FACULTY OF CIVIL LAW (1734)

COMMERCIAL LAW

2022 GOLDEN NOTES

FACULTY OF CIVIL LAW
UNIVERSITY OF SANTO TOMAS
MANILA
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 Faculty of Civil Law (1734)

ACADEMIC YEAR 2021-2022

CIVIL LAW STUDENT COUNCIL
NATHAN RAPHAEL D.L. AGUSTIN PRESIDENT
STEPHEN FLOYD A. GOPEZ VICE PRESIDENT INTERNAL
NICOLO B. BONGOLAN VICE PRESIDENT EXTERNAL
PATRICIA INGRID M. SEE SECRETARY
JULIENNE CELINE G. OGAYON TREASURER
JANNODIN D. DIPATUAN AUDITOR
IVAN ARNIE C. QUIAMCO PUBLIC RELATIONS OFFICER
KAREN DARYL L. BRITO CHIEF-OF-STAFF

UST BAR-OPS

SARAH ANGELA D. EVA CHAIRPERSON

JUSTINE RENEE GERVACIO VICE-CHAIRPERSON
MA. ANDREA D. CABATU SECRETARY
JAN YSABEL U. DE LEON HEAD, PUBLIC RELATIONS OFFICER
PAULINNE STEPHANY G. SANTIAGO HEAD, FINANCE COMMITTEE
KAREN DARYL L. BRITO HEAD, HOTEL ACCOMMODATIONS COMMITTEE
RALPH DOMINIC V. MARTINEZ HEAD, LOGISTICS COMMITTEE
JEDIDIAH R. PADUA SENIOR MEMBER
SABINA MARIA H. MABUTAS SENIOR MEMBER
JOSEPHINE GRACE W. ANG SENIOR MEMBER
REBECCA JOY M. MALITAO SENIOR MEMBER
JOHN FREDERICK A. NOJARA SENIOR MEMBER

ATTY. AL CONRAD B. ESPALDON

ADVISER
 Faculty of Civil Law (1734)

ACADEMICS COMMITTEE 2022

FRANCINE BLAISE M. LOJA
JOANNA NICOLE A. PAZ
MARC GABRIEL A. ABELLA
KIARA LOUISE T. BALIWAG
DANIELLE B. BARANDA
MA. CARMINA A. DIETA
DAINIELE RENEE R. FAJILAGUTAN
GEORJHIA CZARINAH Q. MALALUAN
MARIA CRISANTA M. PALOMA
MIKAELA CECILLE S. SILVERIO
JERICHO SIMON H. DU
SECRETARY GENERAL
SECRETARY GENERAL
EXECUTIVE COMMITTEE for LEGAL ETHICS
EXECUTIVE COMMITTEE for CRIMINAL LAW
EXECUTIVE COMMITTEE for LABOR LAW AND
SOCIAL LEGISLATION
EXECUTIVE COMMITTEE for CIVIL LAW
EXECUTIVE COMMITTEE for REMEDIAL LAW
EXECUTIVE COMMITTEE for COMMERCIAL LAW
EXECUTIVE COMMITTEE for POLITICAL LAW
EXECUTIVE COMMITTEE for TAXATION LAW
COVER DESIGN ARTIST

COMMERCIAL LAW COMMITTEE 2022

EPHRAIM P. BIE
COMMERCIAL LAW SUBJECT HEAD

PAULINE ABEGAIL P. FRIVALDO ASST. HEAD,

INSURANCE, TRANSPORTATION LAW, and ANTI-
MONEY LAUNDERING ACT

ANGELYNN C. SALAZAR ASST. HEAD,

JEAN ALMIRA S. BULONG
ANGELICA M. TAMAYO
INTELLECTUAL PROPERTY LAW, ELECTRONIC
COMMERCE ACT, and FINANCIAL
REHABILITATION AND INSOLVENCY ACT
ASST. HEADS, CORPORATION LAW
 Faculty of Civil Law (1734)

MEMBERS
PRINCESS MONIQUE M. AGPAOA ELLINE M. MANEJA
SOFIA MARIE B. CLARIÑO PRECIOUS JOY D. PACIONELA
IANA CASSANDRA, Y. ESMILE ANGELICA ROSCEA S. QUIAMBAO
MOREL DEI G. FALGUI MONIQUE E. RENS
JAMIE ANNE G. JORGE BRYAN JAY L. SANTOS
PIA AILA D. MARTINEZ

ATTY. MARIAN JOANNE K. CO-PUA

ATTY. ALLAN B. GEPTY
ATTY. AMADO E. TAYAG
ADVISERS
 Faculty of Civil Law (1734)

FACULTY OF CIVIL LAW

UNIVERSITY OF SANTO TOMAS

ACADEMIC OFFICIALS
ATTY. NILO T. DIVINA REV. FR. ISIDRO C. ABAÑO, O.P.
DEAN REGENT

ATTY. ARTHUR B. CAPILI

FACULTY SECRETARY

ATTY. ELGIN MICHAEL C. PEREZ

LEGAL COUNSEL
UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC

JUDGE PHILIP A. AGUINALDO

SWDB COORDINATOR

LENY G. GADIANA, R.G.C.

GUIDANCE COUNSELOR
 Faculty of Civil Law (1734)

OUR DEEPEST APPRECIATION TO OUR

MENTORS AND INSPIRATION

Dean Nilo T. Divina Atty. Marian Joanne K. Co-Pua

Dean Amado L. Dimayuga Atty. Allan B. Gepty

Dean Eduardo Juan F. Abella Atty. Jacinto D. Jimenez

Justice Japar B. Dimaampao Atty. Albert R. Palacios

Justice Gabriel T. Robeniol Atty. Mercy Jane B. Paras-Leynes

Judge Maria Ella Cecilia D. Escalante Atty. Teofilo R. Ragadio

Judge Edith Cynthia A. Wee Atty. Amado E. Tayag

Atty. Emma Ruby Aguilar-Aprado Atty. Janna Mae B. Tecson

Atty. Fe T. Becina-Macalino Atty. Maria Zarah R. Villanueva-

Castro

For being our guideposts in understanding the intricate sphere of Commercial Law.
– Academics Committee 2022
 DISCLAIMER

THE RISK OF USE OF THIS BAR

REVIEW MATERIAL SHALL BE
BORNE BY THE USER
 TABLE OF CONTENTS

I. INSURANCE.................................................................................................................................................................................. 1

A. BASIC CONCEPTS ......................................................................................................................................................................................1

1. WHAT MAY BE INSURED ................................................................................................................................................................. 4
2. INSURABLE INTEREST...................................................................................................................................................................... 5
3. DOUBLE INSURANCE AND OVERINSURANCE..................................................................................................................... 14
4. NO FAULT, SUICIDE, AND INCONTESTABILITY CLAUSES ............................................................................................. 19
B. PERFECTION OF THE INSURANCE CONTRACT ....................................................................................................................... 24
C. RIGHTS AND OBLIGATIONS OF PARTIES ................................................................................................................................... 34
D. RESCISSION OF INSURANCE CONTRACTS ................................................................................................................................. 39

II. TRANSPORTATION LAW .................................................................................................................................................... 50

A. COMMON CARRIER ............................................................................................................................................................................... 50

1. CONCEPT .............................................................................................................................................................................................. 50
2. COMMON CARRIER vs. PRIVATE CARRIER .......................................................................................................................... 53
3. DILIGENCE REQUIRED OF COMMON CARRIERS ............................................................................................................... 53
B. OBLIGATIONS AND LIABILITIES .................................................................................................................................................... 56
1. VIGILANCE OVER GOODS .............................................................................................................................................................. 59
2. SAFETY OF PASSENGERS .............................................................................................................................................................. 64
C. DEFENSES AVAILABLE TO A COMMON CARRIER .................................................................................................................. 70
1. PROOF OF NEGLIGENCE................................................................................................................................................................ 70
2. DUE DILIGENCE IN THE SELECTION AND SUPERVISION OF EMPLOYEES ........................................................... 71
3. FORTUITOUS EVENT ...................................................................................................................................................................... 71
4. CONTRIBUTORY NEGLIGENCE .................................................................................................................................................. 73
5. DOCTRINE OF LAST CLEAR CHANCE ...................................................................................................................................... 74
D. EXTENT OF LIABILITY ........................................................................................................................................................................ 75
1. RECOVERABLE DAMAGES ............................................................................................................................................................ 75
2. STIPULATIONS LIMITING LIABILITY ...................................................................................................................................... 76
3. LIMITATIONS UNDER THE MONTREAL CONVENTION .................................................................................................. 80

III. CORPORATION LAW .......................................................................................................................................................... 91

A. GENERAL PRINCIPLES ........................................................................................................................................................................ 91

1. NATIONALITY OF CORPORATIONS .......................................................................................................................................... 97
a. CONTROL TEST ............................................................................................................................................................................ 97
b. GRANDFATHER RULE ............................................................................................................................................................... 98
2. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY .................................................................................................. 103
3. DOCTRINE OF PIERCING THE CORPORATE VEIL ........................................................................................................... 112
B. DE FACTO CORPORATIONS VERSUS CORPORATIONS BY ESTOPPEL ......................................................................... 120
C. CORPORATE POWERS ...................................................................................................................................................................... 123
1. HOW POWERS ARE EXERCISED ............................................................................................................................................. 123
a. ULTRA VIRES DOCTRINE ...................................................................................................................................................... 139
b. TRUST FUND DOCTRINE ...................................................................................................................................................... 145
D. BOARD OF DIRECTORS AND TRUSTEES.................................................................................................................................. 147
1. BASIC PRINCIPLES ........................................................................................................................................................................ 147
a. DOCTRINE OF CENTRALIZED MANAGEMENT ........................................................................................................... 147
 b. BUSINESS JUDGMENT RULE ................................................................................................................................................148
2. TENURE AND QUALIFICATIONS OF DIRECTORS OR TRUSTEES ............................................................................. 149
3. ELECTION AND REMOVAL OF DIRECTORS OR TRUSTEES ......................................................................................... 153
4. DUTIES, RESPONSIBILITIES, AND LIABILITIES FOR UNLAWFUL ACTS ............................................................... 158
E. STOCKHOLDERS AND MEMBERS ................................................................................................................................................171
1. RIGHTS AND OBLIGATIONS OF A STOCKHOLDER AND MEMBER .......................................................................... 171
a. DOCTRINE OF EQUALITY OF SHARES .............................................................................................................................172
2. PARTICIPATION IN MANAGEMENT ......................................................................................................................................176
a. PROXY.............................................................................................................................................................................................177
b. VOTING TRUST ..........................................................................................................................................................................179
c. CASES WHEN STOCKHOLDERS’ ACTION IS REQUIRED .......................................................................................... 182
i. BY A MAJORITY VOTE .........................................................................................................................................................183
ii. BY A TWO-THIRDS VOTE.................................................................................................................................................183
iii. BY CUMULATIVE VOTING ..............................................................................................................................................186
3. PROPRIETARY RIGHTS ................................................................................................................................................................186
a. RIGHT TO DIVIDENDS.............................................................................................................................................................186
b. RIGHT OF APPRAISAL.............................................................................................................................................................187
c. RIGHT TO INSPECT...................................................................................................................................................................189
d. PREEMPTIVE RIGHT ...............................................................................................................................................................192
e. RIGHT OF FIRST REFUSAL ....................................................................................................................................................193
4. REMEDIAL RIGHTS........................................................................................................................................................................193
5. INTRA-CORPORATE DISPUTES (INDIVIDUAL vs. REPRESENTATIVE vs. DERIVATIVE SUITS) ................. 194
F. CAPITAL STRUCTURE........................................................................................................................................................................203
1. SHARES OF STOCK .........................................................................................................................................................................204
a. NATURE OF SHARES OF STOCK .........................................................................................................................................205
b. CONSIDERATION FOR SHARES OF STOCK ....................................................................................................................206
c. WATERED STOCKS ...................................................................................................................................................................210
d. SITUS OF SHARES OF STOCK ...............................................................................................................................................211
e. CLASSES OF SHARES OF STOCK .........................................................................................................................................211
2. CERTIFICATE OF STOCK .............................................................................................................................................................216
a. NATURE OF THE CERTIFICATE ..........................................................................................................................................216
b. UNCERTIFICATED SHARES ..................................................................................................................................................217
c. NEGOTIABILITY; REQUISITES FOR VALID TRANSFER OF STOCKS ................................................................... 217
d. ISSUANCE .....................................................................................................................................................................................220
e. LOST OR DESTROYED CERTIFICATES .............................................................................................................................221
3. DISPOSITION AND ENCUMBRANCE OF SHARES .............................................................................................................222
a. SALE OF SHARES .......................................................................................................................................................................222
b. ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES ....................................................................................... 223
c. REQUISITES OF A VALID TRANSFER ...............................................................................................................................223
d. INVOLUNTARY DEALINGS....................................................................................................................................................223
G. DISSOLUTION AND LIQUIDATION ..............................................................................................................................................224
1. MODES OF DISSOLUTION ...........................................................................................................................................................225
a. VOLUNTARY AND INVOLUNTARY DISSOLUTION .....................................................................................................225
2. METHODS OF LIQUIDATION .....................................................................................................................................................229
H. OTHER CORPORATIONS ..................................................................................................................................................................233
1. CLOSE CORPORATION .................................................................................................................................................................233
2. NON-STOCK CORPORATION .....................................................................................................................................................236
3. FOREIGN CORPORATIONS .........................................................................................................................................................241
a. WHAT CONSTITUTES “DOING BUSINESS” ....................................................................................................................242
b. NECESSITY OF A LICENSE TO DO BUSINESS ...............................................................................................................244
 c. REQUISITES FOR ISSUANCE OF LICENSE ...................................................................................................................... 245
d. RESIDENT AGENT .................................................................................................................................................................... 247
e. PERSONALITY TO SUE AND SUABILITY ........................................................................................................................ 249
4. ONE-PERSON CORPORATIONS ............................................................................................................................................... 253
I. MERGERS AND CONSOLIDATIONS .............................................................................................................................................. 257
1. CONCEPT .......................................................................................................................................................................................... 257
2. EFFECTS AND LIMITATIONS.................................................................................................................................................... 263

IV. INTELLECTUAL PROPERTY CODE ............................................................................................................................... 267

A. PATENTS ................................................................................................................................................................................................ 275

1. PATENTABLE VS. NON-PATENTABLE INVENTIONS .................................................................................................... 276
2. OWNERSHIP OF A PATENT....................................................................................................................................................... 280
3. GROUNDS FOR CANCELLATION OF A PATENT ............................................................................................................... 282
4. PATENT INFRINGEMENT .......................................................................................................................................................... 287
B. TRADEMARKS ...................................................................................................................................................................................... 292
1. MARKS vs. COLLECTIVE MARKS vs. TRADE NAMES ...................................................................................................... 292
2. ACQUISITION OF OWNERSHIP ................................................................................................................................................ 295
a. CONCEPT OF ACTUAL USE ................................................................................................................................................... 297
b. EFFECT OF REGISTRATION ................................................................................................................................................. 301
3. WELL-KNOWN MARKS ............................................................................................................................................................... 305
4. RIGHTS CONFERRED BY REGISTRATION .......................................................................................................................... 307
5. CANCELLATION OF REGISTRATION ..................................................................................................................................... 308
6. TRADEMARK INFRINGEMENT ................................................................................................................................................ 310
7. UNFAIR COMPETITION............................................................................................................................................................... 313
C. COPYRIGHT ........................................................................................................................................................................................... 318
1. COPYRIGHTABLE WORKS ......................................................................................................................................................... 319
2. NON-COPYRIGHTABLE WORKS .............................................................................................................................................. 320
3. RIGHTS CONFERRED BY COPYRIGHT .................................................................................................................................. 322
4. OWNERSHIP OF A COPYRIGHT ............................................................................................................................................... 326
5. LIMITATIONS ON COPYRIGHT ................................................................................................................................................ 329
6. DOCTRINE OF FAIR USE ............................................................................................................................................................. 331
7. COPYRIGHT INFRINGEMENT ................................................................................................................................................... 334

V. THE ANTI-MONEY LAUNDERING ACT OF 2001 ........................................................................................................ 340

A. COVERED INSTITUTIONS AND THEIR OBLIGATIONS ....................................................................................................... 340

B. COVERED AND SUSPICIOUS TRANSACTIONS ....................................................................................................................... 342
C. SAFE HARBOR PROVISION ............................................................................................................................................................. 344
D. WHEN IS MONEY LAUNDERING COMMITTED (INCLUDING PREDICATE CRIMES) ............................................ 345
E. AUTHORITY TO INQUIRE INTO BANK DEPOSITS ................................................................................................................ 347
F. FREEZING AND FORFEITURE........................................................................................................................................................ 350

VI. ELECTRONIC COMMERCE ACT OF 2000 .................................................................................................................... 357

A. LEGAL RECOGNITION OF ELECTRONIC DATA MESSAGES, DOCUMENTS, AND SIGNATURES ....................... 357
B. PRESUMPTION RELATING TO ELECTRONIC SIGNATURES ............................................................................................ 358
C. ADMISSIBILITY AND EVIDENTIAL WEIGHT OF ELECTRONIC DATA MESSAGE OR ELECTRONIC
DOCUMENT ................................................................................................................................................................................................ 359
D. OBLIGATION OF CONFIDENTIALITY......................................................................................................................................... 360
VII. FINANCIAL REHABILITATION, INSOLVENCY, LIQUIDATION and SUSPENSION OF PAYMENTS .......... 361

A. BASIC CONCEPTS ................................................................................................................................................................................362

1. REHABILITATION ..........................................................................................................................................................................362
2. INSOLVENT .......................................................................................................................................................................................362
3. LIQUIDATION ...................................................................................................................................................................................362
4. SUSPENSION OF PAYMENTS.....................................................................................................................................................363
B. MODES OF REHABILITATION........................................................................................................................................................367
1. COURT-SUPERVISED REHABILITATION .............................................................................................................................367
a. VOLUNTARY VS. INVOLUNTARY .......................................................................................................................................367
b. COMMENCEMENT ORDER (INCLUDING STAY ORDER).......................................................................................... 368
c. REHABILITATION RECEIVER AND MANAGEMENT COMMITTEE ...................................................................... 375
d. DETERMINATION OF CLAIMS.............................................................................................................................................378
e. REHABILITATION PLAN ........................................................................................................................................................379
f. CREDITOR APPROVAL AND CONFIRMATION ..............................................................................................................380
g. FAILURE OF REHABILITATION ..........................................................................................................................................381
2. PRE-NEGOTIATED REHABILITATION ..................................................................................................................................381
a. HOW INITIATED ........................................................................................................................................................................381
b. PERIOD AND EFFECT OF APPROVAL ..............................................................................................................................381
3. OUT-OF-COURT OR INFORMAL RESTRUCTURING AGREEMENT OR REHABILITATION PLAN ................ 382
a. MINIMUM REQUIREMENTS .................................................................................................................................................382
b. STANDSTILL PERIOD ..............................................................................................................................................................382
c. CRAM DOWN EFFECT..............................................................................................................................................................382
C. LIQUIDATION ........................................................................................................................................................................................384
1. VOLUNTARY LIQUIDATION VS. INVOLUNTARY LIQUIDATION VS. CONVERSION .......................................... 384
2. PROCEDURE .....................................................................................................................................................................................389
a. LIQUIDATION ORDER; EFFECTS ........................................................................................................................................389
3. DETERMINATION OF CLAIMS ..................................................................................................................................................390
D. SUSPENSION OF PAYMENTS; SUSPENSION OF PAYMENT ORDER ............................................................................. 392
 Insurance
I. INSURANCE
(P.D. No. 162, as amended by R.A. No. 10607)
Laws Governing Contracts of Insurance in the
Philippines
1. Insurance Code (IC) (R.A. No. 10607, enacted on
23 July 2012, further amending P.D. No. 612);
2. New Civil Code (NCC);
3. Special Laws.
A. BASIC CONCEPTS
Contract of Insurance
It is an agreement whereby one undertakes for a
consideration to indemnify another against loss,
damage or liability arising from an unknown or
contingent event. (Sec. 2(a), Insurance Code [IC])
A contract of insurance, to be binding from the date
of application, must have been a completed
contract. (Perez v. CA, G.R. No. 112329, 28 Jan. 2000)
Thus, it must have all the essential elements of a
valid contract: (SM-Co-Me)
1. Subject Matter in which the insured has an
insurable interest;
2. Consideration, which is the premium paid by
the insured, for the insurer’s promise to
indemnify the former upon the happening of
the event or peril insured against; and
3. Meeting of the minds of the parties. (Art. 1318,
New Civil Code)
Event or Peril Insured Against
It is any contingent or unknown event, whether past
or future, which may damnify a person having an
insurable interest, or create a liability against him
may be insured, subject to the provisions of Chapter
1 UNIVERSITY OF SANTO TOMAS
I of the Insurance Code.
“Doing an insurance business” or “transacting
an insurance business”
The term “doing an insurance business” or
“transacting an insurance business” means:
(I-S-R-A)
1. Making or proposing to make, as Insurer, any
insurance contract;
2. Making or proposing to make, as Surety, any
contract of suretyship as a vocation and not as
merely incidental to any other legitimate
business or activity of the surety;
3. Doing any kind of business, including a
Reinsurance business, specifically recognized
as constituting the doing of an insurance
business within the meaning of the Insurance
Code (IC);
4. Doing or proposing to do Any business in
substance equivalent to any of the foregoing in
a manner designed to evade the provisions of
the IC.
NOTE: In the application of the provisions of the IC,
the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or
that no separate or direct consideration is received
therefor, shall not be deemed conclusive to show
that the making thereof does not constitute the
doing or transacting of an insurance business. (Sec.
2(b), IC)
Q: The parties’ CBA contains the following
provision, “The COMPANY shall obtain group
hospitalization insurance coverage or assume
under a self-insurance basis hospitalization for
the dependents of regular employees.”
Eventually, three members of Mitsubishi Motors
Philippines Salaried Employees Union
(MMPSEU) filed claims for reimbursement of
hospitalization expenses of their dependents. In
turn, Mitsubishi Motors Philippines Corporation
(MMPC) paid only a portion of their
hospitalization insurance claims, not the full
FACULTY OF CIVIL LAW
 Commercial Law
amount. However, MMPSEU insists that MMPC is
also liable for the amounts covered under other
insurance policies; otherwise, MMPC will
unjustly profit from the premiums the
employees contribute through monthly salary
deductions. Is MMPSEU’s contention, correct?
A: NO. Since the subject CBA provision is an
insurance contract, the rights and obligations of the
parties must be determined in accordance with the
general principles of insurance law. Being in the
nature of a non-life insurance contract and
essentially a contract of indemnity, the CBA
provision obligates MMPC to indemnify the covered
employees’ medical expenses incurred by their
dependents but only up to the extent of the
expenses actually incurred. This is consistent with
the principle of indemnity which proscribes the
insured from recovering greater than the loss.
(Mitsubishi Motors Philippines Salaried Employees
Union v. Mitsubishi Motors Phil. Corp, G.R. No.
175773, 17 June 2013)
Insurance as an Uberrimae Fides contract (1993
BAR)
The contract of insurance is one of perfect good
faith (uberrimae fidei) not for the insured alone,
but equally so for the insurer; in fact, it is more so
for the latter, since its dominant bargaining position
carries with it stricter responsibility. (Qua Chee Gan
v. Law Union and Rock Insurance, Co. Ltd., G.R. No. L-
4611, 17 Dec. 1955)
It requires the parties to the contract to
communicate that which a party knows and ought
to communicate, that is, the duty to disclose in good
faith all facts material to the contract. This doctrine
is essential on account of the fact that the full
circumstances of the subject matter of insurance
are, as a rule, known to the insured only and the
insurer, in deciding whether or not to accept a risk,
must rely primarily upon the information supplied
to him by the applicant. (Sundiang Sr. & Aquino,
2014)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Insurance as Contracts of Adhesion (Fine Print
Rule)
While generally stipulations in a contract come
about after deliberate drafting by the parties
thereto, there are certain contracts in which almost
all the provisions of which have been drafted only
by one party, usually a corporation. Such contracts
are called contracts of adhesion because the only
participation of the other party is the signing of his
signature or his 'adhesion' thereto. Insurance
contracts fall into this category (Sweet Lines, Inc. v.
Teves, G.R. No. L-37750, 19 May 1978). An illustration
of a contract of adhesion is when the insurer used
“fine print” letters in conditions stated in a contract
of insurance. (Ibid)
Rules in the Construction or Interpretation of
Insurance Contracts
GR: If the terms of the contract clearly show the
intention of the parties, there shall be no room for
interpretation.
XPN: If there are ambiguities in the terms of an
insurance contract, they have to be resolved in favor
of the insured and strictly against the insurer
because an insurance contract being a contract of
adhesion, most of its terms is not a product of
mutual negotiation between the parties as they are
prepared by the insurance company in final printed
forms. (De Leon, 2014)
Elements of an Insurance Contract (S-P-E-A-R)
1. Scheme to distribute losses – Such assumption of
risk is part of a general scheme to distribute
actual losses among a large group or substantial
number of persons bearing a similar risk.
2. Payment of premium – As consideration for the
insurer’s promise, the insured makes a ratable
contribution called “premium” to a general
insurance fund.
3. Existence of insurable interest – The insured
possesses an interest of some kind, susceptible
of pecuniary estimation known as “insurable
interest.”
2
 Insurance
4. Assumption of risk – The insurer assumes that
risk of loss for a consideration.
5. Risk of loss – The insured is subject to a risk of
loss through the destruction or impairment of
that interest by the happening of the designated
peril.
NOTE: The inherent uncertainty of events is
normally described in terms of risk. A contract
possessing only the last three elements enumerated
above is a risk-shifting device, but NOT a contract
of insurance which is a risk-distributing device. (De
Leon, 2006)
Moral Hazard Phenomenon
Consequently, however, the existence of insurance
could have the perverse effect of increasing the
probability of loss. This is when the insured, having
in mind the indemnification for loss or damage
caused by the happening of the event insured
against, would have reduced incentive to take steps
to protect himself or his property, subject of
insurance. (Ibid)
Characteristics and Nature of Insurance
Contracts (Con3-Vol-A-Uni-Per)
The following are the characteristics and nature of
an insurance contract:
1. Consensual
It is perfected by the meeting of the minds of the
parties as to the object, cause and consideration of
the insurance contract. There should be acceptance
of the application for insurance.
2. Voluntary
GR: The parties may incorporate such terms and
conditions as they may deem convenient: Provided
they do not contravene any provision of law and are
not opposed to public policy, law, morals, good
customs, or public order.
3 UNIVERSITY OF SANTO TOMAS
XPNs: Insurance contracts that may be required by
law such as:
a. For motor vehicles;
b. As a condition to granting a license to conduct
business or calling affecting the public safety
or welfare;
c. For employees; or
d. Social insurance for members of the GSIS and
for employees of the private sector covered by
the SSS.
3. Aleatory
The liability of the insurer depends upon some
contingent event, the happening of an uncertain
future event. Thus, it is not a contract of chance. In
an insurance contract, each party takes a risk:
a. For the insurer – risk of having to pay the
indemnity if the contingent event happens.
b. For the insured – risk of paying the premium
without receiving anything therefor if the
contingent event does not happen except
protection, which in itself is a valuable
consideration. (De Leon, 2014)
4. Unilateral
It imposes legal duties only on the insurer who
promises to indemnify the insured. It is executed as
to the insured after payment of the premium, and
executory on the part of the insurer in the sense that
it is not executed until payment for a loss. (De Leon,
2014)
5. Conditional
It is subject to conditions the principal one of which
is the happening of the event insured against.
6. Contract of Indemnity
Recovery is commensurate with the amount of the
loss suffered.
GR: The insurer promises to make good only the
loss of the insured.
FACULTY OF CIVIL LAW
 Commercial Law
XPN: The principle is not applicable to life and
accident insurance where the result is death
because life is not capable of pecuniary estimation.
The only situation where the principle of indemnity
is applicable to life insurance is when the interest of
a person insured is capable of exact pecuniary
measurement. (e.g., where a creditor insures the life
of his debtor to the extent of the latter’s debt)
7. Personal
It is personal between the insurer and insured. Each
party having in view the character, credit and
conduct of the other.
NOTE: Since insurance is a contract, such is
considered a property in legal contemplation.
However, unlike property policies, life insurance
policies are generally assignable like any chose in
action. (De Leon, 2014)
1. WHAT MAY BE INSURED
Persons who May be Insured (2000 BAR)
Anyone except a public enemy may be insured. (Sec.
7, IC)
A public enemy is a nation at war with the
Philippines and every citizen or subject of such
nation. It does not include mobs, thieves or robbers.
(Bouvier’s Law Dictionary)
If majority of the stockholders of the corporation
were subjects who became an enemy corporation
upon the outbreak of the war between two states, it
stands to reason that an insurance policy ceases to
be allowable as soon as an insured becomes a public
enemy. Hence, any contingency which may occur
during or after said war cannot be indemnified
under a policy issued before said war. However,
elementary rules of justice and in the absence of
specific provision in the Insurance Law require that
the premium paid by the insured for the period
covered by its policy should be returned. The
purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is
inconsistent that one country should destroy its
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
enemy's property and repay in insurance the
value of what has been so destroyed. (Filipinas
Compaña de Seguros v. Christern, Huenefeld and Co.,
Inc., G.R. No. L- 2294, 25 May 1951)
Q: May a member of the MILF or its breakaway
group, the Abu Sayyaf, be insured with a
company licensed to do business under the
Insurance Code of the Philippines? Explain.
(2000 BAR)
A: YES, a member of the MILF or Abu Sayyaf may be
insured with a company licensed to do business
under the Insurance Code of the Philippines. What
is prohibited is to be insured is a public enemy. A
public enemy is a citizen or national of a country
with which the Philippines is at war. Such member
of the MILF or Abu Sayyaf is not a citizen or national
of another country, but of the Philippines.
Subject Matter of a Contract of Insurance
Anything having an appreciable pecuniary value,
which is subject to loss or deterioration, or of which
one may be deprived so that his pecuniary interest
is or may be prejudiced.
Consent of Spouse NOT Necessary
The consent of the spouse is not necessary for the
validity of an insurance policy taken out by a
married person on his or her life or that of his or her
children. (Sec. 3, IC)
Consent of the Person Insured is NOT Essential
to the Validity of the Policy
So long as it could be proved that the insured has an
insurable interest at the inception of the policy, the
insurance is valid even without such consent. (Sec.
10, IC)
Effect of Death of Policy’s Original Owner
All rights, title and interest in the policy of insurance
taken out by an original owner on the life or health
of the person insured shall automatically vest in the
latter upon the death of the original owner, unless
otherwise provided for in the policy. (Sec. 3, IC)
4
 Insurance

NOTE: Prior to the effectivity of the Insurance Code
of 2013, the term used was “minor” instead of “the
person insured.” A minor cannot enter into any
contract of insurance with any insurance company.
Games of Chance Cannot be Insured
An insurance for or against the drawing of any
lottery, or for or against any chance or ticket in a
lottery drawing a prize is not authorized. (Sec. 4, IC)
Void Stipulations in an Insurance Contract
The following are void stipulations in an insurance
contract which provides:
NOTE: The existence of insurable interest is a
matter of public policy and is not susceptible to the
principle of estoppel. The existence of an insurable
interest gives a person the legal right to insure the
subject matter of the policy of insurance. (Violeta.
Lalican v. Insular Life Assurance Co. Ltd., G.R. No.
183526, 25 Aug. 2009)
Mere Hope or Expectancy is NOT Insurable
A mere contingent or expectant interest in anything,
not founded on an actual right to the thing, nor upon
any valid contract for it, is not insurable. (Sec. 16, IC)
When does a Person have Insurable Interest?

1. For the payment of loss whether the person GR: A person is deemed to have an insurable
insured has or has no interest in the property interest in the subject matter insured when a person
insured; or has a relation or connection with or concern in the
2. That the policy shall be received as proof of such subject matter, such that he will derive pecuniary
interest; and benefit or advantage from its preservation and will
3. Every policy executed by way of gaming or suffer pecuniary loss from its destruction or injury
wagering. (Sec. 25, IC) by the happening of the event insured against.

NOTE: The Insurance Code provides that a policy XPN: However, in some cases, expectation of benefit
may declare that a violation of specified provisions from the continued life of that person need not
thereof shall avoid it. Thus, in fire insurance policies, necessarily be of pecuniary nature to have an
which contain provisions that if the claim be in any insurable interest in the life of a person. (De Leon,
respect fraudulent or if any false declaration be 2010)
made or used in support thereof, all the benefits
under the policy, shall be forfeited, a fraudulent Insurable Interest in Life Insurance vs. Insurable
discrepancy between the actual loss and that Interest in Property Insurance (2002 BAR)
claimed in the proof of loss voids the insurance
policy. Mere filing of such a claim will exonerate the LIFE PROPERTY
insurer. (United Merchants Corp. v. Country Bankers As to Extent
Insurance Corp, G.R. No. 198588, 11 July 2012)
GR: Every person
has an unlimited
2. INSURABLE INTEREST
insurable interest in
his own life.
An insurable interest is that interest which a
person is deemed to have in the subject matter Limited to the actual
insured, where he has a relation or connection with XPN: Where life
value of the
or concern in it, such that the person will derive insurance is taken
property.
pecuniary benefit or advantage from the out by a creditor on
preservation of the subject matter insured and will the life of the debtor,
suffer pecuniary loss or damage from its insurable interest is
destruction, termination, or injury by the happening limited to the
of the event insured against. amount of debt.

