed agreement with the creditors. the creditors' meeting. (FLSP Rules, Rule 3,
(FLSP Rules, Rule 3, Sec. 1) Sec. 2)
Court Action in Suspension of Payments Actions Suspended by a Suspension Order

If the court finds the petition sufficient in form and Upon motion filed by the individual debtor, the
substance, it shall, within 5 working days from the court may issue an order suspending any
filing of the petition, issue a Suspension of pending execution against the individual debtor.
Payments Order: Properties held as security by secured creditors
a. Prohibiting creditors from suing or instituting shall not be the subject of such suspension order.
proceedings for collection against the debtor,
except: (i) creditors having claims for The suspension order shall lapse when three (3)
personal labor, maintenance, expense of last months shall have passed without the proposed
illness and funeral of the wife or children of agreement being accepted by the creditors or as
the debtor incurred within 60 days soon as such agreement is denied. (FLSP Rules,
immediately prior to the filing of the petition; Rule 3, Sec. 3)
and (ii) secured creditors;
b. Calling a meeting of all the creditors named 2. Voluntary Liquidation
in the schedule of debts and liabilities at such
time not less than 15 days nor more than 40 Party Applicant
days from the date of such Order and An individual debtor whose properties are not
designating the date, time and place of the sufficient to cover his liabilities, and owing debts
meeting; exceeding Php500,000.00, may apply to be
c. Directing such creditors to prepare and discharged from his debts and liabilities by filing
present written evidence of their claims a verified petition with the court of the province or
before the scheduled creditors' meeting; city in which he has resided for 6 months prior to
d. Directing the publication of the said order in a the filing of such petition. (FLSP Rules, Rule 3,
newspaper of general circulation published in Sec. 11)
the province or city in which the petition is
filed once a week for 2 consecutive weeks, Petition for Voluntary Liquidation
with the first publication to be made within The petition shall indicate the names of at least 3
seven 7 days from the time of the issuance of nominees to the position of commissioner and
the Order; shall include, as minimum attachments, the
e. Directing the clerk of court to cause the following:
sending of a copy of the Order by registered a. Schedule of debts and liabilities, including a
mail, postage prepaid, to all creditors named list of creditors with their addresses, amount
in the schedule of debts and liabilities; of claims and collaterals, if any;
f. Forbidding the individual debtor from selling, b. Inventory of all the debtor's assets, including
transferring, encumbering or disposing in any receivables and claims against third parties;
manner of his property, except those used in
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c. Schedule of current income and expenditures purpose of hindering or delaying the

within three (3) months prior to the filing of the liquidation or of defrauding his creditors;
petition; f. He has confessed or offered to allow
d. Income tax return of the debtor for the judgment in favor of any creditor or claimant
immediately preceding year; for the purpose of hindering or delaying the
e. List of all properties acquired by the debtor in liquidation or of defrauding any creditors or
the immediately preceding two (2) years; claimant;
f. List of all properties sold, disposed of, or g. He has willfully suffered judgment to be taken
donated by the debtor in the immediately against him by default for the purpose of
preceding two (2) years; and hindering or delaying the liquidation or of
g. Schedule of the debtor's executory contracts defrauding his creditors;
and unexpired leases (FLSP Rules, Rule 3, h. He has suffered or procured his property to
Sec. 11) be taken on legal process with intent to give
a preference to one or more of his creditors
If the court finds the petition sufficient in form and and thereby hinder or delay the liquidation or
substance it shall, within five (5) working days defraud any one of his creditors;
issue the Liquidation Order (FLSP Rules, Rule 3, i. He has made any assignment, gift, sale,
Sec. 12) conveyance or transfer of his estate,
property, rights or credits with intent to hinder
Note: The official copy of the FLSP Rules states or delay the liquidation or defraud his
Rule 3, Sec. 12 as Rule 3, Sec. 3. creditors;
j. He has, in contemplation of insolvency, made
3. Involuntary Liquidation any payment, gift, grant, sale, conveyance or
transfer of his estate, property, rights or
Party Applicant credits;
Any creditor or group of creditors with a claim of, k. Being a merchant or tradesman, he has
or with claims aggregating at least generally defaulted in the payment of his
Php500,000.00 may file a verified petition for current obligations for a period of 30 days;
liquidation with the court of the province or city in l. For a period of 30 days, he has failed, after
which the individual debtor resides. (FLSP Rules, demand, to pay any moneys deposited with
Rule 3, Sec. 13) him or received by him in a fiduciary; and
m. An execution having been issued against him
Acts of Insolvency on final judgment for money, he shall have
The following shall be considered acts of been found to be without sufficient property
insolvency, and the petition for liquidation shall subject to execution to satisfy the judgment.
set forth or allege at least one of such acts: (FLSP Rules, Rule 3, Sec. 13)
a. Such person is about to depart or has
departed from the Republic of the Philippines, Court Action in Involuntary Liquidation
with intent to defraud his creditors; The court shall issue an Order requiring the
b. Being absent from the Republic of the individual debtor to show cause, at a time and
Philippines, with intent to defraud his place to be fixed by the said court, why he should
creditors, he remains absent; not be adjudged an insolvent. (FLSP Rules, Rule
c. He conceals himself to avoid the service of 3, Sec. 15)
legal process for the purpose of hindering or
delaying the liquidation or of defrauding his Upon good cause shown, the court may issue an
creditors; Order forbidding the individual debtor from
d. He conceals, or is removing, any of his making payments of any of his debts, and
property to avoid its being attached or taken transferring any property belonging to him.
on legal process; However, nothing contained herein shall affect or
e. He has suffered his property to remain under impair the rights of a secured creditor to enforce
attachment or legal process for 3 days for the his lien in accordance with its terms.
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ii. Conversion of Rehabilitation to The motion shall be verified & shall contain/set
Liquidation Proceedings forth the same matters mentioned in the FLSP
Rules, Sec. 4. (FLSP Rules, Rule 2, Sec. 6)
During the pendency of court-supervised or pre-
negotiated rehabilitation proceedings, the court Action on the Petition or Motion
may order the conversion of rehabilitation If the petition or motion is sufficient in form and
proceedings to liquidation proceedings pursuant substance, the court shall issue an Order:
to:  Directing the publication of the petition or
a. Section 25(c) of the FRIA which states that motion in a newspaper of general circulation
conversions can be done when the debtor is once a week for 2 consecutive weeks;
insolvent and there is no substantial  Directing the debtor and all creditors who are
likelihood for the debtor to be successfully not the petitioners to file their comment on the
rehabilitated; or petition or motion within 15 days from the
b. Section 72 of the FRIA or if no Rehabilitation date of last publication; and
Plan is confirmed within 1 year from the date  Directing that a copy of the petition or motion
of the filing of a petition to confirm the be served on the debtor and on all known
rehabilitation plan, the proceedings may, creditors, unless they exceed 20 in number,
upon motion or motuproprio, be converted in which case, service shall be made on at
into one for the liquidation of the debtor; or least the first 20 largest known creditors of
c. Section 75 of the FRIA or if termination of the debtor in terms of credits held. However,
proceedings is due to failure of rehabilitation if there are more than 20 known creditors
or dismissal of the petition for reasons other (who are not petitioners) and one or more of
than technical grounds, the proceedings shall them acquired their credit/s within the 6-
be immediately converted to liquidation; or month period immediately preceding the filing
d. Section 90 of the FRIA or if during the of the petition, the number of creditors to be
pendency of court-supervised or preserved copies of the petition shall be
negotiated rehabilitation proceedings, the increased by the same number.
debtor may also initiate liquidation
proceedings by filing a motion in the same If, after considering the comments filed, the court
court where the rehabilitation proceedings determines that the petition or motion is
are pending to convert the rehabilitation meritorious, it shall issue the Liquidation Order.
proceedings into liquidation proceedings. (FLSP Rules, Rule 2, Sec. 8)
e. At any other time upon the recommendation
of the rehabilitation receiver that the After notice and hearing, the court where
rehabilitation of the debtor is not feasible. rehabilitation proceedings are pending may also
order the conversion of rehabilitation proceedings
Motion to Convert Rehabilitation Proceedings into liquidation proceedings in those cases
Into Liquidated Proceedings authorized by law, or at any other time upon the
At any time during the pendency of or after a recommendation of the rehabilitation receiver or
rehabilitation court-supervised or pre-negotiated management committee that the rehabilitation of
rehabilitation proceedings, creditors may compel the debtor is no longer feasible. (FLSP Rules,
a debtor who is undergoing rehabilitation to Rule 2, Sec. 9)
liquidate instead. The following are the requisites:
Thereupon, the court shall issue the Liquidation
The applicants must be made up of 3 or more Order.
creditors whose claim(s) is/are:
a. At least P1,000,000; or
b. At least 25% of the subscribed capital
stock or partners’ contributions
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iii. Liquidation Order the Liquidator for him to accept and settle or
contest. If the liquidator contests or disputes
The Liquidation Order shall: the claim, the court shall allow, hear and
a. Declare the debtor insolvent; resolve such contest except when the case is
b. Order the liquidation of the debtor and, in the already on appeal. In such a case, the suit
case of a juridical debtor, declare it as may proceed to judgment, and any final and
dissolved; executor judgment therein for a claim against
c. Order the sheriff to take possession and the debtor shall be filed and allowed in court;
control of all the property of the debtor, and
except those that may be exempt from e. No foreclosure proceeding shall be allowed
execution; for a period of 180 days. (FLSP Rules, Rule
d. Order the publication of the petition or motion 4, Sec. 3)
in a newspaper of general circulation once a
week for 2 consecutive weeks; iv. Rights of Secured Creditors
e. Direct payments of any claims and
conveyance of any property due the debtor to The Liquidation Order shall not affect the right of
the liquidator; a secured creditor to enforce his lien in
f. Prohibit payments by the debtor and the accordance with the applicable contract or law,
transfer of any property by the debtor; unless he waives his right. (FLSP Rules, Rule 4,
g. Direct all creditors to file their claims with the Sec. 4)
liquidator within the period set by the rules of
procedure Options available to a secured creditor
h. Authorize the payment of administrative A secured creditor may:
expenses as they become due; a. Waive his right under the security or lien,
i. State that the debtor and creditors who are prove his claim in the liquidation proceedings
not petitioner/s may submit the names of and share in the distribution of the assets of
other nominees to the position of liquidator; the debtor; or
and b. Maintain his rights under the security or lien.
j. Set the case for hearing for the election and
appointment of the liquidator, which date Failure to file a manifestation means that the
shall not be less than 30 days nor more than secured creditor is deemed to have opted to
45 days from the date of the last publication. maintain his right under the security or lien (FLSP
(FLSP Rules, Rule 4, Sec. 2) Rules, Rule 4, Sec. 5)
Upon issuance of the Liquidation Order: Nature of Waiver

a. Juridical debtor shall be deemed dissolved A secured creditor shall not be deemed to have
and its corporate or juridical existence waived his right under the security or lien unless
terminated; the waiver is made in a public document, in
b. Legal title to and control of all the assets of unequivocal language, and with full knowledge of
the debtor, except those that may be exempt the consequences of his action. If a secured
from execution, shall be deemed vested in creditor waives his right, he shall be entitled to
the liquidator or, pending his election or participate in the liquidation proceedings as an
appointment, with the court; unsecured creditor. (FLSP Rules, Rule 4, Sec. 6)
c. All contracts of the debtor shall be deemed
terminated and/or breached, unless the If the secured creditor maintains his rights
liquidator, within 90 days from the date of his under the security or lien:
assumption of office, declares otherwise and a. The value of the property may be fixed in a
the contracting party agrees; manner agreed upon by the creditor and the
d. No separate action for the collection of an liquidator. When the value of the property is
unsecured claim shall be allowed. Such less than the claim it secures, the liquidator
actions already pending will be transferred to may convey the property to the secured
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creditor and the latter will be admitted in the Appointment of a Liquidator