5 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
As to When must Insurable Interest Exist
GR: Must exist twice,
i.e., both at the time
the policy takes
effect and the time of
loss but need not
exist in the period in
between. (Sec. 19, IC)
XPNs:
1. A change in
interest in a thing
insured, after the
occurrence of an
injury which results
in a loss, does not
affect the right of the
insured to indemnity
for the loss. (Sec. 21,
Must exist at the time IC)
the policy takes
effect and need not 2. A change of
exist thereafter. (Sec. interest in one or
19, IC) more several distinct
things, separately
insured by one
policy, does not
avoid the insurance
as to the others. (Sec.
22, IC)
3. A change of
interest, by will or
succession, on the
death of the insured,
does not avoid an
insurance; and his
interest in the
insurance passes to
the person taking his
interest in the thing
insured. (Sec. 23, IC)
UNIVERSITY OF SANTO TOMAS 6
2022 GOLDEN NOTES
4. A transfer of
interest by one of
several partners,
joint owners, or
owners in common,
who are jointly
insured, to the
others, does not
avoid an insurance
even though it has
been agreed that the
insurance shall cease
upon an alienation of
the thing insured.
(Sec. 24, IC)
5. Every stipulation
in a policy of
insurance for the
payment of loss
whether the person
insured has or has
not any interest in
the property
insured, or that the
policy shall be
received as proof of
such interest, and
every policy
executed by way of
gaming or wagering,
is void. (Sec. 25, IC)
As to the Beneficiary’s Interest
GR: The beneficiary
need not have The beneficiary must
insurable interest have insurable
over the life of the interest over the
insured if the thing insured.
insured himself
secured the policy. NOTE: Insurable
interest is an
XPN: However, if the indispensable
life insurance was requirement.
obtained by the
 Insurance
beneficiary, the
latter must have
insurable interest
over the life of the
insured.
Change of Beneficiary
GR: The insured shall have the right to change the
beneficiary he designated in the policy.
XPN: If the insured expressly waived this right in
the said policy.
Notwithstanding the foregoing, in the event the
insured does not change the beneficiary during his
lifetime, the designation shall be deemed
irrevocable. (Sec. 11, IC)
NOTE: Under Art. 64 of the Family Code, the
innocent spouse is allowed to revoke the
designation of the other spouse as irrevocable
beneficiary upon the finality of a decree of legal
separation.
Effects of Irrevocable Designation of a premiums over the life policies from both their
Beneficiary (2005 BAR)
1. The insured cannot assign the policy without
the written consent of the beneficiary if the
designation of the beneficiary is irrevocable.
The irrevocable beneficiary has a vested right.
(2005 BAR; Sundiang Sr. & Aquino, 2014)
2. The beneficiary designated in a life insurance
contract cannot be changed without the written
consent of the beneficiary. (Gercio v. Sun Life
Assurance of Canada, G.R. No. 23703, 28 Sept.
1925)
3. A new beneficiary cannot be added to the
irrevocably designated beneficiary without the
latter’s written consent for this would in effect
reduce the latter’s vested rights. (Go v. Redfern,
G.R. No. L-47705, 25 Apr. 1941)
4. The irrevocably designated beneficiary may
obtain a policy loan to the extent stated in the
7 UNIVERSITY OF SANTO TOMAS
schedule of values attached to the policy.
(Gercio v. Sun Life Assurance of Canada, supra)
5. The insured cannot take the cash surrender
value assign or even borrow on said policy
without the consent of the beneficiary.
Effects of Revocable Designation of a Beneficiary
The insured may change the beneficiary during his
lifetime, add a beneficiary or exclude a beneficiary
in case of joint designation of beneficiaries.
The same rule applies in case the policy is silent on
the nature of the designation, for in such case, the
designation is deemed to be revocable. (Sec. 11, IC;
Divina, 2021)
Q: Shortly after Yin and Yang were wed, they
each took out separate life insurance policies on
their lives, and mutually designated one another
as sole beneficiary. Both life insurance policies
provided for a double indemnity clause, the cost
for which was added to the premium rate.
During the last 10 years of their marriage, the
spouses had faithfully paid for the annual
salaries.
Unfortunately, Yin fell in love with his
officemate, Yessel, and they carried on an affair.
After two years, their relationship bore them a
daughter named Yinsel. Without the knowledge
of Yang, Yin changed the designation of the
beneficiary to an "irrevocable designation" of
Yinsel and Yessel jointly. When Yang learned of
the affair, she was so despondent that, having
chanced upon Yin and Yessel on a date, she
rammed them down with the car she was
driving, resulting in Yin's death and Yessel's
complete loss of mobilization. Yang was sued for
parricide, and while the case was pending, she
filed a claim on the proceeds of the life insurance
of Yin as irrevocable beneficiary, or at least his
legal heir, and opposed the claims on behalf of
Yessel and her daughter Yinsel.
Yang claimed that her designation as beneficiary
in Yin's life insurance policy was irrevocable, in
FACULTY OF CIVIL LAW
 Commercial Law
the nature of one "coupled with interest," since
it was made in accordance with their mutual
agreement to designate one another as sole
beneficiary in their respective life policies. Is
Yang correct in saying that her designation as
beneficiary was irrevocable? (2018 BAR)
A: Yang is not correct. The insured shall have the
right to change the beneficiary he designated in the
policy, unless he has expressly waived this right in
the policy. There is nothing in the life insurance
policy taken by Yang which indicated that the
designation of Yin is irrevocable. As such, it is
deemed to be revocable.
INSURABLE INTEREST IN LIFE/HEALTH
Two (2) General Classes of Life Policies
1. Insurance upon one’s life – are those taken out
by the insured upon his own life for the benefit
of: (H-E-T)
a. Himself;
b. His Estate, in case it matures only at his
death; or
c. Third person who may be designated as
beneficiary.
The question of insurable interest is immaterial
where the policy is procured by the person whose
life is insured. A person who insures his own life can
designate any person as his beneficiary, whether or
not the beneficiary has an insurable interest in the
life of the insured subject to the limits under Art.
2012 in relation to Art. 739 of the New Civil Code.
(De Leon, 2010)
(See discussion on Persons Prohibited from being
Designated as Beneficiaries – page 9)
2. Insurance upon life of another – are those
taken out by the insured upon the life of
another. Where a person names himself
beneficiary in a policy, he takes on the life of
another, he must have insurable interest in the
life of the latter. This class includes the
following: (SC-E-L-D)
a. His Spouse and of his Children.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
b. Any person on whom he depends wholly or
in part for Education or support, or in
whom he has a pecuniary interest.
c. Of any person under a Legal obligation to
him for the payment of money, or
respecting property or services, of which
death or illness might delay or prevent the
performance.
d. Of any person upon whose life any estate or
interest vested in him Depends. (Sec. 10, IC)
NOTE: In paragraph (a) of Sec. 10 of the Insurance
Code, mere relationship is sufficient while the rest
(pars. b, c, and d) requires pecuniary interest. Thus,
the interest of the creditor over the life of the debtor
ceases upon full payment. (Sundiang Sr. & Aquino,
2009)
Q: Does a person have insurable interest on the
life of his parents?
A: By express exclusion under par. (a) of Sec. 10 of
the Insurance Code, a person has no insurable
interest on the life of his parents and other
ascendants unless he depends upon them for
education and/or support. (par. b.) The rationale for
their exclusion in par. (a) is that the parents are
logically expected to predecease their children.
(Divina, 2021)
Q: On July 3, 1993, Delia Sotero (Sotero) took out
a life insurance policy from Ilocos Bankers Life
Insurance Corporation (Ilocos Life) designating
Cresencia Aban (Aban) her niece, as her
beneficiary. Ilocos Life issued Policy No. 747,
with a face value of P100,000, in Sotero’s favor
on Aug. 30, 1993, after the requisite medical
examination and payment of the premium.
On Apr. 10, 1996, Sotero died. Aban filed a claim
for the insurance proceeds on July 9, 1996,
Ilocos Life conducted an investigation into the
claim and came out with the following findings:
1. Sotero did not personally apply for
insurance coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capability
to pay the premium on the policy.
4. Sotero did not sign the application for
8
 Insurance
insurance
5. Aban was the one who filed the insurance
application and designated herself as the
beneficiary.
For the above reasons and claiming fraud, Ilocos
Life denied Aban’s claim on Apr. 16, 1997, but
refunded the premium paid on the policy. May
Sotero validly designate her niece as
beneficiary? (2014 BAR)
A: YES. Sotero may validly designate her niece as
beneficiary. The same is not prohibited under the
Insurance Code or any other laws pertinent to the
problem.
Q: Carlo and Bianca met in the La Boracay
festivities. Immediately, they fell in love with
each other and got married soon after. They
have been cohabiting blissfully as husband and
wife, but they did not have any offspring. As the
years passed by, Carlo decided to take out
insurance on Bianca’s life for P1 million with
him as sole beneficiary, given that he did not
have a steady source of income and he always
depended on Bianca both emotionally and
financially.
During the term of the insurance, Bianca died of
what appeared to be a mysterious cause so that
Carlo immediately requested for an autopsy to
be conducted. It was established that Bianca
was transgender all along – a fact unknown to
Carlo. Can Carlo claim the insurance benefit?
(2014 BAR)
A: YES, Carlo can claim the insurance benefit. He
had insurable interest on Bianca’s life under Sec.
10(b) of the Insurance Code as the problem states
that Carlo “always depended on Bianca both
emotionally and financially.” The insurable interest
upon the life of another under the aforesaid
provision need not be based on kinship or legal
obligation to give support. The fact that their
marriage may be void is irrelevant.
9 UNIVERSITY OF SANTO TOMAS
Persons Prohibited from being Designated as
Beneficiaries (1998 BAR)
Under the Art. 739 in relation to Art. 2012 of the
New Civil Code, the following are prohibited
designation of beneficiaries:
1. Those made between persons who were guilty
of adultery or concubinage at the time of
donation.
NOTE: The guilt of the donor and donee may be
proved by preponderance of evidence in the
same civil action.
2. Those made between persons found guilty of
the same criminal offense, in consideration
thereof.
3. Those made to a public officer or his wife,
descendants or ascendants by reason of his
office.
The designation of the above-enumerated persons
is void but the policy is binding. The estate will get
the proceeds. (Sundiang Sr. & Aquino, 2009)
Art. 2012, NCC. Any person who is forbidden from
receiving any donation under Art. 739 cannot be
named beneficiary of a life insurance policy by the
person who cannot make any donation to him,
according to said article.
Rationale for Prohibition
A beneficiary in a life insurance policy is no different
from a donee. Both are recipients of pure
beneficence. So long as marriage remains the
threshold of family laws, reason and morality
dictate that the impediments imposed upon married
couple should likewise be imposed upon extra-
marital relationship. If legitimate relationship is
circumscribed by these legal disabilities, with more
reason should an illicit relationship be restricted by
these disabilities. (Insular Life v. Ebrado, G.R. No. L-
44059, 28 Oct. 1977)
FACULTY OF CIVIL LAW
 Commercial Law
Beneficiary Willfully brought about the Death of
the Insured (2008 BAR)
GR: The interest of a beneficiary in a life insurance
policy shall be forfeited when the beneficiary is the
principal, accomplice, or accessory in willfully
bringing about the death of the insured. In such a
case, the share forfeited shall pass on to the other
beneficiaries, unless otherwise disqualified. In the
absence of other beneficiaries, the proceeds shall be
paid in accordance with the policy contract. If the
policy contract is silent, the proceeds shall be paid
to the estate of the insured. (Sec. 12, IC)
XPNs: (I-U-D)
1. Insanity of the beneficiary at the time he killed
the insured;
2. The insured’s death was Unintentionally caused
(e.g., thru accident); and
3. The beneficiary acted in self-Defense.
Q: Juan de la Cruz was issued Policy No. 8888 of
the Midland Life Insurance Co. on a whole life
plan for P20,000 on Aug. 19, 1989. Juan is
married to Cynthia with whom he has three
legitimate children. He, however, designated
Purita, his common-law wife, as the revocable
beneficiary. Juan referred to Purita in his
application and policy as the legal wife. Three
(3) years later, Juan died. Purita filed her claim
for the proceeds of the policy as the designated
beneficiary therein. The widow, Cynthia, also
filed a claim as the legal wife. To whom should
the proceeds of the insurance policy be
awarded? (1998, 2012 BAR)
A: The estate is entitled to claim for the proceeds
of the insurance policy. As a general rule, the
insured may designate anyone he wishes to be
his/her beneficiary. However, Art. 2012 of the Civil
Code, which applies suppletorily to the Insurance
Code, provides that any person who is forbidden
from receiving any donation under Art. 739 cannot
be named beneficiary of a life insurance policy by
the person who cannot make any donation to him,
according to said article. Art. 739 specifically bars
the donations as between persons who were guilty
of adultery or concubinage.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Since Purita is a common-law wife of Juan, she falls
squarely into this category; therefore, she is
disqualified to receive insurance proceeds and
when this happens, the estate of the deceased is the
one entitled to the proceeds. (Insular Life v. Ebrado,
supra)
Q: Loreto designated Eva, his common-law wife,
and illegitimate children as beneficiaries in his
life insurance policies. Loreto was killed and
Eva was the prime suspect in his death. The
legitimate wife and children of Loreto asked for
the insurance proceeds contending that
illegitimate family is disqualified from being
beneficiaries and that the insurance benefits
must redound to the benefit of the estate of
Loreto. Will the claim of the legitimate family
prosper?
A: NO. The insurance proceeds shall be applied
exclusively to the proper interest of the person in
whose name or for whose benefit it is made unless
otherwise specified in the policy.
While the share of Eva must be forfeited, the
designation of the illegitimate children as
beneficiaries remains valid. There is no proscription
in naming illegitimate children as beneficiaries. It is
only in cases where the insured has not designated
any beneficiary or when the designated beneficiary
is disqualified by law to receive the proceeds, that
the policy proceeds shall redound to the benefit of
the estate of the insured. Thus, the proceeds of the
policy must be awarded to the illegitimate children,
to the exclusion of the legitimate family. (Heirs of
Loreto Maramag v. Maramag, G.R. No. 181132, 05
June 2009)
INSURABLE INTEREST IN PROPERTY
Insurable interest in property is every interest in
property, whether real or personal, or any relation
thereto, or liability in respect thereof, of such nature
that a contemplated peril might indirectly damnify
the insured. It may consist of an existing interest, an
inchoate interest founded on an existing interest, or
an expectancy coupled with an existing interest in
that out of which the expectancy arises. (Secs. 13 and
14, IC; 2019 BAR)
10
 Insurance
Insurable Interest in Property may Consist of
the Following (1991, 2019 BAR): (Ex-In-Ex)
1. An Existing interest – The existing interest in the
property may be legal or equitable title.
Examples of insurable interest arising from
legal title:
a. Trustee, as in the case of the seller of
property not yet delivered;
b. Mortgagor of the property mortgaged; or
c. Lessor of the property leased. (De Leon,
supra)
Examples of insurable interest arising from
equitable title:
a. Purchaser of property before delivery or
before he has performed the conditions
of the sale;
b. Mortgagee of property mortgaged; or
c. Mortgagor, after foreclosure but before
the expiration of the redemption period.
(De Leon, 2010)
2. An Inchoate interest founded on an existing
interest.
Example: A stockholder has an inchoate interest
in the property of the corporation of which he is
a stockholder, which is founded on an existing
interest arising from his ownership of shares in
the corporation. (De Leon, 2014)
3. An Expectancy coupled with an existing interest
in that out of which the expectancy arises.
NOTE: Existence of insurable interest is a matter of
public policy. Hence, the principle of estoppel
cannot be invoked. (Sundiang Sr. & Aquino, 2014)
Q: Asgard and Milestone entered into a Toll
Manufacturing Agreement (TMA) whereby
Asgard undertook to perform toll-
manufacturing of paper products for Milestone,
effective until Jan. 31, 2008. Sometime later,
Asgard needed additional capital to purchase
new equipment for its manufacturing plant. It
invited Milestone to invest in the company and
the latter accepted the invitation by
11
contributing installed equipment and infusing a
capital.
In 2009, Milestone and Asgard took out an
Industrial All Risk Policy insurance from UCPB
Insurance to insure Asgard’s corrugating
machine and equipment of every kind and
description in Novaliches, Quezon City.
Afterwards, Milestone pulled out its stocks,
machinery, and equipment from Asgard’s plant
in Novaliches for relocation to Milestone own
premises in Laguna. In the course thereof, it
caused damage to several Asgard machinery and
equipment. Due to this, Asgard notified UCPB
about the loss and filed an insurance claim
under the Policy based on Malicious Damage
Endorsement provision. However, UCPB
Insurance denied the claim explaining that the
Policy had no cross-liability cover, and the
malicious damage was committed by Milestone,
one of the named insured, and not committed by
a third party.
Asgard filed a Complaint for Sum of Money with
application for writ of preliminary attachment
and praying for actual damages against UCPB
Insurance. Does Milestone have insurable
interest over Asgard’s machine at the time of the
loss or damage?
A: NO. Sec. 13 of the Insurance Code defines
insurable interest as "every interest in property,
whether real or personal, or any relation thereto, or
liability in respect thereof, of such nature that a
contemplated peril might directly damnify the
insured." Parenthetically, under Sec. 14 of the same
Code, an insurable interest in property may consist
in: (a) an existing interest, like that of an owner or
lienholder; (b) an inchoate interest founded on
existing interest, like that of a stockholder in
corporate property; or (c) an expectancy, coupled
with an existing interest in that out of which the
expectancy arises, like that of a shipper of goods in
the profits he expects to make from the sale thereof.
Where the interest of the insured in, or his relation
to, the property is such that he will be benefitted by
its continued existence, or will suffer a direct
pecuniary loss by its destruction, his contract of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
insurance will be upheld, although he has no legal or
equitable title.
An insurable interest in property does not
necessarily imply a property interest in, or a lien
upon, or possession of, the subject matter of the
insurance, and neither the title nor a beneficial
interest is requisite to the existence of such an
interest. It is sufficient that the insured is so situated
with reference to the property that he would be
liable to loss should it be injured or destroyed by the
peril against which it is insured. Anyone has an
insurable interest in property who derives a benefit
from its existence or would suffer loss from its
destruction. (UCPB General, Insurance Co. Inc. v.
Asgard Corrugated Box Manufacturing Corp., G.R. No.
244407, 26 Jan. 2021)
Measure of Insurable Interest in Property (2000
BAR)
Under Sec. 17, the measure of insurable interest in
property is the extent to which the insured might be
damnified by loss or injury thereof. Insurable
interest in property does not necessarily imply a
property interest in, or lien upon, or possession of,
the subject matter of the insurance, and neither title
nor a beneficial interest is requisite to the existence
thereof. It is sufficient that the insured is so situated
with reference to the property that he would be
liable to loss should it be injured or destroyed by the
peril against which it is insured. Anyone has an
insurable interest in property who derives a benefit
from its existence or would suffer loss from its
destruction. (Gaisano Cagayan, Inc. v. Insurance
Company of North America, G.R. No. 147839, 08 June
2006)
A Common Carrier or Depository’s Extent of
Insurable Interest in a Thing Held by Him
A carrier or depositary has an insurable interest in
a thing held by him as such, to the extent of his
liability but not to exceed the value thereof, because
the loss of the thing by the carrier or depositary may
cause liability against him to the extent of its value.
(Sec 15., IC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Change of Interest in Any Part of a Thing Insured
“Change of interest” contemplated by law is an
absolute transfer of the insured’s entire interest in
the property insured to one not previously
interested or insured. (Perez, 2006)
GR: A change of interest in any part of a thing
insured unaccompanied by a corresponding change
in interest in the insurance suspends the insurance
to an equivalent extent, until the interest in the thing
and the interest in the insurance are vested in the
same person. (Sec. 20; Sec. 58, IC)
XPNs: (P-L-A-D-S-Jo-F)
1. When there is a Prohibition against alienation
or change of interest without the consent of the
insurer in which case the policy is not merely
suspended but avoided. (Sundiang & Aquino,
2014., citing Curtis v. Girard Fire and Marine Ins.,
11 SE 3, 190 Ga. 954)
2. In Life, accident, and health insurance. (Sec. 20,
IC)
3. A change of interest in a thing insured, After the
occurrence of an injury which results in a loss
does NOT affect the right of the insured to
indemnity for loss. (Sec. 21, IC)
NOTE: After the occurrence of the peril insured
against, the insured acquired a vested right over
the proceeds of the policy.
4. A change of interest in one or more Distinct
things, separately insured by one policy does
NOT avoid the insurance as to the others. (Sec.
22, IC)
5. A change of interest by will or Succession, on
the death of the insured, does NOT avoid an
insurance; and his interest in the insurance
passes to the person taking his interest in the
thing insured. (Sec. 23, IC)
6. A transfer of interest by one of several partners,
Joint owners, or owners in common, who are
jointly insured, to the others does NOT avoid an
12
 Insurance
insurance even though it has been agreed that
the insurance shall cease upon an alienation of
the thing insured. (Sec. 24, IC)
7. When the policy is so Framed that it will inure
to the benefit of whomsoever, during the
continuance of the risk, may become the owner
of the interest insured. (Sec. 57, IC)
Instances where More than One Insurable
Interest may Exist in the Same Property
1. Trust – both trust or and trustee have insurable
interest over the property in trust;
2. Corporation – both the corporation and its
stockholders have insurable interest over the
assets;
3. Partnership – both the firm and partners have
insurable interest over its assets;
4. Assignment – both the assignor and assignee
have insurable interest over the property
assigned;
5. Lease – the lessor, lessee and sub-lessees have
insurable interest over the property in lease;
and
6. Mortgage – both the mortgagor and mortgagee
have insurable interest over the property
mortgaged.
Insurable Interest of Mortgagor and Mortgagee
in case of a Mortgaged Property are NOT the
Same (1999, 2010 BAR)
Each has an insurable interest in the property
mortgaged and this interest is separate and distinct
from the other. Therefore, insurance taken by one in
his name only and in his favor alone does not inure
to the benefit of the other. The same is not open to
objection that there is double insurance. (RCBC v.
CA, G.R. Nos. 128833-34, 128866, 20 April 1998; Sec
8, IC)
13
Extent of Insurable Interest of Mortgagor and
Mortgagee (1999 BAR)
1. Mortgagor – The mortgagor of property, as
owner, has an insurable interest to the extent of
its value even though the mortgage debt equals
such value.
2. Mortgagee – The mortgagee as such has an
insurable interest in the mortgaged property to
the extent of the debt secured; such interest
continues until the mortgage debt is
extinguished. (Sundiang Sr. & Aquino, 2014)
NOTE: In case of an insurance taken by the
mortgagee alone and for his benefit, the mortgagee,
after recovery from the insurer, is not allowed to
retain his claim against the mortgagor but it passes
by subrogation to the insurer to the extent of the
insurance money paid. (De Leon, 2010)
Q: What are the effects if the mortgagee
procures separate insurance coverage without
reference to the right of the mortgagor?
A: The effects are as follows:
a. The mortgagee may collect from the insurer to
the extent of his credit.
b. The insurer, after payment to the mortgagee, is
subrogated to the rights of the latter against the
mortgagor and may collect the debt of the latter
to the extent of the amount paid to the
mortgagee. This principle applies only where
the policy obtained by the mortgagee covers his
interest alone.
c. The mortgagee-insured can no longer collect
the mortgagor’s indebtedness after receiving
full payment of the credit from the insurer since
the latter acquires the right to collect from the
mortgagor by virtue of the subrogation.
However, if the mortgagee is not able to collect
the whole amount of the credit, he may still
collect the deficiency from the mortgagor.
(Divina, 2021)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

Q: To secure a loan of P10 million, Mario 3. DOUBLE INSURANCE AND OVERINSURANCE

mortgaged his building to Armando. In
accordance with the loan arrangements, Mario Double Insurance (2005 BAR)
had the building insured with First Insurance
Com for P10 million, designating Armando as Double insurance exists where the same person is
the beneficiary. Armando also took an insurance insured by several insurers separately, in respect to
on the building upon his own interest with the same subject and interest. (Sec. 95, IC)
Second Insurance Company for P5 million.
Requisites of Double Insurance (S-T-R-I-P)
The building was totally destroyed by fire, a
peril insured against under both insurance 1. Subject matter is the same;
policies. It was subsequently determined that 2. Two (2) or more insurers insuring separately;
the fire had been intentionally started by Mario 3. Risk or peril insured against is the same;
and that in violation of the loan agreement, he 4. Interest insured is the same; and
had been storing inflammable materials in the 5. Person insured is the same.
building.
There is no double insurance even though two
a. How much, if any, can Armando recover
policies were both issued over the same subject
from either or both insurance companies?
matter, and both covered the same peril insured
b. What happens to the P10 million debt of
against if the two policies were issued to two
Mario to Armando? Explain. (2010 BAR)
different entities which have separate and distinct
insurable interest over the said subject matter.
A:
(Malayan Insurance Co. v. Philippine First Insurance
a. Armando can receive P5 million from
Co., G.R. No. 184300, 11 July 2012)
Second Insurance Company. As mortgagee, he
had an insurable interest in the building.
Double Insurance is NOT Prohibited by Law
Armando cannot collect anything from First
Insurance Co., since the latter is not liable for
It is not contrary to law and hence, in case of double
the loss of the building. First, it was due to a
insurance, the insurers may still be made liable up
willful act of Mario, who committed arson.
to the extent of the value of the thing insured but not
Second, fire insurance policies contain a
to exceed the amount of the policies issued.
warranty that the insured will not store
hazardous materials within the insured
A provision in the policy that prohibits double
premises. Mario breached this warranty when
insurance is valid. However, in the absence of such
he stored inflammable materials in the building.
prohibition, double insurance is allowed. (Perez,
These two factors exonerate First Insurance Co.
2006)
from liability to Armando as mortgagee even
though it was Mario who committed them. (Sec.
Q: TRUE OR FALSE: The law on life insurance
8; Sec. 87, IC)
prohibits double insurance. (2017 BAR)

b. Since Armando would have collected P5 million

A: FALSE. Double insurance only applies to
from Second Insurance Company, this amount
property insurance.
should be considered as partial payment of the
loan. Armando can only collect the balance of P5
Nature of the Liability of the Several Insurers in
million. Second Insurance Co. can recover from
Double Insurance (2005 BAR)
Mario the amount of P5 million it paid, because
it became subrogated to the rights of Armando.
In double insurance, the insurers are considered as
co-insurers. Each one is bound to contribute ratably
to the loss in proportion to the amount for which he

UNIVERSITY OF SANTO TOMAS 14

2022 GOLDEN NOTES
 Insurance
is liable under his contract. This is known as the
“principle of contribution” or “contribution
clause.” (Sec. 96(e), IC)
Q: X borrowed from CCC Bank. She mortgaged
her house and lot in favor of the bank. X insured
her house. The bank also got the house insured.
a. Is this double insurance? Explain your
answer.
b. Is this legally valid? Explain your answer.
c. In case of damage, can X and CCC Bank
separately claim for the insurance
proceeds? (2013 BAR)
A:
a. NO, there is no double insurance. Double
insurance exists where the same person is
insured by several insurers separately with
respect to the same subject and interest. (Sec.
93, IC)
b. YES, X and CCC Bank can both insure the house
as they have different insurable interest
therein. X, the borrower mortgagor, has an
insurable interest in the house being the owner
thereof while CCC Bank, the lender, also has an
insurable interest in the house as mortgagee
thereof.
c. YES. If X obtained an open policy then she could
claim an amount corresponding to the extent of
the damage based on the value of the house
determined as of the date the damage occurred,
but not to exceed the face value of the insurance
policy; however, if she obtained a valued policy
then she could claim an amount corresponding
to the extent of the damage based on the agreed
upon valuation of the house.
As for CCC Bank, it could claim an amount
corresponding to the extent of the damage but
not to exceed the amount of the loan it extended
to X or so much thereof as may remain unpaid.
Q: Terrazas de Pation Verde, a condominium
building, has a value of P50M. The owner
insured the building against fire with three (3)
insurance companies for the following amounts:
15
1. Northern Insurance Corp. — P20M
2. Southern Insurance Corp. — P30M
3. Eastern Insurance Corp. — P50M
a. Is the owner's taking of insurance for the
building with three (3) insurers valid?
Discuss.
b. The building was totally razed by fire. If the
owner decides to claim from Eastern
Insurance Corp, only P50M, will the claim
prosper? Explain. (2008 BAR)
c. Can the owner claim from Northern
Insurance and Southern Insurance
Corporation?
A:
a. Taking out insurance covering the same
property, same insurable interest and same risk
with three insurance companies is “double
insurance,” recognized under Sec. 93 of the
Insurance Code. However, in American Home
Assurance Co. v. Chua, G.R. No. 130421, 28 June
1999, the court referred to the common
inclusion of the “other insurance clause” in fire
insurance policies, requiring disclosure of co-
insurance of the same property with other
insurers.
ALT. ANSWER: The taking of insurance from the
three (3) insurers is valid, there being no stipulation
against obtaining additional insurance. It is a case of
“double insurance.” Double insurance is valid. What
is prohibited is for the insured to recover more than
his interest or value of the property as this will
violate the indemnity principle of an insurance
contract.
b. Insured can recover from Eastern Insurance
Corp. up to the extent of his loss. However,
Eastern may refuse to pay if the policy contains
an “other insurance clause” stipulating that
non-disclosure of double insurance will avoid
the policy (Geagonia v. Country Bankers
Insurance, G.R. No. 114427, 06 Feb. 1995). As
there is no indication of a contractual
prohibition on double or other insurance, all
insurance contracts over the building are
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

deemed valid and enforceable. the insured.

As to the Number of Insurers
Since Eastern insured the property up 50% of
There may be only
the total coverage, it is liable for only 50% of the
one (1) insurer, with
total actual loss. Eastern insurance Corp. is There are two (2) or
whom the insured
liable to the extent of its coverage but may more insurers insuring
takes insurance
recover one-half of the total indemnity from the the same subject matter.
beyond the value of
co-insurers in the proportion of 60% (Southern
his insurable interest.
Insurance) – 40% (Northern Insurance).

Rules when the Insured in a Policy Other than

ALT. ANSWER: YES, the owner may legally claim
Life is Over Insured by Double Insurance
the entire P50M from Eastern Insurance Corp. The
Insurance Code provides that where the insured is
1. The insured, unless the policy otherwise
over-insured by double insurance, the insured,
provides, may claim payment from the insurers
unless the policy otherwise provides, may claim
in such order as he may select, up to the amount
payment from the insurers in such order as he may
which the insurers are severally liable under
select, up to the amount for which the insurers are
their respective contracts;
severally liable under their respective contracts.
Each insurer is bound, as between himself and the
2. Where the policy under which the insured
other insurers, to contribute ratably to the loss in
claims is a valued policy, any sum received by
proportion to the amount for which he is liable
him under any other policy shall be deducted
under his contract.
from the value of the policy without regard to
the actual value of the subject matter insured;
c. If the owner has been paid in full by Eastern
Insurance, he can no longer recover from any of
3. Where the policy under which the insured
Northern and Southern Insurance
claims is an unvalued policy, any sum received
Corporations. Otherwise, the owner can
by him under any policy shall be deducted
recover P20M and P30M, respectively. The
against the full insurable value, for any sum
owner can choose who he wants to claim
received by him under any policy;
against to recover the full indemnity provided
that the claim will not exceed the face value of
4. Where the insured receives any sum in excess
the insurer’s respective insurance policies.
of the valuation in the case of valued policies, or
(Divina, 2021)
of the insurable value in the case of unvalued
policies, he must hold such sum in trust for the
Over Insurance
insurers, according to their right of contribution
among themselves; and
There is over insurance whenever the insured
obtains a policy in an amount exceeding the value of
5. Each insurer and the other insurers, to
his insurable interest. (Perez, 2006)
contribute ratably to the loss in proportion to
the amount for which he is liable under his
DOUBLE INSURANCE OVER INSURANCE
contract. (Sec. 96, IC)
As to the Amount of Insurance
There may be no over Additional or Other Insurance Clause (2008
When the amount of
insurance as when the BAR)
the insurance is
sum total of the
beyond the value of
amounts of the policies A clause in the policy that provides that the policy
the insured’s
issued does not exceed shall be void if the insured procures additional
insurable interest.
the insurable interest of insurance without the consent of the insurer.
(Pioneer Insurance and Surety Corp v. Yap, G.R. No. L-

UNIVERSITY OF SANTO TOMAS 16

2022 GOLDEN NOTES
 Insurance
36232, 19 Dec. 1974)
The insurer may insert an “other insurance clause”
to prevent the danger that the insured will over
insure his property and thus avert the possibility of
perpetration of fraud. It is lawful and specifically
allowed under Sec. 75 of the Insurance Code which
provides that “a policy may declare that a violation
or a specified provision thereof shall avoid it,
otherwise the breach of an immaterial provision
does not avoid it.”
Waiver of Violation
When the insurer, with the knowledge of the
existence of other insurances, which the insurer
deemed a violation of the contract, preferred to
continue the policy, its action amounted to a waiver
of annulment of the contract. (Perez, 2006 citing
Gonzales Lao v. Yek Tong Lin Fire & Marine Ins. Co.,
G.R. No. L-33131, 13 Dec. 1930)
Q: Wyeth Philippines, Inc. (Wyeth) procured a
marine policy from Philippines First Insurance
Co., Inc. (PFIC) to secure its interest over its own
products while the same were being
transported or shipped in the Philippines.
Thereafter, Wyeth executed its annual contract
of carriage with Reputable Forwarder Services,
Inc. (Reputable).
Under the contract, Reputable undertook to
answer for all risks with respect to the goods
and shall be liable to Wyeth, for the loss,
destruction, or damage of the goods/products
due to any and all causes whatsoever, including
theft, robbery, flood, storm, earthquakes,
lightning, and other force majeure while the
goods/products are in transit and until actual
delivery to the customers, salesmen, and
dealers. The contract also required Reputable to
secure an insurance policy on Wyeth’s goods.
Thus, Reputable signed a Special Risk Insurance
Policy (SR Policy) with Malayan Insurance Co.,
Inc., (Malayan) for the amount of P1,000,000.00.
Is there is double insurance (as prohibited
under Sec. 5 of the SR Policy between Malayan
and Reputable) so as to preclude PFIC from
17
claiming indemnity from Malayan?
A: NO. The interest of Wyeth over the property
subject matter of both insurance contracts is
different and distinct from that of Reputable’s. The
policy issued by PFIC was in consideration of the
legal and/or equitable interest of Wyeth over its
own goods. On the other hand, what was issued by
Malayan to Reputable was over the latter’s
insurable interest over the safety of the goods,
which may become the basis of the latter’s liability
in case of loss or damage to the property and falls
within the contemplation of Sec. 15 of the IC.
Therefore, even though the two concerned
insurance policies were issued over the same goods
and cover the same risk, there arises no double
insurance since they were issued to two different
persons/entities having distinct insurable interests.
Necessarily, over insurance by double insurance
cannot likewise exist. (Malayan Insurance Co., Inc., v.
Philippine First Insurance Co., Inc. and Reputable
Forwarder Services, Inc., G.R. No. 184300, 11 July
2012)
Q: X Corp. took out a Fire Policy Insurance from
Easter Insurance in the amount of
P10,000,000.00. The properties insured were
the pieces of machinery and equipment, tools,
spare parts and accessories stored at Buildings
1 and 2, PTA Compound, No. 26 Isidro Francisco
Street, Malinta, Valenzuela, Metro Manila,
Manila.
He took another Fire Policy Insurance from
Northern Insurance for P7,000,000.00, covering
the pieces of machinery and equipment, tools,
spare parts, and accessories excluding mould,
and stocks of manufactured goods and/or goods
still in process, raw materials and supplies
found in the PTA Central Warehouse Compound,
Building 1, No. 26 Isidro Francisco Street, Brgy.
Vicente Reales, Dalandan, Valenzuela, Metro
Manila.
He took a third Fire Policy Insurance from
Southern Insurance covering the same
machinery and equipment located at Building 1,
PTA Compound, No. 26 Francisco St., Malinta,
Valenzuela, Metro Manila.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
A fire broke out in PTA Compound causing
damages and loss on property. X Corp tried to
claim from the 3 insurance companies but the
same were denied on the ground of violation of
the policy condition (Policy Condition No. 3) on
non-disclosure of insurance policies already
acquired or thereafter may be acquired
regarding the same properties, which ultimately
results in the avoidance of the insurance policy.
Are the insurance policies avoided?
A. YES. Policy Condition No. 3 is clear that it
obligates X Corp, as insured, to notify the insurer of
any insurance effected to cover the insured items
which involve any of its property or stocks in trade,
goods in process and/or inventories and that non-
disclosure by the insured of other insurance policies
obtained covering these items would result in the
forfeiture of all the benefits under the policy. To be
regarded as a violation of Policy Condition No. 3, the
other existing but undisclosed policies must be
upon the same matter and with the same interest
and risk. The records of this case show that
petitioner obtained fire insurance policies from the
3 insurance companies covering the same matter
and the same risk, i.e., the policies uniformly cover
fire losses of petitioner’s machinery and equipment.
In American Home Assurance Company v. Chua, the
Court held that where the insurance policy specifies
as a condition the disclosure of existing co-insurers,
non-disclosure thereof is a violation that entitles the
insurer to avoid the policy. This condition is
common in fire insurance policies and is known as
the “other insurance clause”. (Multi-ware
Manufacturing Corporation v. Cibeles Corporation,
G.R. No. 230528, 1 Feb. 2021)
Absence of Notice of Existence of Other
Insurance constitutes Fraud
When the insurance policy specifically requires that
notice should be given by the insured of the
existence of other insurance policies upon the same
property, the lack or absence of such notice nullifies
the policy. Such failure to give notice of the existence
of other insurance on the same property when
required to do so constitutes deception and it could
be inferred that had the insurer known that there
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
were many other insurance policies on the same
property, it could have hesitated or plainly desisted
from entering into such contract. (Perez, 2006)
No Policy of Insurance shall be Cancelled Except
upon Notice thereof to the Insured
Q: The Peninsula Insurance Company offered to
insure Francis' brand-new car against all risks in
the sum of P1 million for one year. The policy
was issued with the premium fixed at
P60,000.00 payable in 6 months. Francis only
paid the first two months installments. Despite
demands, he failed to pay the subsequent
installments.
Five months after the issuance of the policy, the
vehicle was carnapped. Francis filed with the
insurance company a claim for its value.
However, the company denied his claim on the
ground that he failed to pay the premium
resulting in the cancellation of the policy. Can
Francis recover from the Peninsula Insurance
Company? (2006 BAR)
A: YES. As a general rule, no policy is binding unless
the premiums thereof have been paid. However, one
of the exceptions is when there is an agreement
allowing the insured to pay the premium in
installments and partial payment has been made at
the time of loss. In the case at hand, Francis already
paid two installments at the time of the loss and as
such may recover on the policy (Makati Tuscany
Condominium Corp. v. CA, G.R. No. 95546, 6 Nov.
1992). Furthermore, the contention of the insurer
that the failure to pay premium resulted in the
cancellation of the policy is not tenable since no
policy of insurance shall be cancelled except upon
notice thereof to the insured. (Sec. 64, IC)
Cancellation of Policy of Insurance by reason of
Over Insurance
Sec. 64 of the IC provides that upon discovery of
other insurance coverage that makes the total
insurance in excess of the value of the property
insured, the insurer may cancel such policy of
insurance; provided there is prior notice and such
circumstance occurred after the effective date of the
18
 Insurance
policy.
4. NO FAULT, SUICIDE, AND INCONTESTABILITY
CLAUSES
NO FAULT INDEMNITY CLAUSE
No Fault Indemnity Clause (1994 BAR)
It is a clause where the insurer is required to pay a
third party injured or killed in an accident without
the necessity of proving fault or negligence on
the part of the insured. There is a stipulated
maximum amount to be recovered.
It is a clause that gives the victim (injured person or
heirs of the deceased) an option to file a claim for
death or injury without the necessity of proving
fault or negligence of any kind to guarantee
compensation or indemnity to injured persons in
motor vehicle accidents.
Rules under the “no fault indemnity clause”
1. The total indemnity in respect of any one
person shall not exceed P15,000 for all motor
vehicles. (Ins. Memo. Circ. No. 4-2006, otherwise
known as the Compulsory Motor Vehicle License
Insurance (CMVLI))
2. Proof of loss:
a. Police report of accident
b. Death certificate and evidence sufficient to
establish proper payee
c. Medical report and evidence of medical or
hospital disbursement. (Sec. 391(b)(3), IC)
3. Claim may be made against one motor vehicle
only. (Sec. 391(c), IC)
4. In case injury of an occupant of a vehicle, the
claim shall lie against the insurer of the vehicle
in which the occupant is riding, mounting or
dismounting from. (Ibid)
5. In any other case (not an occupant), claim shall
lie against the insurer of the directly offending
vehicle. (Ibid)
19
6. In all cases, the right of the party paying the
claim to recover against the owner of the
vehicle responsible for the accident shall be
maintained. (Ibid)
The claimant is not free to choose from which
insurer he will claim the "no fault indemnity," as the
law, by using the word "shall,” makes it mandatory
that the claim be made against the insurer of the
vehicle in which the occupant is riding, mounting or
dismounting from. That said vehicle might not be
the one that caused the accident is of no moment
since the law itself provides that the party paying
may recover against the owner of the vehicle
responsible for the accident. (Perla Compania de
Seguros, Inc. v. Ancheta, G.R. No. L-49599, 8 Aug.
1988)
This no-fault claim does NOT apply to property
damage. If the total indemnity claim exceeds
P15,000 and there is controversy in respect thereto,
the finding of fault may be availed of by the insurer
only as to the excess. The first P15,000 shall be paid
without regard to the fault. (CMVLI, supra)
Q: X is a passenger of a jeepney for hire being
driven by Y. The jeepney collided with another
passenger jeepney being driven by Z who was
driving recklessly. As a result of the collision, X
suffered injuries. Both passenger jeepneys are
covered by Comprehensive Motor Vehicular
Insurance Coverage. If X wants to claim under
the "no fault indemnity clause", his claim lie
against? – (2012 BAR)
A: Against the insurer of the passenger jeepney
driven by Y because X was his passenger. The
Insurance Code states that in the case of an occupant
of a vehicle, the claim shall lie against the insurer of
the vehicle in which the occupant is riding,
mounting or dismounting from.
SUICIDE CLAUSE
Liability of the Insurer in case of Suicide
The insurer shall be liable in case of suicide by the
insured if: (F-I-Sh)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
1. The suicide is committed after the policy has
been in Force for a period of two (2) years from
the date of its issue or of its last reinstatement.
2. The suicide is committed in the state of Insanity
regardless of the date of commission.
3. The suicide is committed within a Shorter
period as provided in the policy. (Sec. 183, IC)
NOTE: Any stipulation extending the 2-year period
is null and void.
Q: Twenty-five months after a life insurance
policy had been issued, the insured committed
suicide. Upon investigation, the insurance
company discovered that the insured had been
living with an undiagnosed Major Depressive
Disorder for the past year before the suicide.
Under the Diagnostic and Statistical Manual of
Mental Disorders Fifth Edition (DSM-5), a
guidebook used by many professionals to
diagnose various mental health conditions,
Major Depressive Disorder is recognized as a
mental disorder.
Would the beneficiaries of the insured's life
insurance policy still be entitled to receive its
proceeds? Explain briefly. (2020-21 BAR)
A: YES, the life insurance beneficiaries will be
entitled to the proceeds. The insured had no
concealment because he did not neglect to disclose
his mental disorder, which he did not know.
In addition, the suicide happened 25 months after
the policy was issued, hence, after the 2-year
incontestability period. The Insurance Company can
no longer rescind the contract for concealment.
(Manila Bankers Life Insurance v. Aban, G.R. No.
175666, 29 July 2013; Tan v. CA, G.R. No. 48049, 29
June 1989; and Sunlife Assurance v. Bacani, G.R. No.
105135, 22 June 1995)
ALT. ANSWER: Yes, the beneficiaries of the
insured's life insurance policy are entitled to its
proceeds. Under the Insurance Code, the insurer in
a life insurance contract shall be liable in case of
suicide when it is committed after the policy has
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
been in force for period of two years from date of
issue or last reinstatement, unless the policy
provides for a shorter period. If the suicide is
committed in the state of insanity, it shall be
compensable regardless of the date of commission
(Sec. 183, IC).
The insurer is not liable only if the suicide is an
excepted risk.
In this case, not only is the policy in force for a
period of two years from the date of the commission
of suicide, the suicide was also committed in the
state of insanity. There is likewise no showing that
suicide is an excepted risk. Thus, the insurer is
liable.
Q: Sun Insurance Co. issued to Tan a life policy
having this provision: “the company shall not be
liable in respect of ‘bodily injury’ consequent
upon the insured person who willfully exposes
himself to needless peril except in an attempt to
save human life." Tan designated his wife,
Beverly, as beneficiary. One evening, Tan, while
playing with his hand gun, suddenly stood in
front of his secretary and pointed the gun at her.
Startled, she pushed the gun aside and said that
it may be loaded. Thus, Tan, to assure her that it
was not loaded, pointed it at his temple. The next
moment, there was an explosion and Tan
slumped to the floor lifeless.
Beverly then claimed the proceeds from Sun
Insurance, but the latter rejected her claim on
the ground that the death of Tan was not
accidental. Beverly sued the insurer. Will
Beverly’s claim prosper? (1993, 1994 BAR)
A: YES. Beverly can recover the proceeds of the
policy from the insurer. The death of the insured
was not due to suicide or willful exposure to
needless peril which are excepted risks. The
insured’s act was purely an act of negligence which
is covered by the policy and for which the insured
got the insurance for his protection. In fact, he
removed the magazine from the gun and when he
pointed the gun to his temple he did so because he
thought that it was safe for him to do so. He did so
to assure his sister that the gun was harmless. There
20
 Insurance
is none in the policy that would relieve the insurer
of liability for the death of the insured since the
death was an accident. (Sun Insurance v. CA, G.R. Nos.
79937-38, 13 Feb. 1989)
INCONTESTABILITY CLAUSE
Incontestability Clause (1991, 1994, 1996, 1998,
2012 BAR)
After the policy of life insurance made payable on
the death of the insured shall have been in force
during the lifetime of the insured for a period of two
(2) years from the date of its issue or its last
reinstatement, the insurer cannot prove that the
policy is void ab initio (construed as voidable) or is
rescindible by reason of the fraudulent concealment
or misrepresentation of the insured or his agent.
(Sundiang Sr. & Aquino, 2014, citing Sec. 48, IC;
Florendo v. Philam Plans, G.R. No. 186983, 22 Feb.
2012)
Rationale: The “Incontestability Clause” under
Sec. 48 of the Insurance Code regulates both the
actions of the insurers and prospective takers of life
insurance. It gives insurers enough time to inquire
whether the policy was obtained by fraud,
concealment, or misrepresentation; on the other
hand, it forewarns scheming individuals that their
attempts at insurance fraud would be timely
uncovered – thus deterring them from venturing
into such nefarious enterprise. (Manila Bankers Life
Insurance Corporation v. Cresencia Aban, G.R. No.
175666, 29 July 2013)
NOTE: The period of two (2) years may be
shortened but it cannot be extended by stipulation.
Requisites of the Incontestability Clause
1. The insurance is a life insurance policy payable
on the death of the insured.
NOTE: The clause is therefore NOT applicable
to annuity because the annuitant pays lump
sum to the insurer and gets a certain amount
from the insurer every year until the
annuitant/insured dies.
21
2. The policy is in force for at least two (2) years
from its date of issue as appearing in the policy
or of its last reinstatement.
NOTE: The two-year period is NOT reckoned
from date of receipt but from issuance of the
policy or last reinstatement. (Divina, 2021)
Q: On July 3, 1993, Delia Sotero (Sotero) took out
a life insurance policy from Ilocos Bankers Life
Insurance Corporation (Ilocos Life) designating
Cresencia Aban (Aban) her niece, as her
beneficiary. Ilocos Life issued Policy No. 747,
with a face value of P100,000, in Sotero’s favor
on August 30, 1993, after the requisite medical
examination and payment of the premium.
On April 10, 1996, Sotero died. Aban filed a claim
for the insurance proceeds on July 9, 1996,
Ilocos Life conducted an investigation into the
claim and came out with the following findings:
1. Sotero did not personally apply for
insurance coverage, as she was illiterate.
2. Sotero was sickly since 1990.
3. Sotero did not have the financial capability
to pay the premium on the policy.
4. Sotero did not sign the application for
insurance.
5. Aban was the one who filed the insurance
application and designated herself as the
beneficiary.
For the above reasons and claiming fraud, Ilocos
Life denied Aban’s claim on April 16, 1997, but
refunded the premium paid on the policy. May
the incontestability period set in even in cases of
fraud as alleged in this case? (2014 BAR)
A: YES. The incontestability period applies even in
cases of fraud. Sec. 48 regulates both the actions of
the insurers and prospective takers of the life
insurance. It gives insurers enough time to inquire
whether the policy was obtained by fraud,
concealment, or misrepresentation; on the other
hand, it forewarns scheming individuals that their
attempts at insurance fraud would be timely
uncovered. Legitimate policy holders are absolutely
protected from unwarranted denial of their claims
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
or delay in the collection of insurance proceeds
occasioned by allegations of fraud, concealment, or
misrepresentation by insurers, claims which may no
longer be set up after the two-year period expires.
Sec. 48 prevents a situation where the insurer
knowingly continues to accept annual premium
payments, only to later on deny a claim on the policy
on specious claims of fraudulent concealment or
misrepresentation. (Manila Bankers Life Insurance
Corp. v. Aban, supra)
Q: Sibya applied for life insurance with Sun Life.
He indicated therein that he sought advice for
kidney problems. Sun Life approved the
application and issued an insurance policy.
Three months after, Sibya died as a result of a
gunshot wound. His beneficiary, Daisy, filed a
claimant’s statement with Sun Life to seek death
benefits but was denied by the latter stating that
Sibya did not disclose his previous medical
treatment at National Kidney Transplant
Institute.
According to Sun Life, the undisclosed fact was a
“renal failure” and a high-risk medical
condition. On the other hand, Daisy averred that
Sibya was in good faith since he authorized Sun
Life to inquire into his medical history. The RTC
held that Sibya did not commit material
concealment and misrepresentation when he
applied for life insurance. Is the court correct?
A: YES. Sec. 48, as held in Manila Bankers Life
Insurance Corporation v. Aban, serves a noble
purpose, as it regulates the actions of both the
insurer and the insured. Under the provision, an
insurer is given two years – from the effectivity of a
life insurance contract and while the insured is alive
– to discover or prove that the policy is void ab initio
or is rescindible by reason of the fraudulent
concealment or misrepresentation of the insured or
his agent. After the two-year period lapses, or when
the insured dies within the period, the insurer must
make good on the policy, even though the policy was
obtained by fraud, concealment, or
misrepresentation. (Sun Life of Canada v. Sibya III,
G.R. No. 211212, 8 June 2016)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
CAVEAT: Based on Aban and Sibya cases, there are
now two (2) incontestability clauses.
1. Two (2) years had lapsed from issuance of the
policy or last reinstatement.
2. The insured died within two (2) years from
issuance of the policy.
The second application, however, goes against the
rationale of the incontestability clause. It precludes
the insurer from conducting investigation if the
insured committed concealment and/or
misrepresentation, particularly if the insured died
shortly after the issuance of the policy. It is
submitted that this ruling should be re-assessed.
(Divina, 2021)
Q: In Jan. 2016, Mr. H was issued a life insurance
policy by XYZ Insurance Co., wherein his wife,
Mrs. W, was designated as the sole beneficiary.
Unbeknownst to XYZ Insurance Co., however,
Mr. H had been previously diagnosed with colon
cancer, the fact of which Mr. H had concealed
during the entire time his insurance policy was
being processed.
In Jan. 2019, Mr. H unfortunately committed
suicide. Due to her husband's death, Mrs. W, as
beneficiary, filed a claim with XYZ Insurance Co.
to recover the proceeds of the late Mr. H's life
insurance policy. However, XYZ Insurance Co.
resisted the claim, contending that:
1. The policy is void ab initio because Mr. H
fraudulently concealed or misrepresented
his medical condition, i.e., his colon cancer;
and
2. As an insurer in a life insurance policy, it
cannot be held liable in case of suicide.
Rule on each of XYZ Insurance Co. 's contentions.
(2019 BAR)
A: The first contention is not tenable. Under the
incontestability clause, after a policy of life
insurance made payable upon the death of the
insured shall have been in force during the lifetime
of the insured for a period of two years from the
issuance of the policy or last reinstatement, the
22
 Insurance
insurer must make good on the policy even though
the policy was obtained through fraud, concealment
or misrepresentation. (Sec. 48, IC; Manila Bankers v.
Aban, G.R. No. 175666, 29 July 2013; Sun Life of
Canada v. Sibya, G.R. No. 211212, 08 June 2016)
Even if Mr. H had concealed or misrepresented that
he was previously diagnosed with colon cancer, XYZ
can no longer rescind the policy since it has been in
force already for three years.
On the second contention, XYZ Insurance is
liable despite the suicide of Mr. H. Under the
Insurance Code, the insurer is liable when suicide is
committed after the policy has been in force for a
period of two years from the date of issue or its last
reinstatement (Sec. 180-A, IC). In this case, Mr. H
committed suicide three years after issuance of the
policy; thus, XYZ should be liable to the beneficiary
of Mr. H.
Q. Felipe applied for the reinstatement of his life
insurance policy. Insular Life advised Felipe that
his application for reinstatement may only be
considered if he agreed to certain conditions.
Felipe agreed and paid additional premium on
Dec. 27, 1999, and as a result, the Letter of
Acceptance was given to him which indicated
that the reinstated policy will be effective on
June 22, 1999. On Jan. 7, 2000, Insular Life
issued an Endorsement regarding the policy.
On Sept. 22, 2001, Felipe died. Subsequently,
Felipe’s beneficiaries filed with Insular Life a
claim for benefit under the reinstated policy.
This claim was denied. Instead, Insular Life
advised Felipe’s beneficiaries that it had decided
to rescind the reinstated policy on the grounds
of concealment and misrepresentation by
Felipe. However, the respondents contend that
policy cannot be rescinded as it is already
incontestable. Is Felipe’s reinstated life
insurance policy already incontestable at the
time of his death?
A: YES. Under Sec. 48 of the IC, after a policy of life
insurance made payable on the death of the insured
shall have been in force during the lifetime of the
insured for a period of two years from the date of its
23
issue or of its last reinstatement, the insurer cannot
prove that the policy is void ab initio or is
rescindible by reason of the fraudulent concealment
or misrepresentation of the insured or his agent.
The reinstatement of the insured’s policy is to be
reckoned from the date when the application was
processed and approved by the insurer. To reinstate
a policy means to restore the same to premium-
paying status after it has been permitted to lapse.
(The Insular Life Assurance Company, Ltd. v. Khu, G.R.
No. 195176, 18 Apr. 2016)
Defenses that are NOT Barred by the
Incontestability Clause (P-I-P-E-T-F-C)
1. That the person taking the insurance lacked
Insurable interest as required by law;
2. That the cause of the death of the insured is an
Excepted risk;
3. That the Premiums have not been paid; (Secs.
77, 233(b), 236(b), IC)
4. That the Conditions of the policy relating to
military or naval service have been violated;
(Secs. 233(b), 234(b), IC)
5. That the Fraud is of a particularly vicious type;
6. That the beneficiary failed to furnish Proof of
death or to comply with any condition imposed
by the policy after the loss has happened; or
7. That the action was not brought within the
Time specified. (Sundiang Sr. & Aquino, 2014)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