liquidation proceedings as a creditor for the The court may appoint the liquidator if:
balance. If its value exceeds the claim a. On the date set for the election of the
secured, the liquidator may convey the liquidator, the creditors do not attend;
property to the creditor and waive the debtor's b. Creditors who attend, fail or refuse to
right of redemption upon receiving the excess elect a liquidator;
from the creditor; c. After being elected, the liquidator fails to
b. Liquidator may sell the property and satisfy qualify ; or
the secured creditor's entire claim from the d. Vacancy occurs for any reason
proceeds of the sale; or whatsoever, In any of the cases provided
c. Secure creditor may enforce the lien or herein, the court may instead set another
foreclose on the property pursuant to hearing of the election of the liquidator.
applicable laws. (FLSP Rules, Rule 4, Sec. 7)
Qualifications of a Liquidator
v. Liquidator The liquidator shall have the same qualifications
as the rehabilitation receiver:
The Liquidator  Citizen of the Philippines or a resident of
The Liquidator is a natural person or juridical the Philippines in the 6months
entity appointed as such by the court and immediately preceding his nomination;
entrusted with such powers and duties.  Good moral character and with
acknowledged integrity, impartiality and
If the liquidator is a juridical entity, it must independence;
designated a natural person who possesses all  Has the requisite knowledge of
the qualifications and none of the disqualifications insolvency and other relevant
as its representative, it being understood that the commercial laws, rules and procedures,
juridical entity and the representative are as well as the relevant training and/or
solidarity liable for all obligations and experience that may be necessary to
responsibilities of the liquidator. (FLSP Rules, enable him to properly discharge the
Rule 4, Sec. 8) duties and obligations of a rehabilitation
receiver; and
Election of a Liquidator  Has no conflict of interest: Provided, That
The creditors entitled to vote will elect the such conflict of interest may be waived,
liquidator in open court. The nominee receiving expressly or impliedly, by a party who
the highest number of votes cast in terms of may be prejudiced thereby. (FLSP Rules,
amount of claims and who is qualified shall be Rule 4, Sec. 8)
appointed as the liquidator.
Powers, Duties and Responsibilities of a
Only creditors who have filed their claims within Liquidator
the period set by the court, and whose claims are The liquidator shall be deemed an officer of the
not barred by the statute of limitations, will be court with the principal duly of preserving and
allowed to vote in the election of the liquidator. maximizing the value and recovering the assets
of the debtor, with the end of liquidating them and
A secured creditor will not be allowed to vote discharging to the extent possible all the claims
unless: against the debtor. The powers, duties and
a. He waives his security or lien; or responsibilities of the liquidator shall include, but
b. Has the value of the property subject of not limited to:
his security or lien fixed by agreement a. Sue and recover all the assets, debts and
with the liquidator, and is admitted for the claims, belonging or due to the debtor;
balance of his claim. (FLSP Rules, Rule b. Take possession of all the property of the
4, Sec. 9) debtor except property exempt by law from
execution;
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c. Sell, with the approval of the court, any f. Conflict of interest, unless, waived, expressly
property of the debtor which has come into or impliedly, by a party who may be
his possession or control; prejudiced thereby;
d. Redeem all mortgages and pledges, and so g. Partiality or lack of independence; or
satisfy any judgement which may be an h. Any other ground analogous to the foregoing.
encumbrance on any property sold by him; (FLSP Rules, Rule 4, Sec. 13)
e. Settle all accounts between the debtor and
his creditors, subject to the approval of the vi. Determination of Claims
court;
f. Recover any property or its value, Registry of Claims
fraudulently conveyed by the debtor; Within 20 days from his assumption into office the
g. Recommend to the court the creation of a liquidator shall prepare a preliminary registry of
creditors' committee which will assist him in claims of secured and unsecured creditors.
the discharge of the functions and which shall Secured creditors who have waived their security
have powers as the court deems just, or lien, or have fixed the value of the property
reasonable and necessary; and subject of their security or lien by agreement with
h. Upon approval of the court, to engage such the liquidator and is admitted as a creditor for the
professional as may be necessary and balance, shall be considered as unsecured
reasonable to assist him in the discharge of creditors.
his duties.
The liquidator shall make the registry available for
In addition to the rights and duties of a public inspection and provide publication notice to
rehabilitation receiver, the liquidator, shall have creditors, individual debtors owner/s of the sole
the right and duty to take all reasonable steps to proprietorship- debtor, the partners of the
manage and dispose of the debtor's assets with a partnership-debtor and shareholders or members
view towards maximizing the proceedings of the corporation-debtor, on where and when
therefrom, to pay creditors and stockholders, and they may inspect it. All claims must be duly
to terminate the debtor's legal existence. Other proven before being paid. (FLSP Rules, Rule 4,
duties of the liquidator in accordance with this Sec. 17)
section may be established by procedural rules.
(FLSP Rules, Rule 4, Sec. 12) Challenging/Opposing Claims
Within thirty 30 days from the expiration of the
Removal of Liquidator period for filing of applications for recognition of
The liquidator may be removed at any time by the claims:
court either motu proprio or upon motion by the 1. creditors,
debtor or any creditor or creditors on any of the 2. individual debtors,
following grounds: 3. owner/s of the sole proprietorship-debtor,
a. He did not actually receive the highest 4. partners of the partnership-debtor and
number of votes during the election for 5. shareholders or members of the corporation-
liquidator; debtor and
b. Incompetence, gross negligence, failure to 6. other interested parties
perform or exercise the proper degree of care
in the performance of his duties and powers; may submit a challenge to claim or claims to the
c. Lack of a particular or specialized court, serving a certified copy on the liquidator
competency required by the specific case; and the creditor holding the challenged claim.
d. Illegal acts or conduct in the performance of
his duties and powers; Upon the expiration of the 30 day period, the
e. Lack of any of the qualifications stated under rehabilitation receiver shall submit to the court the
Section 8 of the FLSP Rules or presence of registry of claims containing the undisputed
any disqualification; claims that have not been subject to challenge.
Such claims shall become final upon the filling of
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the register and may be subsequently set aside the debtor shall enjoy first preference under
only on grounds or fraud, accident, mistake or Article 2244 of the Civil Code, unless the claims
inexcusable neglect. (FLSP Rules, Rule 4, Sec. constitute legal liens under Article 2241 and 2242
19) thereof. (FLSP Rules, Rule 4, Sec. 25)
Right of Set-Off Court Action upon Completion of Liquidation

If the debtor and creditor are mutually debtor and – Removal from Registry of Legal Entries and
creditor of each other, one debt shall be set off Termination of Liquidation Proceeding
against the other and only the balance, if any, Upon determining that the liquidation has been
shall be allowed in the liquidation proceedings. completed, the court shall issue an Order
(FLSP Rules, Rule 4, Sec. 18) approving the report and ordering the SEC to
remove the debtor from the registry of legal
vii. Liquidation Plan entities.
Within 3 months from his assumption into office,
the Liquidator shall submit a Liquidation Plan to Upon receipt of evidence showing that the debtor
the court. The Liquidation Plan shall, as a has been removed from the registry of legal
minimum enumerate all the assets of the debtor entities at the SEC, the court shall issue an Order
and a schedule of liquidation of the assets and terminating the proceedings. (FLSP Rules, Rule
payment of the claims. (FLSP Rules, Rule 4, Sec. 4, Sec. 29)
23)
Properties Exempt from Liquidation --------end of topic --------

It shall be the duty of the court, upon petition and
after hearing, to exempt and set apart, for the use
and benefit of the said insolvent, such real and
personal property as is by law exempt from
execution, and also a homestead.
However, no such petition shall be heard as

aforesaid until it is first proved that notice of the
hearing of the application therefor has been duly
given by the clerk, by causing such notice to be
posted it at least 3 public places in the province
or city at least 10 days prior to the time of such
hearing, which notice shall set forth the name of
the said insolvent debtor, and the time and place
appointed for the hearing of such application, and
shall briefly indicate the homestead sought to be
exempted or the property sought to be set aside;
and the decree must show that such proof was
made to the satisfaction of the court, and shall be
conclusive evidence of that fact.
Preference of Credit
The Liquidation Plan and its Implementation shall
ensure that the concurrence and preference of
credits as enumerated in the Civil Code and other
relevant laws shall be observed, unless a
preferred creditor voluntarily waives his preferred
right. For purposes of this chapter, credits for
services rendered by employees or laborers to
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VIII. SPECIAL LAWS F. DATA PRIVACY ACT OF 2012

F. DATA PRIVACY ACT OF 2012
1. Definitions and scope 1. DEFINITIONS AND SCOPE
2. Extraterritorial application
3. Processing of personal information DEFINITIONS
a. General principles
b. Sensitive and privileged Informational Privacy
information Right to control the collection, maintenance, use,
c. Subcontracting and dissemination of data about oneself. (Lee v.
d. Rule on privileged communication Ilagan, GR. No. 203254, 2014)
4. Rights of the data subject;
exceptions/non-applicability The individual’s ability to control the flow of
5. Duties and responsibilities of personal
information concerning or describing him, which
information controller
however must be overbalanced by legitimate
public concerns. To deprive an individual of his
power to control or determine whom to share
information of his personal details would deny
him of his right to his own personhood. (KMU v.
NEDA, GR. No. 167798, 2006, J. Ynares-
Santiago dissenting opinion; Bayan Muna v.
Ermita, GR. No. 167930, 2006)
Consent of the Data subject

Any freely given, specific, informed indication of
will, whereby the data subject agrees to the
collection and processing of personal information
about and/or relating to him or her.
Consent shall be evidenced by written, electronic

or recorded means. It may also be given on behalf
of the data subject by an agent specifically
authorized by the data subject to do so. (Sec.
3(c), Implementing Rules and Regulations,
hereinafter IRR)
Data Subject
An individual whose personal information is
processed. (Sec. 3(d), IRR)
Data Sharing
The disclosure or transfer to a third party of
personal data under the custody of a personal
information controller or personal information
processor. In the case of the latter, such
disclosure or transfer must have been upon the
instructions of the personal information controller
concerned.
The term excludes outsourcing, or the disclosure

or transfer of personal data by a personal
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information controller to a personal information information is collected, or the purpose or extent

processor (Section 3(f), IRR) of its processing. (Sec. 3(m), IRR)
Personal Data Personal Information Processor

 All types of personal information (Section 3(j), Any natural or juridical person qualified to act as
IRR) such under this Act to whom a personal
 Any information from which the identity of an information controller may outsource the
individual is apparent or any information that processing of personal data pertaining to a data
can be put together with other information to subject. (Sec. 3(n), IRR)
reasonably and directly identify an individual
 Includes sensitive personal information such Privileged Information
as your health, education, genetic or sexual This refers to any and all forms of data which
life and information that is classified or under the Rules of Court and other pertinent laws
privileged constitute privileged communication.
Personal Data Breach Processing

A breach of security leading to the accidental or Any operation or any set of operations performed
unlawful destruction, loss, alteration, upon personal information including, but not
unauthorized disclosure of, or access to, personal limited to, the collection, recording, organization,
data transmitted, stored, or otherwise processed storage, updating or modification, retrieval,
(Section 3(k), IRR) consultation, use, consolidation, blocking,
erasure or destruction of data. (Sec. 3(o), IRR)
Personal Information
Any information whether recorded in a material Profiling
form or not, from which the identity of an Any form of automated processing of personal
individual is apparent or can be reasonably and data consisting of the use of personal data to
directly ascertained by the entity holding the evaluate certain personal aspects relating to a
information, or when put together with other natural person, in particular to analyze or predict
information would directly and certainly identify aspects concerning that natural person’s
an individual. (Sec. 3(l), IRR) performance at work, economic situation, health,
personal preferences, interests, reliability,
Personal Information Controller behavior, location or movements (Section 3(p),
A person or organization who controls the IRR)
collection, holding, processing or use of personal
information, including a person or organization Sensitive Personal Information
who instructs another person or organization to This refers to personal information:
collect, hold, process, use, transfer or disclose 1. About an individual’s race, ethnic origin,
personal information on his or her behalf. marital status, age, color, and religious,
philosophical or political affiliations;
The term excludes: 2. About an individual’s health, education,
1. A person or organization who performs genetic or sexual life of a person, or to
such functions as instructed by another any proceeding for any offense
person or organization; and committed or alleged to have been
2. An individual who collects, holds, committed by such person, the disposal
processes or uses personal information of such proceedings, or the sentence of
in connection with the individual’s any court in such proceedings;
personal, family or household affairs. 3. Issued by government agencies peculiar
to an individual which includes, but not
Note: There is control if the natural or juridical limited to, social security numbers,
person or any other body decides on what previous or current health records,
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licenses or its denials, suspension or employment with the

revocation, and tax returns; and government.
4. Specifically established by an executive
order or an act of Congress to be kept b. Information about an individual who is or
classified was performing service under contract
for a government institution that
SCOPE (SECTION 4) relates to the services performed,
including the terms of the contract, and
General Rule: The DPA applies to the the name of the individual given in the
processing of all types of personal information course of the performance of those
by: services;
 any natural and juridical person involved
in personal information processing c. Information relating to any discretionary
 personal information controllers and benefit of a financial nature such as the
processors who, although not found or granting of a license or permit given by
established in the Philippines, use the government to an individual,
equipment that are located in the
including the name of the individual and
Philippines, or those who maintain an
the exact nature of the benefit;
office, branch or agency in the
Philippines (Sec. 4, DPA)
Provided, that they do not include
benefits given in the course of an
Limitations:
ordinary transaction or as a matter of
 The rule on privileged communications right
 The DPA does not amend or repeal RA Note: (a), (b), (c) considers the right to
53 which protects publishers, editors, or information on matters of public concern
duly accredited reporters of any
newspaper, magazine, or periodical of d. Personal information processed for
general circulation from being compelled journalistic, artistic, literary or
to reveal the source of published news or
research purposes;
information obtained in confidence.
Note: The IRR explains this exemption
as limited to that necessary in order to
Information Outside the Scope of the DPA
uphold freedom of speech, of expression,
a. Information about any individual who is or
or of the press, subject to requirements
was an officer or employee of a
of other applicable law or regulation. For
government institution that relates to research purpose, research is for a public
the position or functions of the individual, benefit, where processing is subject to
including: the requirements of applicable laws,
1. The fact that the individual is or regulations, or ethical standards.
was an officer or employee of the
government institution e. Information necessary in order to carry
2. The title, business address and out the functions of public authority
office telephone number of the which includes the processing of
individual personal data for the performance by the
3. The classification, salary range independent, central monetary authority
and responsibilities of the and law enforcement and regulatory
position held by the individual; agencies of their constitutionally and
and statutorily mandated functions.
4. The name of the individual on a
document prepared by the Note: the DPA shall not be construed as
individual in the course of to have amended or repealed:
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 Republic Act No. 1405, 2. EXTRATERRITORIAL APPLICATION

otherwise known as the Secrecy
of Bank Deposits Act; The DPA applies to an act done or practice
 Republic Act No. 6426, engaged in and outside of the Philippines by an
otherwise known as the Foreign entity if:
Currency Deposit Act; and 1. The natural or juridical person involved in the
 Republic Act No. 9510, processing of personal data is found or
otherwise known as the Credit established in the Philippines (IRR, Section 4
Information System Act (CISA) (a))
2. The act, practice or processing relates to
Note: Exemption for law enforcement is personal information about a Philippine
only to extent allowed by Constitution, citizen or a resident;
including right against unreasonable 3. The processing of personal data is being
search and seizure done in the Philippines (IRR, Section 4(c))
4. The entity has a link with the Philippines, and
f. Information necessary for banks and the entity is processing personal information
other financial institutions under the in the Philippines or even if the processing is
jurisdiction of the independent, central outside the Philippines as long as it is about
monetary authority or Bangko Sentral ng Philippine citizens or residents such as, but
Pilipinas to comply with Republic Act No. not limited to, the following:
9510, and Republic Act No. 9160, as  Use of equipment located in the country,
amended, otherwise known as the Anti- or maintains an office, branch, or
Money Laundering Act and other agency in the Philippines for processing
applicable laws; and of personal data (IRR, Section 4(d)(1))
 A contract is entered in the Philippines;
g. Personal information originally collected  A juridical entity unincorporated in the
from residents of foreign jurisdictions Philippines but has central management
in accordance with the laws of those and control in the country; and
foreign jurisdictions, including any  An entity that has a branch, agency,
applicable data privacy laws, which is office or subsidiary in the Philippines
being processed in the Philippines. and the parent or affiliate of the
Philippine entity has access to personal
Note: IRR explains that the burden of information;
proving the law of the foreign jurisdiction 5. The entity has other links in the Philippines
falls on the person or body seeking such as, but not limited to:
exemption. In the absence of proof, the  The entity carries on business in the
applicable law shall be presumed to be Philippines; and
the Act and these Rules.  The personal information was collected
or held by an entity in the Philippines
The non-applicability of the Act or the Rules does (Sec. 6, DPA)
not extend to personal information controllers or
personal information processors, who remain
subject to the requirements of implementing
security measures for personal data protection.
The processing of the information provided in the

preceding paragraphs shall be exempted from
the requirements of the Act only to the minimum
extent necessary to achieve the specific purpose,
function, or activity. (Section 5, IRR)
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3. PROCESSING OF PERSONAL as reasonably practicable, after

INFORMATION collection.
 Only personal data that is
A. General principles necessary and compatible with
declared, specified, and
Transparency legitimate purpose shall be
The data subject must be aware of the nature, collected. (Section 19 (a) of the
purpose, and extent of the processing of his or IRR)
her personal data, including the risks and 2. Processed fairly and lawfully
safeguards involved, the identity of personal  Processing shall uphold the rights of the
information controller, his or her rights as a data data subject, including the right to refuse,
subject, and how these can be exercised. Any withdraw consent, or object. It shall
information and communication relating to the likewise be transparent, and allow the
processing of personal data should be easy to data subject sufficient information to
access and understand, using clear and plain know the nature and extent of
language. (Section 18(a), IRR) processing.
 Information provided to a data subject
Legitimate Purpose
must always be in clear and plain
The processing of information shall be compatible
language to ensure that they are easy to
with a declared and specified purpose which must
understand and access.
not be contrary to law, morals, or public policy.
 Processing must be in a manner
(Section 18(b), IRR)
compatible with declared, specified, and
legitimate purpose (Section 19 (b), IRR-
Proportionality
DPA).
The processing of information shall be adequate,
3. Accurate, relevant and, where necessary for
relevant, suitable, necessary, and not excessive
purposes for which it is to be used the
in relation to a declared and specified purpose.
processing of personal information, kept up to
Personal data shall be processed only if the
date; inaccurate or incomplete data must be
purpose of the processing could not reasonably
rectified, supplemented, destroyed or their
be fulfilled by other means. (Section 18(c), IRR)
further processing restricted.
 Processing should ensure data quality.
The processing of personal information shall be
(Section 19 (b), IRR-DPA)
allowed, subject to compliance with the
4. Adequate and not excessive in relation to the
requirements of the DPA and other laws allowing
purposes for which they are collected and
disclosure of information to the public and
processed.
adherence to the three principles above.
5. Retained only for as long as necessary for the
fulfillment of the purposes for which the data
Processing of Personal information must be:
1. Collected for specified and legitimate was obtained or for the establishment,
purposes determined and declared before, or exercise or defense of legal claims, or for
as soon as reasonably practicable after legitimate business purposes, or as provided
collection, and later processed in a way by law.
compatible with such declared, specified and 6. Kept in a form which permits identification of
legitimate purposes only. data subjects for no longer than is necessary
for the purposes for which the data were
 When consent is required, it
collected and processed: Provided, That
must be time-bound in relation to
personal information collected for other
the declared, specified and
purposes may be processed for historical,
legitimate purpose. Consent
statistical or scientific purposes, and in cases
given may be withdrawn.
laid down in law may be stored for longer
 Purpose should be determined
periods: Provided, further, That adequate
and declared before, or as soon
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safeguards are guaranteed by said laws Example:

authorizing their processing. (Sec. 11, DPA) Q: Lawyer got the CENOMAR w/o the consent of
 Personal data shall not be retained in the Data Subject but it was legally obtained from
perpetuity in contemplation of a possible the PSA (PSA made an error in releasing the
future use yet to be determined (Section CENOMAR). Can the Lawyer use the
19(e)(3), IRR) CENOMAR?
Criteria for Lawful Processing of Personal NPC Ruling: YES. Cannot fault the lawyer for
Information (Section 12, DPA) (not sensitive) legally obtaining evidence.
The processing of personal information shall be
permitted only if not otherwise prohibited by law,
and when at least one of the following conditions B. Sensitive and privileged information
exists:
1. The data subject has given his or her consent Criteria For Lawful Processing Of Sensitive
prior to the collection, or as soon as Personal Information And Privileged
practicable and reasonable. Information (Section 13, DPA)
2. The processing of personal information is General Rule: The processing of sensitive
necessary and is related to the fulfillment of a personal information and privileged information
contract with the data subject or in order to shall be prohibited.
take steps at the request of the data subject
prior to entering into a contract; Exceptions:
3. The processing is necessary for compliance 1. The data subject has given his or her
with a legal obligation to which the personal consent, specific to the purpose prior to the
information controller is subject; processing, or in the case of privileged
4. The processing is necessary to protect vitally information, all parties to the exchange have
important interests of the data subject, given their consent prior to processing;
including life and health; 2. The processing of the same is provided for by
5. The processing is necessary in order to existing laws and regulations;
respond to national emergency, to comply 3. The processing is necessary to protect the
with the requirements of public order and life and health of the data subject or another
safety, or to fulfill functions of public authority person, and the data subject is not legally or
which necessarily includes the processing of physically able to express his or her consent
personal data for the fulfillment of its mandate prior to the processing;
or the processing of personal information is 4. The processing is necessary to achieve the
necessary for the fulfillment of the lawful and noncommercial objectives of
constitutional or statutory mandate of a public public organizations and their associations:
authority (Section 21(f) of the IRR) Provided that:
6. The processing is necessary for the purposes  such processing is only confined and
of the legitimate interests pursued by the related to the bona fide members of these
personal information controller or by a third organizations or their associations:
party or parties to whom the data is disclosed,  the sensitive personal information are not
except where such interests are overridden transferred to third parties:
by fundamental rights and freedoms of the  consent of the data subject was obtained
data subject which require protection under prior to processing;
the Philippine Constitution. 5. The processing is necessary for purposes of
medical treatment, Provided, that it is carried
out by a medical practitioner or a medical
treatment institution, and an adequate level of
protection of personal information is ensured;
or
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6. The processing concerns such personal shall prove the nature of the communication
information as is necessary for the protection in an executive session.
of lawful rights and interests of natural or 2. Should the communication be determined as
legal persons in court proceedings, or the privileged, it shall be excluded from evidence,
establishment, exercise or defense of legal and the contents thereof shall not form part of
claims, or when provided to government or the records of the case
public authority. (Sec. 13, DPA) 3. where the privileged communication itself is
the subject of a breach, or a privacy concern
or investigation, it may be disclosed to the
C. Subcontracting Commission but only to the extent necessary
for the purpose of investigation, without
Subcontract of Personal Information including the contents thereof in the records.
A personal information controller may (Sec. 23, IRR)
subcontract the processing of personal
information subject to the following parameters: Applicability of DPA to Surveillance
1. the personal information controller shall be
responsible for ensuring that proper Surveillance of Suspects and Interception of
safeguards are in place Recording of Communications. Section 7 of
Republic Act No. 9372, otherwise known as the
2. ensure the confidentiality of the personal
“Human Security Act of 2007”, is hereby
information processed,
amended to include the condition that the
3. prevent its use for unauthorized purposes, processing of personal data for the purpose of
and surveillance, interception, or recording of
4. generally, comply with the requirements of communications shall comply with the Data
the DPA, other laws for processing of Privacy Act, including adherence to the principles
personal information, and issuances of the of transparency, proportionality, and legitimate
National Privacy Commission (Sec. 43, IRR) purpose. (Sec. 24, IRR)
The personal information processor shall comply