insured shall be ascertained at the time of the

B. PERFECTION OF THE INSURANCE CONTRACT loss. (Sec. 60, IC)

2. Valued – is one which expresses on its face an

agreement that the thing insured shall be
Policy of Insurance
valued at a specific sum. (Sec. 61, IC)

It is the written instrument in which the contract of

3.
insurance is set forth. (Sec. 49, IC)
It is the written document embodying the terms and
stipulations of the contract of insurance between
the insured and insurer.
Running – one which contemplates successive
insurances, and which provides that the object
of the policy may be from time to time defined,
especially as to the subjects of insurance, by
additional statements or indorsements. (Sec. 62,
IC)

The policy is not necessary for the perfection of the

Basic Contents of a Policy (P3-A-I-R2)
contract. (Sundiang Sr. & Aquino, 2014)

1. Parties;
Form of an Insurance Contract
2. Period during which the insurance is to
continue
1. The policy shall be in printed form which may
3. Property or life insured;
contain blank spaces to be filled in.
4. Amount of insurance, except in open or running
policies;
2. Any rider, clause, warranty, or endorsement
5. Interest of the insured in the property if he is
purporting to be part of the contract of
not the absolute owner;
insurance, and which is pasted or attached to
6. Risk insured against; and
said policy is not binding on the insured, unless
7. Rate of premium. (Sec. 51, IC)
the descriptive title or name of the rider, clause,
warranty, or endorsement is also mentioned
Rider
and written on the blank spaces provided in the
policy.
An attachment to an insurance policy that modifies
the conditions of the policy by expanding or
3. Unless applied for by the insured or owner, any
restricting its benefits or excluding certain
rider, clause, warranty, or endorsement issued
conditions from the coverage. (Black’s Law
after the original policy shall be countersigned
Dictionary)
by the insured or owner.

Riders are not binding on the insured unless the

NOTE: Notwithstanding the foregoing, the policy
descriptive title or name thereof is mentioned and
may be in electronic form subject to the pertinent
written on the blank spaces provided in the policy.
provisions of R.A. No. 8792, otherwise known as the
It should be countersigned by the insured or owner
‘Electronic Commerce Act’ and to such rules and
unless he was the one who applied for the same.
regulations as may be prescribed by the
(Sec. 50, IC)
Commissioner. (Sec. 50, IC)
Cover Notes
Types of Policy of Insurance (O-Va-R)
Persons who wish to be insured may get protection
1. Open – one in which the value of the thing
before the perfection of the insurance contract by
insured is not agreed upon, and the amount of
securing a cover note. The cover note issued by the
the insurance merely represents the insurer’s
insurer shall be deemed an insurance contract as
maximum liability. The value of such thing
contemplated under Sec. 1(1) of the Insurance Code

UNIVERSITY OF SANTO TOMAS 24

2022 GOLDEN NOTES
 Insurance
subject to the following rules:
1. The cover note shall be issued or renewed only
upon prior approval of the Insurance
Commission;
2. The cover note shall be valid and binding for not
more than sixty (60) days from the date of its
issuance;
3. No separate premium (separate from the policy
or main contract) is required for the cover note;
4. The cover note may be canceled by either party
upon prior notice to the other of at least seven
(7) days;
5. The policy should be issued within sixty (60)
days after the issuance of the cover note;
6. The sixty (60)-day period may be extended
upon written approval of the Insurance
Commission; and
8. The written approval of the Insurance
Commission is dispensed with upon the
certification of the president, vice-president, or
general manager of the insurer that the risk
involved, the values of such risks and premium
therefor, have not as yet been determined or
established and the extension or renewal is not
contrary to or is not for the purpose of violating
the Insurance Code or any rule
OFFER AND ACCEPTANCE/CONSENSUAL
Perfection of an Insurance Contract
The contract of insurance is perfected when the
assent or consent is manifested by the meeting of
the offer and the acceptance upon the thing and the
cause which are to constitute the contract. Mere
offer or proposal is not contemplated. (De Lim v. Sun
Life Assurance Co., G.R. No. L-15774, 29 Nov. 1920)
Cognition Theory
Mere submission of the application without the
corresponding approval of the policy does not result
in the perfection of the contract of insurance.
Insurance contracts through correspondence follow
the “cognition theory” wherein an acceptance made
by letter shall not bind the person making the offer
except from the time it came to his knowledge.
25
(Enriquez v. Sun Life Assurance Co., G.R. No. L-15895,
29 Nov. 1920)
Q: On June 1, 2011, X mailed to Y Insurance Co.
his application for life insurance. On July 21,
2011, the insurance company accepted the
application and mailed, on the same day, its
acceptance plus the cover note. It reached X's
residence on Aug. 11. On Aug. 4, 2011, X figured
in a car accident. He died a day later. May X's
heirs recover on the insurance policy? (2011
BAR)
A: NO. X had no knowledge of the insurer's
acceptance of his application before he died. What is
being followed in insurance contracts is what is
known as the “cognition theory”. Where the
applicant died before he received notice of the
acceptance of his application for the insurance,
there is no perfected contract. (Perez v. CA, G.R. No.
112329, 28 Jan. 2000)
Q: Jason is the proud owner of a newly-built
house worth P5 million. As a protection against
any possible loss or damage to his house, Jason
applied for a fire insurance policy thereon with
Shure Insurance Corporation (Shure) on Oct. 11,
2016 and paid the premium in cash. It took the
company a week to approve Jason's application.
On Oct. 18, 2016, Shure mailed the approved
policy to Jason which the latter received five (5)
days later. However, Jason's house had been
razed by fire which transpired a day before his
receipt of the approved policy. Jason filed a
written claim with Shure under the insurance
policy. Shure prays for the denial of the claim on
the ground that the theory of cognition applies
to contracts of insurance. Decide Jason's claim
with reasons. (2016 BAR)
A: Jason’s claim should be denied. What governs
insurance contract is the cognition theory whereby
the insurance contract is perfected only from the
time the applicant came to know of the acceptance
of the offer by the insurer. In this case, the loss
occurred a day prior to Jason’s knowledge of the
acceptance by Shure of Jason’s application. There
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
being no perfected insurance contact, Jason is not
entitled to recover from Shure.
Offer in Property and Liability Insurance
It is the insured who makes an offer to the insurer,
who accepts the offer, rejects it, or makes a counter-
offer. The offer is usually accepted by an insurance
agent on behalf of the insurer. (De Leon, 2010)
Offer in Life and Health Insurance
It depends upon whether the insured pays the
premium at the time he applies for insurance.
1. If he does not pay the premium, his application
is considered an invitation to the insurer to
make an offer, which he must then accept
before the contract goes into effect.
2. If he pays the premium with his application,
his application will be considered an offer. (De
Leon, 2010)
Delivery of Policy
Delivery is not necessary in the formation of the
contract of insurance since the contract of insurance
is consensual. (Sundiang Sr. & Aquino, 2014)
The mere delivery of an insurance policy to
someone does not give rise to the formation of a
contract in the absence of proof that he had agreed
to be insured.
The contract may be completed prior to delivery of
the policy or even without the delivery of the policy
depending upon the intention of the parties. The
policy may contain a provision that states that the
insurance is not effective until the delivery of the
policy. (De Leon, 2010)
Two (2) Types of Delivery
1. Actual – delivery to the person of the insured;
and
2. Constructive
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
a. By mail –If policy was mailed already and
premium was paid and nothing is left to be
done by the insured, the policy is
considered constructively delivered if
insured died before receiving the policy.
b. By agent –If delivered to the agent of the
insurer, whose duty is ministerial, or
delivered to the agent of the insured, the
policy is considered constructively
delivered. (De Leon, 2010)
PREMIUM PAYMENT
Insurance Premium
It is the amount of money a person pays for an
insurance policy, in consideration for the
assumption by the insurance of the risk of loss as a
result of the happening of the designated peril.
(Divina, 2021)
Payment of Premiums
The burden is on an insured to keep a policy in force
by the payment of premiums, rather than on the
insurer to exert every effort to prevent the insured
from allowing a policy to elapse through a failure to
make premium payments. The continuance of the
insurer's obligation is conditional upon the payment
of premiums, so that no recovery can be had upon a
lapsed policy, the contractual relation between the
parties having ceased. (Philippine Phoenix Surety &
Insurance Company v. Woodworks, Inc., G.R. No. L-
25317, 6 Aug. 1979)
Acceptance of Premium
Acceptance of premium within the stipulated period
for payment thereof, including the agreed grace
period, merely assures continued effectivity of the
insurance policy in accordance with its terms.
(Stokes v. Malayan Insurance Co., Inc., G.R. No. L-
34768, 24 Feb. 1984)
Payment of the premium to agent of the insurance
company is binding on it. (Malayan Insurance v.
Arnaldo, G.R. No. L-67835, 12 Oct. 1987, and Areola v.
CA, G.R. No. 95641, 22 Sept. 1994)
26
 Insurance

NOTE: An insurance company which delivers a credit extension is given. No credit extension to
policy to an insurance broker, is deemed to have a duly licensed intermediary should exceed
authorized the latter to receive the payment of the ninety (90) days from date of issuance of the
premium. (Sec. 306, IC) policy. (Sec. 77, IC)

Premium vs. Assessment 5. When there is Acknowledgment in a policy of a

receipt of premium, which the law declares to be
PREMIUM ASSESSMENT conclusive evidence of payment, even if there is
As to their Purpose stipulation therein that it shall not be binding
Levied and paid to until the premium is actually paid. This is
Collected to meet actual without prejudice however to right of insurer to
meet anticipated
losses. collect corresponding premium. (Sec. 77, IC)
losses.
As to whether it is a debt or not
Assessment when 6. When the Public interest so requires, as
properly levied is a determined by the Insurance Commissioner
Premium is not a debt.
debt, unless otherwise
expressly agreed. Example: In compulsory motor vehicle
insurance, if the policy was issued without
“Cash and carry” Rule (2003 BAR) payment of premium by the vehicle owner, the
insurer will still be held liable. To rule
GR: No policy or contract of insurance issued by an otherwise would prejudice the 3rd party victim.
insurance company is valid and binding unless and
until the premium thereof has been paid. Any Q: Will an insurance policy be binding even if
agreement to the contrary is void. premium is unpaid? What if partially paid?
(2015 BAR)
XPNs: (I-C-E G-A-P)
A policy is valid and binding even when there is non- A: As a general rule, the insurance policy is not valid
payment of premium: and binding, unless the premium thereof has been
paid. This is the cash-and-carry rule under the
1. When there is an agreement allowing the Insurance Code. Premium is the consideration for
insured to pay the premium in Installments and the undertaking of the insurer to indemnify the
partial payment has been made at the time of insured against a specified peril. There are
loss. (Makati Tuscany Condominium Corp. v. CA, exceptions, however, one of them is, when there is
G.R. No. 95546, 6 Nov. 1992) an agreement allowing the insured to pay the
premium in installments and partial payment has
2. When there is an agreement to grant the been made at the time of the loss. (Makati Tuscany
insured Credit extension for the payment of the Condominium Corporation v. CA, G.R. No. 95546, 06
premium and loss occurs before the expiration Nov. 1992)
of the credit term. (2007 BAR; Art. 1306, NCC;
UCPB General Insurance v. Masagana Telemart, 1. Payment in Installments
G.R. No. 137172, 4 Apr. 2001)
Q: American Home Assurance Co. (AHAC), issued
3. When Estoppel bars the insurer to invoke non- in favor of Makati Tuscany Condominium
recovery on the policy. Corporation insurance policies for 2 years. The
premiums were paid by Tuscany on
4. In case of life or industrial life policy whenever installments. The policy was again renewed,
the Grace period provision applies, or whenever however, Tuscany thereafter refused to pay the
under the broker and agency agreements with balance of the premium. AHAC filed an action to
duly licensed intermediaries, a ninety (90)-day recover the unpaid balance. Tuscany contended

27 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
that payment by installment of the premiums
due on an insurance policy invalidates the
contract of insurance and no risk attached to the
policy. The policy was never binding and valid,
and no risk attached to the policy. Is the
contention of Tuscany valid?
A: NO. The subject policies are valid even if the
premiums were paid on installments. The records
clearly show that Tuscany and AHAC intended the
subject insurance policies to be binding and
effective notwithstanding the staggered payment of
the premiums. For 3 years, the insurer accepted all
the installment payments. Such acceptance of
payments speaks loudly of the insurer’s intention to
honor the policies it issued to Tuscany.
While the import of Sec. 77 is that prepayment of
premiums is strictly required as a condition to the
validity of the contract, Sec. 78 of the IC in effect
allows waiver by the insurer of the condition
prepayment by making an acknowledgment in the
insurance policy of receipt of premium as
conclusive evidence of payment so far as to make
the policy binding despite the fact that premium is
actually unpaid. (Makati Tuscany Condominium
Corp. v. CA, supra)
Q: The Peninsula Insurance Company offered to
insure Francis' brand new car against all risks in
the sum of PI Million for 1 year. The policy was
issued with the premium fixed at 160,000.00
payable in 6 months. Francis only paid the first
two months installments. Despite demands, he
failed to pay the subsequent installments. Five
months after the issuance of the policy, the
vehicle was carnapped. Francis filed with the
insurance company a claim for its value.
However, the company denied his claim on the
ground that he failed to pay the premium
resulting in the cancellation of the policy. Can
Francis recover from the Peninsula Insurance
Company? (2006 BAR)
A: YES. When insured and insurer have agreed to
the payment of premium by installments and partial
payment has been made at the time of loss, then the
insurer becomes liable. When the car loss happened
on the 5th month, the six months agreed period of
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
payment had not yet elapsed. The owner may
recover from Peninsula Insurance Company, but the
latter has the right to deduct the amount of unpaid
premium from the insurance proceeds.
2. Credit Extension
Under Sec. 77 as amended by R.A. No. 10607, a
ninety (90)-day credit extension may be given
whenever credit extension is given under the broker
and agency agreements with duly licensed
intermediaries. The requisites are as follows:
1. The credit extension must be provided for
under the broker and agency agreements; and
2. The credit extension to a duly licensed
intermediary should not exceed ninety (90)
days from date of issuance of the policy.
(Sundiang Sr. & Aquino, 2014)
Q: Stable Insurance Co. (SIC) and St. Peter
Manufacturing Co. (SPMC) have had a long-
standing insurance relationship with each
other; SPMC secures the comprehensive fire
insurance on its plant and facilities from SIC. The
standing business practice between them has
been to allow SPMC a credit period of 90 days
from the renewal of the policy within which to
pay the premium.
Soon after the new policy was issued and before
premium payments could be made, a fire gutted
the covered plant and facilities to the ground.
The day after the fire, SPMC issued a manager's
check to SIC for the fire insurance premium, for
which it was issued a receipt; a week later SPMC
issued its notice of loss. SIC responded by issuing
its own manager's check for the amount of the
premiums SPMC had paid and denied SPMC's
claim on the ground that under the "cash and
carry" principle governing fire insurance, no
coverage existed at the time the fire occurred
because the insurance premium had not been
paid. Is SPMC entitled to recover for the loss
from SIC? (2003, 2013 BAR)
A: YES. St. Peter Manufacturing Company is entitled
to recover for the loss from Stable Insurance
Company. Stable Insurance Company granted a
28
 Insurance
credit term to pay the premiums. This is not against
the law, because the standing business practice of
allowing St. Peter Manufacturing Company to pay
the premiums after 60 or 90 days, was relied upon
in good faith by SPMC. Stable Insurance Company is
in estoppel. (UCPB General Insurance Company, Inc.
v. Masagana Telemart, Inc., G.R. No. 137172, 4 Apr.
2001)
Q: CCTL, through its broker and agent JLT,
applied with Chartis for professional indemnity
insurance and fidelity insurance. On Jan. 20,
2005, JLT transmitted Placing Instructions to
Chartis informing the latter that CCTL had
accepted the terms. The premium payment term
is 90 days from the inception of the policies. On
the same day, Chartis also paid the DST due for
the said policies. JLT, on behalf of CCTL,
requested extensions of the credit term. Chartis
agreed and gave CCTL more time to pay the
premiums and the DST.
Finally, on June 15, 2005, no payment having
been made by then, Chartis issued notices of
cancellation. Chartis demanded payment of the
premiums but to no avail. It then sued CCTL for
payment of sum of money with damages. CCTL
invoked Sec. 77 of the Insurance Code and
argued that since no payment of premiums had
been made, the policies took no effect at all.
Is Chartis entitled to the payment of the
premiums and SDT?
A: YES. If the insured did not actually pay the
premium but the parties have agreed that the
insurer’s liability has attached, then the insured is
considered to have extended credit on the premium.
When the insured accepts the terms of the credit,
there is a valid and binding contract of insurance.
The insured must pay the premium before the end
of the credit term; otherwise, he cannot demand
indemnification in case of loss. The insurer may
demand the premium, whether or not loss occurred.
Here, the premiums were advanced on credit. The
parties had agreed that Chartis was already liable to
indemnify CCTL if the contingencies occurred from
20 Jan. 2005 onward, even though CCTL had not
29
actually paid the premium. The insured must pay
the premium because the insurer was at risk. It
could be unjust and equitable if the insurer, after
taking on the risk of indemnifying, cannot recover
the premiums on policies for which it had
consistently granted credit terms. (Chartis
Philippines Insurance, Inc. v. Cyber City Teleservices,
Ltd., G.R. No. 234299, 3 Mar. 2021)
3. Estoppel
Q: Maxilite and Marques entered into a trust
receipt transaction with FEBTC for the shipment
of various high-technology equipment. FEBIBI,
upon the advice of FEBTC, facilitated the
procurement and processing from Makati
Insurance Company of four separate and
independent fire insurance policies over the
merchandise. Maxilite agreed that FEBTC would
debit Maxilite’s account for the premium
payments. However, said premiums were not
paid.
A fire gutted Maxilite’s office and warehouse. As
a result, Maxilite suffered losses amounting to at
least P2.1 million, which Maxilite claimed
against the fire insurance policy with Makati
Insurance Company. Makati Insurance Company
denied the fire loss claim on the ground of non-
payment of premium. FEBTC and FEBIBI
disclaimed any responsibility for the denial of
the claim. Will the claim of Maxilite prosper?
A: YES. The claim of Maxilite will prosper. FEBTC is
estopped from claiming that the insurance premium
has been unpaid. That FEBTC induced Maxilite to
believe that the insurance premium has in fact been
debited from Maxilite’s account is grounded on the
following facts: (1) FEBTC represented and
committed to handle Maxilite’s financing and capital
requirements, including the insurance of the trust
receipted merchandise; (2) the premiums of prior
insurance policies had been paid through automatic
debit arrangement; (3) FEBIBI sent FEBTC, not
Maxilite, to debit Maxilite’s account; (4) there was
no written demand from FEBTC or Makati
Insurance Company for Maxilite to pay the
insurance premium; (5) the subject insurance policy
remained uncancelled despite the alleged non-
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
payment of the premium, making it appear that the
insurance policy remained in force and binding.
Thus, Maxilite can still claim from FEBTC. (Jose
Marques and Maxilite Technologies, Inc. v. FEBTC,
G.R. Nos. 171379, 171419, 10 Jan. 2011)
4. Grace Period
In case of individual life or endowment insurance
and group life insurance, the policyholder is entitled
to a grace period of either 30 days or 1 month within
which the payment of any premium after the first
may be made. (Secs. 233(a) and 234(a), IC)
In case of industrial life insurance, the grace period
is 4 weeks, where premiums are payable monthly,
either 30 days or 1 month. (Sec. 236(a), IC)
5. Acknowledgment of Receipt of Premium
Acknowledgment of receipt of premium is
conclusive evidence of its payment, in so far as to
make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until
the premium is actually paid. (Sec. 79, IC)
When the policy contains such written
acknowledgment, it is presumed that the insurer
has waived the condition of prepayment. It hereby
creates a legal fiction of payment. The presumption
is however, extended only to the question of the
binding effect of the policy.
As far as the payment of the premium itself is
concerned, the acknowledgment is only prima facie
evidence of the fact of such payment. The insurer
may still dispute its acknowledgment but only for
the purpose of recovering the premium due and
unpaid. Whether payment was indeed made is a
question of fact.
Payment of Premium by Post-dated Check
Delivery of a promissory note or a check will not be
sufficient to make the policy binding until the said
note or check has been converted into cash. This is
consistent with Art. 1249 of the New Civil Code.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
NOTE: Payment by means of a check or note,
accepted by the insurer, bearing a date prior to the
loss, assuming availability of the funds thereof,
would be sufficient even if it remains unencashed at
the time of the loss. The subsequent effects of
encashment would retroact to the date of the
instrument and its acceptance by the creditor.
(2007 BAR)
NOTE: This is not applicable in case of post-dated
checks. The payment of a promissory note or
postdated check at a stated maturity subsequent to
the loss, is insufficient to put the insurance into
effect. (Vitug, Commercial Laws and Jurisprudence,
2006, Vol. I, p. 250)
Q: If the applicant failed to pay the premium and
instead executed a promissory note in favor of
the insurer payable within 30 days which was
accepted by the latter, is the insurer liable in
case of loss?
A: YES. The insurer is liable because there has been
a perfected insurance contract. The insurer
accepted the promise of the applicant to pay the
insurance premium within thirty 30 days from the
effective date of policy. By so doing, it has implicitly
agreed to modify the tenor of the insurance policy
and in effect, waived any provision therein that it
would only pay for the loss or damage in case the
same occurs after the payment of the premium.
Considering that the insurance policy is silent as to
the mode of payment, insurer is deemed to have
accepted the promissory note in payment of the
premium. This rendered the policy immediately
operative on the date it was delivered. (Capital
Insurance & Surety Co. Inc. v. Plastic Era Co., Inc., G.R.
No. L-22375, 18, July 1975)
Q: On Sept. 25, 2013, Danny Marcial (Danny)
procured an insurance on his life with a face
value of P5 million from RN Insurance Company
(RN), with his wife Tina Marcial (Tina) as sole
beneficiary. On the same day, Danny issued an
undated check to RN for the full amount of the
premium. On Oct. 1, 2013, RN issued the policy
covering Danny’s life insurance. On Oct. 5, 2013,
Danny met a tragic accident and died. Tina
claimed the insurance benefit, but RN was quick
30
 Insurance
to deny the claim because at the time of Danny’s
death, the check was not yet encashed and
therefore the premium remained unpaid.
a. Is RN correct?
b. Will your answer be the same if the check is
dated Oct. 15, 2013? (2014 BAR)
A:
a. NO. RN Insurance is not correct. The facts of the
case show that Danny procured insurance on
his life on Sept. 25, 2013, with his wife Tina as
beneficiary, and on that same day, he issued an
undated check to RN for the full amount of the
premium. Since the undated check was issued
to RN on Sept. 25, 2013, it will be considered
dated as of the same day.
RN Insurance denied the claim of Tina because
at the time of Danny’s death, the check was not
yet encashed, therefore, the premium remained
unpaid. The payment by means of a check or
note, accepted by the insurer, bearing a date
prior to the loss, assuming the availability of the
funds thereof, would be sufficient even if it
remains unencashed at the time of the loss. The
subsequent effects of encashment would
retroact to the date of the mercantile
instrument.
b. NO. The answer would not be the same if the
check were dated Oct. 15, 2013. The payment
of a promissory note or postdated check at a
stated maturity subsequent to the loss, is
insufficient to put the insurance into effect.
(Vitug, Commercial Laws and Jurisprudence,
2006, Vol. I, p. 250)
If it were RN Insurance who dated the check
Oct. 15, 2013, then my answer would be the
same as my answer to the first question.
Q: Alfredo took out a policy to insure his
commercial building from fire. The broker for
the insurance company agreed to give a 15-day
credit within which to pay the insurance
premium. Upon delivery of the policy on May 15,
2006, Alfredo issued a postdated check payable
on May 30, 2006. On May 28, 2006, a fire broke
31
out and destroyed the building owned by
Alfredo. May Alfredo recover on the insurance
policy? (2007 BAR)
A: YES. Alfredo may recover on the policy. It is valid
to stipulate that the insured will be granted credit
term for payment of premium. Payment by means of
a check which was accepted by the insurer, bearing
a date prior to the loss, would be sufficient. The
subsequent effects of encashment retroact to the
date of the check. (UCPB General Insurance Co., Inc.
v. Masagana Telamart, Inc., G.R. No. 137172, 4 Apr.
2001)
Non-payment of Premiums
Non-payment of the premium will not entitle the
insured to recover the premium from the insurer.
The continuance of the insurer’s obligation is
conditioned upon the payment of the premium, so
that no recovery can be had upon a lapsed policy,
the contractual relation between the parties having
ceased. If the peril insured against had occurred, the
insurer would have had a valid defense against
recovery under the policy.
Non-payment of the first premium prevents the
contract from becoming binding notwithstanding
the acceptance of the application or the issuance of
the policy, unless waived. But nonpayment of the
balance of the premium due does not produce the
cancellation of the contract.
With respect to subsequent premiums, non-payment
does not affect the validity of the contracts unless,
by express stipulation, it is provided that the policy
shall in that event be suspended or shall lapse. (De
Leon, 2010)
Non-payment of Premiums by reason of the
Circumstances or Conduct of the Insurer
GR: Non-payment of premiums does not merely
suspend but put an end to an insurance contract
since the time of the payment is peculiarly of the
essence of the contract. (De Leon, 2010)
XPNs: (I-W-W)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
1. The insurer has become Insolvent and has
suspended business, or has refused without
justification a valid tender of premiums;
(Gonzales v. Asia Life Ins. Co., G.R. No. L-5188, 29
Oct. 1952)
2. Failure to pay was due to the Wrongful
conduct of the insurer; or
3. The insurer has Waived his right to demand
payment.
Fortuitous events will not prevent forfeiture of the
policy when the premium remains unpaid. Hence,
non-payment of premium by reason of a fortuitous
event is not an excuse.
Non-payment of premiums occasioned by war
causes complete abrogation of the insurance. Hence,
war does not excuse non-payment. (Constantino v.
Asia Life Insurance Company, G.R. No. L-1669-70, 31
Aug. 1950)
NON-DEFAULT OPTIONS IN LIFE INSURANCE
Non-Default or Forfeiture Options in Whole Life
Insurance
1. Extended term insurance, where the policy’s
available cash value will be used as single
premium to purchase a term insurance.
2. Reduced paid up cash value, where the policy’s
available cash value will be used to purchase a
paid up insurance providing a coverage with
term equivalent to the original policy but lower
amount.
3. Cash surrender value, where the cash value of
the policy is paid to the insured upon surrender
of the policy. However, once policy is
surrendered, it can’t be reinstated.
Refund of premium is not recoverable in life
insurance but the insured has non-default or
forfeiture options. (Divina, 2021)
NOTE: Whole life or permanent insurance is one
where the insurer pays benefits whenever the
insured dies. (Divina, 2021)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
REINSTATEMENT OF A LAPSED POLICY
OF LIFE INSURANCE
Purpose of the Reinstatement Provision
The purpose of the provision is to clarify the
requirements for restoring a policy to premium-
paying status after it has been permitted to lapse.
The law requires that the policy owner be
permitted to reinstate the policy, subject to the
violations specified, any time within three (3)
years from the date of default of premium
payment. A longer period, being more favorable to
the insured, may be used.
Reinstatement is not an absolute right of the
insured, but discretionary on the part of the
insurer, which has the right to deny reinstatement
if it were not satisfied as to the insurability of the
insured, and if the latter did not pay all overdue
premiums and other indebtedness to the insurer.
(McGuire v. Manufacturer’s Life Ins. Co., G.R. No. L-
3581, 21 Sept. 1950)
Q: A life insurance policy lapsed. The insured
applied for reinstatement of the policy and paid
only a part of the overdue premiums.
Subsequently, the insured died. Was the insurer
liable?
A: The insurer is not liable as the policy was not
reinstated. The failure to pay the balance of the
overdue premiums prevented reinstatement and
recovery of the face value of the policy. (Andres v.
Crown Life Ins. Co., G.R. No. L-10874, 28 Jan. 1958)
Q: Eulogio took out a life insurance policy which
contained a provision which allows for
reinstatement any time within three years after
it lapsed. Eulogio paid the premiums due on the
first two months. However, he failed to pay
subsequent premiums. One month after the
policy lapsed, he filed an application for the
reinstatement of his policy. He deposited the
overdue premiums and signed a reinstatement
policy stating that the payment deposit only
and shall not bind the Company until this
application is finally approved. Hours later,
32
 Insurance
Eulogio died of electrocution. The insurance
company denied the claim of his beneficiaries
stating that the policy was never approved. Is
the contention of the insurance company valid?
A: YES. The stipulation in a life insurance policy
giving the insured the privilege to reinstate it upon
written application does not give the insured
absolute right to such reinstatement by the mere
filing of an application. The insurer has the right to
deny the reinstatement if it is not satisfied as to the
insurability of the insured and if the latter does not
pay all overdue premium and all other
indebtedness to the insurer. After the death of the
insured, the Insurance Company cannot be
compelled to entertain an application for
reinstatement of the policy because the conditions
precedent to reinstatement can no longer be
determined and satisfied. (Violeta Lalican v. Insular
Life, G.R. No. 183526, 25 Aug. 2009)
REFUND OF PREMIUM
Instances when the Insured Entitled to Recover
Premiums Already Paid or a Portion thereof
(2000 BAR)
1. Whole or Full Amount (E-F-I-De-R)
a. When no part of the thing insured has been
Exposed to any of the perils insured
against. (Sec. 80, IC)
b. When the contract is voidable because of
the Fraud or misrepresentations of the
insurer of his agent. (Sec. 82, IC)
c. When the insurance is voidable because of
the existence of facts of which the insured
was Ignorant without his fault. (Sec. 82, IC)
d. When the insurer never incurred any
liability under the policy because of the
Default of the insured other than actual
fraud. (Sec. 82, IC)
e. When Rescission is granted due to insurer’s
breach of contract. (Sec. 74, IC)
NOTE: When the contract is voidable, a person
insured is entitled to a return of the premium
33
when such contract is subsequently annulled
under the provisions of the New Civil Code.
A person insured is not entitled to a return of
premium if the policy is annulled, rescinded or if a
claim is denied by reason of fraud. (Sec. 82, IC)
2. Pro rata (DO)
a. When the insurance is for a Definite period
and the insured surrenders his policy
before the termination thereof; except:
i. Policy not made for a definite period
of time;
ii. Short period rate is agreed upon; or
iii. In life insurance policy.
b. When there is Over-insurance. The
premiums to be returned shall be
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing at
risk. (Sec. 83, IC)
i. In case of over-insurance by double
insurance, the insurer is not liable for
the total amount of the insurance
taken, his liability being limited to the
property insured. Hence, the insurer
is not entitled to that portion of the
premium corresponding to the excess
of the insurance over the insurable
interest of the insured. (1990 BAR)
ii. In case of over-insurance by several
insurers, the insured is entitled to a
ratable return of the premium,
proportioned to the amount by which
the aggregate sum insured in all the
policies exceeds the insurable value of
the thing insured. (Sec. 83, IC)
Illustration:
Where there is a total over insurance of
P500,000.00 in an aggregate P2,000,000.00
policy (P1,500,000.00 is only the insurable
value), 25% (proportion of P500k to P2M)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

of the premiums paid to the several

insurers should be returned. C. RIGHTS AND OBLIGATIONS OF PARTIES

When the Insured is NOT Entitled to Return of

Premiums Paid (L-I2-F-E)
Parties to the Contract of Insurance

1. In Life insurance policies; (Sec. 80(b), IC)

1. Insurer – party who assumes or accepts the risk
2. If contract is Illegal and the parties are in pari
of loss and undertakes for a consideration to
delicto;
indemnify the insured on the happening of a
3. If the policy is annulled, rescinded or if a claim
specified contingency or event.
is denied by reason of Fraud; (Sec. 82, IC) or
4. If the peril insured against has Existed, and the
2. Insured – person in whose favor the contract is
insurer has been liable for any period, the peril
operative and who is indemnified against or is
being entire and Indivisible. (Sec. 81, IC)
to receive a certain sum upon the happening of
a specified contingency or event.
Q: Teodoro Cortez, applied for a 20-year
endowment policy with Great Pacific Insurance
NOTE: The insured is not always the person to
Corporation (Great Pacific). His application,
whom the proceeds are paid.
with the requisite medical examination, was
accepted and approved by the Great Pacific and
NOTE: An insured may be considered a
in due course, an endowment policy was issued
policyholder under the Insurance Code. The
in his name. Thereafter, Great Pacific advised
Insurance Commission defines a policyholder as
Cortez that the policy was not in force.
the named owner of the insurance policy who
may be the insured or assured in life or nonlife
To make it enforceable and operative, Cortez
insurance policy or a beneficiary as may be
was asked to remit the balance to complete his
applicable. (Aquino, 2018)
initial annual premium and to see Dr. Felipe V.
Remollo for another full medical examination at
Assured or Beneficiary
his own expense. Because of this, Cortez
informed that it that he was cancelling the policy
An Assured/Beneficiary is a person designated by
and he demanded the return of his premium
the terms of the policy to receive the proceeds of the
plus damages. Great Pacific ignored his demand.
insurance. He may be the insured or a third party in
Is Cortez entitled to a refund of his premium?
the contract for whose benefit the policy is issued
and to whom the loss is payable.
A: YES. Great Pacific should have informed Cortez of
the deadline for paying the first premium before or
Insurer
at least upon delivery of the policy to him, so he
could have complied with what was needful and
Every corporation, partnership, or association duly
would not have been misled into believing that his
authorized to transact insurance business as
life and his family were protected by the policy,
elsewhere provided in the Insurance Code, may be
when actually they were not. And, if the premium
an insurer. (Sec. 6, IC)
paid by Cortez was unacceptable for being late, it
was the company's duty to return it. Since his policy
The term “insurer” no longer includes “individuals”
was in fact inoperative or ineffectual from the
under R.A. No. 10607. Hence, an individual natural
beginning, the company was never at risk, hence, it
person is no longer allowed to be an insurer. The
is not entitled to keep the premium. (Great Pacific
term, however, includes the following:
Life Insurance Corp. v. CA, et al., G.R. No. L-57308, 23
Apr. 1990)
1. Professional reinsurer – any person,
partnership, association or corporation that