4. RIGHTS OF THE DATA SUBJECT;
with the requirements of the Act, these Rules,
EXCEPTIONS/NON-APPLICABILITY
other applicable laws, and other issuances of the
Commission, in addition to obligations provided in Rights of the data subject
a contract, or other legal act with a personal 1. Right to Information
information controller. (Sec. 45, IRR) The right to be informed whether personal
information pertaining to him or her shall be,
are being, or have been processed. Including
D. Rule on privileged communication
the existence of automated decision-making
Personal information controllers may invoke the and profiling. (Sec. 34(a), IRR)
principle of privileged communication over
privileged information that they lawfully control or 2. Right to Object
process. (Sec. 15, DPA) The data subject shall have the right to object
to and be notified and be given an opportunity
Inadmissibility of Privileged Information to withhold consent to the processing of his
Subject to existing laws and regulations, any or her personal data, including processing for
evidence gathered on privileged information is direct marketing, automated processing or
inadmissible. (Sec. 15) profiling. (Sec. 34(b), IRR)
Rules on the Use of Privileged 3. Right to Access

Communication The Data Subject shall have reasonable
1. When the Commission inquires upon access to, upon demand, the following:
communication claimed to be privileged, the  Contents of his or her personal
personal information controller concerned information that were processed;
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 Sources from which personal  The personal data is incomplete,

information were obtained; outdated, false, or unlawfully
 Names and addresses of recipients of obtained;
the personal information;  The personal data is being used for
 Manner by which such data were purpose not authorized by the data
processed; subject;
 Reasons for the disclosure of the  The personal data is no longer
personal information to recipients; necessary for the purposes for which
 Information on automated processes they were collected;
where the data will or likely to be made  The data subject withdraws consent
as the sole basis for any decision or objects to the processing, and
significantly affecting or will affect the there is no other legal ground or
data subject; overriding legitimate interest for the
 Date when his or her personal processing;
information concerning the data subject  The personal data concerns private
were last accessed and modified; and information that is prejudicial to data
 The designation, or name or identity and subject, unless justiﬁed by freedom
address of the personal information of speech, of expression, or of the
controller. (Sec. 34(c), IRR) press or otherwise authorized;
 The processing is unlawful;
4. Right to Correct/Rectification  The personal information controller
The data subject has the right to: or personal information processor
 dispute the inaccuracy or error in the violated the rights of the data subject.
personal data
 have the personal information controller The personal information controller may
correct it immediately and accordingly, notify third parties who have previously
unless the request is vexatious or received such processed personal
otherwise unreasonable (Sec. 34(d), information. (Sec. 34(e), IRR)
IRR)
6. Right to Damages
If the personal information have been The Data subject may be indemnified for any
corrected, the personal information controller damages sustained due to such inaccurate,
shall ensure the accessibility of both the new incomplete, outdated, false, unlawfully
and the retracted information and the obtained or unauthorized use of personal
simultaneous receipt of the new and the information, taking into account any violation
retracted information by recipients thereof. of his or her rights and freedoms as data
subject (Sec. 34(f), IRR)
5. Right to Erasure/Blocking
The data subject shall have the following 7. Right to Data Portability
rights in relation to his or her personal data in  Where data is processed by electronic
the PIC’s filing system: means and in a structured and
 suspend commonly used format
 withdraw  The data subject may obtain from the
 order the blocking personal information controller a copy of
 remove data undergoing processing in an
 destroy electronic or structured format, which is
commonly used and allows for further
This right may be exercised upon discovery use by the data subject
and substantial proof of any of the following:  This should primarily take into account
the right of data subject to have control
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over his or her personal data being destruction, alteration and disclosure, as well as
processed based on consent or contract, against any other unlawful processing (Sec.
for commercial purpose, or through 20(a), DPA)
automated means (Sec. 36, IRR)
Note: The personal information controller should
8. Right to File a Complaint (Sec. 34(f), IRR) implement organizational, physical and technical
security measures to ensure the confidentiality,
Transmissibility of Rights integrity and availability of personal data.
The rights of the data subject may be invoked by
the lawful heirs and assigns of the data subject to Organizational Security Measures
which he or she is an heir or an assignee. This 1. Data Protection Officers – Persons
may be invoked at any time after the death of the accountable for ensuring compliance with
data subject, or when the data subject is applicable laws and regulations for the
incapacitated or incapable of exercising his or her protection of data privacy and security
rights. (Sec. 17, DPA) 2. Data Protection Policies – Policies that
provide for organization, physical, and
NON-APPLICABILITY technical security measures.
3. Management of Human Resources –
The provisions on the rights of the data subject
are not applicable if the processed personal Selection and supervision of the processor’s
information is: employees, agents, or representatives,
particularly those who will have access to
1. used only for the needs of scientific and
personal data.
statistical research and,
4. Records of Processing Activities –
2. on the basis of such, no activities are carried Maintain records that sufficiently describe its
out and no decisions are taken regarding the data processing system, and identify the
data subject. The personal information shall
duties and responsibilities of those
be held under strict confidentiality and shall
individuals who will have access to personal
be used only for the declared purpose.
data.
3. information gathered for the purpose of 5. Ensure that its personal information
investigations in relation to any criminal, processors, where applicable, shall also
administrative or tax liabilities of a data
implement the security measures required by
subject.
the Act and these Rules.
Note: Any limitations on the rights of the data 6. Implement reasonable and appropriate
subject shall only be to the minimum extent measures to protect personal information
necessary to achieve the purpose of said against natural and human dangers.
research or investigation. (Sec. 19, DPA) 7. Ensure implementation by third-party
processors of the security measures required
5. DUTIES AND RESPONSIBILITIES OF by this provision (Sec. 20, DPA)
PERSONAL INFORMATION CONTROLLER
Notification for Breach
Duties of Personal Information Controller The PIC should promptly notify the Commission
1. Ensure implementation of personal and affected data when:
information processing principles of the
DPA. (Sec. 11, DPA)  The personal data involves sensitive
2. Uphold rights of data subjects personal information or any other
3. Implement reasonable and appropriate information that may be used to enable
a. organizational identity fraud
b. physical and  There is reasonable belief that that the
c. technical measures information may have been acquired by
These are intended for the protection of personal an unauthorized person (confidentiality
information against any accidental or unlawful breach); and
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 The personal information controller or 2. Safeguards to protect their computer network

the Commission believes that such against accidental, unlawful or unauthorized
unauthorized acquisition is likely to give usage, any interference which will affect data
rise to a real risk of serious harm to any integrity or hinder the functioning or
affected data subject. availability of the system, and unauthorized
access through an electronic network;
Note: The National Privacy Commission requires 3. Ensure and maintain the confidentiality,
notification of both NPC and data subjects within integrity, availability, and resilience of their
72 hours from breach or reasonable belief that processing systems and services;
personal data breach occurred. (Sec. 38 (a), 4. Restore the availability and access to
DPA) personal data in a timely manner in the event
of a physical or technical incident;
Notification may be delayed only to the extent 5. Regularly test, assess, and evaluate the
necessary to determine the scope of the breach, effectiveness of security measures;
to prevent further disclosures, or to restore 6. Encrypt personal data during storage and
reasonable integrity to the information and while in transit, authentication processes,
communications system. (Sec. 26, IRR) and other technical security measures that
control and limit access. (Sec. 28, IRR)
Physical Security Measures
Where appropriate, personal information Accountability for Transfer of Personal
controllers and personal information processors Information
shall comply with the following guidelines for
physical security: Responsibilities of the PIC:
1. Monitor and limit access to and activities in 1. Responsible for personal information under
the room, workstation or facility, and specify its control or custody
the proper use of and access to electronic 2. Shall be responsible for information
media; transferred to a third party for processing
2. Provide privacy to anyone processing a. This includes domestic or international
personal data when designing office space information
and work stations, taking into consideration b. Also subject to cross-border
the environment and accessibility to the arrangement and cooperation (Sec. 21,
public; DPA)
3. Implement policies and procedures regarding
the transfer, removal, disposal, and re-use of Duties of the PIC:
electronic media, to ensure appropriate 1. Comply with the requirements of the Data
protection of personal data; Privacy Act
4. Prevent the mechanical destruction of files 2. Use contractual or other reasonable means
and equipment. The room and workstation to provide a comparable level of protection
used in the processing of personal data shall, while the information are being processed by
as far as practicable, be secured against a third party (Sec. 21(a), DPA)
natural disasters, power disturbances, 3. Designate and individual or individuals who
external access, and other similar threats. are accountable for the organization’s
(Sec. 27, IRR) compliance with the DPA
a. The Data Privacy Officer’s identity may
be known to the data subject upon
Technical Security Measure.
request (Sec. 21(b), DPA)
Where appropriate, personal information
controllers and personal information processors
shall adopt and establish the following technical
security measures:
1. A security policy with respect to the
processing of personal data;
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5 PILLARS OF COMPLIANCE OF THE

NATIONAL PRIVACY COMMISSION
1. Designate a Data Protection Officer

2. Conduct Risk Assessment or Privacy
Impact Assessment
3. Have a Privacy Management Program
4. Implement Security Measures
5. Be prepared in case of a Breach
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VIII. SPECIAL LAWS G. PHILIPPINE COMPETITION ACT

G. PHILIPPINE COMPETITION ACT
1. Definition and scope of application 1. DEFINITION AND SCOPE OF
2. Powers and functions of the Philippine
APPLICATION
Competition Commission
3. Jurisdiction and enforcement
4. Determining the relevant market a. Definition
5. Determining control or dominance of
market The Philippine Competition Act (PCA) or R.A.
6. Prohibited acts No. 10667, which took effect on Aug. 8, 2015, is
a. Prohibited mergers and the primary legislative act which provides for a
acquisitions national competition policy and establishes the
b. Anti-competitive agreements main competition authority in the Philippines, the
c. Abuse of dominant position Philippine Competition Commission (PCC).
7. Forbearance by the Philippine
Competition Commission Competition policy broadly refers to all laws,
government policies and regulations aimed at
establishing competition and maintaining the
same. It includes measures intended to promote,
advance and ensure competitive market
conditions by the removal of control, as well as to
redress anti-competitive results of public and
private restrictive practice
Declaration of Principles and Policy