UNIVERSITY OF SANTO TOMAS 34

2022 GOLDEN NOTES
 Insurance
transacts solely and exclusively reinsurance
business in the Philippines.
2. Mutual Insurance Companies – The law also
provides for the procedure for mutualization of
domestic stock life insurance companies. A new
provision on RA 10607 is on demutualization or
conversion of mutual insurance companies into
stock corporations. (Sec. 280, IC)
3. Cooperatives – are now expressly included in
the term “insurer” or “insurance company.”
However, the cooperative must: (Su-C-A)
a. Have Sufficient capital and assets required
under the Insurance Code and the pertinent
regulations issued by the Commission. (Sec.
192, IC)
b. Have a Certificate of Authority to operate
issued by the Commission which should be
renewed every year. (Sec. 193, IC; Sundiang
Sr. & Aquino, 2014)
(See also definition of “doing an insurance business”
or “transacting an insurance business” – page 1)
Q: Philippine Health Care Providers, Inc. is
engaged in operating a prepaid group practice
health care delivery system or a health
maintenance organization (HMO) to take care of
the sick and disabled persons enrolled in the
health care plan. Individuals enrolled in its
health care programs pay an annual
membership fee and are entitled to various
medical services provided by its duly licensed
physicians, specialists and other professional
technical staff participating in the group
practice health delivery system at a hospital or
clinic operated or accredited by it. Is Philippine
Health Care Providers, Inc. an insurance
company or HMO?
A: HMOs are not insurance businesses. One test that
they have applied is whether the assumption of risk
and indemnification of loss (which are elements of
an insurance business) are the principal object and
purpose of the organization or whether they are
merely incidental to its business. If these are the
35
principal objectives, the business is that of
insurance. But if they are merely incidental and
service is the principal purpose, then the business is
not insurance.
Philippine Health Care Providers appears to provide
insurance-type benefits to its members (with
respect to its curative medical services), but these
are incidental to the principal activity of providing
them medical care. The “insurance-like" aspect of
Philippine Health Care Providers’ business is
miniscule compared to its noninsurance activities.
Therefore, since it substantially provides health
care services rather than insurance services, it
cannot be considered as being in the insurance
business. (Philippine Health Care Providers Inc., v.
CIR, G.R. No. 167330, 18 Sept. 2009)
Rights and Obligations of the Parties in an
Insurance Contract
The rights and obligations of the parties must be
determined by the terms of their contract, taking
into consideration its purpose and always in
accordance with the general principles of insurance
law. (Aquino, 2018)
Each party to a contract of insurance is bound to
know all the general causes which are open to his
inquiry, equally with that of the other, and which
may affect the political or material perils
contemplated; and all general usages of trade. (Sec.
32, IC)
Right to Information of Material Facts
The right to information of material facts may be
waived, either by the terms of insurance or by
neglect to make inquiry as to such facts, where they
are distinctly implied in other facts of which
information is communicated. (Sec. 33, IC)
Rights of Policyholders (F-A-IL-O-IBEO-R-C-ES-
SC-A)
1. Right to a Financially sound and viable
insurance company;
2. Right to Access insurance companies’ official
financial information;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
3. Right to be Informed of the License status of
insurance companies, intermediaries, and
soliciting agents;
4. Right to be Offered a duly approved insurance
product;
5. Right to be Informed of the Benefits, Exclusions,
and Other provisions under the policy;
6. Right to Receive the policy;
7. Right to Confidentiality of information;
8. Right to Efficient Service from insurance
companies, intermediaries, and soliciting
agents;
9. Right to prompt and fair Settlement of Claims;
and
10. Right to seek Assistance from the Insurance
Commission. (Aquino, 2018)
Insured’s Right to Change Designated
Beneficiaries
The insured shall have the right to change the
beneficiary he designated in the policy, unless he
has expressly waived this right in said policy.
Notwithstanding the foregoing, in the event the
insured does not change the beneficiary during his
lifetime, the designation shall be deemed
irrevocable. (Sec. 11, IC)
(See also discussion on Change of Beneficiary –
page 7)
Limitations in the Appointment of Beneficiary
Any person who is forbidden from receiving any
donation under Art. 739 cannot be named
beneficiary of a life insurance policy by the person
who cannot make any donation to him, according to
said article. (Art. 2012, NCC)
(See discussion on Persons Prohibited from being
Designated as Beneficiaries – page 9)
Effect of Death of Insured
The right must be exercised specifically in the
manner provided in the policy or contract. However,
the insured’s power to extinguish the beneficiary’s
interest ceases at his death, and cannot be exercised
by his personal representatives or assignees. The
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
beneficiary’s designation shall be deemed
irrevocable. (De Leon, 2014)
Where Right to Change is Waived
If the right to change the beneficiary is expressly
waived in the policy, then the insured has no power
to make such change without the consent of the
beneficiary. (De Leon, 2014)
The insured does not even retain the power to
destroy the contract by refusing to pay premiums
for the beneficiary can protect his interest by paying
the premiums for the reason that the fulfillment of
an obligation may be made by a third person even
against the will of the debtor and if he has an
interest in the fulfillment of the obligation, even
against the will of the creditor. (Art. 1236, NCC)
Insurer’s Right of Subrogation
If the plaintiff's property has been insured, and he
has received indemnity from the insurance
company for the injury or loss arising out of the
wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights
of the insured against the wrongdoer or the person
who has violated the contract. If the amount paid by
the insurance company does not fully cover the
injury or loss, the aggrieved party shall be entitled
to recover the deficiency from the person causing
the loss or injury. (Art. 2207, NCC)
The insurer, after paying the amount covered by the
policy, steps into the shoes of the insured, availing
himself the latter’s rights that exist against the
wrongdoer at the time of the loss. (De Leon, 2014).
Payment by the Insurer to the Assured Operates
as an Equitable Assignment
Payment by the insurer to the assured operates as
an equitable assignment to the insurer of all
remedies, which the assured may have against the
third party whose negligence or wrongful act
caused the loss.
The right of subrogation is not dependent upon, nor
does it grow out of any privity of contract or upon
36
 Insurance
written assignment of claim. It accrues simply upon
payment of the insurance claim by the insurer. (Pan
Malayan Insurance Corporation v. CA, G.R. No. 81026,
03 Apr. 1990)
Effects of Legal Subrogation under Art. 2207 of
the NCC
Legal subrogation produces the same effects as of
assignment and no new obligation is created
between the subrogee and debtor.
The effect of legal subrogation is to transfer to the
new creditor the credit and all the rights and actions
that could have been exercised by the former
creditor either against the debtor or against third
persons, be they guarantors or mortgagors.
Simply stated, except only for the change in the
person of the creditor, the obligation subsists in all
respects as before the novation. However, unlike
assignment, legal subrogation, to produce effects,
does not need to be agreed upon by the subrogee
and subrogor. (Henson Jr. v. UCPB General Insurance
Co., Inc., G.R. No. 223134, 14 Aug. 2019)
Reasons behind the Right of Subrogation
1. To make the person who caused the loss legally
responsible for it; and
2. To prevent the insured from having double
recovery from the wrongdoer and insurer. (De
Leon, 2014)
Right of Subrogation Applicable Only to
Property Insurance
The value of human life is incapable of pecuniary
estimation. In addition, Art. 2207 of the NCC refers
only to property. (De Leon, 2014)
XPNs to the Right of Subrogation:
1. If the insured, by his own act, releases the
wrongdoer from liability;
2. Where the insurer pays the assured the value of
the lost goods without notifying the carrier who
37
has in good faith settled the assured’s claim for
loss; and
3. Where the insurer pays the assured for a loss
which is not a risk covered by the policy, thereby
effecting “voluntary payment”. (Pan Malayan
Insurance Corporation v. CA, supra)
Prescriptive Period in cases where the Insurer is
Subrogated to the Rights of the Insured against
the Wrongdoer
Following the principles of subrogation, the insurer
inherits only the remaining period within which
the insured may file an action against the
wrongdoer.
The ruling in Henson v. UCPB General Insurance Co.,
Inc. (G.R. No. 223134, 14 Aug. 2019) abandoned the
ruling in the case of Vector Shipping v. American
Home Assurance Company (G.R. No. 159213, 03 July,
2013) with regard the prescriptive period in cases
where the insurer is subrogated to the rights of the
insured against the wrongdoer.
Vector Shipping v. American Home Assurance
Company became final on Aug. 15, 2013 while
Henson v. UCPB General Insurance Co., Inc. became
final on Aug. 14, 2019.
Guidelines to the Application of the Henson
Ruling regarding the prescriptive period of filing
claims
The Henson Ruling will only apply prospectively.
First Guideline: For actions of such nature that have
already been filed and are currently pending before
the courts at the time of the finality of this Decision,
the rules on prescription prevailing at the time the
action is filed would apply.
1. For cases that were filed by the subrogee-
insurer prior to the applicability of the Vector
ruling (i.e., before Aug. 15, 2013), the
prescriptive period is four (4) years from the
time the tort is committed against the insured
by the wrongdoer.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

2. For cases that were filed by the subrogee-
insurer during the applicability of the Vector
ruling (i.e., from Vector's finality on Aug. 15,
2013 up until the finality of this Decision on
Aug. 14, 2019), the prescriptive period is ten
(10) years from the time of payment by the
insurer to the insured, which gave rise to an
obligation created by law.
Second Guideline: For actions of such nature that
have not yet been filed at the time of the finality of
this Decision:
1. For cases where the tort was committed and the
consequent loss/injury against the insured
occurred prior to the finality of this Decision
(Aug. 14, 2019), the subrogee-insurer is given
an additional four (4) years from the time of the
finality of this Decision to file the action against
the wrongdoer; but the total period to file such
case shall not exceed ten (10) years from the
time the insurer is subrogated to the rights of
the insured.
period in the policy subject to the limitation under
Sec. 63 of the IC which states that “a condition,
stipulation, or agreement in any policy of insurance,
limiting the time for commencing an action
thereunder to a period of less than one (1) year from
the time when the cause accrues, is void. (Aquino,
2018)
Final Rejection of the Claim
The prescriptive period for the insured’s action for
indemnity should be reckoned from the final
rejection of the claim. The final rejection simply
means denial by the insurer of the claims of the
insured and not the rejection or denial by the
insurer of the insured’s motion or request for
reconsideration. The rejection referred to should be
construed as the rejection in the first instance.
(Alpha Plus International Enterprises Corp. v.
Philippine Charter Insurance Corp, G.R. No. 203756,
10 Feb. 2021)

2. For cases where the tort was committed and the

consequent loss/injury against the insured
occurred only upon or after the finality of this
Decision, the prescriptive period is four (4)
years from the time the tort is committed
against the insured by the wrongdoer. The
Vector doctrine would hold no application.
(Henson Jr. v. UCPB General Insurance Co., Inc.,
G.R. No. 223134, 14 Aug. 2019)

Right to the Recovery of the Proceeds of the

Insurance

The named beneficiary is the person designated by

the terms of the policy as the one to receive the
proceeds of the insurance. (Aquino, 2018)

Prescriptive Period for Filing of a Complaint for

the Recovery of the Proceeds of the Insurance

The Insurance Code does not provide for a

prescriptive period for the filing of a complaint for
the recovery of the proceeds of the insurance.
However, the parties may stipulate a prescriptive

UNIVERSITY OF SANTO TOMAS 38

2022 GOLDEN NOTES
 Insurance

Notice of Cancellation of the Contract

D. RESCISSION OF INSURANCE CONTRACTS
All notices of cancellation shall be in writing, mailed
or delivered to the named insured at the address
shown in the policy, or to his broker provided the
Instances wherein a Contract of Insurance may
broker is authorized in writing by the policy owner
be Rescinded (1991, 1994, 1996, 1998 BAR)
to receive the notice of cancellation on his behalf,
(Co-M-B)
and shall state:

1. Concealment
1. Which of the grounds set forth in Sec. 64 is
2. Misrepresentation/ omission
relied upon; and
3. Breach of warranties
2. That, upon written request of the named
insured, the insurer will furnish the facts on
Instances wherein a Contract of Insurance may
which the cancellation is based. (Sec. 65, IC)
be Canceled by the Insurer
(N-C-D-P-Discovery of Fra-M-E-W-O-R)
CONCEALMENT

1. Nonpayment of premium;
Concealment is a neglect to communicate that
which a party knows and ought to communicate.
2. Conviction of a crime arising out of acts
(Sec. 26, IC)
increasing the hazard insured against;

Under Sec. 27 of the IC, “a concealment entitles the

3. A Determination by the Commissioner that the
injured party to rescind a contract of insurance.”
continuation of the policy would violate or
Moreover, under Sec. 168 of the IC, the insurer is
would place the insurer in violation of the
entitled to rescind the insurance contract in case of
Insurance Code;
an alteration in the use or condition of the thing
insured. (Malayan Insurance Company v. PAP Co.,
4. Physical changes in the property insured which
G.R. No. 200784, 7 Aug. 2013, in Divina 2014)
result in the property becoming uninsurable;

Requisites: (Ne-D-NoW-NoM-Ma)
5. Discovery of Fraud or Material
misrepresentation;
1. A party knows a fact which he Neglects to
communicate or disclose to the other party;
6. Discovery of other insurance coverage that
2. Such party concealing is Duty bound to disclose
makes the total insurance in Excess of the value
such fact to the other;
of the property insured; or
3. Such party concealing makes No Warranty as to
the fact concealed;
7. Discovery of Willful or Omissions or Reckless
4. The other party has No Means of ascertaining
acts increasing the hazard insured against. (Sec.
the fact concealed; and
64, IC)
5. The fact must be Material.

No policy of insurance other than life shall be

Test of Materiality (2000 BAR)
canceled by the insurer except upon prior notice
thereof to the insured, and no notice of cancellation
It is determined not by the event, but solely by the
shall be effective unless it is based on the
probable and reasonable influence of the facts upon
occurrence, after the effective date of the policy, of
the party to whom the communication is due, in
one or more of the abovementioned instances. (Sec.
forming his estimate of the disadvantages of the
64, Ibid)
proposed contract, or in making his inquiries. (Sec.
31, IC)

39 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
NOTE: As long as the facts concealed are material,
concealment, whether intentional or not, entitles
the injured party to rescind. (Sec. 27, IC)
Facts not conveyed to the insurer raises
presumption that the failure of the insured to
communicate must have been intentional rather
than inadvertent. Good faith is not a defense
because of the Uberrimae Fidei Doctrine.
Rules on Concealment
1. If there is concealment under Sec. 27, the
remedy of the insurer is rescission since
concealment vitiates the contract of insurance;
(1996 BAR)
2. The party claiming the existence of
concealment must prove that there was
knowledge of the fact concealed on the part of
the party charged with concealment.;
3. Good faith is NOT a defense in concealment.
Concealment, whether intentional or
unintentional entitles the injured party to
rescind the contract of insurance; (Sec. 27, IC)
4. The matter concealed need not be the cause of
loss; (Sec. 31, IC) and
5. To be guilty of concealment, a party must have
knowledge of the fact concealed at the time of
the effectivity of the policy.
Q: Should the fact/s concealed be the proximate
cause of the loss in order to constitute
concealment?
A: NO, the facts concealed need not be the proximate
cause of the loss in order to constitute concealment.
Materiality is to be determined not by the event, but
solely by the probable and reasonable influence of
the facts upon the party to whom the
communication is due, in forming his estimate of the
disadvantages of the proposed contract, or in
making his inquiries. The test is whether the
matters concealed would have definitely affected
the insurer’s action on the application of the
insured, either by approving it with the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
corresponding adjustment for a higher premium or
rejecting the same. (Sunlife Assurance Company of
Canada v. CA, G.R. No. 105135, 22 June 1995 in Divina,
2021)
In order for Concealment to Produce the Effect
of Avoiding the Policy, it should Take Place at the
Time the Contract is Entered into
Concealment should take place at the time the
contract is entered into and not afterwards in order
that the policy may be avoided. The duty of
disclosure ends with the completion of the contract.
Waiver of medical examination in a non-medical
insurance contract renders even more material the
information required of the applicant concerning
previous condition of health and diseases suffered,
for such information necessarily constitutes an
important factor which the insurer takes into
consideration in deciding whether to issue the
policy or not. Failure to communicate information
acquired after the effectivity of the policy will not be
a ground to rescind the contract.
NOTE: The reason for this rule is that if concealment
should take place after the contract is entered into,
the information concealed is no longer material as it
will no longer influence the other party to enter into
such contract.
Q: Joanna applied for a non-medical life
insurance. Joanna did not inform the insurer
that one week prior to her application for
insurance, she was examined and confined at St.
Luke’s Hospital where she was diagnosed for
lung cancer. The insured soon thereafter died in
a plane crash. Is the insurer liable considering
that the fact concealed had no bearing with the
cause of death of the insured? Why? (2001 BAR)
A: NO. The insurer is not liable. The concealed fact
is material to the approval and issuance of the
insurance policy. It is well settled that the insured
need not die of the disease she failed to disclose to
the insurer. It is sufficient that his nondisclosure
misled the insurer in forming his estimate of the
risks of the proposed insurance policy or in making
inquiries. (Sun Life v. CA, supra)
40
 Insurance
Q: On June 21, 2008, Yate took out a life
insurance policy on her life in the amount of PhP
10 million and named her husband Vandy and
daughter as joint irrevocable beneficiaries.
Before the policy was issued and the premiums
were paid, Yate underwent a medical checkup
with a physician accredited by the insurer, and
the only result found was that she was suffering
from high blood pressure.
Yate was previously diagnosed by a private
physician of having breast cancer which she did
not disclose to the insurer in her application,
nor to the insurer's accredited physician
because by then, she was told that she was
already cancer-free after undergoing surgery
which removed both her breasts. She was later
diagnosed with psychotic tendency that
graduated into extreme despondency.
She was found dead hanging in her closet 36
months after the issuance of the policy. The
police authorities declared it to be a case of
suicide. The policy did not include suicide as an
excepted risk.
a. Can the insurer raise the issue of failure to
disclose that she had cancer as a cause for
denying the claim of the beneficiaries?
b. Are the beneficiaries entitled to receive the
proceeds of the life insurance
notwithstanding the fact that the cause of
death was suicide? (2018 BAR)
A:
a. The insurer cannot raise the issue of
concealment, because only material facts
known to the insured at the time of the issuance
of the policy should be disclosed to the insurer
(Sec. 28, IC). Yate’s previous cancer diagnosis is
no longer a material fact at the time she
procured the policy.
b. YES. The beneficiaries are entitled to receive
the proceeds. The rule is that the insurer in life
insurance is liable in case of suicide only when
it is committed after the policy has been in force
for a period of two years from the date of issue
41
or last reinstatement. The rule, however, admits
of an exception so that when suicide is
committed in the state of insanity, it shall be
compensable regardless of the date of
commission. (Sec. 183, IC)
In the facts given, Yate was diagnosed with
psychotic tendency that graduated into extreme
despondency; thus, even though Yate
committed suicide 36 months from issuance of
the policy, the insurer is liable.
Concealment in Marine Insurance
Rules on concealment are stricter in marine
insurance since the insurer would have to depend
almost entirely on the matters communicated by the
insured. Thus, in addition to material facts, each
party must disclose all the information he possesses
which are material or the information of the belief
or expectation of a third person, in reference to a
material fact. But concealment in a marine
insurance in any of the following matters
enumerated under Sec. 112 of the IC does not vitiate
the entire contract, but merely exonerates the
insurer from a loss resulting from the risk
concealed.
Test in Ascertaining the Existence of
Concealment
If the applicant is aware of the existence of some
circumstances which he knows would probably
influence the insurer in acting upon his application,
good faith requires him to disclose that
circumstance, though unasked.
Matters that Need NOT be Disclosed
GR: The parties are not bound to communicate
information of the following matters:
(O-W-K-E-R-I)
1. Those which, in the exercise of ordinary care,
the other Ought to know and of which, the
former has no reason to suppose him ignorant;
2. Those of which the other Waives
communication;
3. Those which the other Knows;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
4. Those which prove or tend to prove the
Existence of a risk excluded by a warranty, and
which are not otherwise material;
5. Those which Relate to a risk excepted from the
policy and which are not otherwise material;
and
6. The nature or amount of the Interest of one
insured, except if he is not the owner of the
property insured. (Sec. 34, IC)
XPN: In answer to inquiries of the other. (Sec. 30, IC)
NOTE: Neither party is bound to communicate, even
upon inquiry, information of his own judgment,
because such would add nothing to the appraisal of
the application. (Sec. 35, IC)
Matters that Must be Disclosed Even in the
Absence of Inquiry
1. Those material to the contract;
2. Those which the other has no means of
ascertaining; and
3. Those as to which the party with the duty to
communicate makes no warranty.
NOTE: Matters relating to the health of the insured
are material and relevant to the approval of the
issuance of the life insurance policy as these
definitely affect the insurer’s action to the
application. It is well-settled that the insured need
not die of the disease he had failed to disclose to the
insurer, as it is sufficient that his non-disclosure
misled the insurer in forming his estimates of the
risks of the proposed insurance policy or in making
inquiries. (Sunlife Assurance Co. of Canada v. CA,
supra)
Information as to the nature of interest need not be
disclosed except in property insurance if the
insured is not the owner. If somebody is insuring
properties of which he is not the owner, he must
disclose why he has insurable interest that would
entitle him to ensure it, and the extent thereof. (Secs.
34 and 51(e), IC)
Q: X insured his life for P20 million. X plays golf
and regularly exercises everyday, hence is
considered in good health. He did not know,
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
however, that his frequent headache is really
caused by his being hypertensive. In his
application form for a life insurance for himself,
he did not put a check to the question if he is
suffering from hypertension, believing that
because of his active lifestyle, being
hypertensive is a remote possibility. While
playing golf one day, X collapsed at the fairway
and was declared dead on arrival at the
hospital. His death certificate stated that X
suffered a massive heart attack.
a. Will the beneficiary of X be entitled to the
proceeds of the life insurance under the
circumstances, despite the non-disclosure
that he is hypertensive at the time of
application?
b. If X died in an accident instead of a heart
attack, would the fact of X's failure to
disclose that he is hypertensive be
considered as material information? (2016
BAR)
A:
a. NO, the beneficiary of X is not entitled to the
proceeds of the life insurance. The
hypertension of X is a material fact that should
have been disclosed to the insurer. The
concealment of such material fact entitles the
insurer to rescind the insurance policy.
b. It is still a material information. It is settled that
the insured cannot recover even though the
material fact not disclosed is not the cause of
the loss.
Evidence of Insurability
Evidence of Insurability is a broader phrase than
“Evidence of Good Health” and includes such other
factors as the insured’s occupation, habits, financial
condition, and other risk selection factors.
Q: Ngo Hing filed an application with the Great
Pacific Life Assurance Company (Pacific Life) for
a twenty-year endowment policy on the life of
his one-year-old daughter Helen Go. Ngo Hing
supplied the essential data and filed the
42
 Insurance
application to Mondragon, the branch manager.
After some time, Helen Go died of influenza with
complication of bronchopneumonia.
Thereupon, Ngo Hing sought the payment of the
proceeds of the insurance, but having failed in
his effort, he filed the action for the recovery of
the same. Did Ngo Hing conceal the state of
health and physical condition of Helen Go, which
rendered void the binding receipt?
A: YES. Ngo Hing intentionally concealed the state of
health of his daughter Helen Go. He was fully aware
that his child was a typical mongoloid child upon
filling out the application form. It is evident that he
withheld a fact material to the risk to be assumed by
the insurance company had the plan be approved.
The contract of insurance is one of perfect good
faith, uberrimae fides, absolute and perfect candor;
the absence of any concealment or demotion.
Concealment is a neglect to communicate that which
needs to be communicated whether intentional or
unintentional. In case of concealment, the insurer is
entitled to rescind the contract of insurance. In the
case at bar, the respondent is guilty of such
concealment. Ultimately, there was no perfected
contract of insurance since the conditions in the
binding receipt were not complied with by the
applicant. (Great Pacific Life Assurance Company v.
CA, G.R. No. L-31845, 30 Apr. 1979)
Q: Benny applied for life insurance for Php 1.5
Million. The insurance company approved his
application and issued an insurance policy
effective 6 Nov. 2008. Benny named his children
as his beneficiaries. On 6 Apr. 2010, Benny died
of hepatoma, a liver ailment.
The insurance company denied the children's
claim for the proceeds of the insurance policy on
the ground that Benny failed to disclose in his
application two previous consultations with his
doctors for diabetes and hypertension, and that
he had been diagnosed to be suffering from
hepatoma. The insurance company also
rescinded the policy and refunded the
premiums paid. Was the insurance company
correct? (2013 BAR)
43
A: YES. The insurance company correctly rescinded
the policy because of concealment. Benny did not
disclose that he was suffering from diabetes,
hypertension, and hepatoma. The concealment is
material because these are serious ailments. Also,
Benny died less than two years from the date of the
issuance of the policy, hence rescission is still
possible. (Sec. 26; Sec. 48, IC)
Right to Information of Material Facts May be
Waived
1. Expressly by the terms of the contract; or
2. Impliedly the failure to make an inquiry as to
such facts, where they are distinctly implied in
other facts from which information is
communicated. (Sec. 33, IC)
Q: Kwong Nam applied for a 20-year endowment
insurance on his life with his wife, Ng Gan Zee as
beneficiary. On the same date, Asian Crusader,
upon receipt of the required premium from the
insured, approved the application and issued
the corresponding policy. Kwong Nam died of
cancer of the liver with metastasis. All
premiums had been paid at the time of his death.
Ng Gan Zee presented a claim for payment of the
face value of the policy. Asian Crusader Life
Assurance denied the claim on the ground that
the answers given by the insured to the
questions in his application for life insurance
were untrue, claiming Kwong Nam's
misrepresentation when he answered "No" to
the question appearing in the application for life
insurance. Also, it was alleged that Kwong Nam
was examined in connection with his application
for life insurance, but he gave the medical
examiner false and misleading information as to
his ailment and previous operation by saying
that it was associated with ulcer of the stomach.
Asian Crusader contended that he was operated
on for peptic ulcer 2 years before the policy was
applied for and that he never disclosed such an
operation. Was there concealment?
A: NO, concealment exists where the assured has
knowledge of fact material to the risk, and honesty,
good faith, and fair dealing require that he should
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
communicate it to the assurer, but he designedly
and intentionally withholds the same. In the
absence of evidence that the insured had sufficient
medical knowledge as to enable him to distinguish
peptic ulcer and a tumor, his statement that said
tumor was associated with ulcer of the stomach,
should be construed as an expression made in good
faith of his belief as to the nature of his ailment and
operation. (Ng Gan Zee v. Asian Crusader Life
Assurance Corporation, G.R. No. L-30685, 30 May
1983 cited in Divina, 2021)
Indeed, such statement must be presumed to have
been made by him without knowledge of its
incorrectness and without any deliberate intent on
his part to mislead Asian Crusader. While it may be
conceded that, from the viewpoint of a medical
expert, the information communicated was
imperfect, the same was nevertheless sufficient to
have induced Asian Crusader to make further
inquiries about the ailment and operation of the
insured. (Ng Gan Zee v. Asian Crusader Life Assurance
Corporation, supra)
Instances whereby Concealment Made by an
Agent Procuring the Insurance Binds the
Principal
1. Where it was the duty of the agent to acquire
and communicate information of the facts in
question; or
2. Where it was possible for the agent, in the
exercise of reasonable diligence to have made
such communication before the making of the
insurance contract.
NOTE: Failure on the part of the insured to disclose
such facts known to his agent, or wholly due to the
fault of the agent, will avoid the policy, despite the
good faith of the insured.
MISREPRESENTATION/OMISSIONS
Representation
An oral or written statement of a fact or condition
affecting the risk made by the insured to the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
insurance company, tending to induce the insurer to
assume the risk.
Under Sec. 37, representation should be made,
altered or withdrawn at the time of or before the
issuance of the policy. It may be altered or
withdrawn before the insurance is effected, but not
afterwards. (Sec. 34, IC)
Characteristics of Representation (C-OW-D-AW-
BA)
1. Not a part of the contract but merely a Collateral
inducement to it;
2. Oral or Written;
3. Must be presumed to refer to the Date the
contract goes into effect;
4. Altered or Withdrawn before the insurance is
effected but not afterwards; and
5. Made Before or At the time of issuing the policy
and not after. (Sec. 42, IC)
Similarities of Concealment and Representation
1. Both refer to the same subject matter and both
take place before the contract is entered.;
2. Concealment or representation prior to loss or
death gives rise to the same remedy; that is
rescission or cancellation;
3. The test of materiality is the same; (Secs. 31, 46,
IC)
4. The rules of concealment and representation
are the same with life and non-life insurance;
5. Whether intentional or not, the injured party is
entitled to rescind a contract of insurance on
ground of concealment or false representation;
and
6. Since the contract of insurance is said to be one
of utmost good faith on the part of both parties
to the agreement, the rules on concealment and
representation apply likewise to the insurer.
Kinds of Representation
1. Oral or written (Sec. 36, IC);
2. Affirmative (Sec. 42, IC); and
3. Promissory (Sec. 39, IC).
44
 Insurance
Affirmative Representation
Any allegation as to the existence or non-existence
of a fact when the contract begins (e.g., the
statement of the insured that the house to be
insured is used only for residential purposes is an
affirmative representation).
Promissory Representation
Any promise to be fulfilled after the contract has
come into existence or any statement concerning
what is to happen during the existence of the
insurance.
Representation as to a Future Undertaking
A representation as to the future is to be deemed a
promise unless it appears that it was merely a
statement of belief or an expectation that is
susceptible to present, actual knowledge. (Sec. 39,
IC)
An Erroneous Opinion or Belief will NOT Avoid
the Insurance Policy
The statement of an erroneous opinion, belief, or
information, or of an unfulfilled intention, per se,
will not avoid the contract of insurance, unless
fraudulent.
To avoid liability, the insurer must prove both
materiality of the insured’s opinion and the latter’s
intention to deceive.
Omission
The failure to communicate information on matters
proving or tending to prove the falsity of warranty.
In case of omission, the aggrieved party may rescind
the contract of insurance.
Misrepresentation
It occurs when the facts fail to correspond with its
assertions or stipulations. Misrepresentation is an
affirmative defense. To avoid liability, the insurer
has the duty to establish such a defense by
satisfactory and convincing evidence. (Sec. 44, IC; Ng
45
Gan Zee v. Asian Crusader Life Assurance Corp.,
supra)
NOTE: In the absence of evidence that the insured
has sufficient medical knowledge to enable him to
distinguish between “peptic ulcer” and “tumor”, the
statement of deceased that said tumor was
“associated with ulcer of the stomach” should be
considered an expression in good faith. Fraudulent
intent of insured must be established to entitle
insurer to rescind the insurance contract.
Misrepresentation, as a defense of the insurer to
avoid liability, is an affirmative defense which must
be proved. The duty to establish such a defense by
satisfactory and convincing evidence rests upon the
defendant. (Ng Gan Zee v. Asian Crusader Life
Assurance Corp., G.R. No. L- 30685, 30 May 1983)
Requisites of Misrepresentation (U-K-Ma)
1. The insured stated a fact which is Untrue;
2. Such fact was stated with Knowledge that it is
untrue and with intent to deceive or which he
states positively as true without knowing it to
be true and which has a tendency to mislead;
and
3. Such fact in either case is Material to the risk.
A representation cannot qualify an express
provision in a contract of insurance, but it may
qualify an implied warranty. (Sec. 40, IC)
Test of Materiality
It is to be determined not by the event, but solely by
the probable and reasonable influence of the facts
upon the party to whom the representation is made,
in forming his estimates of the disadvantages of the
proposed contract or in making his inquiries. (Sec.
46, IC)
Effects of Misrepresentation
1. It renders the insurance contract voidable at
the option of the insurer, although the policy is
not thereby rendered void ab initio. The injured
party entitled to rescind from the time when the
representation becomes false; and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

2. When the insurer accepted the payment of Q: Alvarez applied for and was granted a housing
premium with the knowledge of the ground for loan by Union Bank. The said loan was secured
rescission, there is waiver of right of rescission. by a promissory note, a real estate mortgage
over the lot, and a mortgage redemption
Concealment vs. Misrepresentation insurance taken on the life of Alvarez with Union
Bank as beneficiary. Later Alvarez passed away.
CONCEALMENT MISREPRESENTATION
As to their Definition Union Bank filed with Insular Life a death claim
The insured makes under Alvarez's name. However, Insular Life
The insured withholds erroneous statements denied the claim after determining that Alvarez
the information of of facts with the intent was not eligible for coverage as he was
material facts from of inducing the insurer supposedly more than 60 years old at the time of
the insurer. to enter into the his loan's approval. It asserts that Alvarez's
insurance contract. concealment of his age, whether intentional or
As to Kind of Act unintentional, entitles it to rescind the
Concealment is a insurance contract. It claims that proof of
negative act, meaning fraudulent intent is not necessary for the
Misrepresentation is a insurer to rescind the contract on account of
the neglect to
positive act as the concealment. Is Insular Life correct?
communicate
insured volunteers such
information as to
fact. A: NO. Sec. 44 of the IC states, "A representation is
material facts known
to the insured. to be deemed false when the facts fail to correspond
As to When Made with its assertions or stipulations." In relation to
Concealment usually Misrepresentation may this, Sec. 45 of the Insurance code provides that, If a
occurs prior to the be made at the time of, representation is false in a material point, whether
making of the or prior, to the issuance affirmative or promissory, the injured party is
insurance contract. of the insurance policy. entitled to rescind the contract from the time when
the representation becomes false.
As to Necessity of Proof of Fraudulent Intent
Not necessary in Necessary in case of
The recession under Sec. 45 remains subject to the
rescission due to rescission due to
basic precept of fraud having to be proven by clear
concealment misrepresentation
and convincing evidence. Fraud is never presumed
and fraudulent misrepresentation as a defense of
While there are distinctions between the two,
the insurer to avoid liability must be established by
concealment has the same effect as
convincing evidence. Consistent with the
misrepresentation in terms of entitling the insurer
requirement of clear and convincing evidence, it
to rescind the insurance policy. (Divina, 2021)
was Insular Life's burden to establish the merits of
its own case. (The Insular Assurance Co. v. Heirs of
Application of Concealment and
Alvarez, G.R. No. 207526, 03 Oct. 2018)
Misrepresentation in case of Loss or Death

Theory of Imputed Knowledge

GR: If the concealment or misrepresentation is
discovered before loss or death, the insurer can
This means that if the insured furnished the agent
cancel the policy. If the discovery is after loss or
the needed information and delegated to him/her
death, the insurer can refuse to pay.
the filling up of the insurance application, then,
he/she acted on the insured’s, instruction, not that
XPN: The incontestability clause under Sec. 48(2) of
of the insurer. If the agent answered the application
the IC.
differently, the insured is bound by the statements
and information contained in the application, unless

UNIVERSITY OF SANTO TOMAS 46

2022 GOLDEN NOTES
 Insurance

there is connivance between the insurer and the insurer was in fact prejudiced by such untruth or
agent. (Florendo v. Philam Plans, G.R. No. 186983, 22 non-fulfillment render the policy voidable by the
Feb. 2012, cited in Divina, 2021) insurer.

This theory, however, was not applied in property Purpose of Warranties

insurance. In one case, it was held that the insurer is
not liable despite the claim of the insured that the
insurance agent knew about other insurance
covering the same property against fire and
knowledge of the agent is not tantamount to
knowledge of the insurer. (New Life Enterprises v.
CA, G.R. No. 94071, 31 March 1992, cited in Divina,
2021)
Effect of Collusion between the Insurer’s Agent
and the Insured
It vitiates the policy even though the agent is acting
within the apparent scope of his authority. The
agent ceases to represent his principal. He, thus,
represents himself; so, the insurer is not estopped
from avoiding the policy.
Remedy of the Injured Party in case of
Misrepresentation
If there is misrepresentation, the injured party is
entitled to rescind from the time when the
representation becomes false.
Exercise of the Right to Rescind the Contract
In non-life insurance policy, it must be exercised
previous to the commencement of an action on the
contract, -the action referred to is that to collect a
claim on the contract. (Sec. 48(1), IC)
To eliminate potentially increasing moral or
physical hazards which may either be due to the acts
of the insured or to the change of the condition of
the property.
Basis of Warranties
The insurer took into consideration the condition of
the property at the time of effectivity of the policy.
Kinds of Warranties (A-P-I-E)
1. Affirmative warranty – one which relates to
matters which exist at or before the issuance of
the policy;
2. Promissory warranty – one in which the insured
undertakes that something shall be done or
omitted after the policy takes effect and during
its continuance;
3. Express warranty – a statement in a policy, of a
matter relating to the person or thing insured,
or to the risk, as a fact; and
4. Implied warranty – an agreement or stipulation
not expressed in the policy but the existence of
which is admitted or presumed from the fact
that the contract of insurance has been
executed.

In life insurance policy, the defenses mentioned in Warranty vs. Representation

Sec. 48(2) of the IC are available only within the 2-
year incontestability period. (De Leon, 2014) WARRANTY REPRESENTATION
As to their Nature
BREACH OF WARRANTIES
Considered parts of the Collateral inducement
contract. to the contract.
Warranties (1993 BAR)
As to their Form
Statements or promises by the insured set forth in Always written on the
May be written in a
the policy itself or incorporated in it by proper face of the policy,
totally disconnected
reference, the untruth or non-fulfillment of which in actually or by
paper or may be oral.
any respect, and without reference to whether the reference.

47 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
As to their Compliance
Must be strictly Only substantial proof
complied with. is required.
As to Effect of their Falsity or Non-fulfillment
Its falsity or non- Its falsity renders the
fulfillment operates as policy void on the
a breach of contract. ground of fraud.
As to their Materiality
Insurer must show its
Presumed material. materiality in order to
defeat an action on the
policy.
Effects of Breach of Warranty
1. Material –
GR: Violation of material warranty or of
material provision of a policy will entitle the
other party to rescind the contract.
XPN: (with regard to “promissory” warranties)
a. Loss occurs before the time of performance
of the warranty;
b. The performance becomes unlawful at the
place of the contract; or
c. Performance becomes impossible. (Sec. 73,
IC)
2. Immaterial –
GR: It will not avoid the policy.
XPN: When the policy expressly provides, or
declares that a violation thereof will avoid it.
For instance, an “Other Insurance Clause” which
is a condition in the policy requiring the insured
to inform the insurer of any other insurance
coverage of the property. A violation of the
clause by the insured will not constitute a
breach unless there is an additional provision
stating that the violation thereof will avoid the
policy. (Sec. 75, IC)
Q: On May 13, 1996, PAM Inc. obtained a P15
million fire insurance policy from Ilocano
Insurance covering its machineries and
equipment effective for one year or until 14 May
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
1997. The policy expressly stated that the
insured properties were located at “Sanyo
Precision Phils. Building Phase III Lots 4 and 6
Block 15 PEZA, Rosario, Cavite.” Before its
expiration, the policy was renewed on “as is”
basis for another year or until May 13, 1998.
The subject properties were later transferred to
Pace Factory also in PEZA. On Oct. 12, 1997,
during the effectivity of the renewed policy, a
fire broke out at the Pace Factory which totally
burned the insured properties.
The policy forbade the removal of the insured
properties unless sanctioned by Ilocano.
Condition 9 (c) of the policy provides that “the
insurance ceases to attach as regards the
property affected unless the insured, before the
occurrence of any loss or damage, obtains the
sanction of the company signified by
endorsement upon the policy x x x (c) if the
property insured is removed to any building or
place other than in which is herein stated to be
insured.” PAM claims that it has substantially
complied with notifying Ilocano through its
sister company, the RBC which in fact, referred
PAM to Ilocano for the insurance coverage. Is
Ilocano liable under the policy? (2014 BAR)
A: NO. Ilocano Insurance is not liable under the
policy. By the clear and express condition in the
renewal policy, the removal of the insured property
to any building or place required the consent of
Ilocano. Any transfer effected by PAM, Inc. without
Ilocano’s consent would free the latter from any
liability. (Malayan Insurance Company, Inc v. PAP CO,
Ltd., G.R. No. 200784, 7 Aug. 2013)
Effect of a Breach of Warranty Without Fraud
The policy is avoided only from the time of breach
and the insured is entitled:
1. To the return of the premium paid at a pro rata
from the time of breach or if it occurs after the
inception of the contract; or
2. To all premiums if it is broken during the
inception of the contract.
48
 Insurance

Effect of Breach of Warranty With Fraud:

1. Policy is avoided ab initio and never became

binding; or
2. Insured is not entitled to the return of the
premium.

49 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Transportation Law
II. TRANSPORTATION LAW
Laws that govern contracts of transportation
Contracts of transportation, whether by land, sea, or
air, (i) if within the Philippines; or (ii) if the
transportation of goods be from a foreign country to
the Philippines, shall be governed by the following
laws, arranged by order of application: (Ci-Co-Spec)
1. Provisions of the New Civil Code on Common
Carriers;
2. Code of Commerce; and
3. Special laws such as Carriage of Goods by the
Sea (COGSA); Salvage Law; Public Service Act;
Land Transportation and Traffic Code; Tariff
and Customs Code; and Civil Aeronautics Act.
(Art. 1753 and 1766, NCC; American President
Lines, Ltd. v. Klepper, G.R. No. L-15671, 29 Nov.
1960)
NOTE: In case of international carriage in air
transportation, (i) the Montreal Convention as
ratified by the Philippines in 2015; (ii) the Warsaw
Convention; and (iii) the Civil Aviation Authority
Act, may be applicable.
If the goods are to be transported from the
Philippines to a foreign country, the law of the latter
country shall govern the transportation contract.
(Art. 1753, NCC; NDC. v. CA, G.R. No. L-49407, 19 Aug.
1988)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
A. COMMON CARRIER
1. CONCEPT
Requisites for an entity to be classified as a
common carrier (1996, 1997, 2000, 2002 BAR)
(Pecofa-B-LAW-F-P)
1. Must be a Person, corporation, firm, or
association;
2. Engaged in the Business of carrying or
transporting passengers or goods or both;
3. The carriage or transport must either be by
Land, Water or Air;
4. The service is for a Fee; and
5. The service is offered to the Public. (Art. 1732,
NCC)
NOTE: A pipeline operator who carries oil and other
petroleum products through pipes or pipelines is a
common carrier. The law does not distinguish as to
the means by which transportation is carried out, as
long as it is by land, water, or air. Neither does the
law require that transportation be through a motor
vehicle. (First Phil. Industrial Corp. v. CA, G.R. No.
125948, 29 Dec. 1998)
Q: The Pereñas were engaged in the business of
transporting students from their respective
residences in Parañaque City to Don Bosco in
Pasong Tamo, Makati City and back. They
employed Alfaro as driver of the van. The
Zarates contracted the Pereñas to transport
their son, Aaron, to and from Don Bosco.
However, a train hit the rear end of the van
driven by Alfaro, and the impact threw nine (9)
students in the rear, including Aaron, out of the
van. Aaron landed on the path of the train, which
dragged his body and severed his head,
instantaneously killing him.
The Zarates commenced an action for damages
against Alfaro, the Pereñas, PNR, and Alano. The
Zarates’ claim against the Pereñas was based on
breach of the contract of carriage and based on
50
 Commercial Law
quasi-delict under Art. 2176 of the Civil Code
against PNR.
The Pereñas argued that they exercised the
diligence of a good father of a family in the
selection and supervision of Alfaro by making
sure that Alfaro had been issued a driver’s
license and had not been involved in any
vehicular accident prior to the collision. Is the
operation of a school bus service considered as
a private carrier?
A: NO. The Pereñas, as the operators of a school bus
service, were:
1. Engaged in transporting passengers generally
as a business, not just as a casual occupation;
2. Undertaking to carry passengers over
established roads by the method by which the
business was conducted; and
3. Transporting students for a fee.
Despite catering to a limited clientèle, the Pereñas
operated as a common carrier because they held
themselves out as a ready transportation
indiscriminately to the students of a particular
school living within or near where they operated the
service and for a fee. (Sps. Pereña v. Sps. Zarate, G.R.
No. 157917, 29 Aug. 2012)
Test for determining whether one is a common
carrier (1996 BAR)
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 a part of the activity engaged in by
the carrier that he has held out to the general public
as his business or occupation. The question must be
determined by the character of the business actually
carried on by the carrier, not by any secret intention
or mental reservation it may entertain or assert
when charged with the duties and obligations that
the law imposes. (Sps. Pereña v. Sps. Zarate, supra)
The concept of common carriers contemplated
under Art. 1732 of the NCC and the fact that the said
concept corresponds to the concept of “public
51
service” under the Public Service Act results in the
application of the following rules or principles:
1. Art. 1732 makes no distinction between one
whose principal business activity is the carrying
of persons or goods or both, and one who does
such carrying only as an ancillary activity. (De
Guzman v. CA, G.R. No. L-47822, 22 Dec. 1988)
2. Art. 1732 also carefully avoids making any
distinction between a person or enterprise
offering transportation service on a regular or
scheduled basis and one offering such service
on an occasional, episodic, or unscheduled
basis. (Ibid.)
3. Art. 1732 does not distinguish between a
carrier offering its services to the “general
public,” and one who offers services or solicits
its business only from a narrow segment of the
general population. (Ibid.)
4. A person or entity is a common carrier and has
the obligations of the common carrier under the
Civil Code even if he did not secure a Certificate
of Public Convenience. (Ibid.)
5. The Civil Code makes no distinction as to the
means of transporting, as long as it is by land,
water or air. (First Philippine Industrial
Corporation v. CA, G.R. No. 125948, 29 Dec. 1998)
6. The Civil Code does not provide that the
transportation should be by motor vehicle.
(Ibid.)
7. A person or entity may be a common carrier
even if he has no fixed and publicly known
route, maintains no terminals, and issues no
tickets. (Asia Lighterage and Shipping, Inc. v. CA,
G.R. No. 147246, 19 Aug. 2003)
8. A person or entity need not be engaged in the
business of public transportation for the
provisions of the Civil Code on common carriers
to apply to them. (Fabre, Jr. v. CA, G.R. No.
111127, 26 July 1996)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
9. The carrier can also be a common carrier even
if the operator does not own the vehicle or
vessel that he or she operates. (Cebu Salvage
Corporation v. Philippine Home Assurance Corp.,
G.R. No. 150403, 25 Jan. 2007; Aquino and
Hernando, 2016)
Q: Alejandro Camaling is engaged in buying
copra, charcoal, firewood, and used bottles and
in reselling them in Cebu City. He uses two (2)
big Isuzu trucks for the purpose; however, he
has no certificate of public convenience or
franchise to do business as a common carrier.
On the return trips to Alegria, he loads his trucks
with various merchandise of other merchants in
Alegria and in the two neighboring
municipalities. He charges them freight rates
much lower than the regular rates. In one of the
return trips, one cargo truck was loaded with
several boxes of sardines, owned by Pedro
Rabor. While passing the zigzag road between
Carcar and Barili, the truck was hijacked by
three (3) armed men who took all the boxes of
sardines and kidnapped the driver and his
helper, releasing them only two (2) days later.
Rabor sought to recover from Alejandro the
value of the sardines. The latter argued that he
is not a common carrier. If you were the judge,
would you sustain the contention of Alejandro?
(1991 BAR)
A: NO. If I were the judge, I would rule that
Alejandro is a common carrier. A person who offers
his services to carry passengers or goods for a fee is
a common carrier, regardless of whether he has a
certificate of public convenience or not, whether it
is his main business or is incidental to such
business, whether it is scheduled or unscheduled
service, and whether he offers his services to the
general public or to a limited few. (De Guzman v. CA,
G.R. No. 47822, 27 Dec. 1988)
Q: Maria shipped 3,000 bags of Australian
delicacies to Pauline in the Philippines. Such
goods were insured with PH insurance. Pauline
then hired B Brokerage as its customs broker.
When the goods arrived at the Port of Manila,
the same was loaded into the barge owned by
AVL Shipping’s barge, called ANYA-I. When the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
barge traversed Pasig River, the goods got wet as
it was found that the barge had a hole, thereby
allowing river water to flow inside the same.
This resulted to the goods being wet which now
became inedible. Pauline asserted her
insurance claim with PH Insurance, to which the
latter paid. PH Insurance now filed a claim
against B Brokerage and AVL Shipping. AVL
Shipping contends that its barge, ANYA-I cannot
be considered as a common carrier. Is ANYA-I a
common carrier?
A: YES. ANYA-I is a common carrier. Art. 1732 of the
NCC defines common carriers as “persons,
corporations, firms, or associations engaged in the
business of carrying or transporting passengers or
goods or both, by land, water, or air, for
compensation, offering their services to the public”.
Art. 1732 does not make any distinction between
one whose principal business activity is the carrying
of persons or goods or both, and one who does the
carrying only as an ancillary activity; between a
person or enterprise offering transportation service
on a regular or scheduled basis, and one offering the
service on an occasional, episodic or unscheduled
basis; and a carrier offering its services to the
general public, and one who offers services or
solicits business only from a narrow segment of the
general population. (C.V. Gaspar Salvage &
Lighterage Corporation v. LG Insurance Company
Ltd., G.R. Nos. 206892 & 207035, 3 Feb. 2021)
Private Carrier
A private carrier is one who, without making the
activity a vocation, or without holding himself or
itself out to the public as ready to act for all who may
desire his or its services, undertakes, by special
agreement in a particular instance only, to transport
goods or persons from one place to another either
gratuitously or for hire. (Sps Pereña v. Sps Zarate,
supra) A carrier which does not qualify under the
requisites of a common carrier is deemed a private
carrier. (National Steel Corporation v. CA, G.R. No.
112287, 12 Dec. 1997)
52
 Commercial Law

2. COMMON CARRIER vs. PRIVATE CARRIER 3. DILIGENCE REQUIRED OF COMMON

CARRIERS
Common Carrier vs. Private Carrier (2002
BAR) The diligence required of common carriers is
extraordinary diligence. (Art. 1733, NCC)
COMMON CARRIER PRIVATE CARRIER
To whom the carrier caters its services Extraordinary diligence is that extreme measure of
Carriage is generally care and caution which persons of unusual
undertaken by special prudence and circumspection use for securing and
Undertakes to carry
agreement and it does preserving their own property or rights. The law
passengers or goods
not hold itself out to requires common carriers to render service with
for the public
carry goods for the the greatest skill and utmost foresight.
general public (Loadmasters Services v. Glodel Brokerage, G.R.
Governing laws 179446, 10 Jan. 2011)
Civil Code Provisions
on Common Carriers, Reasons for the requirement of extraordinary
Public Service Act, and diligence:
other Special laws Civil Code provisions
relating to on ordinary contracts 1. Because of the nature of the business of
transportation common carrier which is public service; and
2. For public policy consideration - the common
(CICOCA-PSA-SPEC) carriers are supposed to serve the public
Degree of Diligence required interest and therefore, they have to exercise
Ordinary diligence or extraordinary diligence. (Martin, 1989)
Extraordinary
diligence of a good
diligence Q: Are common carriers liable for injuries to
father of a family
Presumption of Negligence passengers even if they have observed ordinary
1. If the goods are lost, diligence and care? Explain. (2015 BAR)
destroyed or
No presumption as to A: YES, common carriers are liable to injuries to
deteriorated
negligence passengers even if the carriers observed ordinary
2. In case of death of or
injuries to passengers diligence and care because the obligation imposed
upon them by law is to exercise extraordinary
Whether subject to regulation or not
diligence. Common carriers are bound to carry the
NOT subject to
Subject to regulation passengers safely as far as human care and foresight
regulation by a
by a regulatory agency can provide, using the utmost diligence of very
regulatory agency
cautious persons with a due regard for all the
Exemption from liability
circumstances.
A common carrier
cannot stipulate that it
is exempt from liability A private carrier may
for negligence of its validly enter into a
agents or employees. stipulation exempting
Such stipulation is void it from liability.
as it is against public
policy

53 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Transportation Law

Exercise of extraordinary diligence in the The requirement to observe extraordinary diligence

carriage of goods and transport of passengers begins with the actual delivery of the goods for
transportation, and not merely with the formal
EXTRAORDINARY DILIGENCE execution of a receipt or bill of lading; the issuance
Transport of of a bill of lading is not necessary to complete
Carriage of Goods
Passengers delivery and acceptance by the carrier. (Compañia
Commencement Maritima v. Insurance Co. of North America, G.R. No.
Commences from the L-18965, 30 Oct. 1964)
Commences from the
moment the person
time the goods are Q: In cases where the cargoes are damaged when
who purchases the
unconditionally placed it is being unloaded from the vessel, is the vessel
ticket from the carrier
in the possession of owner relieved of its responsibility to observe
presents himself at the
and received by the extraordinary diligence from the moment the
proper place and in a
carrier for cargoes were delivered to the arrastre
proper manner to be
transportation. operator?
transported.
Duration
1. GR: Continues until A: NO. Under the Civil Code, other pertinent laws
the goods are and jurisprudence, the extraordinary responsibility
delivered, actually or of common carriers lasts until the time the goods
constructively, by the are actually or constructively delivered by the
carrier to the carrier to the consignee or the person who has the
consignee or to the right to receive. There is actual delivery in contracts
person who has a right for the transport of goods when possession has been
to receive them, and turned over to the consignee or to his duly
even when they are authorized agent and a reasonable time is given him
temporarily unloaded to remove the goods. In this case, since the
or stored in transit discharging of the containers had not yet been
completed at the time the damage occurred, there
XPN: The shipper or was still no delivery, actual or constructive, of the
Continues until the cargoes. (Westwind Shipping Corp v. UCPB General
owner had made use of
passenger has been Insurance Co., G.R. No. 200289, 25 Nov. 2013)
the right or stoppage in
landed at the port of
transit.
destination and has left Q: X, while driving his Toyota Altis, tried to cross
the vessel owner’s the railway tract of PNR along Blumentritt
2. Continues even
dock or premises. Avenida Ext., Manila. The train, as it approached
during the time the
goods are stored in a Blumentritt Avenida Ext., applied its horn as a
warehouse of the warning to all the vehicles that might be
carrier at the place of crossing the railway tract, but there was really
destination until the nobody manning the crossing. X was listening to
consignee has been his lpod Touch, hence, he did not hear the sound
advised of the arrival of of the horn of the train and so his car was hit by
the goods and has been the train. As a result of the accident, X suffered
given a reasonable some injuries and his car was totally destroyed
opportunity thereafter as a result of the impact. Is PNR liable? (2012
to remove them or BAR)
otherwise dispose of
them. A: NO. PNR is not liable because X should have
known that he was crossing a place designated as

UNIVERSITY OF SANTO TOMAS 54

2022 GOLDEN NOTES
 Commercial Law

crossing for train, and therefore should have been vehicle and his driver is
more careful. joint and several. (J.
Dimaampao, citing Tiu v.
Causes of Action for Failure to Observe Diligence Arriesgado, G.R. No.
Required 138060, 01 Sept. 2004)

BASIS OF CAUSE OF Q: Fil-Asia Air Flight 916 was on a scheduled

PERSON WHO HAS ACTION AGAINST passenger flight from Manila when it crashed as
CAUSE OF ACTION THE COMMON it landed at the Cagayan de Oro airport. The pilot
CARRIER miscalculated the plane's approach and
Third person who Tort (extra-contractual undershot the runway. Ten passengers died at
suffered damages negligence) the crash scene.
Breach of the contract
Shipper of the goods
of carriage (Culpa One of them managed to leave the plane but was
damaged
Contractual) run over by an ambulance coming to the rescue.
Heir/s of the deceased Another was an airline employee who hitched a
passengers or the Breach of the contract free ride to Cagayan de Oro and who was not in
passenger himself for of carriage (Culpa the passenger manifest.
the injuries sustained Contractual)
by him The Civil Aeronautics Authority investigation
showed that the co-pilot who had control of the
CAUSE OF ACTION plane's landing had less than the required flying
OF THE INJURED and landing time experience, and should not
BASIS OF CAUSE OF have been in control of the plane at the time. He
PASSENGER OR HIS
ACTION was allowed to fly as a co-pilot because of the
HEIRS, IF THE
PASSENGER DIES: scarcity of pilots - Philippine pilots have been
Culpa criminal recruited by foreign airlines under vastly
improved flying terms and wages so that newer
If the driver is convicted and less trained pilots are being locally
and it turns out that he deployed. The main pilot, on the other hand, had
is insolvent, the a very high level of blood alcohol at the time of
heirs/passengers may the crash.
Against the negligent
run after the employer
driver You are part of the team that the victims hired to
of the driver, pursuant
to the employer’s handle the case for them as a group. In your case
subsidiary liability conference, the following questions came up:
under Art. 103, in
relation to Arts. 100 and a. Explain the causes of action legally possible
102, RPC. under the given facts against the airline and
Against the carrier the pilots; whom will you specifically
and driver operating Tort implead in these causes of action?
the other b. How will you handle the cases of the
Culpa Contractual; passenger run over by the ambulance and
Direct and primary the airline employee allowed to hitch a free
ride to Cagayan de Oro? (2013 BAR)
Against the common
The liability of the
carrier at fault A:
common carrier and his
driver as well as the a. A complaint for breach of contract of carriage
operator of the other can be filed against Fil-Asia Air for failure to

55 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Transportation Law

carry the passengers safely as far as human care

and foresight can provide, using the utmost B. OBLIGATIONS AND LIABILITIES
diligence of a very cautious person, with a due
regard for all the circumstances. (Art. 1755,
NCC)
Presumption of negligence in the carriage of
goods (1997, 2001, 2008 BAR)
A complaint based on a quasi-delict can be filed
against the pilots because of their fault and
GR: There is a presumption of negligence if the
negligence. (Art. 2176, NCC) Fil-Asia Air can be
goods are lost, destroyed, or deteriorated.
included for negligence in the selection and
supervision of the pilots. (Art. 2180, NCC)
XPNs: (Di-Ca-W-A-C-O-A-ED)

A third cause of action may be a criminal

1. Natural Disaster or Calamity which is the
prosecution for the reckless imprudence
proximate cause of the loss (flood, storm,
resulting in homicide against two pilots. The
earthquake, lightning);
airline will be subsidiary liable for the civil
2. Acts of public enemy in War, whether
liability, only after the pilots are convicted and
international or civil;
found to be insolvent.
3. Act or omission of the shipper or the owner of
the goods;
b. It is the driver of the ambulance and his
4. Character of the goods or defects in the packing
employer who should be held liable for
or container;
damages because a passenger was run over.
5. Order or Act of competent public authority (Art.
This is in accordance with Arts. 2176 and 2180
1734, NCC); or
of the NCC. There could also be a criminal
6. Exercise of Extraordinary Diligence. (Art. 1735,
prosecution for reckless imprudence resulting
NCC)
in homicide against the ambulance driver and
his consequent civil liability.
Presumption of Negligence in the transportation
of passengers (1990, 1994 BAR)
Since the airline employee was being
transported gratuitously, Fil-Asia Air was not
In case of death of or injuries to passengers,
required to exercise extraordinary diligence for
common carriers are presumed to have been at fault
his safety and only ordinary care. (Lara v.
or to have acted negligently. (Art. 1756, NCC)
Valencia, G.R. No. L-9907, 30 June 1958)
However, such presumption may be refuted by
proving observance of extraordinary diligence as
prescribed by Art. 1733 of the NCC.

Q: Is it important that the plaintiff still prove

that the subject shipment suffered actual
shortage before the burden is shifted to the
defendant common carrier to prove that it
exercised extraordinary diligence?

A: YES. Though it is true that common carriers are

presumed to have been at fault or to have acted
negligently if the goods transported by them are
lost, destroyed, or deteriorated, and that the
common carrier must prove that it exercised
extraordinary diligence in order to overcome the
presumption, the plaintiff must still, before the