 Efficiency of market competition is an
effective mechanism for allocating goods and
services.
 Equal opportunities for all promotes
entrepreneurial spirit, encourages private
investment, facilitates technology
development and transfer and enhances
resources productivity.
 Competition serves the interest of
consumers by allowing them to exercise their
right of choice over goods and services.
 Pursuant to the constitutional goals for the
national economy under Sec. 1, Art. XII of the
1987 Constitution and to the mandate under
Sec. 19, Art. XII, the State shall:
o Enhance economic efficiency and

promote free and fair competition in
trade, industry and all commercial
economic activities and establish a
National Competition Policy;
o Prevent economic concentration which
will control the production, distribution,
trade, or industry that will unduly stifle
competition, lessen, manipulate or
constrict the discipline of free markets;
o Penalize all forms of anti-competitive
agreements, abuse of dominant
position, and anti-competitive mergers
and acquisitions, with the objective of
protecting consumer welfare and
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advancing domestic and international arrangements with their employers

trade and economic development. (Sec. when such combinations, activities,
2) agreements, or arrangements are
designed solely to facilitate
b. Scope of Application
collective bargaining in respect of
i. As to who: The Act is enforceable against conditions of employment. (Sec. 3,
any person or entity engaged in any trade, last par.)
industry and commerce. (Sec. 3)
2. Neither does it apply to trade
“Entity” refers to any person, natural or associations. Section 48 provides
juridical, sole proprietorship, partnership, that nothing contained in the Act shall
combination or association in any form,
be construed to prohibit the existence
whether incorporated or not, domestic or
foreign, including those owned or controlled and operation of trade associations
by the government, engaged directly or organized to promote quality standard
indirectly in any economic activity. (Sec. and safety issues, provided that:
4[h]) a. These associations shall not in
any way be used to justify any
Single Economic Entity Doctrine violation of the PCA
An entity that controls, is controlled by, or is b. It shall not be illegal to use the
under common control with another entity or association as a forum to discuss
entities, have common economic interests, or promote quality standards,
and are not otherwise able to decide or act efficiency, safety, security,
independently of each other, shall not be productivity, competitiveness
considered competitors for purposes of and other matters of common
Section 14 (Anti-Competitive Agreements). interest involving the industry
(Sec. 14, last par.) *Provided that such is done
without any anti-competitive
ii. As to what: intent or effect.
(a) Any trade, industry and
commerce in the Republic of the 2. POWERS AND FUNCTIONS OF THE
Philippines PHILIPPINE COMPETITION COMMISSION
(b) International trade having direct,
substantial, and reasonably Definition
The Philippine Competition Commission
foreseeable effects in trade,
(“PCC” or the “Commission”) is an independent
industry, or commerce in the quasi-judicial body created by the PCA to
Republic of the Philippines, implement the policy, objectives, and purposes of
including those that result from acts the Act. It is an attached agency to the Office of
done outside the Philippines. (Sec. the President. (Sec. 5)
3)
Powers and Functions
Note: The PCA applies to non-profit The Commission shall have original and primary
activities. The term “economic activity” does jurisdiction over the enforcement and
not only cover activities that generate profits implementation of the PCA. The Commission
or dividends for shareholders; it may also shall exercise the following powers and functions:
include activities conducted on a not for-
profit basis. (3.4, PCC Merger Review 1. Conduct inquiry, investigate, and hear
Guidelines) and decide on cases involving any
violation of the PCA and other existing
Exceptions competition laws motu proprio or upon
1. The PCA does not apply to the receipt of a verified complaint, and
institute the appropriate civil or
combinations or activities of workers
criminal proceedings;
or employees nor to agreements or
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2. Review proposed mergers and 12. Monitor and analyze the practice of
acquisitions; determine thresholds, competition in markets that affect the
requirements, and procedures for Philippine economy;
notification; and upon exercise of its 13. Conduct, publish, and disseminate
powers to review, prohibit mergers and studies and reports on anti-
acquisitions that will substantially competitive conduct and agreements
prevent, restrict, or lessen competition in to inform and guide the industry and
the relevant market; consumers;
3. Monitor and undertake consultation 14. Intervene or participate in
with stakeholders and affected agencies; administrative and regulatory
4. Stop or redress any anti-competitive proceedings requiring consideration of
agreement; the provisions of this Act that are initiated
5. Conduct administrative proceedings, by government agencies;
impose sanctions, fines or penalties 15. Assist the National Economic and
for any noncompliance with or breach of Development Authority, in consultation
this Act and its implementing rules and with relevant agencies and sectors, in the
regulations (IRR) and punish for preparation and formulation of a national
contempt; competition policy;
6. Issue subpoena duces tecum and 16. Act as the official representative of the
subpoena ad testificandum to require Philippine government in international
the production of books, records, or other competition matters;
documents or data which relate to any 17. Promote capacity building and the
matter relevant to the investigation and sharing of best practices with other
personal appearance before the PCC, competition-related bodies;
summon witnesses, administer oaths, 18. Advocate pro-competitive policies of
and issue interim orders; the government by:
7. Upon order of the court, undertake a. Reviewing economic and
inspections of business premises and administrative regulations,
other offices, land and vehicles, as motu proprio or upon request;
used by the entity; and
8. Issue adjustment or divestiture orders b. Advising the Executive
including orders for corporate Branch on the competitive
reorganization or divestment. Such implications of government
orders, which are structural remedies, actions, policies and programs;
should only be imposed: and
a. Where there is no equally 19. Charging reasonable fees to defray the
effective behavioral remedy; or administrative cost of the services
b. Where any equally effective rendered. (Sec. 12)
behavioral remedy would be
more burdensome for the 3. JURISDICTION AND ENFORCEMENT
enterprise concerned than the
structural remedy; The PCC’s jurisdiction
9. Deputize any and all enforcement The PCC has original and primary jurisdiction
agencies of the government or enlist over the enforcement and implementation of the
the aid and support of any private PCA. (Sec. 12)
institution, corporation, entity or
association, in the implementation of its Relationship with sector regulators
powers and functions; The PCC shall have original and primary
10. Monitor compliance by the person or jurisdiction in the enforcement and regulation of
entities concerned with the cease and all competition-related issues. (Sec. 32)
desist order or consent judgment;
11. Issue advisory opinions and The PCC shall still have jurisdiction if the issue
guidelines on competition matters involves both competition and noncompetition
and submit annual and special reports issues, but the concerned sector regulator
to Congress, including proposed shall be consulted and afforded reasonable
legislation; opportunity to submit its own opinion and
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recommendation on the matter before the PCC (b) Not less than P100M but not more than
makes a decision on any case. (Sec. 32) P250M for the second offense (Sec. 29)
Note: This is why the PCC has original and Appeals of PCC Decisions
primary, not exclusive, jurisdiction. Decisions of the PCC shall be appealable to the
Court of Appeals in accordance with the Rules
Preliminary inquiry by the PCC of Court. The appeal does not stay the decision,
The PCC, motu proprio, or upon the filing of a unless directed otherwise by the CA. (Sec. 39)
verified complaint by an interested party or upon
referral by a regulatory agency, shall have the b. Criminal proceedings
sole and exclusive authority to initiate and
conduct a fact-finding or preliminary inquiry Jurisdiction
for the enforcement of the PCA based on The Regional Trial Court of the city or province
where the entity or any of the entities whose
reasonable grounds. (Sec. 31)
business act or conduct constitutes the subject
matter of a case, conducts its principal place of
The PCC shall terminate said preliminary inquiry business, shall have original and exclusive
by issuing a resolution: jurisdiction, regardless of the penalties and fines
a. Ordering its closure if no violation or herein imposed, of all criminal and civil cases
infringement of the Act is found; or involving violations of the PCA and other
b. To proceed, on the basis of reasonable competition-related laws. (Sec. 44)
grounds, to conduct a full administrative
investigation. (Sec. 31) DOJ-OFC
The Office for Competition under the DOJ
conducts the preliminary investigation and
If the evidence so warrants, the Commission may
prosecution criminal offenses arising from the
file before the DOJ criminal complaints for PCA and other competition-related laws. (Sec.
violations of this Act or relevant laws for 13)
preliminary investigation and prosecution before
the proper court. (Sec. 31) Criminal Penalties
An entity that enters into any anti-competitive
Note: A single violation of the PCA can give rise agreement under Section 14(a) and 14(b) shall,
to three (3) kinds of liabilities: (a) administrative, for each and every violation, be penalized by
(b) civil, and (c) criminal. imprisonment from 2-7 years and a fine of not
less than P50M but not more than P250M.
a. Administrative proceedings (Sec. 30)
Jurisdiction Note: Entities can be investigated and fined

It is within the PCC’s powers and functions to administratively by the PCC and can be
conduct administrative proceedings, impose proceeded against separately in the Regional
sanctions, fines or penalties for any non- Trial Courts for criminal violations. There is no
compliance with or breach of the PCA and its IRR double jeopardy as the case before the PCC is
(Sec. 12[e]) administrative in nature.
Administrative Penalties
c. Civil proceedings
In any investigation under Sections 14 (Anti-
Private Actions
Competitive Agreements), 15 (Abuse of
Any person who suffers direct injury by reason of
Dominant Position), 17 (Compulsory Notification), any violation of the PCA may institute a separate
and 20 (Prohibited Mergers and Acquisitions) of and independent civil action after the PCC has
the PCA, after due notice and hearing, the PCC completed the preliminary inquiry provided under
may impose administrative fines on the Sec. 31 of the Act. (Sec. 45)
violating entity, as follows:
(a) Up to P100M for the first offense
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d. Other matters of general application

4. DETERMINING THE RELEVANT
Confidentiality Rules MARKET
1. Confidentiality of Information
General Rule: Confidential business Definition
information submitted by entities, relevant to Market refers to the group of goods or services
any inquiry or investigation being conducted that are sufficiently interchangeable or
pursuant to the PCA as well as any substitutable and the object of competition, and
deliberation in relation thereto, shall not, in the geographic area where said goods or
any manner, be directly or indirectly services are offered.
disclosed, published, transferred, copied, or
disseminated. The PCC shall, to the extent Relevant market refers to the market in which a
possible, keep such information confidential particular good or service is sold and which is a
when it issues notices, bulletins, rulings and combination of the relevant product market and
other documents. (Sec. 34) the relevant geographic market.
“Confidential business information” Note: The relevant market is one considered for
refers to information which concerns or purposes of determining: i) whether or not an
relates to the operations, production, Entity is dominant, and ii) whether or not there will
sales, shipments, purchases, transfers, be a substantial lessening of competition. The act
identification of customers, inventories, of determining the relevant market is known as
or amount or source of any income, “Market Definition”
profits, losses, expenditures. (Sec. 4[e])
a. A relevant product market comprises
Exceptions: The Rule shall not apply if: all those goods and/or services which are
1. The notifying entity consents to the regarded as interchangeable or
disclosure; or substitutable by the consumer or the
2. The document or information is customer, by reason of the goods and/or
mandatorily required to be disclosed by services' characteristics, their prices and
law; or their intended use.
3. The document or information is
mandatorily required to be disclosed by a b. A relevant geographic market
valid order of a court of competent comprises the area in which the entity
jurisdiction or of a government or concerned is involved in the supply and
regulatory agency, including an demand of goods and services, in which
exchange. (Sec. 34) the conditions of competition are
sufficiently homogenous and which can
2. Confidentiality of Identity be distinguished from neighboring areas
General Rule: The identity of the persons because the conditions of competition
who provide information to the PCC under are different in those areas. (Sec. 4[k])
condition of anonymity, shall remain
confidential. (Sec. 34) c. Market refers to the group of goods or
services that are sufficiently
Exception: When such confidentiality is interchangeable or substitutable and the
expressly waived by these persons. (Sec. 34) object of competition, and the geographic
area where said goods or services are
Statute of Limitations offered.
Any action arising from a violation of any
provision of the PCA shall be forever barred Factors to determine the relevant market
unless commenced within five (5) years from: The following factors, among others, affecting the
a. For criminal actions: the time the substitutability among goods or services
violation is discovered by the offended constituting such market, and the geographic
party, the authorities, or their agents; and area delineating the boundaries of the market
b. For administrative and civil actions: shall be considered:
the time the cause of action accrues.
(Sec. 46)
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a. The possibilities of substituting the ii. There is power to Direct or