UNIVERSITY OF SANTO TOMAS 56

2022 GOLDEN NOTES
 Commercial Law
burden is shifted to the defendant, prove that the
subject shipment suffered actual shortage. This can
only be done if the weight of the shipment at the
port of origin and its subsequent weight at the port
of arrival have been proven by a preponderance of
evidence, and it can be seen that the former weight
is considerably greater than the latter weight, taking
into consideration the exceptions provided in
Article 1734 of the Civil Code. (Asian Terminals, Inc.
v. Simon Enterprises, Inc., G.R. No. 177116, 27 Feb.
2013)
Q: Peter hailed a taxicab owned and operated by
Jimmy Cheng and driven by Hermie Cortez. On
the way to Malate, the taxicab collided with a
passenger jeepney, as a result of which Peter’s
left leg was fractured. Peter sued Jimmy for
damages, based on contract of carriage, and
Peter won. Jimmy wanted to challenge the
decision before the SC on the ground that the
trial court erred in not making an express
finding as to whether or not Jimmy was
responsible for the collision and, hence, civilly
liable to Peter. He went to see you for advice.
What will you tell him? Explain. (1990 BAR)
A: I will advise Jimmy to desist from challenging the
decision. The action of Peter being based on culpa
contractual, the carrier’s negligence is presumed
upon the breach of contract. The burden of proof
instead would lie on Jimmy to establish that despite
an exercise of utmost diligence, the collision could
not have been avoided.
Q: In a court case involving claims for damages
arising from death and injury of bus
passengers, counsel for the bus operator filed a
demurrer to evidence arguing that the
complaint should be dismissed because the
plaintiffs did not submit any evidence that the
operator or its employees were negligent. If you
were the judge, would you dismiss the
complaint? (1997 BAR)
A: NO. In the carriage of passengers, the failure of
the common carrier to bring the passengers safely
to their destination immediately raises the
presumption that such failure is attributable to the
carrier’s fault or negligence, the plaintiff need not
57
adduce proof of specific acts of negligence
committed by the carrier. It is for the carrier to
rebut such presumption.
Presumption of Negligence
The court need not make an express finding of fault
or negligence of common carriers, the law imposes
liability upon common carriers, as long as it shown
that: (Con-Lo-D-I-D)
1. There exists a Contract between the passenger
or the shipper and the common carrier; and
2. That the Loss, Deterioration, Injury or Death
took place during the existence of the contract.
(Air France v. Gillego, G.R. No. 165266, 15 Dec.
2010)
Q: SEACOL, a foreign company, received
shipment of musical instruments from
Melbourne, Australia for delivery at the port of
Manila. Upon arriving in Manila, the shipment
was received by Unitrans Inc., which delivered
the same to the consignee, where it was found
that said instruments were damaged and could
no longer be used. After paying the consignee,
ICNA filed a complaint to recover from the
marine insurance coverage on the imported
instruments against SEACOL doing business in
the Philippines through its local ship agent
Unitrans Inc. Unitrans Inc. denied liability
alleging that it is not a ship agent of SEACOL but
was only engaged by the consignee as customs
broker for the subject shipment with the limited
obligation to pay fees in the BOC and to
transport and deliver the said shipment to the
consignee’s premises in good condition.
Is Unitrans Inc.’s contention tenable?
A: NO. Emphasis must be placed on the fact that
Unitrans itself admitted that in handling the subject
shipment and making sure that it was delivered to
the consignee’s premises in good condition as the
delivery/forwarding agent, Unitrans was acting as a
freight forwarding entity and an accredited non-
vessel operating common carrier.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
Jurisprudence holds that a common carrier is
presumed to have been negligent if it fails to prove
that it exercised extraordinary vigilance over the
goods it transported. When the goods shipped are
either lost or arrived in damaged condition, a
presumption arises against the carrier of its failure
to observe that diligence, and there need not be an
express finding of negligence to hold it liable. To
overcome the presumption of negligence, the
common carrier must establish by adequate proof
that it exercised extraordinary diligence over the
goods. It must do more than merely show that some
other party could be responsible for the damage.
(Unitrans International Forwarders, Inc. v. Insurance
Company of North America, G.R. No. 203865, 13 Mar.
2019)
Effect of Acquittal
The acquittal of the employee of the common carrier
in the criminal case is immaterial to the case for
breach of contract. (Heirs of Marcial K. Ochoa v. G&S
Transport Corp., G.R. Nos. 170071 and 170125, 09
Mar. 2011)
Q: Vivian Martin was booked by PAL, which
acted as ticketing agent of Far East Airlines, for a
round trip flight on the latter’s aircraft, from
Manila–Hong Kong-Manila. The ticket was cut by
an employee of PAL. The ticket showed that
Vivian was scheduled to leave Manila at
5:30p.m. Vivian arrived at NAIA an hour before
the time scheduled in her ticket, but was told her
flight had left at 12:10 p.m. It turned out that the
ticket was inadvertently cut and wrongly
worded. PAL employees nevertheless scheduled
her to fly two hours later aboard their plane. She
agreed and arrived in Hong Kong safely. The
aircraft used by Far East Airlines had an engine
trouble, and did not make it to HK but returned
to Manila. Vivian sued both PAL and Far East.
Could either or both airlines be held liable to
Vivian? Why? (2003 BAR)
A: Only Far East Airline is liable. The instant
petition was based on breach of contract of carriage;
therefore, Vivian can only sue Far East Airlines
alone, and not PAL, since the latter was not a party
to the contract. However, this is not to say that PAL
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
is relieved from any liability due to any of its
negligent acts. In China Air Lines, Ltd. v. CA, while
not exactly in point, however, illustrates the
principle which governs this particular situation. In
that case, the carrier (PAL), acting as an agent of
another carrier, was also liable for its own negligent
acts or omission in the performance of its duties. Far
East Airlines may also file a third-party complaint
against PAL for the purpose of determining who was
primarily at fault between them. It is but logical, fair,
and equitable to allow Far East Airlines to sue PAL
for indemnification, if it is proven that the latter’s
negligence was the proximate cause of Vivian’s
unfortunate experience, instead of totally absolving
PAL from any liability. (British Airways v. CA, G.R. No.
121824, 29 Jan. 1998)
Transport Network Company (TNC)
It refers to a person or entity that provides pre-
arranged transportation services for compensation
using an internet-based technology application or
digital platform technology to connect passengers
with drivers using their personal vehicles. (Sec. 1,
[Department of Transportation] Department Order
No. 2018-012, 11 June 2018)
Transport Network Vehicle Service
It refers to a TNC-accredited private vehicle owner,
which is a common carrier, using internet-based
technology application or digital platform
technology transporting passengers from one point
to another, for compensation.
The TNVS cannot operate as a common carrier
outside of or independent from the use of the
internet-based technology of the TNC or TNCs to
which they are accredited. (Sec. 2, [Department of
Transportation] Department Order No. 2018-012, 11
June 2018)
TNVS and TNCs are classified as Public Utilities
The Department of Transportation issued
Department Order no. 2018-012, dated 11 June
2018 in which it recognized the roles of TNVS and
TNCs in providing transport services to the public
and as such they should be treated as engaged in the
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 Commercial Law
operation of a public utility. They are considered
engaged in the business of carrying or transporting
passengers for compensation and offering their
services to the public.
Therefore, the operation of TNVS and TNCs is
imbued with public interest and must submit to the
full regulation by the State.
1. VIGILANCE OVER GOODS
Presumption on the loss, destruction, or
deterioration of goods
GR: The common carrier is presumed to have been
at fault or to have acted negligently when the goods
transported are lost, destroyed, or deteriorated.
(Art. 1735, NCC)
XPNs: When the same is due to any of the following
causes only: (F-A2–C-O)
1. Fortuitous events (flood, storm, earthquake,
lightning, or other natural disaster or calamity).
Provided, the following conditions are present:
a. Natural disaster was the proximate and
only cause;
b. Carrier exercised due diligence to prevent
or minimize loss before, during, and after
the occurrence of the natural disaster; and
c. The common carrier has not negligently
incurred delay in transporting the goods.
(Art. 1739-1740, NCC)
2. Act of the public enemy in war, whether
international or civil, provided:
a. Act was the proximate and only cause; and
b. Carrier exercised due diligence to prevent
or minimize loss before, during, and after
the act. (Art. 1739-1740, NCC)
3. Act or omission of the shipper or owner of the
goods, provided:
a. If proximate and only cause – exempting
b. If contributory negligence – mitigating
4. The Character of the goods or defects in the
packing or in the containers; provided, carrier
59
exercised due diligence to forestall or prevent
loss. (Art 1742, NCC)
NOTE: If the fact of improper packing is known
to the carrier or its servants, or apparent upon
ordinary observation, but it accepts the goods
notwithstanding such condition, it is not
relieved from responsibility for loss or injury
resulting therefrom. (Southern Lines Inc., v. CA,
G.R. No. L-16629, 31 Jan. 1962)
5. Order or act of competent authority; provided,
the authority is with power to issue the order.
(Art. 1743, NCC)
NOTE: There must be an order or act of
competent public authority through which the
goods are seized or destroyed. (Art. 1734, NCC)
If the officer acts without legal process or
authority, the common carrier will be held
liable. (Ganzon v. CA, G.R. No. L-48757, 30 May
1988)
In all cases other than those enumerated above,
there is presumption of negligence even if there is
an agreement limiting the liability of the common
carrier in the vigilance over the goods.
Common Carrier’s Liability for the Acts of
Strangers or Criminals
GR: A common carrier is liable even for acts of
strangers like thieves or robbers.
XPN: Where such thieves or robbers acted "with
grave or irresistible threat, violence or force." The
common carrier is not liable for the value of the
undelivered merchandise which was lost because of
an event that is beyond his control. (De Guzman v.
CA, supra)
Q: M. Dizon Trucking entered into a hauling
contract with Fairgoods Co. whereby the former
bound itself to haul the latter’s 2000 sacks of
soya bean meal from Manila Port Area to
Calamba, Laguna. To carry out faithfully its
obligation, Dizon subcontracted with Enrico
Reyes the delivery of 400 sacks of the soya bean
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
meal. Aside from the driver, three male
employees of Reyes rode on the truck with the
cargo. While the truck was on its way to Laguna,
two strangers suddenly stopped the truck and
hijacked the cargo. Investigation by the police
disclosed that one of the hijackers was armed
with a bladed weapon while the other was
unarmed. For failure to deliver the 400 sacks,
Fairgoods sued Dizon for damages. Dizon in turn
set up a third-party complaint against Reyes
which the latter registered on the ground that
the loss was due to force majeure. Did the
hijacking constitute force majeure to exculpate
Reyes from any liability? (1995 BAR)
A: NO. The hijacking in this case cannot be
considered as force majeure. Only one of the two
hijackers was armed with a bladed weapon. As
against four male employees of Reyes, two (2)
hijackers, with only one of them being armed with a
bladed weapon, cannot be considered force
majeure. In De Guzman vs. Court of Appeals, the
Supreme Court held that hijacking, not being
included in the provisions of Article 1734, must be
dealt with under the provisions of Article 1735 and
thus, the common carrier is presumed to have been
at fault or negligent. To exculpate the carrier from
liability arising from hijacking, he must prove that
the robbers or the hijackers acted with grave or
irresistible threat, violence, or force. (Bascos v. CA,
G.R. No. 101089, 07 Apr. 1993)
When an airline company was not authorized to
search passengers for firearms, the loss of the
jewelry and cash of a passenger because of an armed
robbery committed by other passengers is a force
majeure, for which the airline company is not liable.
(Quisumbing v. CA, G.R. No L-50076, 14 Sept. 1990)
NOTE: With increased concern over airplane
hijacking and terrorism has come increased security
at the nation’s airports. Passengers attempting to
board an aircraft routinely pass-through metal
detectors; their carry-on baggage as well as checked
luggage are routinely subjected to x-ray
scans. Should these procedures suggest the
presence of suspicious objects, physical searches
are conducted to determine what the objects
are. There is little question that such searches are
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
reasonable, given their minimal intrusiveness, the
gravity of the safety interests involved, and the
reduced privacy expectations associated with
airline travel. Indeed, travelers are often notified
through airport public address systems, signs and
notices in their airline tickets that they are subject
to search and, if any prohibited materials or
substances are found, such would be subject to
seizure. These announcements place passengers on
notice that ordinary constitutional protections
against warrantless searches and seizures do not
apply to routine airport procedures. (People
v. Suzuki, G.R. No. 120670, 23 Oct. 2003)
Other Invalid Defenses
Explosion. Damage to cargo from explosion of
another cargo is not ordinarily attributable to peril
of the sea or accidents of navigation particularly
where it occurs after the vessel has ended its voyage
and is finally moored to unload.
Worms and Rats. Whenever the ship is damaged by
worms resulting in damage to the cargo, the carrier
cannot cite the same as an excuse. The same is true
with respect to damage of the cargo by rats whether
the cargo was directly damaged by the rats or by the
water let in through holes gnawed by rats in the ship
or her fixtures.
Water Damage. Damage by seawater is not a valid
excuse where the water gains entrance through a
port that had been left open or insufficiently
fastened on sailing.
Barratry. The ship owner cannot escape liability to
third persons if the cause of damage is barratry. It is
an act committed by the master or crew of the ship
for some unlawful or fraudulent purpose, contrary
to their duty to the owner. (Aquino and Hernando,
2016)
Rules regarding the time of delivery of goods
and delay
1. If there is an agreement as to time of delivery
– delivery must be within the time stipulated in
the contract or bill of lading.
60
 Commercial Law
2. If there is no agreement – delivery must be
within a reasonable time. (Saludo, Jr. v. CA, G.R.
No. 95536, 23 Mar. 1992)
Delay in the delivery of goods
The carrier shall be liable for damages immediately
and proximately resulting from such neglect of duty.
(Ibid; Art. 1170, NCC)
Effects of delay of delivery of goods
In the absence of a special contract, a carrier is not
an insurer against delay in the transportation of
goods. The effects of delay are as follows:
1. If the common carrier, without just cause,
delays the transportation of the goods or
changes the stipulated or usual route, the
contract limiting the common carrier’s liability
cannot be availed of in case of the loss,
destruction, or deterioration of the goods. (Art.
1747, NCC)
NOTE: An agreement limiting the common
carrier’s liability for delay on account of strikes
or riots is valid. (Art. 1748, NCC)
2. Excusable delay in carriage merely suspends
and generally does not terminate the contract of
carriage;
3. The carrier shall be made liable when vessel or
vehicle is unreasonably delayed;
4. Carrier remains duty bound to exercise
extraordinary diligence; and
5. Natural disaster shall not free the carrier from
responsibility. (Dimaampao & Dumlao-
Escalante, 2014)
However, where the delay in the transportation of
the remains of a deceased person was due to the
fault of the mortuary service, who erroneously
switched the casket with that of another deceased
person, the airline company cannot be held liable for
damages because of the delay. (Saludo v. CA, supra)
61
Although the delivery of the suitcase of a passenger
was delayed by eleven days, an airline company
cannot be held liable for moral damages, exemplary
damages, and attorney’s fees, where the airline
company was not guilty of bad faith and exerted
efforts in tracing the suitcase. (Philippine Air Lines v.
Miano, G.R. No. 106664, 08 Mar. 1995)
Due Diligence to Prevent or Lessen Loss
To free the common carrier from liability in case of
flood, storm or other natural disaster or an act of a
public enemy:
1. The common carrier must exercise due
diligence to prevent or minimize loss before,
during, and after the occurrence. (Art., 1739,
NCC)
2. The natural disaster or the act of the public
enemy is the proximate and only cause of the
loss. (Art. 1739, NCC)
NOTE: If the common carrier negligently incurs
delay in transporting the goods, a natural disaster
shall not free such carrier from responsibility.
Loss due to Character of the Goods or the Faulty
Nature of its Containers
If the loss, destruction, or deterioration of the goods
was caused by the character of the goods, or the
faulty nature of the packing or the containers, the
common carrier must exercise due diligence to
forestall or lessen the loss.
Q: Because of spillage of the rice during the trip
from Davao to Manila due to the bad condition of
the sacks, there was a shortage in the rice
delivered by the Provident Lines Inc. to the
consignee XYZ Import and Export Corporation.
The carrier accepted the shipment, knowing
that the sacks had holes, and some had broken
strings. When sued, Provident Lines, Inc. alleged
that the loss was caused by the spillage of the
rice on account of the defective condition of the
sacks, at the time it received the shipment, and
therefore, it cannot be held liable. Decide. Give
reasons. (1978 BAR)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
A: The maritime carrier is liable. Where the fact of
improper packing is known to the carrier or its
servants, or apparent upon ordinary observations,
but the carrier accepts the goods notwithstanding
such conditions, it is not relieved of liability for loss
or injury resulting therefrom. (Southern Lines, Inc. v.
CA, G.R. No. L-16629, 31 Jan. 1962)
Duration of Liability
The New Civil Code is explicit when it comes to the
duration of extraordinary responsibility with
respect to goods. Such responsibility lasts from the
time the goods are unconditionally placed in the
possession of and received by the carrier for
transportation. Until the same are delivered,
actually or constructively, by the carrier to the
consignee, or to the person who has a right to
receive them. (Art. 1736, NCC)
The carrier’s responsibility terminates in any of the
following cases:
1. When the goods are delivered actually or
constructively by the carrier to the consignee or
to the person who has a right to receive them
(Art. 1736, NCC);
2. When the goods are temporarily unloaded or
stored in transit by reason of the exercise of the
shipper or owner of his right of stoppage in
transit; or
3. When the consignee has been advised of the
arrival of the goods at the place of destination
and has had reasonable opportunity to remove
them or dispose of them from the warehouse of
the carrier at the place of destination. (Art.
1738, NCC)
Delivery of Goods to Common Carrier
The goods are deemed delivered to the carrier when
the goods are ready for and have been placed in the
exclusive possession, custody and control of the
carrier for the purpose of their immediate
transportation and the carrier has accepted them.
When the carrier has thus accepted such delivery,
the liability of the carrier commences. (Saludo, Jr. v.
CA, G.R. No. 95536, 23 Mar. 1992, citing 13 Am. Jur.
2d, Carriers, 763-764)
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2022 GOLDEN NOTES
Party to whom delivery should be made
It must be delivered, actually or constructively, to
the consignee or to the person who has a right to
receive them. (Art. 1736, NCC)
Delivery of the cargo to the customs authorities is
not delivery to the consignee, or to the person who
has a right to receive them. (Lu Do & Lu Ym Corp. v.
Binamira, G.R. No. L-9840, 22 Apr. 1957)
Constructive Delivery
There is constructive delivery when delivery is
effected not by actually transferring the possession
of thing to the vendee (in this case, the other party,
either the carrier or the consignee) but by legal
formalities or by symbolic tradition. (Pineda, 2010)
NOTE: Delivery of the cargo to the customs
authorities is not delivery of the cargo to the
consignee, or to the person who has a right to
receive them", contemplated in Art. 1736, because
in such case the goods are still in the hands of the
Government and the owner cannot exercise
dominion over them. However, the parties may
agree to limit the liability of the carrier considering
that the goods have still to go through the inspection
of the customs authorities before they are actually
turned over to the consignee. It is a situation where
the carrier losses control of the goods because of a
custom regulation and it is unfair that it be made
responsible for what may happen during the
interregnum. This stipulation is not contrary to
morals or public policy. (Lu Do v. Binamira, G.R. No.
L-9840, 22 Apr. 1957)
Misdelivery by a carrier who was chosen by the
buyer
Misdelivery of the goods is attributable to the
carrier and not to the seller. And, since the carrier
was chosen and authorized to make the delivery by
the buyer itself, the seller cannot be held
responsible for such misdelivery. (Smith Bell & Co.
[Phils.] v. Gimenez, G.R. No. L-17617, 29 June 1963)
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 Commercial Law
Right of Stoppage In Transitu
It is the right exercised by the seller by stopping the
delivery of the goods, in case of insolvency of the
buyer or consignee, when such goods are already in
transit. (Art. 1530, NCC)
The seller may exercise this right either:
1. By obtaining actual possession of the goods; or
2. By giving notice of his claim to the carrier or
other bailee in whose possession the goods are.
NOTE: Notice may be given either to the person
in actual possession of the goods or to his
principal. In the latter case, the notice, to be
effectual, must be given at such time and under
such circumstances that the principal, by the
exercise of reasonable diligence, may prevent a
delivery to the buyer. (Art. 1532, NCC)
GR: The common carrier’s duty to observe
extraordinary diligence in the vigilance over the
goods remains in full force and effect even when
they are temporarily unloaded or stored in transit.
XPN: When the shipper or owner has made use of
the right of stoppage in transitu. (Art. 1737, NCC)
The diligence required is merely ordinary diligence
because of the following:
1. It is holding the goods in the capacity of an
ordinary bailee or warehouseman and not as a
carrier.
2. There is a change of contract from a contract of
carriage to a contract of deposit. (Art. 1737,
NCC)
Obligation required of the common carrier in
case of stoppage in transitu
When notice of stoppage in transitu is given by the
seller to the carrier, he must redeliver the goods to,
or according to the directions of, the seller. The
expenses of such delivery must be borne by the
seller. (Art. 1532, NCC)
63
NOTE: If the seller instructs to deliver it somewhere
else, a new contract of carriage is formed and the
carrier must be paid accordingly.
Liability for Baggage of Passengers
Baggage is any personal property carried by the
passenger, either check-in or hand-carry. (Sec. 2.1,
Air Passenger Bill of Rights)
Checked-in Baggage
The provisions of Articles 1733 to 1753, NCC shall
apply. (Art. 1754, NCC)
An airline company is liable for moral damages
where it left behind the luggage of a passenger, and
its employees did not assist the passenger in
locating his luggage but instead treated him
boorishly. (Pan American World Airways v. IAC, G.R.
No. 68988, 21 June 1990)
In one case, the Court held that the cause of the loss
was the negligence of the carrier in not ensuring
that the doors of the baggage compartment of the
bus were securely fastened. (Sarkies Tours
Philippines, Inc. v. CA, G.R. No. 108897, 02 Oct. 1997)
Baggage in Possession of Passengers
The rules in Arts. 1998 and 2000 to 2003, NCC
concerning the responsibility of hotel-keepers for
necessary deposit shall be applicable.
1. The common carrier shall be responsible for
shipper’s baggage as depositaries, provided
that:
a. notice was given to them, or to their
employees, of the effects brought by
the guests; and
b. on the part of the shipper, they take the
precautions which said common
carriers or their substitutes advised
relative to the care and vigilance of
their effects. (Art. 1998, NCC)
2. The responsibility shall include the loss of, or
injury to the personal property of the shipper
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
caused by the employees of the common carrier
as well as strangers; but not that which may
proceed from any force majeure. (Art. 2000,
NCC)
3. The act of a thief or robber, who has entered the
carrier, is not deemed force majeure, unless it is
done with the use of arms or through an
irresistible force. (Art. 2001, NCC)
4. The common carrier is not liable for
compensation if the loss is due to the acts of the
shipper, his family, or servants, or if the loss
arises from the character of the things brought
into the carrier. (Art. 2002, NCC)
5. The common carrier cannot free himself from
responsibility by posting notices to the effect
that he is not liable for the articles brought by
the passenger. Any stipulation between the
common carrier and the shipper whereby the
responsibility of the former as set forth in Arts.
1998 to 2001 is suppressed or diminished shall
be void. (Art. 2003, NCC)
Q: Pasahero, a paying passenger, boarded a
Victory Liner bus bound for Olongapo. He chose
a seat at the front near the bus driver. Pasahero
told the bus driver that he had valuable items in
his bag which was placed near his feet. Since he
had not slept for 24 hours, he requested the
driver to keep an eye on the bag should he doze
off during the trip. While Pasahero was asleep,
another passenger took the bag away and
alighted at Guagua, Pampanga. Is Victory Liner
liable to Pasahero? Explain. (1987 BAR)
A: YES. The responsibility of common carriers in the
case of loss or damage to hand-carried baggage is
governed by the rule on necessary deposits. The
common carrier is thus liable for the loss of the
personal property caused by its employees or by
strangers. In this case, the passenger told the driver
that he had valuable item placed beside the driver’s
seat. If the driver exercised due diligence, he could
have prevented the loss of the bag.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
2. SAFETY OF PASSENGERS
A common carrier is bound to carry the passengers
safely as far as human care and foresight can
provide, using the utmost diligence of very cautious
persons, with a due regard for all the circumstances.
(Art. 1755, NCC)
Who are not considered passengers (W-A-M-U)
1. One who has boarded a Wrong vehicle, has been
properly informed of such fact, and on alighting,
is injured by the carrier.
2. Invited guests and Accommodation passengers.
3. One who attempts to board a Moving vehicle,
although he has a ticket, unless the attempt be
with the knowledge and consent of the carrier.
4. One who remains on a carrier for an
Unreasonable length of time after he has been
afforded every safe opportunity to alight.
The carrier is thus NOT obliged to exercise
extraordinary diligence but only ordinary diligence
in these instances.
Assumption of risk on the part of passengers
Passengers must take such risks incident to the
mode of travel. The passenger must observe the
diligence of a good father of a family to avoid injury
to himself. (Art. 1761, NCC)
Carriers are not insurers of any and all risks to
passengers and goods. It merely undertakes to
perform certain duties to the public as the law
imposes and holds itself liable for any breach
thereof. (Pilapil v. CA, G.R. No. 52159, 22 Dec. 1989)
Q: Wisconsin Transportation Co., Inc. (WTC)
owned and operated an inter-island deluxe bus
service plying the Manila-Batangas-Mindoro
route. Three friends, namely: Aurelio, Jerome
and Florencio rode on the same WTC bus from
Manila bound for Mindoro. Aurelio purchased a
ticket for himself. Jerome, being a boyhood
friend of the bus driver, was allowed a free ride
by agreeing to sit during the trip on a stool
placed in the aisle. Florencio, already penniless
after spending all his money on beer the night
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 Commercial Law
before, just stole a ride in the bus by hiding in
the on-board toilet of the bus. During the trip,
the bus collided with another bus coming from
the opposite direction. The three friends all
suffered serious physical injuries. What are
WTC's liabilities, if any, in favor of Aurelio,
Jerome and Florencio? Explain your answer.
(2017 BAR)
A: As a common carrier, WTC is liable to Aurelio for
breach of contract of carriage, the latter being a
passenger who purchased a ticket for himself. WTC
is also liable to Jerome for breach of contract of
carriage because he was a passenger although he
was being transported gratuitously. However, WTC
has no liability in favor of Florencio for breach of
contract of carriage. A stowaway like Florencio, who
secures passage by fraud, is not considered as a
passenger.
NOTE: As accommodation passengers or invited
guests, defendant as owner and driver of the pick-
up owes to them merely the duty to exercise
reasonable care so that they may be transported
safely to their destination. The rule is established by
the weight of authority that the owner or operator
of an automobile owes the duty to an invited
guest to exercise reasonable care in its operation,
and not unreasonably to expose him to danger and
injury by increasing the hazard of travel. (Articles
1755 and 1756, NCC, Lara v. Valencia, G.R. No. L-
9907, 30 June 1958)
Duration of Liability
Observance of extraordinary diligence in
transportation of goods commences from the
moment the person who purchases the ticket from
the carrier presents himself at the proper place and
in a proper manner to be transported and continues
until the passenger has been landed at the port of
destination and has left the vessel owner’s dock or
premises.
Waiting for Carrier or Boarding of Carrier
A proper person whom the carrier would be bound
to accept who enters upon the carrier’s premises
such as a station, ticket office, or waiting room, with
65
the intention of becoming a passenger, will
ordinarily be viewed as assuming the status of a
passenger. (LRTA v. Navidad, G.R. No. 145804, 06 Feb.
2003, citing 10 Am. Jur. 30)
Trains
The carrier is supposed to exercise extraordinary
diligence although the passenger is still waiting for
a coach on the platform of the train station. (LRTA v.
Navidad, G.R. No. 145804, 06 Feb. 2003)
However, there is no obligation on the part of a
street railway company to stop its cars to let on
intending passengers at other points than those
appointed for stoppage. (Del Prado v. Manila Electric
Co., G.R. No. L-29462, 7 Mar. 1929)
Q: City Railways, Inc. (CRI) provides train
service, for a fee, to commuters from Manila to
Calamba, Laguna. Commuters are required to
purchase tickets and then proceed to designated
loading and unloading facilities to board the
train. Ricardo Santos purchased the ticket for
Calamba and entered the station. While waiting,
he had an altercation with the security guard of
CRI leading to a fistfight. Ricardo Santos fell on
the railway just as a train was entering the
station. Ricardo Santos was run over by the
train. He died. CRI contented that the mishap
occurred before Ricardo Santos boarded the
train and that it was not guilty of negligence.
Decide. (2008 BAR)
A: The contention of CRI must fail. The duty of a
common carrier to provide safety to its passengers
is not only during the course of the trip but for so
long as the passengers are within its premises and
where they ought to be in pursuance to the contract
of carriage. Furthermore, the common carrier will
still be liable even though its employees acted
beyond the scope of their work. (LRTA vs. Navidad,
G.R. No. 145804, 6 Feb. 2003)
Q: P, a salesgirl in a flower shop at the Ayala
Station of the MRT bought two (2) tokens or
tickets, one for her ride to work and another for
her ride home. She got to her flower shop where
she usually worked. While P was attending to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
her duties at the flower shop, two (2) crews of
the MRT got into a fight near the flower shop,
causing injuries to P in the process. Can P sue the
MRT for contractual breach as she was within
the MRT premises where she would shortly take
her ride home? (2011 BAR)
A: NO. P had no intention to board an MRT train
coach when the incident occurred.
Carriage by Sea
The duty of the carrier commences as soon as a
person with bona fide intention of taking passage
places himself in the care of the carrier or its
employees and is accepted as passenger. (Aquino
and Hernando, 2016, citing 80 C.J.S. 1085)
Land Transportation
The act of the driver in stopping their conveyances
is a continuous offer to riders (continuing offer rule).
The passenger is deemed to be accepting the offer if
he is already attempting to board the conveyances
and the contract of carriage is perfected from that
point.
It is the duty of common carriers of passengers,
including common carriers by railroad train,
streetcar, or motorbus, to stop their conveyances a
reasonable length of time in order to afford
passengers an opportunity to board and enter, and
they are liable for injuries suffered by boarding
passengers resulting from the sudden starting up or
jerking of their conveyances while they are doing so.
(Dangwa Transportation Co., Inc. vs. CA, G.R. No.
95582, 07 Oct. 1991)
Q: A bus of GL Transit on its way to Davao
stopped to enable a passenger to alight. At that
moment, Santiago who had been waiting for a
ride, boarded the bus. However, the bus driver
failed to notice Santiago who was still standing
on the bus platform and stepped on the
accelerator. Because of the sudden motion,
Santiago slipped and fell down suffering serious
injuries. Is GL Transit liable? (1996 BAR)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
A: YES. Santiago may hold GL Transit liable for
breach of contract of carriage. It was the duty of the
driver, when he stopped the bus, to do no act that
would have the effect of increasing the peril to a
passenger such as Santiago while he was attempting
to board the same. When a bus is not in motion there
is no necessity for a person who wants to ride the
same to signal his intention to board. A public utility
bus, once it stops, is in effect making a continuous
offer to bus riders. It is the duty of common carriers
of passengers to stop their conveyances while they
are doing so. Santiago, by stepping and standing on
the platform of the bus is already considered as a
passenger and is entitled to all the rights and
protection pertaining to a contract of carriage.
(Dangwa Transportation Co., Inc. v. CA, supra)
When a Public Utility Vehicle is not in motion, it
is not necessary for a person who wants to ride
the same to signal his intention to board
When the bus is not in motion, there is no necessity
for a person who wants to ride the same to signal his
intention to board. A public utility bus, once it stops,
is in effect making a continuous offer to bus riders.
Hence, it becomes the duty of the driver and the
conductor, every time the bus stops, to do no act that
would have the effect of increasing the peril to a
passenger while he was attempting to board the
same. The premature acceleration of the bus in this
case was a breach of such duty.
A person, by stepping and standing on the platform
of the bus, is already considered a passenger and is
entitled all the rights and protection pertaining to
such a contractual relation. Hence, it has been held
that the duty which the carrier owes to its patrons
extends to persons boarding cars as well as to those
alighting therefrom. (Dangwa Transportation Co.,
Inc. vs. CA, supra)
Liability for death or injury to passengers upon
Arrival at Destination
Once created, the relationship will not ordinarily
terminate until the passenger has, after reaching his
destination, safely alighted from the carrier's
conveyance or had a reasonable opportunity to
leave the carrier's premises. All persons who
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 Commercial Law
remain on the premises a reasonable time after
leaving the conveyance are to be deemed
passengers, and what is a reasonable time or a
reasonable delay within this rule is to be
determined from all the circumstances, and
includes a reasonable time to see after his baggage
and prepare for his departure. (La Mallorca v. CA,
G.R. No. L-21486, 14 May 1966)
Carrier-passenger relationship continues until the
passenger has been landed at the port of destination
and has left the vessel-owner’s premises. The
victim’s presence in a vessel after one (1) hour from
his disembarkation is not enough in order to
absolve the carrier from liability in his death.
(Aboitiz Shipping Corporation v. CA, G.R. No. 84458,
06 Nov. 1989)
Q: Robert De Alban and his family rode a bus
owned by Joeben Bus Company. Upon reaching
their desired destination, they alighted from the
bus, but Robert returned to get their baggage.
However, his youngest daughter followed him
without his knowledge. When he stepped into
the bus again, the bus accelerated that resulting
to Robert’s daughter death. The bus ran over
her. Is the bus company liable?
A: YES. The relation of carrier and passenger does
not cease at the moment the passenger alights from
the carrier’s vehicle at a place selected by the carrier
at the point of destination but continues until the
passenger has had a reasonable time or reasonable
opportunity to leave the carrier’s premises. (La
Mallorca v. CA, G.R. No. L-20761, 27 July 1966)
Liability for acts of others
1. Employees – Common carriers are liable for
the acts of their employees
Common carriers are liable for the death of or
injuries to passengers through the negligence or
willful acts of the former’s employees, although such
employees may have acted beyond the scope of
their authority or in violation of the orders of the
common carriers. The liability of the common
carriers does not cease upon proof that they
exercised all the diligence of a good father of a
67
family in the selection and supervision of their
employees. (Art. 1759, NCC)
NOTE: By express provision of Art. 1759, it is no
defense that the employee acted beyond the scope
of his authority because the riding public is not
expected to inquire from time to time before they
board the carrier whether or not the driver or any
other employee is authorized to drive the vehicle or
that said driver is acting within the scope of his
authority and observing the existing rules and
regulations required of him by management.
(Aquino and Hernando, 2016)
Q: At around 8:45 in the morning, A, after having
alighted from a passenger bus in front of
Robinsons Galleria along the north-bound lane
of EDSA, was hit and run over by a bus driven by
B, who was then employed by C Transport
Company. A was immediately rushed to the
hospital where she was pronounced dead on
arrival. By reason of the quasi-delict, who
should be held liable for the death of A? B, the
bus driver, C Transport Company, or both?
A: Both B and C Transport Company should be held
solidarily liable as joint tortfeasors. Under Art. 2180
of the NCC, employers are liable for the damages
caused by their employees acting within the scope
of their assigned tasks. Once negligence on the part
of the employee is established, a presumption
instantly arises that the employer was remiss in the
selection and/or supervision of the negligent
employee. It is incumbent upon the employer to
rebut this presumption by presenting adequate and
convincing proof that it exercised the care and
diligence of a good father of a family in the selection
and supervision of its employees. Failing to do this,
a common carrier cannot avoid liability for the
quasi-delict committed by its negligent employee.
The responsibility of two or more persons who
are liable for a quasi-delict is solidary. (R
Transport Corporation vs. Luisito G. Yu, G.R. No.
174161, 18 Feb. 2015)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
2. Other passengers and strangers
The registered owner of the vehicle may be held
liable for damages suffered by a third person in
the course of the operation of the vehicle
The registered owner of a public service vehicle is
responsible for damages that may arise from
consequences incident to its operation or that may
be caused to any of the passengers therein. (Gelisan
vs. Alday, G.R. No. L-30212, 30 Sept. 1987)
Extent of Liability of Common Carriers for Acts
of Co-Passengers or Strangers (1997, 2005 BAR)
A common carrier is responsible for injuries
suffered by a passenger on account of the willful acts
or negligence of other passengers or of strangers, if
the carrier’s employees through the exercise of the
diligence of a good father of a family could have
prevented or stopped the act or omission. (Art.
1763, NCC)
Q: P rode a Sentinel Liner bus going to Baguio
from Manila. At a stop-over in Tarlac, the bus
driver, the conductor, and the passengers
disembarked for lunch. P decided, however, to
remain in the bus, the door of which was not
locked. At this point, V, a vendor, sneaked into
the bus and offered P some refreshments. When
P rudely declined, V attacked him, resulting in P
suffering from bruises and contusions. Does he
have cause to sue Sentinel Liner? (2011 BAR)
A: YES, since the carrier's crew did nothing to
protect the passenger P who remained in the bus
during the stop-over.
Q: In a jeepney, Angela, a passenger, was injured
because of the flammable material brought by
Antonette, another passenger. Antonette denied
her baggage to be inspected invoking her right
to privacy.
a. Should the jeepney operator be held liable
for damages?
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
b. If it were an airline company involved,
would your answer be the same? (1992
BAR)
A:
a. NO. The operator is not liable for damages. In
overland transportation, the common carrier is
not bound nor empowered to make an
examination on the contents of packages or
bags, particularly those hand carried by
passengers. (Nocum vs. Laguna Tayabas Bus
Company, G.R. No. L-23733, 31 Oct. 1969)
b. NO. The common carrier should be made liable.
In case of air carriers, it is unlawful to carry
flammable materials in passenger aircrafts, and
airline companies may open and investigate
suspicious packages and cargoes pursuant to
R.A. No. 6235.
Q: Marites, a paying bus passenger, was hit
above her left eye by a stone hurled at the bus by
an unidentified bystander as the bus was
speeding through the National Highway. The bus
owner’s personnel lost no time in bringing
Marites to the provincial hospital where she was
confined and treated. Marites wants to sue the
bus company for damages and seeks your advice
whether she can legally hold the bus company
liable. What will you advise her? (1994 BAR)
A: I will advise Marites that she cannot legally hold
the bus company liable if the stone throwing was
entirely unforeseeable and the carrier exercised
utmost diligence. However, I will also inform her
that the burden is on the carrier to prove such
exercise of due diligence. If she decides to file a case
in court, all that she will prove is that she was a
passenger and she was injured while on board the
bus. (Pilapil v. CA, G.R. No. 52159, 22 Dec. 1989)
Liability for Delayed Voyage
Delayed voyage refers to a voyage involving:
1. Late departure of the ship from its port of
origin; or
2. Late arrival to its port of destination for a period
of time not exceeding twenty-four (24) hours
from the Certificate of Public Convenience
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 Commercial Law
(CPA)-authorized time of departure or arrival
of the ship. (Sec. III, Maritime Industry Authority
Circular No. 2018-07)
Rights of passengers in case of delayed voyages
In case of delay of the voyage attributable to the
operator, a passenger shall have the following
rights:
1. Right to Information
The operator shall, within thirty (30) minutes
from receipt of information or from knowledge
that the voyage shall be delayed, but not later
than one (1) hour before the CPC-authorized
departure schedule, inform the passengers of
the delay and the cause thereof, as well as of the
new departure or expected arrival time.
NOTE: The information shall be made by public
announcement through the Public
Announcement System, written and/or
published notice, or through SMS, electronic or
any other available means.
2. Right to Refund or Revalidation
Should the delay be for more than three (3)
hours, the passenger shall be offered by the
operator the option to request a refund of the
ticket price or for the revalidation of the ticket.
3. Right to Amenities
The operator shall provide, free of charge, the
passengers waiting for their re-scheduled trip
with the following:
a. Snacks or refreshments, or meals
during mealtime;
b. Free access to first aid/relief medicine,
if necessary;
c. Free access to communication facilities
or services, if necessary;
d. Free, decent, and clean accommodation
that must be located near or accessible
from the port; and
e. Free transportation to and from the
port and place of accommodation,
should the delay require a waiting time
69
of more than eight (8) but not
exceeding 24 hours.
NOTE: The passengers shall be entitled to these
amenities for as long as may be required by the
period for which they have to wait for their next
scheduled voyage.
4. Right to Compensation
As an alternative to providing accommodation
or whenever the provision of the same is not
practicable, the operator may offer the
passengers corresponding compensation:
a. In an amount equivalent to the
prevailing market price of a decent and
clean accommodation in the
immediate or adjacent locality of the
ship’s point of departure;
b. Subject to the same limitation of a
maximum of three (3) nights per
passenger. (Sec. V, Maritime Industry
Authority Circular No. 2018-07)
5. Right to Remain on Board
In case the departure of the vessel is delayed,
the passengers have a right to remain on board
and to be furnished with food for the account of
the vessel, unless the delay is due to an
accidental cause or to force majeure. (Art. 698,
Code of Commerce [COC])
6. Right to Return
If the delay should exceed ten (10) days, the
passengers who request it shall be entitled to
the return of the passage. (Art. 698, COC)
7. Right to Damages
If the delay were due exclusively to the captain
or agent, the passengers may furthermore
demand indemnity for losses and damages. (Art.
698, COC)
Liability for Defects in Equipment and Facilities
The carrier, while not an insurer of the safety of his
passengers, should nevertheless be held to answer
for the flaws of his equipment if such flaws were at
all discoverable.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
The preponderance of authority is in favor of the
doctrine that a passenger is entitled to recover
damages from a carrier for an injury resulting from
a defect in an appliance purchased from a
manufacturer, whenever it appears that the defect
would have been discovered by the carrier if it had
exercised the degree of care which under the
circumstances was incumbent upon it, with regard
to inspection and application of the necessary tests.
The manufacturer is considered in law the agent or
servant of the carrier, as far as regards the work of
constructing the appliance. According to this theory,
the good repute of the manufacturer will not relieve
the carrier from liability. (Necesito v. Paras, G.R. No.
L-10605, 30 June 1958)
Rationale of the Carrier’s Liability
The rationale is the fact that the passenger has
neither choice nor control over the carrier in the
selection and use of the equipment and appliances
in use by the carrier. Having no privity whatever
with the manufacturer or vendor of the defective
equipment, the passenger has no remedy against
him , while the carrier usually has. (Ibid)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
C. DEFENSES AVAILABLE TO A COMMON
CARRIER
Defenses available to a Common Carrier (F-E-D-
Co-L)
1. Fortuitous event
2. Exercise of extraordinary diligence
3. Due Diligence in the selection and supervision
of employees.
4. Contributory negligence of passengers – it does
not bar recovery of damages for death or injury
if the proximate cause is the negligence of the
common carrier but the amount of damages
shall be equitably reduced. (Art. 1762, NCC)
5. Doctrine of Last Clear Chance
1. PROOF OF NEGLIGENCE
The diligence of the passenger may be
considered in determining liability in case of
injury
The passenger must observe the diligence of a good
father of a family or ordinary diligence to avoid
injury to himself. (Art. 1761, NCC) This means that if
the proximate cause of the passenger’s injury is his
negligence, the common carrier is not liable.
Proof that the Common Carrier exercised
extraordinary diligence in the performance of
its duties
Under Art. 1733 of the NCC, common carriers are
required to observe extraordinary diligence for the
safety of the passenger transported by them,
according to all the circumstances of each case.
In addition, Art. 1756 of the NCC, in creating a
presumption of fault or negligence on the part of the
common carrier when its passenger is injured,
merely relieves the latter, for the time being, from
introducing evidence to fasten the negligence on the
former, because the presumption stands in the place
of evidence.
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 Commercial Law
Being a mere presumption, however, the same is
rebuttable by proof that the common carrier had
exercised extraordinary diligence as required by
law in the performance of its contractual obligation,
or that the injury suffered by the passenger was
solely due to a fortuitous event. (Jose Pilapil v. CA,
G.R. No. 52159, 22 Dec. 1989)
2. DUE DILIGENCE IN THE SELECTION AND
SUPERVISION OF EMPLOYEES
Liability of Common Carriers does not cease
upon proof that they exercised due diligence in
the selection and supervision of their employees
Common carriers are liable for the death of or
injuries to passengers through the negligence or
willful acts of the former's employees, although such
employees may have acted beyond the scope of
their authority or in violation of the orders of the
common carriers. This liability of the common
carriers does not cease upon proof that they
exercised all the diligence of a good father of a
family in the selection and supervision of their
employees. (Art. 1759, NCC)
NOTE: The carrier, unlike in suits for quasi-delict,
may not escape liability by proving that it has
exercised due diligence in the selection and
supervision of its employees. (Art. 1759, NCC;
Cangco vs. Manila Railroad Co., G.R. No. L-12191, 14
Oct. 1918; Prado vs. Manila Electric Co., G.R. No. L-
29462, 7 Mar. 1929)
Q: Why is the defense of due diligence in the
selection and supervision of an employee not
available to a common carrier? (2002 BAR)
A: The defense of due diligence in the selection and
supervision of an employee is not available to a
common carrier because the degree of diligence
required of a common carrier is not the diligence of
a good father of a family but extraordinary diligence,
i.e., diligence of the greatest skill and utmost
foresight.
71
3. FORTUITOUS EVENT
Art. 1174 of the NCC provides that no person shall
be responsible for a fortuitous event which could
not be foreseen, or which, though foreseen, was
inevitable.
Requisites of a fortuitous event (F-EV-UN-I)
1. The common carrier must be Free from any
participation in or aggravation of the injury to
the creditor;
2. The EVent must be such as to render it
impossible for the common carrier to fulfill his
obligation in a normal manner;
3. The event must be UNforeseen or unavoidable;
and
4. The cause of the breach of obligation must be
Independent of the will of the common carrier.
(Real v. Belo, G.R. No. 146224, 26 Jan. 2007)
A mechanical defect is not fortuitous event
Mechanical defects in the carrier are NOT
considered a caso fortuito that exempts the carrier
from responsibility. (Sweet Lines, Inc. v. CA, G.R. No.
L-46340, 28 Apr. 1983)
Tire blowout of a jeep is not a fortuitous event
where there exists a specific act of negligence by the
carrier consisting of the fact that the jeepney was
overloaded and speeding at the time of the incident.
(Juntilla v. Fontanar, GR No. L-45637, 31 May 1985)
Defective brakes cannot be considered fortuitous in
character. (Vergara v. CA, G.R. No. 77679, 30 Sept.
1987)
Fire is not considered a natural disaster
GR: Fire arises almost invariably from some act of
man or by human means. It does not fall within the
category of an act of God.
XPN: If the fire is caused by lightning or by other
natural disaster or calamity. (Eastern Shipping Lines
v. IAC, G.R. No. L-69044, 29 May 1987)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
NOTE: In case that the goods have already been
deposited in the warehouse of the Bureau of
Customs and the goods were then destroyed by fire,
the carrier is not anymore liable. (Servando v.
Philippine Steam Navigation, G.R. No. L-36481-2, 23
Oct. 1982)
Typhoon as a Fortuitous Event
GR: If all the elements of a natural disaster or
calamity concur and there was no contributory
negligence or delay, the occurrence of a typhoon is a
fortuitous event. This holds true especially if the
vessel was seaworthy at the time it undertook that
fateful voyage and that it was confirmed with the
Coast Guard that the weather condition would
permit safe travel of the vessel to its destination.
(PhilAm Gen. v. MGG Marine Services, Inc., G.R. No.
135645, 08 Mar. 2002)
The loss of cargoes due to the sinking of a seaworthy
tugboat which was suddenly tossed by waves of
extraordinary height is due to a force majeure.
(PhilAm Gen. v. PKS Shipping Company, G.R. No.
149038, 09 Apr. 2003)
XPN: If a vessel sank due to a typhoon, and there
was failure to ascertain the direction of the storm
and the weather condition of the path they would be
traversing, it constitutes lack of foresight and
minimum vigilance over its cargoes taking into
account the surrounding circumstances of the case.
Thus, the common carrier will still be liable. (Arada
v. CA, G.R. No. 98243, 01 July 1992)
Where a vessel encountered stormy weather and
the coils of wire it was transporting became rusty
because rain entered the hatch of the vessel, the
damage was not due to a fortuitous event, because
heavy rains are foreseeable, and rain would not
have entered the hatch if it was closed properly.
(Eastern Shipping Lines v. CA, G.R. No. 97412, 12 July
1994)
Q: On a clear weather, M/V Sundo, carrying
insured cargo, left the port of Manila bound for
Cebu. While at sea, the vessel encountered a
strong typhoon forcing the captain to steer the
vessel to the nearest island where it stayed for
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
seven days. The vessel ran out of provisions for
its passengers. Consequently, the vessel
proceeded to Leyte to replenish its supplies.
Assuming that the cargo was damaged because
of such deviation, who between the insurance
company and the owner of the cargo bears the
loss? Explain. (2005 BAR)
A: The insurance company is liable. It is an instance
of a valid deviation because the strong typhoon is a
fortuitous event over which neither the master nor
the owner has any control. Deviation is likewise
proper in order to avoid a peril. Common carriers
are responsible for the loss, destruction,
deterioration of the goods unless the same is due to
any of the causes provided by law – which includes,
among others, is when there is flood, storm,
earthquake, lightning, or other natural disaster or
calamities. Moreover, even in cases where a natural
disaster is the proximate and only cause of the loss,
a common carrier is still required to exercise due
diligence to prevent or minimize loss before, during
and after the occurrence of the natural disaster, for
it to be exempt from liability under the law for the
loss of the goods. Such deviation is just proper in its
exercise of extraordinary diligence. (The Philippine
American General Insurance Co., Inc. v. MGC Marine
Services, Inc. and Gaerlan, G.R. No. 135645, 08 Mar.
2002)
Q: Philip Mauricio shipped a box of cigarettes to
a dealer in Naga City through Bicol Bus Company
(BBC). When the bus reached Lucena City, the
bus developed engine trouble. The driver
brought the bus to a repair shop in Lucena
where he was informed by the mechanic that an
extensive repair was necessary, which would
take at least 2 days. While the bus was in the
repair shop, Typhoon Coring lashed Quezon
Province. The cargoes inside the bus, including
Mauricio’s cigarettes, got wet and were totally
spoiled. Mauricio sued BBC for damage to his
cargoes. Decide. (1987 BAR)
A: BBC is liable for damages to the cargoes lost by
Mauricio. A natural disaster would relieve liability if
it is the proximate and only cause of the damage.
The carrier itself, in this case, had been negligent.
The presumption of negligence in culpa contractual
72
 Commercial Law
is not overcome by invoking the defense that there
has been engine trouble, for such defense does not
preclude it having been due to the fault of the
common carrier. The fact that an extensive repair
work was necessary which, in fact, took 2 days to
complete, somehow justifies an impression that the
engine trouble could have been detected, if not
already known, well before the actual breakdown.
4. CONTRIBUTORY NEGLIGENCE
Contributory negligence is the failure of a person
who has been exposed to injury by the fault or
negligence of another, to use such degree of care for
his safety and protection an ordinarily prudent man
would use under the circumstances. (Martin, 1989,
citing Rakes v. Atlantic Gulf Co., G.R. No. 1719, 23 Jan.
1907)
NOTE: Contributory negligence on the part of the
passenger does not justify the common carrier’s
exemption from liability. (Martin, 1989)
Q: Nelson owned and controlled the Sonnel
Construction Company. Acting for the company,
Nelson contracted the construction of a building.
Without first installing a protective net atop the
sidewalks adjoining the construction site, the
company proceeded with the construction work.
One day, a heavy piece of lumber fell from the
building. It smashed a taxicab which at that time
had gone off-road and onto the sidewalk in
order to avoid the traffic. The taxicab
passengers died as a result.
a. If you were the counsel for Sonnel
Construction, how would you defend your
client? What would be your theory?
b. Could the heirs hold the taxicab owner and
driver liable? Explain. (2008 BAR)
A:
a. I shall raise the affirmative defense of
contributory negligence. The proximate cause
of death is the violation of the taxi driver of
traffic rules and regulations when it drove off-
road to avoid heavy traffic. The lumber that fell
from the building was only the immediate cause
73
of death of the victims. Further, Sonnel
Construction, exercised due diligence in the
selection and supervision of its employees.
b. YES. Both taxicab owner and driver may be held
liable based on breach of contract of carriage
and negligence in the selection and supervision
of employees for quasi-delict. The driver can be
held criminally liable for reckless imprudence
resulting to homicide and for damages under
quasi-delict as provided in Article 2176 of the
Civil Code while the employer may be held
liable under Article 2180 of the same Code— an
employer may be held solidarily liable for the
negligent act of his employee acting within the
scope of their assigned task. Hence, in this case,
the taxicab owner is exempted from liability
while the taxicab driver is liable solely and
personally for criminal prosecution.
Q: A and his classmates took a bus from UP to
Quiapo. On the way, another Quiapo-bound bus
tries to overtake them. A and his classmates
dared the bus driver to run faster and race with
the other bus. The driver takes their dare, to the
delight of A and his friends who cheered him. On
rounding the curve, the bus driver fails to slow
down and the bus turns turtle, resulting in the
death of A and injuries to the other passengers.
The bus carried the following sign: “Do not talk
to driver while bus is on motion, otherwise the
company will not assume liability for any
accident.” Explain briefly the extent of the
liability, if any, of the bus company, giving the
legal provisions and principles involved. (1983
BAR)
A: The bus company is liable for damages to A’s
heirs and to all the injured passengers. Under the
Civil Code, a common carrier is duty bound to
exercise extraordinary diligence in carrying its
passengers through the negligence or willful acts of
its employees even if the latter have acted beyond
the scope of their authority or in violation of their
orders. This liability cannot be eliminated or limited
by stipulation or by posting notices. Although it may
be argued that A was guilty of contributory
negligence, such an argument loses its force in the
face of the driver’s recklessness in taking the dare.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
And even if such argument would be accepted, at
most it can only mitigate the amount of damages,
since the proximate cause of the accident was the
driver’s willful and reckless act in running a race
with the other bus.
Rule if there is Contributory Negligence on the
part of the shipper
If the shipper or owner merely contributed to the
loss, destruction, or deterioration of the goods, the
proximate cause thereof being the negligence of the
common carrier, the latter shall be liable for
damages, which however, shall be equitably
reduced. (Art. 1741, NCC)
5. DOCTRINE OF LAST CLEAR CHANCE
The doctrine of last clear chance provides that
where both parties are negligent but the negligent
act of one is appreciably later in point of time than
that of the other, or where it is impossible to
determine whose fault or negligence brought about
the occurrence of the incident, the one who had the
last clear opportunity to avoid the impending harm
but failed to do so, is chargeable with the
consequences arising therefrom.
Stated differently, the rule is that the antecedent
negligence of a person does not preclude recovery
of damages caused by the supervening negligence of
the latter, who had the last fair chance to prevent the
impending harm by the exercise of due diligence.
(Greenstar v. Universal Robina, G.R. No. 205090, 17
Oct. 2016)
Q: B Traversing EDSA swerved then collision
took place with B barely encroaching on C’s lane.
Prior to and at the time of collision, C did not
take any defensive maneuver to prevent the
accident and minimize the impending damage to
life and property, which resulted in the collision
in the middle of the highway, where a vehicle
would normally be traversing. Is C liable for his
lack of care in driving?
A: YES. The collision was certainly foreseen and
avoidable, but C took no measures to avoid it. Rather
than exhibit concern for the welfare of his
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
passengers and the driver of the oncoming vehicle,
who might have fallen asleep or suddenly fallen ill at
the wheel, C coldly and uncaringly stood his ground,
closed his eyes, and left everything to fate, without
due regard for the consequences. Such a suicidal
mindset cannot be tolerated, for the grave danger it
poses to the public and passengers availing of
petitioners' services. Where both parties are
negligent but the negligent act of one is appreciably
later in point of time than that of the other, or where
it is impossible to determine whose fault or
negligence brought about the occurrence of the
incident, the one who had the last clear opportunity
to avoid the impending harm but failed to do so, is
chargeable with the consequences arising
therefrom. In this case C, clearly had the Last Clear
Chance, thus he should be the one liable for having
failed to avert the clearly imminent danger.
(Greenstar v. Universal Robina, G.R. No. 205090, 17
Oct. 2016)
The doctrine of “last clear chance” cannot apply
if the: (Co-In2)
1. Negligence of the plaintiff is Concurrent with
that of the defendant (in pari delicto);
2. Party charged is required to act
Instantaneously;
3. Injury cannot be avoided despite the
application at all times of all the means to avoid
the injury (after the peril is or should have been
discovered), at least in all instances where the
previous negligence of the party charged cannot
be said to have contributed to the injury at all.
(O'Mally vs. Eagan, 77 ALR 582)
NOTE: It goes without saying that the plaintiff
himself was not free from fault, for he was guilty of
antecedent negligence in planting himself in the
wrong side of the road. But as we have already
stated, the defendant was also negligent; and in such
case the problem always is to discover which agent
is immediately and directly responsible. It will be
noted that the negligent acts of the two parties were
not contemporaneous, since the negligence of the
defendant succeeded the negligence of the plaintiff
by an appreciable interval. Under these
circumstances, the law is that a person who has the
last clear chance to avoid the impending harm and
74
 Commercial Law

fails to do so is chargeable with the consequences,

without reference to the prior negligence of the D. EXTENT OF LIABILITY
other party. (Picart v. Smith, GR. No. L-12219, 15 Mar.
1918)

1. RECOVERABLE DAMAGES
The last clear chance doctrine of the common law
was imported into our jurisdiction by Picart v. Smith
Kinds of damages that may be recovered in case
but it is a matter for debate whether, or to what
of death of a passenger (De-Lo-M-E-At-I-H)
extent, it has found its way into the Civil Code of the
Philippines. The historical function of that doctrine
1. An indemnity for the Death of the victim
in the common law was to mitigate the harshness of
2. An indemnity for Loss of earning capacity of the
another common law doctrine or rule—that of
deceased
contributory negligence.
3. Moral damages
4. Exemplary damages
The common law rule of contributory negligence
prevented any recovery at all by a plaintiff who was
NOTE: Carrier is not liable for exemplary
also negligent, even if the plaintiff’s negligence was
damages where there is no proof that it acted in
relatively minor as compared with the wrongful act
a wanton, fraudulent, reckless, oppressive or
or omission of the defendant. The common law
malevolent manner.
notion of last clear chance permitted courts to grant
recovery to a plaintiff who had also been negligent
5. Attorney's fees and expenses of litigation
provided that the defendant had the last clear
6. Interest in proper cases (Briñas v. People, G.R.
chance to avoid the casualty and failed to do so.
No. L-30309, 25 Nov. 1983)
Accordingly, it is difficult to see what role, if any, the
7. Hospital and funeral expenses
common law last clear chance doctrine has to play
in a jurisdiction where the common law concept of
NOTE: In case of death, the plaintiff is entitled
contributory negligence as an absolute bar to
to the amount he spent during the wake and
recovery by the plaintiff, has itself been rejected, as
funeral of the deceased. However, it has been
it has been in Art. 2179 of the NCC. (Phoenix
ruled that expenses after the burial are not
Construction, Inc. and Carbonel v. IAC, G.R. No. L-
compensable. (Victory Liner, Inc. v. Heirs of
65295, 10 Mar. 1987)
Andres Malecdan, G.R. No. 154278, 27 Dec. 2002)

Damages in Personal Injury Cases

Personal injury and even death entitles claimant to

all medical expenses as well as other reasonable
expenses that he incurred to treat his or his
relative’s injuries. Medical expenses may even
include the amount spent for plastic surgery of the
plaintiff or any procedure to restore the part of the
body that was affected. (Sps. Ong v. CA, G.R. No.
117103, 21 Jan. 1999)

Loss of Earning Capacity

The formula for the computation of unearned

income is:

75 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Transportation Law
1. Net Earning Capacity = Life Expectancy x (Gross
annual income - Reasonable and necessary
living expenses).
2. Life expectancy is determined in accordance
with the formula: 2/3 x (80 – age of deceased at
the time of death). (Heirs of Ochoa vs. G & S
Transport Corporation, G.R. No. 170071, 09 Mar.
2011)
NOTE: When there is no showing that the living
expenses constituted the smaller percentage of the
gross income, the Court fixes the living expenses at
half of the gross income.
Moral Damages
GR: Moral damages are not recoverable for breach
of contract of carriage, because such contract cannot
be considered included in the “analogous cases”
used in Art. 2219 of the NCC. Also, Art. 2176 of the
NCC, which is the provision on quasi-delict,
expressly excludes the cases where there is a “pre-
existing contractual relation between the parties”
from recovering damages. (Versoza v. Baytan, et al.,
G.R. L-14092, 29 Apr. 1960)
XPNs: (De-Fra-G)
1. Where the mishap results in the Death of the
passenger; (Art. 1764, NCC)
2. Where it is proved that the common carrier was
guilty of Fraud or bad faith, even if death does
not result; or
3. Where the negligence of the carrier is so Gross
and reckless as to virtually amount to bad faith.
(PAL v. CA et al., G.R. No. 123238, 22 Sept. 2008)
Although the relation of passenger and carrier is
"contractual both in origin and nature"
nevertheless, “the act that breaks the contract may
be also a tort" when said act is done with gross
negligence or with bad faith. (Air France v.
Carrascoso, G.R. No. L-21438, 28 Sept. 1966)
NOTE: The current jurisprudential award for the
loss of life of a passenger is P100,000 by way of
moral damages. (Heirs of Ochoa vs. G & S Transport
Corporation, G.R. No. 170071, 09 Mar. 2011)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Q: Judith and Joyce were on board a passenger
bus operated by Eduardo. The bus was driven at
a fast speed by the driver, Rolando, when it
crashed into a truck parked on the shoulder of
the Kennon Road. As a result, Judith and Joyce
suffered injuries. Eduardo and Rolando paid for
their medical and hospitalization expenses.
Nonetheless, Judith and Joyce filed a complaint
against Eduardo and Rolando for breach of
contract of carriage caused by Rolando’s
reckless and negligent driving. As relief, they
prayed for moral and exemplary damages.
Eduardo and Rolando refused to pay moral
damages on the ground that there was neither
proof nor allegation that they acted fraudulently
or in bad faith. Are Eduardo and Rolando liable
for moral damages?
A: NO. In an action for breach of contract, moral
damages may be recovered only when a) death of a
passenger results; or b) the carrier was guilty of
fraud and bad faith even if death does not result. In
the case, Judith and Joyce impute negligence when
the bus collided with another vehicle. While they
propounded on negligence, they did not discuss or
impute fraud or bad faith, or such gross negligence
which would amount to bad faith. There being
neither allegation nor proof that respondents acted
in fraud or in bad faith in performing their duties
arising from their contract of carriage, they are not
liable for moral damages. Since moral damages
cannot be awarded, it follows that the award of
exemplary damages is also not available, since this
kind of damages may only be awarded in addition to
moral, temperate, liquidated, or compensatory
damages. (Darines v. Quiñones, G.R. No. 206468, 02
Aug. 2017)
2. STIPULATIONS LIMITING LIABILITY
Valid stipulations that a common carrier of
goods may indicate in a contract in order to
escape liability
1. A stipulation limiting the liability of the
common carrier for the loss, destruction, or
deterioration of the goods to a degree less than
extraordinary diligence, provided it be:
76
 Commercial Law
a. In writing, signed by the shipper or
owner;
b. Supported by a valuable consideration
other than the service rendered by the
common carrier; and
c. Reasonable, just, and not contrary to
public policy.
2. An agreement limiting the common carrier's
liability for delay on account of strikes or riots.
(Art. 1748, NCC)
3. A stipulation that the common carrier's liability
is limited to the value of the goods appearing in
the bill of lading unless the shipper or owner
declares a greater value. (Art. 1749, NCC; 1998,
2002 BAR)
4. A contract fixing the sum that may be recovered
by the owner or shipper for the loss,
destruction, or deterioration of the goods. (Art.
1750, NCC)
NOTE: The contract limiting the common carrier's
liability cannot be availed of in case of loss,
destruction, or deterioration of the goods, if the
common carrier, without just cause:
1. Delays the transportation of the goods; or
2. Changes the stipulated or usual route. (Art.
1747, NCC)
Even if there is an agreement limiting the liability of
the common carrier in the vigilance over the goods,
the common carrier is still disputably presumed to
have been negligent in case of its loss, destruction or
deterioration. (Art. 1752, NCC)
Annulment of a stipulation limiting the common
carrier’s liability by the shipper or owner
A stipulation limiting the common carrier’s liability
may be annulled by the shipper or owner if the
common carrier refused to carry the goods unless
the shipper or owner agreed to such stipulation.
(Art. 1746, NCC)
77
Void stipulations in a contract of carriage of
goods (C-R2-U-E-L-E-D)
1. That the common carrier need not observe any
diligence in the Custody of the goods;
2. That the goods are transported at the Risk of
the owner or shipper;
3. That the common carrier’s liability for acts
committed by thieves, or of Robbers who do not
act with grave or irresistible threat, violence or
force, is dispensed with or diminished;
4. Any similar stipulation that is Unreasonable,
unjust and contrary to public policy;
5. That the common carrier shall Exercise a
degree of diligence less than that of a good
father of a family, or a man of ordinary
prudence in the vigilance over the movables
transported;
6. That the common carrier will not be liable for
any Loss, destruction, or deterioration of the
goods;
7. That the common carrier shall not be
responsible for the acts or omissions of his or its
Employees; and
8. That the common carrier is not responsible for
the loss, destruction, or deterioration of goods
on account of the Defective condition of the car,
vehicle, ship, airplane or other equipment used
in the contract of carriage. (Art. 1745, NCC)
Q: Discuss whether the following stipulations in
a contract of carriage of a common carrier are
valid:
a. A stipulation limiting the sum that may be
recovered by the shipper or owner to 90%
of the value of the goods in case of loss due
to theft.
b. A stipulation that in the event of loss,
destruction, or deterioration of goods on
account of the defective condition of the
vehicle used in the contract of carriage, the
carrier’s liability is limited to the value of
the goods appearing in the bill of lading
unless the shipper or owner declares a
higher value. (2002 BAR)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
A:
a. Invalid. Article 1745 of the Civil Code provides
that a stipulation which dispenses or
diminishes the common carrier’s liability for
acts committed by thieves or robbers who do
not act with grave and irresistible force, threat
or violence is unreasonable, unjust, and
contrary to public policy.
b. Valid. Article 1749 provides that a stipulation
limiting the carrier’s liability to the value of the
goods appearing in the bill of lading unless the
shipper or owner declares a higher value, is
binding.
Limitation of Liability to Fixed Amount
A contract fixing the sum that may be recovered for
the loss, destruction, and deterioration of goods is
binding provided that it is:
1. Just and reasonable under the circumstances;
and
2. Has been fairly and freely agreed upon. (Art.
1750, NCC)
The liability of a common carrier may, by contract,
be limited to a fixed amount, but the agreement
must be in writing and signed by the shipper or
owner of the goods, besides the other requirements
of the law. (Shewaram v. PAL, G.R. No. L-20099, 07
July 1966)
Q: Martin Nove shipped an expensive video
equipment to a friend in Cebu. Martin had
bought the equipment from Hong Kong for
US$5,000. The equipment was shipped through
M/S Lapu-Lapu under a bill of lading which
contained the following provision in big bold
letters: “The limit of the carrier’s liability for any
loss or damage to cargo shall be P200 regardless
of the actual value of such cargo, whether
declared by shipper or otherwise.” The cargo
was totally damaged before reaching Cebu.
Martin Nove claimed for the value of his cargo
($5,000 or about P100,000) instead of just P200
as per the limitation on the bill of lading. Is there
any legal basis for Nove’s claim? (1987 BAR)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
A: YES. There is a legal basis for the claim of Martin
Nove. The stipulation limiting the carrier’s liability
up to a certain amount “regardless of the actual
value of such cargo, whether declared by its shipper
or otherwise,” is violative of the requirement of Art.
1750 of the NCC, which provides that stipulations
limiting liability should be fairly and freely agreed
upon. A stipulation that denies to the shipper the
right to declare the actual value of his cargoes and
to recover, in case of loss or damage, on the basis of
such stipulation would be invalid.
Limitation of Liability in the Absence of
Declaration of Greater Value
GR: The liability of the common carrier shall not
exceed the stipulation in a contract of carriage, even
if the loss or damage results from the carrier's
negligence. (Eastern and Australian Shipping Co. v.
Great American Insurance Co., GR No. L-37604, 23
Oct. 1981)
XPN: Common carrier’s liability may be extended
beyond the specified amount mentioned if the
shipper or owner of the goods:
1. Declares a greater value and;
2. Pays corresponding freight. (Art. 1749, NCC)
The liability of an airline company for lost baggage
is limited to the amount stated in the ticket unless
the passenger declared a higher valuation and paid
additional fare. (Pan American World Airways, Inc. v.
IAC, G.R. No. 70462, 11 Aug. 1988)
Q: X took a plane from Manila bound for Davao
via Cebu where there was a change of planes. X
arrived in Davao safely but to his dismay, his two
suitcases were left behind in Cebu. The airline
company assured X that the suitcases would
come in the next flight, but they never did. X
claimed P2,000.00 for the loss of both suitcases,
but the airline was willing to pay only P500.00
because the airline ticket stipulated that unless
a higher value was declared, any claim for loss
cannot exceed P250 for each piece of luggage. X
reasoned out that he did not sign the stipulation
and in fact had not even read it. X did not declare
a greater value despite the fact that the clerk had
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 Commercial Law
called the attention to the stipulation in the
ticket. (1998 BAR)
A: X is bound by the stipulation written in the ticket
because he consented to the terms and conditions
thereof from the moment he availed the services of
the carrier. The fact that he did not sign the ticket
and he was not able to declare the true value of his
luggage is not a valid claim in order for the carrier
to pay for the value of the lost luggage. As a general
rule, the liability of the common carrier shall not
exceed the stipulation in a contract of carriage even
if the loss or damage results from the carrier’s
negligence However, it is subject to an exception
provided under Art. 1749 of NCC, as when the
shipper or owner of the goods declares a greater
value and pays corresponding freight. X, therefore,
is only entitled to P500 for the two pieces of luggage
lost. (Eastern and Australian Shipping Co. v. Great
American Insurance Co., G.R. No. L-37604, 23 Oct.
1981)
But when the goods being shipped are packed in
cartons placed in containers supplied by the carrier
and the number of cartons is disclosed in the
shipping documents, it is the number of cartons and
not of the containers that should be used in
computing the liability of the carrier for the loss of
the goods, as it is the cartons that constitute the
packages. (Eastern Shipping Lines, Inc. vs. IAC, G.R.
No. L-71478, 29 May 1987)
Liability of the common carrier as regards the
acts of employees may not be limited by
stipulation
The common carrier’s responsibility cannot be
eliminated or limited by stipulation, by the posting
of notices, by statements on the tickets or otherwise.
(Art. 1760, NCC)
Rationale: The basis of the carrier's liability for
assaults on passengers committed by its drivers
rests on the principle that it is the carrier's implied
duty to transport the passengers safely. As between
the carrier and the passenger, the former must bear
the risk of wrongful acts or negligence of the
carrier's employees against passengers, since it, and
not the passengers, has power to select and remove
79
them. (Maranan vs. Perez, GR No. L-22272, 26 June
1967)
Q: The AAA Bus Company picks up passengers
along EDSA. X, the conductor, while on board the
bus, drew his gun and randomly shot the
passengers inside. As a result, Y, a passenger,
was shot and died instantly. Is AAA Bus Company
liable? (2012 BAR)
A: YES. The bus company is liable because common
carriers are liable for the negligence or willful act of
its employees even though they acted beyond the
scope of their responsibility.
NOTE: Willful acts of the employees include theft. It
should be pointed out that the Code of Commerce
expressly provides that the captain shall be civilly
liable to the naviero and the latter to third persons
for all thefts committed by the crew, reserving the
right of action against the guilty party. (Aquino and
Hernando, 2016)
Stipulations limiting the liability of common
carrier in case of injury or death:
GR: The responsibility of a common carrier for the
safety of passengers cannot be dispensed with or
lessened by stipulation, by posting of notices, by
statements on tickets, or otherwise. (Art. 1757, NCC)
XPN: When a passenger is carried gratuitously, a
stipulation limiting the common carrier’s liability
for negligence is valid. (Art. 1758, NCC)
NOTE: The passenger must be carried gratuitously.
If it is only a reduction of fare, then any limitation of
the common carrier’s liability is not justified. (2001,
2009 BAR)
XPN to the XPN: Notwithstanding the exception,
common carriers will be liable nevertheless for
willful acts or gross negligence.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
3. LIMITATIONS UNDER THE MONTREAL
CONVENTION
Montreal Convention
On 10 Aug. 2015, the Philippine Senate ratified the
Convention for the Unification of Certain Rules for
International Carriage by Air, Montreal, 28 May
1999.
Warsaw Convention
The Warsaw Convention for Unification of Certain
Rules Relating to International Carriage by Air (WC)
provides for rules applicable to international
transportation by air. The Philippines is one of the
signatories to the Warsaw Convention. (Santos III v.
Northwest Orient Airlines, G.R. No. 101538, 23 June,
1992)
One of the purposes of the Montreal Convention
(MC) was to harmonize and consolidate the Warsaw
Convention and related instruments. (Preamble,
MC)
Applicability of the Montreal Convention
The Montreal Convention applies to all
international carriage of persons, baggage or cargo
performed by aircraft for reward. It applies equally
to gratuitous carriage by aircraft performed by an
air transport undertaking. (Art. 1(1), MC)
International Carriage
International carriage means any carriage in which,
according to the agreement between the parties, the
place of departure and the place of destination,
whether or not there be a break in the carriage or a
transshipment, are situated either:
1. Within the territories of two States Parties; or
2. Within the territory of a single State Party if
there is an agreed stopping place within the
territory of another State, even if that State is
not a State Party.
Carriage between two points within the territory of
a single State Party without an agreed stopping
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
place within the territory of another State is not
international carriage for the purposes of the
Montreal Convention. (Art. 1(2), MC)
Q: How is carriage performed by several
successive air carriers treated under the
Montreal Convention?
A: Carriage to be performed by several successive
carriers is deemed, for the purposes of this
Convention, to be one undivided carriage if it has
been regarded by the parties as a single operation,
whether it had been agreed upon under the form of
a single contract or of a series of contracts, and it
does not lose its international character merely
because one contract or a series of contracts is to be
performed entirely within the territory of the same
State. (Art. 1(3), MC)
Right of Disposition of Cargo
Subject to its liability to carry out all its obligations
under the contract of carriage, the consignor has the
right to dispose of the cargo by:
1. Withdrawing it at the airport of departure
or destination; or by
2. Stopping it in the course of the journey on
any landing; or by
3. Calling for it to be delivered at the place of
destination or in the course of the journey
to a person other than the consignee
originally designated; or by
4. Requiring it to be returned to the airport of
departure. (Art. 12, MC)
The consignor must not exercise this right of
disposition in such a way as to prejudice the carrier
or other consignors and must reimburse any
expenses occasioned by the exercise of this right.
(Ibid.)
If it is impossible to carry out the instructions of the
consignor, the carrier must so inform the consignor
forthwith. (Ibid.)
If the carrier carries out the instructions of the
consignor for the disposition of the cargo without
requiring the production of the part of the air
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 Commercial Law
waybill or the cargo receipt delivered to the latter,
the carrier will be liable, without prejudice to its
right of recovery from the consignor, for any
damage which may be caused thereby to any person
who is lawfully in possession of that part of the air
waybill or the cargo receipt. (Ibid.)
The right conferred on the consignor ceases at the
moment when that of the consignee begins in
accordance with the Convention’s provisions on
delivery of the cargo. Nevertheless, if the consignee
declines to accept the cargo, or cannot be
communicated with, the consignor resumes its right
of disposition. (Ibid.)
Where the supervisor of the consignee signed the
delivery receipt for the goods shipped, the
consignee cannot sue the shipping company for
non-delivery of the goods. (National Trucking and
Forwarding Corporation v. Lorenzo Shipping
Corporation, G.R. No. 153563, 7 Feb. 2005)
Liability under the Montreal Convention
The carrier is liable for damage under the following
instances:
1. Damage sustained in case of death or bodily
injury of a passenger upon condition only that
the accident which caused the death or injury
took place on board the aircraft or in the course
of any of the operations of embarking or
disembarking; (Art. 17(1), MC)
2. Damage sustained in case of destruction or loss
of, or of damage to, checked baggage upon
condition only that the event which caused the
destruction, loss or damage took place on
board the aircraft or during any period within
which the checked baggage was in the charge
of the carrier. (Art. 17(2), MC)
NOTE: The carrier is not liable if and to the
extent that the damage resulted from the
inherent defect, quality or vice of the baggage.
In the case of unchecked baggage, including
personal items, the carrier is liable if the
damage resulted from its fault or that of its
servants or agents. (Ibid.)
81
If the carrier admits the loss of the checked
baggage, or if the checked baggage has not
arrived at the expiration of twenty-one days
after the date on which it ought to have arrived,
the passenger is entitled to enforce against the
carrier the rights which flow from the contract
of carriage. (Art. 17(3), MC)
Unless otherwise specified in the Montreal
Convention, the term “baggage” means both
baggage and unchecked baggage. (Art. 17(4),
MC)
3. Damage sustained in the event of the
destruction or loss of, or damage to, cargo upon
condition only that the event which caused the
damage so sustained took place during the
carriage by air. (Art. 18(1), MC)
NOTE: The carrier is not liable if and to the
extent it proves that the destruction, or loss of,
or damage to, the cargo resulted from one or
more of the following:
a. Inherent defect, quality or vice of that
cargo;
b. Defective packing of that cargo performed
by a person other than the carrier or its
servants or agents;
c. An act of war or an armed conflict; or
d. An act of public authority carried out in
connection with the entry, exit or transit of
the cargo. (Art. 18(2), MC)
For purposes of Art. 18(1), MC, carriage by air
comprises the period during which the cargo is
in the charge of the carrier. (Art. 18(3), MC)
The period of the carriage by air does not
extend to any carriage by land, by sea or by
inland waterway performed outside an airport.
If, however, such carriage takes place in the
performance of a contract for carriage by air,
for the purpose of loading, delivery or
transshipment, any damage is presumed,
subject to proof to the contrary, to have been
the result of an event which took place during
the carriage by air. If a carrier, without the
consent of the consignor, substitutes carriage
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law
by another mode of transport for the whole or
part of a carriage intended by the agreement
between the parties to be carriage by air, such
carriage by another mode of transport is
deemed to be within the period of carriage by
air.
4. Damage occasioned by delay in the carriage by
air of passengers, baggage or cargo.
NOTE: The carrier shall not be liable for
damage occasioned by delay if it proves that it
and its servants and agents took all measures
that could reasonably be required to avoid the
damage or that it was impossible for it or them
to take such measures.
Compensation in Case of Damage
Death or bodily injury of a passenger
For damages arising in case of death or bodily
injury of a passenger not exceeding 100,000
Special Drawing Rights for each passenger, the
carrier shall not be able to exclude or limit its
liability.
The carrier shall not be liable for damages arising in
case of death or bodily injury to the extent that
they exceed for each passenger 100,000 Special
Drawing Rights if the carrier proves that:
1. Such damage was not due to the negligence or
other wrongful act or omission of the carrier or
its servants or agents; or
2. Such damage was solely due to the negligence or
other wrongful act or omission of a third party.
(Art. 21, MC)
Delay in carriage of persons
In the case of damage caused by delay in the
carriage of persons, the liability of the carrier for
each passenger is limited to 4,150 Special Drawing
Rights. (Art. 22, MC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Destruction, loss, damage or delay in carriage of
baggage
In the carriage of baggage, the liability of the carrier
in the case of destruction, loss, damage or delay is
limited to 1,000 Special Drawing Rights for each
passenger unless the passenger:
1. Has made, at the time when the checked
baggage was handed over to the carrier, a
special declaration of interest in delivery at
destination, and
2. Has paid a supplementary sum if the case so
requires. (Ibid.)
NOTE: In that case the carrier will be liable to
pay a sum not exceeding the declared sum,
unless it proves that the sum is greater than the
passenger’s actual interest in delivery at
destination. (Ibid.)
Destruction, loss, damage or delay in carriage of
cargo
In the carriage of cargo, the liability of the carrier
in the case of destruction, loss, damage or delay is
limited to a sum of 17 Special Drawing Rights per
kilogram, unless the consignor:
1. Has made, at the time when the package
was handed over to the carrier, a special
declaration of interest in delivery at
destination; and
2. Has paid a supplementary sum if the case so
requires. (Ibid.)
NOTE: In that case the carrier will be liable to
pay a sum not exceeding the declared sum,
unless it proves that the sum is greater than the
consignor’s actual interest in delivery at
destination. (Ibid.)
Weight to be considered in case of destruction,
loss, damage or delay in carriage of cargo
In the case of destruction, loss, damage or delay of
part of the cargo, or of any object contained therein,
the weight to be taken into consideration in
determining the amount to which the carrier’s
82
 Commercial Law

liability is limited shall be only the total weight of terms of the Special Drawing Right at the date
the package or packages concerned. of the judgment. (Art. 23, MC)

Nevertheless, when the destruction, loss, damage or When Limits Not Applicable
delay of a part of the cargo, or of an object contained
therein, affects the value of other packages covered The provisions concerning the limitation of liability
by the same air waybill, or the same receipt or, if in cases of death or bodily injury of a passenger
they were not issued, by the same record preserved and delay in carriage of persons shall not apply if
by other means, the total weight of such package or it is proved that the damage resulted from:
packages shall also be taken into consideration in
determining the limit of liability. (Ibid.) 1. An act or omission of the carrier, its
servants or agents;
As of 28 Dec. 2019, limits of liability have been 2. Done with intent to cause damage or
increased to the following: recklessly; and
3. With knowledge that damage would
1. Passenger death or bodily injury (Art. 17[1],
probably result; and
MC) – no financial limits, however, the carrier
4. In the case of such act or omission of a
shall not be liable for damages exceeding 128,
servant or agent, it is also proved that such
821 Special Drawing Rights (approximately
servant or agent was acting within the
US$183,782) if it proves that it was not
scope of its employment. (Ibid.)
negligent or at fault or such damages is solely
attributable to the negligence or fault of third
Court Not Prevented From Awarding Costs,
parties. The air carrier may make an advance
Expenses
payment to meet the immediate economic
needs of the person entitled to claim
The limitations of liability shall not prevent the
compensation.
court from awarding, in accordance with its own
law, in addition, the whole or part of the court costs
2. Destruction, loss of, or damage or delay to
and of the other expenses of the litigation incurred
baggage (Art. 22(2), MC) – 1,288 Special
by the plaintiff, including interest.
Drawing Rights (approximately US$1,836) per
passenger.
The foregoing provision shall not apply if the
amount of the damages awarded, excluding court
3. Damage caused by delay in the carriage by
costs and other expenses of the litigation, does not
air of passengers (Art. 22(1), MC) – 5,346
exceed the sum which the carrier has offered in
Special Drawing Rights (approximately
writing to the plaintiff within a period of six months
US$7,625). (2019 Revised Limits of Liability
from the date of the occurrence causing the damage,
Under the Montreal Convention of 1999, icao.int)
or before the commencement of the action, if that is
later. (Ibid.)
NOTE: The sums mentioned in terms of Special
Drawing Right in this Convention shall be
Venue for Actions under Montreal Convention
deemed to refer to the Special Drawing Right as
defined by the International Monetary Fund.
An action for damages must be brought, at the
option of the plaintiff, in the territory of one of the
As of 30 June 2021, one (1) SDR is equivalent
States Parties, either before the court of:
to US$1.426420. (International Monetary Fund
SDR Valuation, imf.org)
1. The domicile of the carrier; or
2. Of its principal place of business; or
Conversion of the sums into national currencies
3. Where it has a place of business through which
shall, in case of judicial proceedings, be made
the contract has been made; or
according to the value of such currencies in

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FACULTY OF CIVIL LAW
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4. Before the court at the place of destination.
(Art. 33(1), MC)
In respect of damage resulting from the death or
injury of a passenger, an action may be brought
before one of the aforementioned courts, or:
1. In the territory of a State Party in which at the
time of the accident the passenger has his or
her principal and permanent residence; and
2. To or from which the carrier operates services
for the carriage of passengers by air, either on
its own aircraft, or on another carrier’s aircraft
pursuant to a commercial agreement; and
3. In which that carrier conducts its business of
carriage of passengers by air from premises
leased or owned by the carrier itself or by
another carrier with which it has a commercial
agreement. (Art. 33(2), MC)
NOTE: Questions of procedure shall be
governed by the law of the court seized of the
case.
Limitation of Actions
The right to damages shall be extinguished if an
action is not brought within a period of two (2)
years, reckoned from:
1. The date of arrival at the destination; or from
2. The date on which the aircraft ought to have
arrived; or from
3. The date on which the carriage stopped. (Art.
35, MC)
The method of calculating that period shall be
determined by the law of the court seized of the
case. (Ibid.)
Despite the express mandate that an action for
damages should be filed within 2 years from the
arrival at the place of destination, such rule shall not
be applied where delaying tactics were employed
by airline itself in a case where a passenger wishes
to settle his complaint out-of-court but the airline
gave him the runaround, answering the passenger’s
letters but not giving in to his demands, hence,
giving the passenger no time to institute the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
complaint within the reglementary period. (United
Airlines vs. Uy, G.R. No. 127768, 19 Nov. 1999)
A claim covered by the Warsaw Convention can no
longer be recovered under local law, if the statute of
limitations of two years has already lapsed. (PAL. v.
Savillo, G.R. No. 149547, 4 July 2008)
However, the action filed by a passenger of an
airline company for loss of his luggage is not barred
by the two-year prescriptive period under the
Warsaw Convention, where the passenger
immediately made a demand upon the airline
company and the action was delayed because of the
evasion of the airline company. (United Air Lines, Inc.
v. CA, G.R. No. 124110, 20 Apr. 2001)
Where an airline company failed to deliver the
baggage of a passenger on time, a passenger may
maintain an action for damages under the Civil Code
even if he did not file a claim with the airline
company within fourteen days as required by the
Warsaw Convention, for he may still sue under the
Civil Code. (Luna v. CA, G.R. No. 100374-75, 27 Nov.
1992)
Exoneration from Liabilities
If the carrier proves that the damage was caused or
contributed to by the negligence or other wrongful
act or omission of the person claiming
compensation, or the person from whom he or she
derives his or her rights, the carrier shall be wholly
or partly exonerated from its liability to the
claimant to the extent that such negligence or
wrongful act or omission caused or contributed to
the damage.
When by reason of death or injury of a passenger
compensation is claimed by a person other than the
passenger, the carrier shall likewise be wholly or
partly exonerated from its liability to the extent that
it proves that the damage was caused or contributed
to by the negligence or other wrongful act or
omission of that passenger. (Art. 20, MC)
NOTE: This exoneration provisions applies to all
liability provisions in the Montreal Convention.
(Ibid.)
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 Commercial Law
Stipulation on Limits, Invalidity of Contractual
Provisions and Freedom to Contract
A carrier may stipulate that the contract of carriage
shall be subject to:
1. Higher limits of liability than those provided
for in this Convention; or to
2. No limits of liability whatsoever. (Art. 25, MC)
Any provision tending to relieve the carrier of
liability or to fix a lower limit than that which is laid
down in this Convention shall be null and void. (Art.
26, MC)
NOTE: The nullity of any such provision does not
involve the nullity of the whole contract, which shall
remain subject to the provisions of this Convention.
(Ibid.)
Nothing contained in this Convention shall prevent
the carrier from refusing to enter into any contract
of carriage, from waiving any defenses available
under the Convention, or from laying down
conditions which do not conflict with the provisions
of this Convention. (Art. 27, MC)
Documentary Requirements
In respect of carriage of passengers, an individual
or collective document of carriage shall be delivered
containing:
1. An indication of the places of departure and
destination; and
2. If the places of departure and destination are
within the territory of a single State Party, one
or more agreed stopping places being within
the territory of another State, an indication of
at least one such stopping place. (Art. 3, MC)
In respect of the carriage of cargo, an air waybill
shall be delivered. Any other means which
preserves a record of the carriage to be performed
may be substituted for the delivery of an air waybill.
(Art. 4, MC)
85
The air waybill or the cargo receipt shall include:
1. An indication of the places of departure and
destination;
2. If the places of departure and destination are
within the territory of a single State Party, one
or more agreed stopping places being within
the territory of another State, an indication of
at least one such stopping place; and
3. An indication of the weight of the consignment.
(Art. 5, MC)
Non-compliance with documentary requirements
shall not affect the existence or the validity of the
contract of carriage, which shall, nonetheless, be
subject to the rules of the Convention including
those relating to limitation of liability. (Art. 9, MC)
Advance Payments
In the case of aircraft accidents resulting in death or
injury of passengers, the carrier shall, if required by
its national law, make advance payments without
delay to a natural person or persons who are
entitled to claim compensation in order to meet the
immediate economic needs of such persons. Such
advance payments shall not constitute a recognition
of liability and may be offset against any amounts
subsequently paid as damages by the carrier. (Art.
28, MC)
Basis of Claims
In the carriage of passengers, baggage and cargo,
any action for damages, however founded, whether
under this Convention or in contract or in tort or
otherwise, can only be brought subject to the
conditions and such limits of liability as are set out
in this Convention without prejudice to the question
as to who are the persons who have the right to
bring suit and what are their respective rights.
In any such action, punitive, exemplary or any other
non-compensatory damages shall not be
recoverable. (Art. 29, MC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Transportation Law

Servants, Agents; Aggregation of Claims
If an action is brought against a servant or agent of
the carrier arising out of damage to which the
Convention relates, such servant or agent, if they
prove that they acted within the scope of their
employment, shall be entitled to avail themselves of
the conditions and limits of liability which the
carrier itself is entitled to invoke under this
Convention.
If no complaint is made within the times aforesaid,
no action shall lie against the carrier, save in the
case of fraud on its part. (Art. 31, MC)
Death of Person Liable
In the case of the death of the person liable, an action
for damages lies in accordance with the terms
of this Convention against those legally
representing his or her estate. (Art. 32, MC)

The aggregate of the amounts recoverable from the Arbitration

carrier, its servants and agents, in that case, shall not
exceed the said limits. The parties to the contract of carriage for cargo may
stipulate that any dispute relating to the liability of
Save in respect of the carriage of cargo, the the carrier under this Convention shall be settled by
foregoing provisions shall not apply if it is proved arbitration. (Art. 34(1), MC)
that the damage resulted from an act or omission of
the servant or agent done with intent to cause Such agreement shall be in writing. (Ibid.)
damage or recklessly and with knowledge that
damage would probably result. (Art. 30, MC)

Timely Notice of Complaints

Receipt by the person entitled to delivery of checked

baggage or cargo without complaint is prima facie
evidence that the same has been delivered in good
condition and in accordance with the document of
carriage or with the record preserved by the other
means provided by the Convention.

In the case of damage, the person entitled to

delivery must complain to the carrier forthwith
after the discovery of the damage, and, at the latest:

1. Within seven (7) days from the date of receipt

in the case of checked baggage; and
2. Fourteen (14) days from the date of receipt in
the case of cargo; and
3. In the case of delay, the complaint must be
made at the latest within twenty-one (21) days
from the date on which the baggage or cargo
have been placed at his or her disposal.

Every complaint must be made in writing and given

or dispatched within the times aforesaid.

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 Commercial Law

Montreal Convention vs. Warsaw Convention

MONTREAL CONVENTION WARSAW CONVENTION

Applicability
The Montreal Convention applies to all international The Warsaw Convention applies to all international
carriage of persons, baggage or cargo performed carriage of persons, luggage or goods performed by
by aircraft for reward. It applies equally to gratuitous aircraft for reward. It applies equally to gratuitous
carriage by aircraft performed by an air transport carriage by aircraft performed by an air transport
undertaking. (Art. 1(1), MC) undertaking. (Art. 1(1), WC)
Liabilities
The carrier is liable for damage under the following The carrier is liable under the following instances:
instances: 1. Damage sustained in the event of the death or
wounding of a passenger taking place on board
1. Damage sustained in case of death or bodily injury the aircraft or in the course of any of the
of a passenger upon condition only that the operations of embarking or disembarking;
accident which caused the death or injury took
place on board the aircraft or in the course of any of 2. Loss or damage to any check baggage or goods
the operations of embarking or disembarking; (Art. sustained during the transport by air;
17(1), MC)
3. Delay in the transport by air of passengers,
2. Damage sustained in case of destruction or loss baggage or goods.
of, or of damage to, checked baggage upon
condition only that the event which caused the NOTE: The list is not exclusive.
destruction, loss or damage took place on board the
aircraft or during any period within which the
checked baggage was in the charge of the carrier.
(Art. 17(2), MC)

3. Damage sustained in the event of the destruction

or loss of, or damage to, cargo upon condition
only that the event which caused the damage so
sustained took place during the carriage by air. (Art.
18(1), MC)

4. Damage occasioned by delay in the carriage by air

of passengers, baggage or cargo.

Limitation of Liability
Death or bodily injury of a passenger In the transportation of passengers the liability of
the carrier for each passenger shall be limited to the
For damages arising in case of death or bodily injury sum of 125,000 francs. Where, in accordance with
of a passenger not exceeding 100,000 Special the law of the court to which the case is submitted,
Drawing Rights for each passenger, the carrier shall damages may be awarded in the form of periodical
not be able to exclude or limit its liability. payments, the equivalent capital value of the said
payments shall not exceed 125,000 francs.
The carrier shall not be liable for damages arising in Nevertheless, by special contract, the carrier and the
case of death or bodily injury to the extent that they passenger may agree to a higher limit of liability.
exceed for each passenger 100,000 Special
Drawing Rights if the carrier proves that:

87 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Transportation Law

In the transportation of checked baggage and of

1. Such damage was not due to the negligence or other
wrongful act or omission of the carrier or its
servants or agents; or
2. Such damage was solely due to the negligence or
other wrongful act or omission of a third party. (Art.
21, MC)
Delay in carriage of persons
goods, the liability of the carrier shall be limited to a
sum of 250 francs per kilogram, unless the
consignor has made, at the time when the package
was handed over to the carrier, a special declaration
of the value at delivery and has paid a supplementary
sum if the case so requires. In that case the carrier will
be liable to pay a sum not exceeding the declared sum,
unless he proves that the sum is greater than the
actual value to the consignor at delivery.

In the case of damage caused by delay in the carriage As regards objects of which the passenger takes
of persons, the liability of the carrier for each charge himself the liability of the carrier shall be
passenger is limited to 4,150 Special Drawing limited to 5,000 francs per passenger.
Rights. (Art. 22, MC)

Destruction, loss, damage or delay in carriage of

baggage

In the carriage of baggage, the liability of the carrier

in the case of destruction, loss, damage or delay is
limited to 1,000 Special Drawing Rights for each
passenger unless the passenger:

1. Has made, at the time when the checked baggage

was handed over to the carrier, a special
declaration of interest in delivery at destination,
and
2. Has paid a supplementary sum if the case so
requires. (Ibid.)

Destruction, loss, damage or delay in carriage of

cargo

In the carriage of cargo, the liability of the carrier in

the case of destruction, loss, damage or delay is
limited to a sum of 17 Special Drawing Rights per
kilogram, unless the consignor:

1. Has made, at the time when the package was

handed over to the carrier, a special declaration of
interest in delivery at destination; and
2. Has paid a supplementary sum if the case so
requires. (Ibid.)