goods or services in question with govern the financial and
others of domestic or foreign origin, operating policies of the entity
considering the technological under a statute or agreement;
possibilities, the extent to which iii. There is power to Appoint or
substitutes are available to consumers
remove the majority of the
and the time required for such
substitution; members of the board of directors
b. The cost of distribution of the good or or equivalent governing body;
service, its raw materials, its iv. There is power to Cast the
supplements and substitutes from majority votes at meetings of
other areas and abroad, considering the board of directors or
freight, insurance, import duties, and equivalent governing body;
non-tariff restrictions; the restrictions v. There exists Ownership over or
imposed by economic agents or by their the right to use all or a significant
associations; and the time required to part of the assets of the entity;
supply the market from those areas;
vi. There exist Rights or contracts
c. The cost and probability of users or
consumers seeking other markets; which confer decisive influence
and on the decisions of the entity.
d. National, local or international (Sec. 25)
restrictions which limit the access by
users or consumers to alternate sources Dominance or a Dominant Position refers to a
of supply or the access of suppliers to position of economic strength that an entity or
alternate consumers. (Sec. 24, PCA and entities hold which makes it capable of
Rule 5, IRR) controlling the relevant market independently
from any or a combination of the following:
5. DETERMINING CONTROL OR competitors, customers, suppliers, or consumers.
(Sec. 4[g))
DOMINANCE OF MARKET
Note: Dominance can exist on the part of one
Control refers to the ability to substantially
entity (single dominance) or of two or more
influence or direct the actions or decisions of an
entities (collective dominance) (Rule 8, Sec. 1
entity, whether by contract, agency or otherwise.
of IRR)
(Sec. 4[f])
Factors to determine dominance
Factors to determine control
In determining whether an entity has market
In determining the control of an entity, the PCC
dominant position, the Commission shall consider
may consider the following:
the following: [SEE-ACCO]
a. Control is presumed to exist when the
a. The Share of the entity in the relevant
parent owns directly or indirectly, through
market and the ability of the entity to
subsidiaries, more than ½ of the voting
fix prices unilaterally or to restrict
power of an entity, unless in exceptional
supply in the relevant market;
circumstances, it can clearly be
b. The Existence of barriers to entry and
demonstrated that such ownership does
the elements which could foreseeably
not constitute control.
alter both the said barriers and the supply
from competitors;
b. Control also exists even when an entity
c. The Existence and power of its
owns one half (½) or less of the voting
competitors;
power of another entity when:
d. The possibility of Access by its
[VADCOR]
competitors or other entities to its
sources of inputs;
i. There is power over more than ½
e. The power of its Customers to switch
of the Voting rights by virtue of
to other goods or services;
an agreement with investors; f. Its recent Conduct;
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g. Other criteria established by the A. Prohibited Mergers and Acquisitions

regulations of this Act. (Sec. 27)
Definition
Dominance not prohibited Merger refers to the joining of two (2) or more
What is prohibited under Sec. 15 is not entities into an existing entity or to form a new
dominance per se but the abuse of that entity. (Sec. 4[j])
dominance.
Acquisition refers to the purchase of securities
Note: This is the essence of Sec. 27 which or assets, through contract or other means, for
provides that the Commission shall not consider the purpose of obtaining control by:
the acquiring, maintaining and increasing of (1) One (1) entity of the whole or part of
market share through legitimate means not another;
substantially preventing, restricting, or (2) Two (2) or more entities over another; or
lessening competition in the market such as (3) One (1) or more entities over one (1) or
but not limited to having superior skills, rendering more entities. (Sec. 4[a])
superior service, producing or distributing quality
products, having business acumen, and the Distinction Between Mergers Under the PCA
enjoyment and use of protected intellectual and Under the Revised Corporation Code
property rights as violative of the PCA.
Revised Corporation Philippine
Presumption of dominance Code (RCC) Competition
There is a rebuttable presumption of market Act
dominant position if the market share of an entity
in the relevant market is at least fifty percent Two (2) or more Merger refers to the
(50%), unless a new market share threshold is corporations may merge joining of two (2) or
determined by the Commission for that particular into a single corporation more entities into an
sector. (Sec. 27) which shall be one of existing entity or to
the constituent form a new entity.
corporations or may [Sec. 4(j)]
6. PROHIBITED ACTS
consolidate into a new
single corporation which
Prohibited Acts under the PCA [MAD]
shall be the
a. Anti-competitive Mergers and
consolidated
acquisitions (Sec. 20)
corporation. (Sec. 75,
b. Anti-competitive agreements (Sec. 14);
RCC)
and
c. Abuse of Dominant position (Sec. 15);
Based on the distinction above, the definitions
Substantial Lessening of Competition Test reveal that a “merger” or “acquisition” as
(SLC) contemplated under the PCA does not strictly
It is the general standard used by the PCC to refer to a merger or consolidation under the RCC.
determine whether there is a: Rather, it refers to any transaction that serves to
(1) prohibited merger/acquisition, transfer control of an economic entity to another,
(2) anti-competitive agreement not per se, or the joining of two such entities into a single
and business entity. Thus, the definition under the
(3) an abuse of dominant position. The RCC should not be applied to the PCA.
inquiry is whether the conduct or agreement
has the object or effect of substantially Note: Joint ventures, for purposes of the PCA,
preventing, restricting or lessening are covered under mergers. (Rule 2 [k] of IRR)
competition. (Secs. 14[b] and [c], 15, 20)
The PCC’s Merger Control Power
Note: Generally, “object” refers to the intent of The Commission shall have the power to review
the entity, while “effect” refers to the actual mergers and acquisitions based on factors
impact on competition. The existence of either deemed relevant by the Commission. (Sec. 16,
satisfies the requirement. PCA)
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Compulsory Notification Commission in the form and containing the

information specified in the regulations issued by
i. Notifying entities the Commission. (Sec. 17) However, the
threshold as provided in the PCA has already
Who must notify the PCC? been adjusted.
The parties to a merger or acquisition that satisfy
the thresholds for compulsory notification are Current Threshold
required to notify the Commission before the Size of Party: The aggregate annual gross
execution of the definitive agreements relating to revenues in, into or from the Philippines, or value
the transaction. (Sec. 2[a], Rule 4 of IRR) of the assets in the Philippines of the ultimate
parent entity of at least one of the acquiring or
These parties include: acquired entities, including that of all entities that
(1) All acquiring and acquired pre-acquisition
the ultimate parent entity controls, directly or
ultimate parent entities; or
indirectly, exceeds Six billion Pesos
(2) Any entity authorized by the ultimate
parent entity to file notification on its (Php6,000,000,000.00); and
behalf (Sec. 2[b], Rule 4 of IRR)
Size of Transaction: The value of the
Note: In the formation of a joint venture transaction exceeds Two Billion Four Hundred
(other than in connection with a merger Million Pesos (Php2,400,000,000.00) (PCC
or consolidation), the contributing entities Commission Resolution No. 02-2020, effective 01
shall be deemed acquiring entities, and March 2020)
the joint venture shall be deemed the
acquired entity. (Sec. 2[c], Rule 4 of IRR) Note: All mergers or acquisitions the definitive
agreements of which are executed prior to the
The parties shall not consummate the transaction annual adjustment of thresholds contemplated
before the expiration of the relevant periods herein are subject to the thresholds for
provided in this Rule. (Sec. 2[b], Rule 4 of IRR) notification that are applicable prior to the
adjustment. (PCC Memorandum Circular 18-001)
“Ultimate parent entity” is the juridical entity
that, directly or indirectly, controls a party to the iii. PCC Review By Notification
transaction, and is not controlled by any other
entity. (Rule 2[m] of IRR) (1) Phase 1 Review
Note: It is the Ultimate Parent Entities who must Parties to the merger or acquisition agreement
notify the PCC about the mergers conducted. subject to compulsory notification are prohibited
from consummating their agreement until thirty
ii. Covered transactions (30) days after providing notification to the PCC.
(Sec. 17, PCA) Basically, notification must be
PCA Current Threshold given prior to the consummation of the
(2015) (2020) agreement.
Size of Party: The covered entities must notify the PCC before
Covered Exceeds Php 6 Billion the execution of the definitive agreements
Merger Exceeds
relating to the transaction. (Sec. 2[a], Rule 4 of
and Php 1 Size of Transaction:
IRR)
Acquisition Billion Exceeds Php 2.4
Billion
Note: A definitive agreement sets out the
Basis of Change: Section 19, PCA complete and final terms and conditions of a
merger or acquisition, including the rights
What must be notified? and obligations between or among
Parties to a merger or acquisition agreement transacting parties.
wherein the value of the transaction exceeds one
billion pesos (P1,000,000,000.00) are prohibited This may be in the form of a share purchase
from consummating their agreement until thirty agreement, asset purchase agreement, joint
(30) days after providing notification to the venture agreement, or the like.
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The inclusion of conditions that must be (b) Effect of notification

fulfilled by a party or the parties to make the If within the relevant periods stipulated in
agreement effective against a party or the Sec. 17, the Commission determines that
parties will not negate the definitive nature of such agreement is prohibited and does
the agreement. (Philippine Competition not qualify for exemption, the
Commission Clarificatory Note No. 16-001) Commission may:
a. Prohibit the implementation of
Note: Phase 1 involves an assessment to the agreement;
determine if the notified merger raises any b. Prohibit the implementation of
competition concerns. (2.7., PCC Rules on the agreement unless and until it
Merger Procedure) The Commission may is modified by changes specified
determine whether the merger or acquisition falls by the Commission;
under the prohibition under Sec. 20, applying the c. Prohibit the implementation of
SLC test. the agreement unless and until
the pertinent party or parties
If, after the conduct of Phase 1, the PCC is unable enter into legally enforceable
to conclude that the merger does not raise agreements specified by the
competition concerns, it will provide the parties a Commission. (Sec. 18)
notice and request for additional information to
commence Phase 2. (2.8., PCC Rules on Merger Note: The PCC shall, from time to time, adopt
Procedure) and publish regulations stipulating exemptions
from the notification requirement. (Sec. 19)
(2) Phase 2 Review
Agreement deemed approved
Should the PCC deem it necessary, it may When the relevant periods of review have expired
request further information that are reasonably and no decision has been promulgated for
necessary and directly relevant to the prohibition whatever reason, the merger or acquisition shall
under Section 20 from the parties to the be deemed approved and the parties may
agreement before the expiration of the thirty (30)- proceed to implement or consummate it. (Sec.
day period. The issuance of such a request has 17)
the effect of extending the period within which the
agreement may not be consummated for an Motu Proprio Review
additional sixty (60) days, beginning on the day
after the request for information is received by the Section 12(a) of the PCA gives to the PCC the
parties. (Sec. 17) power to conduct inquiry and investigate cases
involving any violation of this Act and other
In no case shall the total period for review by the existing competition laws motu proprio.
PCC of the subject agreement exceed ninety (90) PCC, motu proprio or upon notification as
days from initial notification by the parties. (Sec. provided under these Rules, shall have the power
17) to review mergers and acquisitions having a
direct, substantial and reasonably
Note: Phase 2 is a more detailed and in-depth foreseeable effect on trade, industry, or
assessment of the merger. (2.9., PCC Rules on commerce in the Philippines, based on factors
Merger Procedure) deemed relevant by the Commission. (Sec. 1 of
IRR)
(3) Consequences of notification
Notwithstanding the notification requirement,
(a) Effect of non-notification nothing prevents the PCC from reviewing a
An agreement consummated in violation merger on its own initiative if there are
of this requirement to notify the reasonable grounds to believe that Section 17
Commission shall be considered void (Compulsory Notification) or Section 20
and subject the parties to an (Prohibited Mergers and Acquisitions) of the PCA
administrative fine of one percent has been or is likely to be infringed. (3.3., PCC
(1%) to five percent (5%) of the value Rules on Merger Procedure)
of the transaction. (Sec. 17)
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Note: The periods for Phases 1 and 2 shall not  Horizontal Agreements – exist between
apply in cases of motu propio review. (2.10., PCC firms (suppliers or consumers) at the
Rules on Merger Procedure) same level of the production chain. An
example of this is when firms agree on a
Summary of the Merger Review Process price. This shows that the combined firms
The merger review process starts: have influence over the price.
(a) By notification from the parties; or  Vertical Agreements – exists where
(b) Motu proprio by the PCC firms at different stages of the
production chain collude. Typically, it
Standard: Substantial Lessening of Competition happens between suppliers and users.
This may relate to price or other matters
Thresholds: Php5.6B (size of party), Php2.2B (i.e. quotas, exclusive dealings, etc.).
(size of transaction)
i. Per se violations
Overview of the Merger Review Procedure
Phase 1 Phase 2 The following agreements, between or among
30 calendar days 60 calendar days competitors, are per se prohibited:
Prohibit Prohibit (a) Restricting competition as to price, or
components thereof, or other terms of
Notification
trade (Price-fixing) (Sec. 14 [a]);

Approve Approve (b) Fixing price at an auction or in any form
unconditionally unconditionally of bidding including cover bidding, bid
Approve with Approve with suppression, bid rotation and market
conditions conditions allocation and other analogous practices
Deemed Deemed of bid manipulation; (Bid Rigging) (Sec.
approved approved 14 [a])
Note: A per se violation is always illegal. It is

Incontestability of Mergers
conclusively presumed to have been done with
General Rule: Merger or acquisition agreements
the objective of harming competition, whereas
that have received a favorable ruling from the
other violations still allow the introduction of
PCC may not be challenged under the Act. (Sec.
evidence to show that these acts were performed
23)
with no anti-competitive objectives in mind.
Exception: When such ruling was obtained on
Elements of Price-fixing
the basis of fraud or false material
1. There are two or more entities in the same
information. (Sec. 23)
horizontal market.
2. Basic element: An “agreement” is reached,
B. Anti-competitive Agreements
whether overt or tacit, which implies two or
more businesses must be involved in
Definition
restraint.
Agreement refers to any type or form of contract,
3. Intent to “fix” prices by restricting
arrangement, understanding, collective
competition as to price.
recommendation, or concerted action, whether
formal or informal, explicit or tacit, written or oral.
Example of Price-fixing
(Sec. 4[d])
After several months of competing against each
other, Company A and Company B, the only
Conduct refers to any type or form of
sellers of soda drinks in Quezon City, agreed to
undertaking, collective recommendation,
set the price of their products to PhP 100.00 per
independent or concerted action or practice,
bottle.
whether formal or informal. (Sec. 4[c])
Kinds of Bid Rigging
Note: Forms that Anti-Competitive Agreements
a. Cover bidding – A typical example of
may take:
this is when bidders submit bids that are
too high to be accepted. In this
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scenario, there is no intention to secure 4. The object or effect of the agreement

the acceptance of the bid but only to substantially prevents, restricts or
make it appear as though there was a lessen competition.
genuine competitive bidding.
b. Bid suppression – One or more Note: Violations of Section 14(a) and (b) are
competitors who are expected to bid, or the only ones in the PCA which carry a penalty
who have previously bid, agree to of imprisonment; such is imposed upon the
refrain from bidding or withdraw a responsible officers and directors of the entity.
previously submitted bid so that the (Sec. 30)
designated winning competitor's bid will
be accepted. (2) Agreements other than those specified in (a)
c. Bid rotation - All conspirators submit and (b) of Section 14 which have the object
bids but take turns on being the low or effect of substantially preventing,
bidder. The terms of the rotation may restricting or lessening competition shall
vary and depend on different also be prohibited. (Sec. 14[c])
circumstances. A strict bid rotation
pattern may suggest that collusion is Exception: Those which contribute to
taking place improving the production or distribution of
d. Market allocation - Agreements in which goods and services or to promoting technical
competitors divide markets among or economic progress, while allowing
themselves. In such schemes, competing consumers a fair share of the resulting
firms allocate specific customers or benefits, may not necessarily be deemed a
types of customers, products, or violation of the PCA. (Sec. 14[c])
territories among themselves. A typical
example of which is an allocation based Rule of Reason Violations
on geographic areas where competitors When a violation is labeled as Rule of
agree to sell only in certain areas and Reason, it cannot be said to be immediately
refuse to sell to, or quote intentionally illegal. The reason for this is that such
high prices to customers in areas conduct may possess reasonable
allocated to them.
commercial justifications, or otherwise
e. Other analogous practices
benefit consumers. In such cases, the
ii. Not per se violations competition commission must establish the
pro or anticompetitive effects first, usually
(1) The following agreements, between or among supported by evidence adduced by the
competitors, which have the object or effect supposed violator and affected parties.
of substantially preventing, restricting or
lessening competition shall be prohibited: The rule of reason violations under the PCA
(a) Setting, limiting, or controlling production, are Sec. 14 (c), because of its justification
markets, technical development, or proviso, and the acts of abuse of dominance
investment; under Section 15, likewise because each
(b) Dividing or sharing the market, whether violation allows presentation of justifying
by volume of sales or purchases, evidence.
territory, type of goods or services,
buyers or sellers or any other means. Note: Sec. 14 (c) is intended as a catch-all
clause to allow the PCC to investigate all
(Sec. 14[b])
violations no matter their manner of
performance.
Elements of a Sec. 14 (b) Violation
1. There is an agreement; Note: Since Section 14 (a) and (b) requires that
2. The parties are competitors or do not the entities be “competitors,” the entities covered
belong to a single economic entity; by the single economic entity doctrine cannot
3. The subject of the agreement is to either commit any violation under said subsections.
limit production, or divide or share the Section 14(c), however, captures agreements
market; between entities that are not competitors; hence,
it may be violated by single economic entities.
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Note: The standard of proof required to prove

iii. Determining existence of anti- anti-competitive agreements in the PCA is
competitive agreement or conduct Substantial Evidence which is ”that amount of
relevant evidence that a reasonable mind might
In determining whether an anti-competitive accept as adequate to support a conclusion”
agreement or conduct substantially prevents,
restricts, or lessens competition, the PCC, in C. Abuse of Dominant Position
appropriate cases, shall, inter alia: [RAPBA]
It shall be prohibited for one or more entities to
(a) Define the Relevant market allegedly abuse their dominant position by engaging in
affected by the anti-competitive conduct that would substantially prevent,
agreement or conduct, following the restrict or lessen competition,
principles laid out in Section 24 of the
PCA and Rule 5 of the PCA-IRR. Elements of Abuse of Dominant Position
(b) Determine if there is actual or 1. The entity must have market power;
potential Adverse impact on 2. The entity commits abusive conduct;
competition in the relevant market 3. The conduct must have a substantial
caused by the alleged agreement or foreclosure effect on the relevant market;
conduct, and if such impact is 4. There is no objective justification for the
substantial and outweighs the actual conduct.
or potential efficiency gains that result
from the agreement or conduct; Forms of Abuse of Dominant Position
(c) Adopt a broad and forward-looking (a) Selling goods or services below cost with
Perspective, recognizing future market the object of driving competition out of the
developments, any overriding need to relevant market (Predatory pricing)
make the goods or services available to (Sec. 15)
consumers, the requirements of large
investments in infrastructure, the In other words, monopolizing the market
requirements of law, and the need of our by imposing extremely low prices that its
economy to respond to international competitors won’t be able to compete as
competition, but also taking account of they would likely not profit anymore.
past behavior of the parties involved and
prevailing market conditions; Note: PCC shall consider whether the
(d) Balance the need to ensure that entity or entities have no such object and
competition is not prevented or the price established was in good faith to
substantially restricted and the risk meet or compete with the lower price of a
that competition efficiency, competitor in the same market selling the
productivity, innovation, or same or comparable product or service
development of priority areas or of like quality.
industries in the general interest of the
country may be deterred by overzealous (b) Imposing barriers to entry or committing
or undue intervention; and acts that prevent competitors from
(e) Assess the totality of evidence on growing within the market in an anti-
whether it is more likely than not that competitive manner (Imposing barriers
the entity has engaged in anti- to entry) (Sec. 15)
competitive agreement or conduct
including whether the entity's conduct In other words, it prevents the entry of
was done with a reasonable commercial new players in the industry and
purpose such as but not limited to gatekeeps the industry only to the
phasing out of a product or closure of a dominant firms.
business, or as a reasonable commercial
response to the market entry or conduct Exception: Those that develop in the
of a competitor. (Sec. 26, PCA and Rule market as a result of or arising from a
7 of IRR) superior product or process, business
acumen, or legal rights or laws; (Sec. 15)
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Elements (d) Setting prices or other terms or

1. Entity has a dominant position in conditions that discriminate
the relevant market; unreasonably between customers or
2. It imposes barriers to entry or sellers of the same goods or services,
committing acts that prevent where such customers or sellers are
competitors contemporaneously trading on similar
3. from growing within the relevant terms and conditions, where the effect
market; may be to lessen competition
4. Such conduct must have substantially (Price discrimination)
foreclosure effect on competition; (Sec. 15)
and
5. The barrier to entry is not an In other words, even though they involve
indispensable and natural result of the same products, there is a difference
the entity’s superior product or in the price and the basis of which is not
process, business acumen or legal associated with costs of supply.
rights or laws.
Exception: The following shall be
(c) Making a transaction subject to considered permissible price
acceptance by the other parties of other differentials (SD-CC)
obligations which, by their nature or 1. Socialized pricing for the less
according to commercial usage, have no fortunate sector of the economy;
connection with the transaction (Tying 2. Price differential which reasonably or
and bundling); (Sec. 15) approximately reflect Differences in
the cost of manufacture, sale, or
In other words, the offer to sell of
delivery resulting from differing
Company 1 is accompanied by the
condition that the customer is either methods, technical conditions, or
bound to buy from Company 2 or to not quantities in which the goods or
buy from any of its competitors. services are sold or delivered to the
buyers or sellers;
Elements of Tying 3. Price differential or terms of sale
1. The entity has a dominant position in offered in response to the
the relevant market; Competitive price of payments,
2. It makes a transaction subject to services or changes in the facilities
acceptance of other obligations furnished by a competitor; and
having no connection with the
4. Price changes in response to
transaction;
3. The conduct has foreclosure effect; Changing market conditions,
4. The entity has no objective marketability of goods or services, or
justification for its conduct. volume; (Sec. 15)
Elements of Bundling Elements

1. The entity has a dominant position in 1. The entity has a dominant position in
the relevant market; the relevant market;
2. There must be at least two sets of 2. The entity discriminates between
products; customers or sellers of the same
3. Both products have no direct products;
connection with each other; 3. The discrimination is in the form of
4. The supply of the main product to the difference in price, terms, or
customer is made dependent on the conditions, when such customers or
purchase of the secondary product sellers contemporaneously trade on
by such customer; similar terms and conditions;
5. The conduct has a foreclosure effect 4. There is no justifiable reason for such
on competition. discrimination;
5. The discrimination must have a
reasonable possibility to
Page 390 of 393

ATENEO CENTRAL
substantially prevent, restrict, lessen (f) Making supply of particular goods or

competition; services dependent upon the purchase of
6. It does not fall under any of the block other goods or services from the supplier
exemptions. which have no direct connection with the
main goods or services to be supplied
(e) Imposing restrictions on the lease or (Bundling) (Sec. 15)
contract for sale or trade of goods or
services concerning where, to whom, or In other words, there is an inclusion of an
in what forms goods or services may be unrelated product together with the
sold or traded, such as fixing prices, purchase of another product.
giving preferential discounts or rebate
upon such price, or imposing conditions (g) Directly or indirectly imposing unfairly low
not to deal with competing entities, where purchase prices for the goods or services
the object or effect of the restrictions is to of, among others, marginalized
prevent, restrict or lessen competition agricultural producers, fisherfolk, micro-,
substantially (Exclusive dealing) (Sec. small-, medium-scale enterprises, and
15) other marginalized service providers and
producers (Unfair purchasing pricing)
In other words, there are certain (Sec. 15)
exclusive stipulations given to customers
which then restricts the competitions as In other words, there is an imposition of
other firms won’t be able to offer the an extremely low price where the
same. competitor might not be able to give as
they are marginalized, otherwise they
Note: Nothing in the Act shall prohibit or would not profit from the business.
render unlawful: (Sec. 15)
1. Permissible franchising, licensing, Elements
exclusive merchandising or 1. The entity has a dominant position
in the relevant market;
exclusive distributorship agreements
2. It must directly or indirectly impose
such as those which give each party unfairly low purchase prices for the
the right to unilaterally terminate the goods or services;
agreement; or 3. Its counterparty must be considered
2. Agreements protecting intellectual a marginalized supplier;
property rights, confidential 4. The conduct has foreclosure effect.
information, or trade secrets.
(h) Directly or indirectly imposing unfair
Elements purchase or selling price on their
1. The entity has a dominant position in competitors, customers, suppliers or
the relevant market; consumers (Unfair selling pricing)
2. In a lease or contract of sale, he (Sec. 15)
entity imposes restrictions
concerning where, to whom, or in In other words, imposing a selling price
what forms products may be sold or that other firms cannot compete.
traded;
3. Such restrictions pertain to prices, Exception: Prices that develop in the
giving preferential discounts or market as a result of or due to a superior
rebate upin such price; product or process, business acumen, or
4. Such restrictions have anti- legal rights or laws shall not be
competitive effect; considered unfair prices. (Sec. 15)
5. The case is not among the block
exemptions; (i) Limiting production, markets or technical
6. The entity has no objective development to the prejudice of
justification for its conduct. consumers (Output restriction) (Sec.
15)
Page 391 of 393

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In other words, the seller lowers the Tying and Must substantially prevent,
output to drive up the cost of the product. bundling restrict or lessen competition.
(Sec. 15[c])
Exception: Limitations that develop in
the market as a result of or due to a
superior product or process, business
acumen, or legal rights or laws shall not Price Permissible price differentials:
be a violation of this Act. (Sec. 15) discrimination (a) Socialized pricing for the
less fortunate sector of
Nothing in the PCA shall be construed or the economy;
interpreted as a prohibition on the following, if (b) Price differential which
done through legitimate means that do not reasonably or
substantially prevent, restrict or lessen approximately reflect
competition: Differences in the cost of
a. Having a dominant position in a relevant manufacture, sale, or
market or delivery resulting from
differing methods,
b. Acquiring, maintaining and increasing
technical conditions, or
market share (Sec. 15) quantities in which the
goods or services are sold
The following conducts may not necessarily or delivered to the buyers
be considered an abuse of dominant position: or sellers;
a. Those which contribute to improving (c) Price differential or terms
production or distribution of goods or of sale offered in
services within the relevant market; response to the
b. Those which contribute to promoting Competitive price of
technical and economic progress while payments, services or
allowing consumers a fair share of the changes in the facilities
resulting benefit. (Sec.15) furnished by a competitor;
and
Abuse of Dominant Position (d) Price changes in
Summary of Exceptions as Defenses response to Changing
market conditions,
ACT DEFENSE marketability of goods or
services, or volume; (Sec.
Predatory (a) Entity has no object of 15[d])
pricing driving competition out;
Exclusive (a) Object or effect of the
and
dealing restrictions must be to to
(b) The price established was
prevent, restrict or lessen
in good faith to meet or
competition substantially
compete with the lower
(b) Permissible franchising,
price of a competitor in the
licensing, exclusive
same market selling the
merchandising or
same or comparable
exclusive distributorship
product or service of like
agreements; or
quality. (Sec. 15[a])
(c) Agreements protecting IP
Imposing The barriers to entry developed rights, confidential
barriers to in the market as a result of or information, or trade
entry/competiti arising from a superior product secrets; (Sec. 15[e])
on growth or process, business acumen,
Bundling If the goods have a direct
hindrance or legal rights or laws (Sec.
15[b]) connection with the main goods
or services to be supplied (Sec.
15[f])
Page 392 of 393

ATENEO CENTRAL
Unfair Prices must be unfairly low. The Commission’s order exempting the relevant
purchasing (Sec. 15[g]) entity or group of entities under this section shall
pricing be made public. Conditions may be attached to
the forbearance if the Commission deems it
Unfair selling Prices that develop in the appropriate to ensure the long-term interest of
pricing market as a result of or due to a consumers. (Sec. 28)
superior product or process,
business acumen or legal rights In the event that the basis for the issuance of the
or laws shall not be considered exemption order ceases to be valid, the order
unfair prices (Sec. 15[h]) may be withdrawn by the Commission. (Sec. 28
and Rule 9, Sec. 1 of IRR)
Output Limitations that develop in the
restriction market as a result of or due to a ————- end of topic ————-
superior product or process,
business acumen or legal rights
or laws shall not be a violation
(Sec. 15[i])
7. FORBEARANCE BY THE PCC
The Commission, motu proprio or upon

application, prior to its initiation of an inquiry, may
forbear from applying the provisions of the PCA,
for a limited time, in whole or in part, in all or
specific cases, on an entity or group of entities, if
in its determination: [NICE]
a. Enforcement is Not necessary to the
attainment of the policy objectives of
the PCA;
b. Forbearance will neither Impede
competition in the market where the
entity or group of entities seeking
exemption operates nor in related
markets;
c. Forbearance is Consistent with public
interest and the benefit and welfare of
the consumers; and
d. Forbearance is justified in Economic
terms. (Sec. 28 and Rule 9, Sec. 1 of
IRR)
Maximum period and extensions

Forbearance will be granted for a maximum
period of one (1) year. Any extension to the
period will have to be expressly approved by the
PCC. Any extension of the duration of an
exemption shall not be longer than one year.
(Rule 9, Sec. 1 of IRR)
Public hearing
A public hearing shall be held to assist the
Commission in making this determination. (Sec.
28)
Page 393 of 393

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PHILIPPINE COPYRIGHT

THE ATENEO CENTRAL BAR OPERATIONS 2020-2021

All Rights Reserved

This material is an intellectual creation of the Ateneo Central Bar Operations

Ad maiorem Dei gloriam.

KATHLEEN KAE Z. ENDOZO MEG V. BUENSALIDO

CARLOS ROSAURO N. MANALO

DEAN JOSE MARIA G. HOFILENA ATTY. TAKAHIRO KENJIE C. AMAN

CARLO ANTON J. DEL MUNDO ALIYAH ROSH DY TIMOTHY JACOB J. PALAFOX

ISABELLE BEATRIZ DLS. GINEZ RIVER M. GADDI LUIS TEODORO B. PASCUA

ROSEANNE REALUBIN MIKKO RINGIA ANA SAMANTHA ISABELA PARUNGAO

JOSEPH BILL P. QUINTOS STEFI MONIKA S. SUERO

AINA RAE L. CORTEZ CHRISTIAN GIO R. SENARLO

DONN MARIE ISABELLE BALINA MELISSA GABRIELLE P. REMULLA

YVES PETER CARLO D. MEDINA THERESE ANNE C. ESPINOSA

EUNICE A. MALAYO MEG V. BUENSALIDO

DEAN JOSE MARIA G. HOFILENA ATTY. TAKAHIRO KENJIE C. AMAN

JONAH MAE M. SAMPANG JUSTIN NICHOLAS T. SY

TIMOTHY JACOB J. PALAFOX ALIYAH ROSH DY CARLO ANTON J. DEL MUNDO

MARIA ANTOINETTE C. DUQUE CHAVI LEVINE REYES KATRINA ANGELA D. LOYOLA

A. CONCEPT OF INSURANCE ................................................................................................................................... 3

II. PRE-NEED ......................................................................................................................................................... 47

III. TRANSPORTATION LAW .................................................................................................................................. 52

A. COMMON CARRIERS ........................................................................................................................................ 53

1. EXEMPTING CAUSES .........................................................................................................................................55

IV. BUSINESS ORGANIZATIONS ............................................................................................................................ 76

A. CAUSES OF DISSOLUTION (ART. 1830) ......................................................................................................90

N. TRUST FUND DOCTRINE ..........................................................................................................................125

14. INVESTIGATIONS, OFFENSES, AND PENALTIES .............................................................................................182

V. SECURITIES .................................................................................................................................................... 189

A. STATE POLICY ................................................................................................................................................. 189

VI. BANKING ...................................................................................................................................................... 205

A. THE NEW CENTRAL BANK ACT ........................................................................................................................ 206

VII. INTELLECTUAL PROPERTY ............................................................................................................................ 239

A. INTELLECTUAL PROPERTY RIGHTS IN GENERAL ............................................................................................... 240

C. INDUSTRIAL APPLICABILITY .....................................................................................................................242

VIII. SPECIAL LAWS............................................................................................................................................. 270

A. SECURED TRANSACTIONS .............................................................................................................................. 271

D. DOMESTIC MARKET ENTERPRISE ............................................................................................................335

I. INSURANCE I. CLAIMS SETTLEMENT AND

B. ELEMENTS OF AN INSURANCE J. BUSINESS OF INSURANCE;

C. CHARACTERISTICS AND NATURE K. INSURANCE COMMISSIONER AND

G. PERFECTION OF THE CONTRACT

A. CONCEPT OF INSURANCE not as merely incidental to any other

The fact that no profit is derived from the making

which should be renewable every 3

[A married woman] may also take out insurance

Insurance Contract vs. Gambling Contract

In both cases, one party promises to pay a Contract of Indemnity

Agreement whereby a party called the surety

E. VARIABLE CONTRACTS c. Any person under a legal obligation to

d. Any person upon whose life any estate or

Exception: Life Insurance Beneficiary

a. Himself, of his spouse and of his children; Designation of Beneficiary

pecuniary interest over the property is always Exceptions

When Interest Must Exist 24 A transfer of interest by one of

when the sum total of of the insured’s insurer’s risk.

G. PERFECTION OF THE CONTRACT OF FORM OF THE CONTRACT

days after the issuance of such cover Rider

deposit and does not make the policy

A provision that the policyholder shall be entitled 5. REFUND OF PREMIUMS

H. RESCISSION OF INSURANCE Proof of Fraud in Concealment

Good faith is not a defense. (Saturnino vs Phil.