As of 28 Dec. 2019, limits of liability have been

increased to the following:

UNIVERSITY OF SANTO TOMAS 88

2022 GOLDEN NOTES
 Commercial Law

1. Passenger death or bodily injury (Art. 17[1], MC)

– no financial limits, however, the carrier shall not
be liable for damages exceeding 128, 821 Special
Drawing Rights (approximately US$183,782) if it
proves that it was not negligent or at fault or such
damages is solely attributable to the negligence or
fault of third parties. The air carrier may make an
advance payment to meet the immediate economic
needs of the person entitled to claim compensation.

2. Destruction, loss of, or damage or delay to

baggage (Art. 22(2), MC) – 1,288 Special Drawing
Rights (approximately US$1,836) per passenger.

3. Damage caused by delay in the carriage by air of

passengers (Art. 22(1), MC) – 5,346 Special
Drawing Rights (approximately US$7,625). (2019
Revised Limits of Liability Under the Montreal
Convention of 1999, icao.int)
Venue for Filing
An action for damages must be brought, at the option An action for damage must be brought at the option of
of the plaintiff, in the territory of one of the States the plaintiff, in the territory of one of the High
Parties, either before the court of: Contracting Parties, either before the court:

1. The domicile of the carrier; or 1. Of the domicile of the carrier; or

2. Of its principal place of business; or 2. Of his principal place of business; or

3. Where it has a place of business through which the 3. Where the ticket was purchased; or
contract has been made; or
4. At the place of destination. (Art. 28(1), WC)
4. Before the court at the place of destination. (Art.
33(1), MC)

In respect of damage resulting from the death or

injury of a passenger, an action may be brought
before one of the aforementioned courts, or:

1. In the territory of a State Party in which at the time

of the accident the passenger has his or her
principal and permanent residence; and

2. To or from which the carrier operates services for

the carriage of passengers by air, either on its own
aircraft, or on another carrier’s aircraft pursuant to
a commercial agreement; and

3. In which that carrier conducts its business of

carriage of passengers by air from premises leased

89 UNIVERSITY OF SANTO TOMAS

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 Transportation Law

or owned by the carrier itself or by another carrier

with which it has a commercial agreement. (Art.
33(2), MC)
Notice of Claim
Receipt by the person entitled to delivery of checked Under the Warsaw Convention, complaint must be
baggage or cargo without complaint is prima facie filed within the following period:
evidence that the same has been delivered in good
condition and in accordance with the document of 1. Three days from receipt of baggage;
carriage or with the record preserved by the other
means provided by the Convention. 2. Seven days from receipt of goods; or

In the case of damage, the person entitled to delivery 3. Fourteen days, in case of delay, counted from the
must complain to the carrier forthwith after the time the baggage was placed at the disposal of the
discovery of the damage, and, at the latest: passenger. (Aquino and Hernando, 2016)

1. Within seven (7) days from the date of receipt in

the case of checked baggage; and
2. Fourteen (14) days from the date of receipt in the
case of cargo; and
3. In the case of delay, the complaint must be made at
the latest within twenty-one (21) days from the
date on which the baggage or cargo have been
placed at his or her disposal.

Prescriptive Period
The right to damages shall be extinguished if an Claim for damages must be brought within two years
action is not brought within a period of two (2) years, reckoned:
reckoned from:
1. From the date of arrival at the destination; or
1. The date of arrival at the destination; or from
2. The date on which the aircraft ought to have 2. From the date on which the aircraft ought to have
arrived; or from arrived; or
3. The date on which the carriage stopped. (Art. 35,
MC) 3. From the date on which the carriage stopped. (Art.
29, WC)

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 Corporation Law
III. CORPORATION LAW
(Provisions of B.P. Blg. 68, as amended by
R.A. No. 11232)
R.A No. 11232, otherwise known as the Revised
Corporation Code of the Philippines (RCC), took
effect on February 23, 2019, upon completion of its
publication in the Manila Bulletin and the Business
Mirror on Saturday, February 23, 2019.
Salient Changes
1. The minimum number of incorporators
required to organize a corporation was
removed, unlike its predecessor – B.P. 68, which
mandated that the number of incorporators
should not be less than five (5). (Sec. 10, RCC)
2. The formation of one-person corporation with
a single stockholder is now allowed. (Sec. 10,
RCC)
3. Corporations now have perpetual existence
unless otherwise stated in their articles of
incorporation (AOI). (Sec. 11, RCC)
4. Participation and voting via remote
communication or in absentia is now allowed
during stockholders’ and members’ meetings.
(Secs. 23, 49, 57, and 88, RCC)
5. A corporate name has to be distinguishable
from one already reserved or registered for the
use of another corporation, and no corporate
name shall be allowed if such name is already
protected by law, or its use is contrary to
existing law, rules, and regulations. (Sec. 17,
RCC)
6. A vacancy in the Board may be temporarily
filled from among the officers of the corporation
when a vacancy prevents the remaining
directors from constituting a quorum and an
emergency action is required to prevent grave,
substantial, and irreparable loss or damage to
the corporation. (Sec. 28, RCC)
91
7. The development and implementation of an
electronic filing and monitoring system was
prescribed. (Sec. 180, RCC)
8. Stock corporations shall not be required to have
a minimum capital stock, except as otherwise
provided by special law. (Sec. 12, RCC)
9. No foreign corporation shall give donations in
aid of any political party or candidate or for
purposes of partisan political activity. (Sec. 35,
RCC)
10. An arbitration agreement may be provided in
the AOI or bylaws of an unlisted corporation.
(Sec. 181, RCC)
A. GENERAL PRINCIPLES
Definition of Corporation
A corporation is an artificial being created by
operation of law, having the right of succession and
the powers, attributes, and properties expressly
authorized by law or incidental to its existence. (Sec.
2, RCC)
Attributes of a Corporation (A-L-S-P-A-P-I)
1. It is an Artificial being;
2. It is created by operation of Law;
3. It enjoys the right of Succession; and
4. It has the Powers, Attributes, and Properties
expressly authorized by law or Incidental to its
existence.
1. ARTIFICIAL BEING
A corporation is a legal or juridical person with a
personality separate and distinct from its individual
stockholders or members and from any other legal
entity into which it may be connected or related.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

2. CORPORATION AS A CREATION OF LAW OR GOVERNMENT CORPORATIONS

BY OPERATION OF LAW

Q: A Special Audit Team from COA audited the

A corporation is not created by mere agreement of
accounts of Leyte Metropolitan Water District
the incorporators nor by their execution of the AOI.
(LMWD). Subsequently, LMWD received a
There ought to be a law from which the corporation
request for payment of auditing fees from
derives its legal existence. This may be a general law
COA. LMWD General Manager Feliciano sent a
governing the formation of private corporations,
reply informing COA that the water district
which is the RCC, or a special law passed by
could not pay the auditing fees, citing as basis for
Congress to create a government-owned and
his action P.D. 198 as well as R.A. No.
controlled corporation.
6758. Thereafter, Feliciano asked COA for a
refund of all auditing fees LMWD previously
Since Feb. 8, 1935, the legislature has not passed a
paid to COA. The COA Chairman denied LMWD’s
single law creating a private corporation. This is
request.
because the Constitution itself precludes the
passage of such statute, particularly, Sec. 16, Art. XII
Feliciano maintains that Local Water Districts
of the 1987 Constitution which states that “The
(LWDs) are not GOCCs with original charters. He
Congress shall not, except by general law, provide
argues that LWDs are private corporations, and
for the formation, organization, or regulation of
thus, not subject to COA’s jurisdiction. Is an LWD
private corporations.” (Divina, 2020)
created under P.D. 198, as amended, a GOCC
subject to the audit jurisdiction of COA?
The Creation of a Corporation is by Operation of
Law
A: YES. LWDs are GOCCs subject to the audit
jurisdiction of COA. The Constitution and existing
NOTE: Philippine jurisprudence adopted the
laws mandate COA to audit all government agencies,
Concession or Fiat Theory, which states that a
including GOCCs with original charters. An LWD is a
corporation is conceived as an artificial person
GOCC with an original charter.
owing its existence through creation by a sovereign
power. Further, a corporation is without any
The Constitution recognizes two classes of
existence until it has received the imprimatur of the
corporations. The first refers to private
State acting according to law, through the SEC.
corporations created under a general law. The
(Tayag v. Benguet Consolidated, Inc., G.R. No. L-
second refers to GOCCs created by special charters.
23145, 29 Nov. 1968)
Congress cannot enact a law creating a private
corporation with a special charter. Such legislation
Q: Since Feb. 8, 1935, the legislature has not
would be unconstitutional. Private corporations
passed even a single law creating a private
may exist only under a general law. The Constitution
corporation. What provision of the constitution
authorizes Congress to create GOCCs through
precludes the passage of such law? (2008 BAR)
special charters. Since private corporations cannot
have special charters, it follows that Congress can
A: Sec. 16, Art. XII of the 1987 Constitution provides
create corporations with special charters only if
that the Congress shall not, except by general law,
such corporations are government-owned or
provide for the formation, organization, or
controlled. Obviously, LWDs are not private
regulation of private corporations. Government-
corporations because they are not created under the
owned and controlled corporations may be created
Corporation Code. (Feliciano v. COA, et al., G.R. No.
or established by special charters in the interest of
147402, 14 Jan. 2004)
the common good and subject to the test of
economic viability.
Q: Is the Philippine National Red Cross (“PNRC”)
a GOCC?

UNIVERSITY OF SANTO TOMAS 92

2022 GOLDEN NOTES
 Corporation Law
A: Initially, the Supreme Court held PNRC is not a
GOCC. Although the PNRC was created by a special
charter, it cannot be considered a GOCC in the
absence of the essential elements of ownership and
control by the government. In creating the PNRC as
a corporate entity, Congress was in fact creating a
private corporation. However, the constitutional
prohibition against the creation of private
corporations by special charters provides no
exception even for non-profit or charitable
corporations. Consequently, the PNRC Charter,
insofar as it created the PNRC as a private
corporation and granted it corporate powers, is void
for being unconstitutional.
Upon a motion for reconsideration, however, the
Supreme Court held that while PNRC does not have
government assets and does not receive any
appropriation from the Philippine Congress, this
does not mean that the charter of PNRC is
unconstitutional. PNRC has a sui generis status.
Although it is neither a subdivision, agency, or
instrumentality of the government nor a
government-owned or -controlled corporation or a
subsidiary thereof, so much so that Senator Gordon
was correctly allowed to hold his position as
Chairman thereof concurrently while he served as a
Senator, such a conclusion does not ipso facto imply
that the PNRC is a “private corporation” within the
contemplation of the provision of the Constitution
that must be organized under the Corporation Code.
The PNRC enjoys a special status as an important
ally and auxiliary of the government in the
humanitarian field in accordance with its
commitments under international law. The court
cannot all of a sudden refuse to recognize its
existence, especially since the issue of the
constitutionality of the PNRC Charter was never
raised by the parties. (Liban, et al., v. Gordon, G.R.
No. 175352, 18 Jan. 2011, in Divina, 2020)
As to what sui generis means, the Supreme Court
ruled that the sui generis character of the Philippine
National Red Cross requires the Court to approach
controversies involving the PNRC on a case-to-case
basis. The Civil Service Commission has jurisdiction
over the PNRC if the issue at hand is the
enforcement of labor laws and penal statutes, thus,
93
in these particular matters, the PNRC can be treated
as a GOCC. (Liban, et al., v. Gordon, G.R. No. 175352,
18 Jan. 2011, in Divina, 2020; Torres v. De Leon, G.R.
No. 199440, 18 Jan. 2016)
Q: Pursuant to E.O. 123, the Ministry of National
Defense and the Philippine Tourism Authority
executed a MOA for the development of
Corregidor. The Philippine Tourism Authority
Board of Directors adopted a Resolution,
approving the creation of a foundation for the
development of Corregidor. The Corregidor
Foundation, Inc. was incorporated.
The Commission on Audit (COA) issued an Audit
Observation Memorandum noting that certain
personnel of the Philippine Tourism Authority
who were concurrently rendering services in
Corregidor Foundation, Inc. received honoraria
and cash gifts. The Legal and Adjudication
Office-Corporate of the COA issued Notice of
Disallowance, disallowing in audit the
honoraria and cash gift paid to said personnel.
The personnel argue that Corregidor
Foundation, Inc. is a private corporation created
under the Corporation Code and, therefore,
cannot be audited by the COA. Is Corregidor
Foundation, Inc. a GOCC under the audit
jurisdiction of the COA?
A: YES. The Corregidor Foundation, Inc. is a
government-owned or controlled corporation
under the audit jurisdiction of the COA. Corregidor
Foundation, Inc. was organized as a non-stock
corporation under the Corporation Code. It was
issued a certificate of registration by the SEC on 28
Oct. 1987 and, according to its Articles of
Incorporation, Corregidor Foundation, Inc. was
organized and to be operated in the public interest.
Corregidor Foundation, Inc. was organized
primarily to maintain and preserve the war relics in
Corregidor and develop the area's potential as an
international and local tourist destination.
Corregidor Foundation, Inc.'s purposes as stated in
its AOI are related to the promotion and
development of tourism in the country, a declared
state policy and, therefore, a function public in
character. Even a cursory reading of the statutory
definitions of "government owned-or controlled
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
corporation" readily reveals that a non-stock
corporation may be government-owned or
controlled. Further, there is nothing in the law
which provides that government-owned or
controlled corporations are always created under
an original charter or special law. (Oriondo v. COA,
G.R. No. 211293, 04 June 2019)
Q: Dennis A.B. Funa requested the COA for a copy
of the latest financial and audit report of the
Manila Economic and Cultural Office (MECO).
MECO was organized as a non-stock, non-profit
corporation under the Corporation Code, in
view of the desire of the Philippines and Taiwan
to maintain an unofficial relationship in lieu of
official diplomatic ties severed by the One-China
policy. Upon receipt of COA’s reply that it does
not audit MECO, Funa filed a petition for
mandamus to compel COA to audit MECO as the
latter was a GOCC as it performs functions
relating to public needs and is controlled by the
government through the appointment of its
board of directors. Is Funa correct?
A: NO. MECO is not owned or controlled by the
government, hence it is not a GOCC or a government
instrumentality. GOCCs are "stock or non-stock"
corporations "vested with functions relating to
public needs" that are "owned by the Government
directly or through its instrumentalities." By
definition, three attributes thus make an entity a
GOCC:
a. First, its organization as stock or non-stock
corporation;
b. Second, the public character of its function; and
c. Third, government ownership over the same.
Possession of all three attributes is necessary to
deem an entity a GOCC. In this case, there is not
much dispute that MECO possesses the first and
second attributes. It is the third attribute, which
MECO lacks.
MECO is not owned or controlled by the
government. Organization as a non-stock
corporation and the mere performance of functions
with a public aspect, however, are not by
themselves sufficient to consider MECO as a GOCC.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
In order to qualify as a GOCC, a corporation must
also, if not more importantly, be owned by the
government.
The government owns a stock or non-stock
corporation if it has controlling interest in the
corporation. In a stock corporation, the controlling
interest of the government is assured by its
ownership of at least fifty-one percent (51%) of the
corporate capital stock. In a non-stock corporation,
like MECO, jurisprudence shows that the controlling
interest of the government is affirmed when "at
least majority of the members are government
officials holding such membership by appointment
or designation" or there is otherwise "substantial
participation of the government in the selection" of
the corporation’s governing board. None of MECO’s
members, officers or trustees were found to be
government appointees or public officers
designated by reason of their office.
The Supreme Court ruled that MECO is a sui generis
private entity especially entrusted by the
government with the facilitation of unofficial
relations with the people in Taiwan without
jeopardizing the country’s faithful commitment to
the One China policy of the PROC. However, despite
its non-governmental character, MECO handles
government funds in the form of the "verification
fees" it collects on behalf of the DOLE and the
"consular fees" it collects under Sec. 2(6) of E.O. 15,
s. 2001. Hence, under existing laws, the accounts of
MECO pertaining to its collection of such
"verification fees" and "consular fees" are subject to
the audit jurisdiction of COA. (Funa v. Manila
Economic and Cultural Office and COA, G.R. No.
193462, 4 Feb. 2014)
3. RIGHT TO SUCCESSION
The right of succession of a corporation does not
connote that a corporation is immortal. It simply
means that it has the power to exist continuously,
either by opting to have perpetual existence or to
extend its corporate life if a fixed term is specified in
its AOI. Its capacity for continued existence is not
affected by any changes in the composition of
corporators. (Divina, 2020)
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 Corporation Law

4. POWERS, ATTRIBUTES AND PROPERTIES OF Q: May a corporation enter into a joint venture?
A CORPORATION (1996 BAR)

This means that a corporation can only exercise A: YES. A corporation may enter into a joint venture
powers conferred upon it by law, its AOI, those with another where the nature is in line with the
implied from the conferred powers, or incidental to business authorized by its charter. (Tuason v.
its existence. Any act of the corporation contrary to Bolaños, G.R. No. L-4935, 28 May 1954)
or outside these powers is ultra vires. (Divina, 2020)
As far back as the case of Aurbach v. Sanitary Wares
TEST: Whether the corporate act or transaction is Manufacturing Corporation, (G.R. No. 75875, 75951,
related to or in furtherance of the purposes of the 75975-76, 15 Dec. 1989) the Supreme Court had
corporation. already ruled that a joint venture is a form of
partnership and should thus be governed by the law
For instance, whether or not a corporation may of partnerships. The Supreme Court, however,
acquire property will not only be tested by the recognized a distinction between these two
lawfulness of the consideration but whether such business forms and held that although a corporation
property is necessary to achieve the purpose of the cannot enter into a partnership contract, it may
corporation. however engage in a joint venture with others.
(Divina, 2020)
Thus, a corporation engaged in mining cannot
acquire properties for urban development. (Heirs of Advantages vs. Disadvantages of a Corporation
Antonio Pael v. CA, G.R. No. 133547, 07 Dec. 2001) A (Divina, 2020)
corporation organized as a lending investor cannot
engage in pawnbroking. (Divina, 2020) ADVANTAGES DISADVANTAGES
It may sue and be
The ability of the
Engagement into a Contract of Partnership or a sued, enter into
stockholder to transfer
Joint Venture contracts, and acquire
shares without having
properties in its own
to secure the consent of
Corporations are empowered to enter into a name and in its own
the corporation and/or
partnership, joint venture, merger, consolidation, or right.
other stockholders may
any other commercial agreement with natural and Stockholders are not
result in persons having
juridical persons. (Sec. 35(h), RCC) liable for the
conflicting interests
obligations of the
against the same
Another significant revision under the new law is corporation beyond
corporation.
the express grant of power to corporations to enter their subscription.
into any commercial agreement, including but not It is subject to more
limited to partnership, joint venture, merger, It continues to exist
stringent
consolidation. despite changes in
administrative and
corporators’
reportorial
It shall be noted that under Sec. 36 of the OCC, composition.
requirements.
corporations were expressly allowed to only enter Shares are
into merger or consolidation with other Minority stockholders
transferable even
corporations as a form of corporate combination. may be denied the right
without the consent of
to actively participate
the corporation and
In the past, jurisprudence is replete with cases in the management of
other stockholders.
prohibiting a corporation from entering into a the corporation and are
Management is clearly
partnership contract. (Divina, 2020) subject to the will of the
defined and
majority stockholders.
centralized through its

95 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
board of directors or
trustees.
Business activities are
It can mobilize more limited by the powers
capital through the provided by law, its
issuance of its shares. AOI, and those which
are incidental thereto.
Joint Account vs. Partnership (Divina, 2020)
JOINT ACCOUNT PARTNERSHIP
Has no firm name and
is conducted in the
Has a firm name.
name of the ostensible
partner.
Has no juridical
Has juridical
personality and can sue
personality and may
or be sued only in the
sue or be sued under
name of the ostensible
its firm name
partner.
Has no common fund. Has a common fund.
The ostensible partner All general partners
manages its business have the right of
operations. management.
Liquidation may, by
Liquidation thereof can
agreement, be
only be done by the
entrusted to a partner
ostensible partner.
or partners.
Partnership vs. Corporation
PARTNERSHIP CORPORATION
As to Creation and Governing Law
Created by the
Created by mere
operation of law and
agreement of the
governed by the
parties and governed
Revised Corporation
by the Civil Code.
Code.
Commencement of Juridical Personality and
Term of Existence
Existence of the
From the moment of
corporation
the meeting of minds
commences from the
of the partners.
date of issuance of the
Certificate of
UNIVERSITY OF SANTO TOMAS 96
2022 GOLDEN NOTES
The term of a Incorporation by the
partnership may be SEC.
established for any
period of time Has perpetual
stipulated by the existence, unless its
partners. AOI provide otherwise.
Number of Formators
Any person,
partnership,
association, or
corporation, singly or
jointly with others but
May be organized by at not more than 15.
least 2 persons.
NOTE: A corporation
with a single
stockholder is
considered a One
Person Corporation.
Powers
GR: May exercise any
power authorized by
May exercise only such
the partners.
powers as may be
conferred by law and
XPN: Acts which are
its AOI, those implied
contrary to law,
therefrom or incidental
morals, good customs,
thereto.
public order, public
policy.
Management
Managed by the
The business of a
Managing Partner, or
corporation is
in the absence of
generally conducted by
designation, by any of
the Board of Directors.
the General Partners.
Extent of Liability to Third Persons
GR: Partners are liable
personally and
Stockholders are liable
subsidiarily
only to the extent of the
(sometimes solidarily)
shares subscribed by
for partnership debts
them whether paid or
to third persons,
not.
XPN: Limited partner
 Corporation Law

Right of Succession in the 60-40 Filipino equity ownership requirement

in the corporation, then it may apply the
No right of succession.
"grandfather rule." With that, the use of the
(i.e., a partnership
Has right of succession. Grandfather Rule as a “supplement” to the Control
dissolves upon death
Test is not proscribed by the Constitution or the
of a partner)
Philippine Mining Act of 1995.
Transferability of Interest
A stockholder has the The Grandfather Rule implements the intent of the
A partner cannot Filipinization provisions of the Constitution. (Narra
right to transfer his
transfer his interest in Nickel Mining and Development Corp., et al. v.
shares without prior
the partnership Redmont Consolidated Mines Corp., G.R. No. 195580,
consent of the other
without the consent of 28 Jan. 2015; SEC Opinion No. 16-15)
stockholders, subject to
all the other existing
limitations embodied in
partners.
the AOI. a. CONTROL TEST
Dissolution
It is a mode of determining the nationality of a
May be dissolved any
Can only be dissolved corporation engaged in nationalized areas of
time by the will of any
with the consent of the activities, provided for under the Constitution and
or all of the partners.
State. other applicable laws, where corporate
shareholders with foreign shareholdings are
Death, civil
Death or insolvency of present, by ascertaining the nationality of the
interdiction, and
shareholders will note controlling stockholder of the corporation. If the
insolvency of a partner
result to dissolution of capital of the investing Corporation is at least 60%
dissolve the
the corporation. owned by Filipinos, then the entire shareholdings of
partnership.
the investing Corporation shall be recorded as
Filipino-owned thus making both the investing and
1. NATIONALITY OF CORPORATIONS investee - corporations Philippine national. (Divina,
2021)
Tests in Determining the Nationality of
Corporations In determining the nationality of a corporation, the
control test uses the nationality of the controlling
1. Place of Incorporation test stockholders or members of the corporation.
2. Control test
3. Grandfather rule A corporation organized/incorporated abroad and
registered as doing business in the Philippines
There are various tests to determine the nationality under the Corporation Code, of which 100% of the
of a corporation. The place of incorporation test is capital stock outstanding and entitled to vote is
applied if the corporation is not engaged in activities wholly owned by Filipinos, may be considered a
reserve, in whole or in part, for Filipinos. Under such Philippine National under the Foreign Investments
test, the nationality of the corporation is determined Act of 1991. This is the only exception to the place
by the state of incorporation. of incorporation test. (SEC Opinion No. 04-14, 3
Mar. 2004; De Leon, 2010).
However, with respect to a corporation engaged in
nationalized areas of activities, provided for under Who are Considered as Philippine Nationals
the Constitution and other laws, the primary mode
of determining the nationality is the control test. Under R.A. No. 7042 (Foreign Investments Act of
1991), other than a citizen of the Philippines, the
When in the mind of the Court, there is doubt, based following are also considered Philippine Nationals:
on the attendant facts and circumstances of the case,

97 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
1. Corporations organized under Philippine laws
of which at least sixty percent (60%) of the
capital stock outstanding and entitled to
vote is owned and held by Filipino citizens.
2. Corporations organized abroad and registered
as doing business in the Philippines under the
Corporation Code of which 100% of the
capital stock outstanding and entitled to
vote is wholly owned by Filipinos or a trustee
of funds for pension or other employee
retirement or separation benefits, where the
trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the
benefit of Philippine nationals:
NOTE: R.A. No. 7042 provides that where a
corporation and its non-Filipino stockholders
own stocks in a SEC-registered enterprise, at
least 60% of the capital stock outstanding and
entitled to vote of each of both corporations and
at least 60% of the members of the Board of
Directors of each of both corporations must be
citizens, in order that the corporation shall be
considered a Philippine national. (DOUBLE
60% RULE)
NOTE: The fact that the religious organization has
no capital stock does not suffice to escape the
constitutional inhibition, since it is admitted that its
members are of foreign nationality. The purpose of
the 60% requirement is obviously to ensure that
corporations or associations allowed to acquire
agricultural land or to exploit natural resources
shall be controlled by Filipinos; and the spirit of the
Constitution demands that in the absence of capital
stock, the controlling membership should be
composed of Filipino citizens. (Register of Deeds v.
Ung Siu Si Temple, G.R. No. L-6776, 21 May 1955)
b. GRANDFATHER RULE
This is the method by which the percentage of
Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of
activities, provided for under the Constitution and
other applicable laws, is accurately computed, in
cases where corporate shareholders with foreign
shareholdings are present, by attributing the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
nationality of the second or even subsequent tier of
ownership to determine the nationality of the
corporate shareholder.
Thus, to arrive at the actual Filipino ownership and
control in a corporation, both the direct and indirect
shareholdings in the corporation are determined. In
the case of a multi-tiered corporation, the stock
attribution rule must be allowed to run
continuously along the chain of ownership until it
finally reaches the individual stockholders. (Divina,
2020)
The purpose of this rule is to trace the nationality of
the stockholder of investor corporations to
ascertain the nationality of the corporation where
the investment is made. (SEC Opinion, 4 May 1987,
as cited in Divina, 2020)
Rules Governing the Application of the
Grandfather Rule
1. The grandfather rule should be used in
determining the nationality of a corporation
engaged in a partly nationalized activity. This
applies in cases where the stocks of a
corporation are owned by another corporation
with foreign stockholders exceeding 40% of the
capital stock of the corporation. (SEC-OGC
Opinion No. 10-31, 9 Dec. 2010)
2. The Grandfather Rule will not apply in cases
where the 60-40 Filipino-alien equity
ownership in a particular natural resource
corporation is not in doubt. If the stockholder
corporation is 60% or more owned by Filipinos,
all the stock held by the stockholder
corporation is deemed to be held by Filipinos.
(DOJ Opinion No. 19, s. 1989)
3. When there is doubt as to the actual extent of
Filipino equity in the investee corporation, the
SEC is not precluded from using the
Grandfather Rule. (SEC-OGC Opinion No. 22-07,
7 Dec. 2007)
98
 Corporation Law
Q: What is the prevailing mode of determining
the nationality of corporations engaged in
nationalized activities?
A: The "control test" is the prevailing mode of
determining the nationality of corporations
engaged in nationalized activities. However, when
in the mind of the Court there is doubt as to where
beneficial ownership and control reside, based on
the attendant facts and circumstances of the case,
then it may apply the "grandfather rule."
In fact, the Control Test can be, as it has been,
applied jointly with the Grandfather Rule to
determine the observance of foreign ownership
restriction in nationalized economic activities. The
Control Test and the Grandfather Rule are not, as it
were, incompatible ownership-determinant
methods that can only be applied alternative to each
other. Rather, these methods can, if appropriate, be
used cumulatively in the determination of the
ownership and control of corporations engaged in
fully or partly nationalized activities. (Narra Nickel
Mining and Development Corp. v. Redmont
Consolidated Mining Corp., G.R. No. 195580, 21 April
2014)
The Grandfather Rule, standing alone, should not be
used to determine the Filipino ownership and
control in a corporation, as it could result in an
otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized
activities. Hence, it is only when the Control Test is
first complied with that the Grandfather Rule may
be applied. Put in another manner, if the subject
corporation's Filipino equity falls below the
threshold of 60%, the corporation is immediately
considered foreign-owned, in which case, the need
to resort to the Grandfather Rule disappears. (Narra
Nickel Mining and Development Corp. v. Redmont
Consolidated Mining Corp., G.R. No. 195580, 28 Jan.
2015)
The Supreme Court stressed, however, that when
the 60% Filipino ownership, is never in doubt, the
control test prevails. In the relevant case, it was held
that the petition is severely wanting in facts and
circumstances to raise legitimate challenges to the
joint venture company's 60-40 Filipino-Foreigner
99
ownership. The application of the control test will
already yield the result that the company is a
Philippine national. The grandfather rule no longer
applies. (Leo Querubin v. COMELEC, G.R. No. 218787,
08 Dec. 2015; Divina, 2021)
Q: Redmont, a mining company, sought to
invalidate the Mining Production and Sharing
Agreement (MPSA) applications of three
domestic mining companies, namely: Narra,
Tesoro and McArthur, on the ground that at least
60% of the capital stock of Narra, Tesoro, and
McArthur are owned and controlled by MBMI, a
100% Canadian corporation; thus they were
disqualified to engage in mining activities
through MPSAs, which are reserved only for
Filipino citizens.
Narra, Tesoro, and McArthur claimed that the
issue on nationality should not be raised since
they are in fact Philippine Nationals as 60% of
their capital is owned by citizens of the
Philippines. They asserted that though MBMI
owns 40% of the shares of PLMDC, SMMI, and
MMC (which in turn each own majority shares of
Narra, McArthur, and Tesoro, respectively), the
shares of MBMI will not make it the owner of at
least 60% of the capital stock of each of
petitioners. They added that the best tool used
in determining the nationality of a corporation
is the “control test,” embodied in Sec. 3 of RA
7042 or the Foreign Investments Act of 1991.
The controversy reached the CA, which used the
grandfather rule to hold that MBMI in effect
owned majority of the common stocks of Narra,
et al., and thus the latter were foreign
corporations.
a. Was the CA wrong in applying the
Grandfather Rule instead of the Control
Test?
b. Will the Grandfather Rule apply only when
less than 60% of the capital stock are
Filipino-owned? (2016 BAR)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
A:
a. NO. Basically, there are two acknowledged tests
in determining the nationality of a corporation:
the control test and the grandfather rule. The
"control test" is still the prevailing mode of
determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2,
Art. XII, of the 1987 Constitution, entitled to
undertake the exploration, development, and
utilization of the natural resources of the
Philippines. When in the mind of the Court
there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-
equity ownership in the corporation, then it
may apply the "grandfather rule".
b. NO. The assertion of Narra, et al. that “doubt”
only exists when the stockholdings are less than
60% fails to convince this Court. It would be
ludicrous to limit the application of the said
word only to the instances where the
stockholdings of non-Filipino stockholders are
more than 40% of the total stockholdings in a
corporation. The corporations interested in
circumventing our laws would clearly strive to
have “60% Filipino Ownership” at face value. It
would be senseless for these applying
corporations to state in their respective articles
of incorporation that they have less than 60%
Filipino stockholders since the applications will
be denied instantly. Thus, various corporate
schemes and layerings are utilized to
circumvent the application of the Constitution.
A corporation that complies with the 60-40
Filipino to foreign equity requirement can be
considered a Filipino corporation if there is no
doubt as to who has the “beneficial ownership”
and “control” of the corporation. In this case, a
further investigation as to the nationality of the
personalities with the beneficial ownership and
control of the corporate shareholders in both
the investing and investee corporations is
necessary. “Doubt” refers to various indicia that
the “beneficial ownership” and “control” of the
corporation do not in fact reside in Filipino
shareholders but in foreign stakeholders. Even
if at first glance the petitioners comply with the
60-40 Filipino to foreign equity ratio, doubt
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
exists in the present case that gives rise to a
reasonable suspicion that the Filipino
shareholders do not actually have the requisite
number of control and beneficial ownership in
petitioners Narra, Tesoro, and McArthur.
Moreover, the ultimate Filipino ownership of
the shares must first be traced to the level of the
Investing Corporation and added to the shares
directly owned in the Investee Corporation.
Concluding from the above-stated facts, it is
quite safe to say that petitioners McArthur,
Tesoro and Narra are not Filipino since MBMI, a
100% Canadian corporation, owns 60% or
more of their equity interests. Such conclusion
is derived from grandfathering petitioners’
corporate owners, namely: MMI, SMMI and
PLMDC.
Hence, the Court is correct in using the
Grandfather Rule in determining the nationality
of the petitioners. (Narra Nickel Mining and
Development Corp. v. Redmont Consolidated
Mines Corp, G.R. No. 195580, 28 Jan. 2015)
NOTE: "Corporate layering" is admittedly allowed
by the FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it becomes
illegal.
Nationalized Activities Reserved for Filipinos
under the Constitution and Special Laws (12th
Negative List, E.O. 175, s. 2022)
100% Filipino Owned
Zero Percent (0%) Foreign Equity
(Co-Fi-A-M-Ma-N-Co-Mi-Se-US$2.5M)
1. Cooperatives; (Art. 26, Ch. III, R.A. No. 6938)
2. Manufacture of Firecrackers and other
pyrotechnic devices; (Sec. 5, R.A. No. 7183)
3. Manufacture, repair, stockpiling and/or
distribution of biological, chemical, and
radiological weapons and Anti-personnel
mines; (Various treaties to which the
Philippines is a signatory and conventions
supported by the Philippines)
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 Corporation Law
4. Mass media, except recording;
5. Utilization of Marine resources; (Sec. 2, Art. XII,
1987 Constitution)
6. Manufacture, repair, stockpiling and/or
distribution of Nuclear weapons; (Sec. 8, Art. II,
1987 Constitution)
7. Cockpits; (Sec. 5, P.D. 449)
8. Small-scale Mining; (Sec. 3, R.A. No. 7076)
9. Private Security agencies; (Sec. 4, R.A. No. 5487)
and
10. Retail trade enterprises with paid-up capital of
less than US$2.5 M. (Sec. 5, R.A. No. 8762)
80% Filipino Owned
Up to Twenty Percent (20%) Foreign Equity (P-R-C)
1. Private Radio Communications network (R.A.
No. 3846)
75% Filipino Owned
Up to Twenty Percent (25%) Foreign Equity
(Lo-R-D-F)
1. Contracts for the construction and repair of
Locally-funded public works (Sec. 1, C.A. 541,
L.O.I. 630) except:
a. infrastructure/development projects
covered in R.A. No. 7718; and
b. projects which are foreign funded or
assisted and required to undergo
international competitive bidding; (Sec.
2(a), R.A. No. 7718)
2. Private Recruitment, whether for local or
overseas employment; (Art. 27, P.D. 442)
3. Contracts for the construction of Defense-
related structures; (Sec. 1, C.A. 541) and
4. Under the Flag Law, in the purchase of articles
for the Government, preference shall be given
to materials and supplies produced, made, or
manufactured in the Philippines, and to
domestic entities. “Domestic entity” means any
citizen of the Philippines or commercial
company at least 75% of the capital of which is
owned by citizens of the Philippines. (Sec. 2, C.A.
138)
101
70% Filipino Owned
Up to Twenty Percent (30%) Foreign Equity
(Ad-Pawn)
1. Advertising; (Sec. 11(2), Art. XVI, 1987
Constitution) and
2. Corporations engaged in Pawnshop business.
(Sec. 8, P.D. 114)
60% Filipino Owned
Up to Twenty Percent (40%) Foreign Equity
(Go-L-E-A-R-N-C-U-P-I-D-Co)
1. Contracts for the supply of materials, goods, and
commodities to GOCC, agency or municipal
corporation; (Sec. 1, R.A. No. 5183)
2. Ownership of private Lands; (Sec. 7, Art. XII,
1987 Constitution; Sec. 22, Ch. 5, C.A. 141; Sec. 4,
R.A. No. 9182)
3. Ownership/establishment and administration
of Educational institutions; (Sec. 4, Art. XIV,
1987 Constitution)
4. Adjustment Companies; (Sec. 323, P.D. 613)
5. Culture, production, milling, processing, trading
excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise,
Rice and corn and the by-products thereof; (Sec.
5, P.D. 194)
6. Exploration, development and utilization of
Natural resources; (Sec. 2, Art. XII, 1987
Constitution)
7. Ownership of Condominium units where the
common areas in the condominium project are
co-owned by the owners of the separate units or
owned by a corporation; (Sec. 5, R.A. No. 4726)
8. Operation and management of public Utilities;
(Sec. 11, Art. XII, Constitution; Sec. 16, C.A. 146)
9. Project Proponent and Facility Operator of a
BOT project requiring a public utilities
franchise; (Sec. 11, Art. XII, Constitution; Sec. 2a,
R.A. No. 7718)
10. Manufacture, repair, storage and/ or
distribution of products/ Ingredients requiring
PNP clearance; (R.A. No. 7042 as amended by
R.A. No. 8179)
11. Operation of Deep-Sea commercial fishing
vessel; (Sec. 27, R.A. No. 8550) and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
12. Corporations engaged in Coastwise shipping.
(Sec. 806, P.D. 1464)
40% Filipino Owned
Up to Twenty Percent (60%) Foreign Equity
[F-I-(SEC)]
1. Financing companies regulated by the SEC (Sec.
6, R.A. No. 5980, as amended by R.A. No. 8556)
2. Investment houses regulated by the SEC (Sec. 5,
P.D. 129, as amended by R.A. No. 8366)
Q: Bell Philippines, Inc. (BellPhil.) is a public
utility company, duly incorporated and
registered with the SEC. Its authorized capital
stock consists of voting common shares and
non-voting preferred shares, with equal par
values of P100.00/share. Currently, the issued
and outstanding capital stock of BellPhil
consists only of common shares shared between
Bayani Cruz, a Filipino with 60% of the issued
common shares, and Bernard Fleet, a Canadian,
with 40%.
To secure additional working fund, BellPhil
issued preferred shares to Bernard Fleet
equivalent to the currently outstanding
common shares. A suit was filed questioning the
corporation action on the ground that the
foreign equity holdings in the company would
now exceed 40% foreign equity limit allowed
under the Constitution for public utilities. Rule
on the legality of Bernard Fleet’s current
holdings. (2013 BAR)
A: The holdings of Bernard Fleet equivalent to the
outstanding common shares is illegal. His holdings
of preferred shares could not exceed 40%. Since the
constitutional requirement of 60% Filipino
ownership of the capital of public utilities applies
not only to voting control but also to beneficial
ownership of the corporation, it should also apply to
the preferred shares. Preferred shares are also
entitled to vote in certain corporate matters. The
state shall develop a self-reliant and independent
national economy effectively controlled by Filipinos
The effective control here should be mirrored
across the board on all kinds of shares. (Gamboa v.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Teves, G.R. No. 176579, 28 June 2011; Sec. 19, Art. II,
1987 Constitution)
Q: Following the decision of the Court in the case
of Gamboa v. Teves, the SEC issued a
Memorandum Circular (SEC-MC No. 8), which
are guidelines on compliance with the Filipino-
foreign ownership requirement prescribed in
the Constitution and/or existing laws by
corporations engaged in nationalized and partly
nationalized activities. The dispositive portion
of the Gamboa Decision stated that the term
‘capital’ referred only to shares of stock entitled
to vote in the election of directors, while there
were certain statements made in the body of the
Resolution to the effect that the 60-40 Filipino-
foreign ownership requirement applies to each
class of shares, whether voting or non-voting.
Hence, Roy filed a case alleging that SEC-MC No.
8 is not compliant with the Gamboa Decision and
Resolution as it did not apply the 60 to 40
Filipino-foreign ownership requirement
separately to each class of share. Is Roy correct?
A: NO. While there is a passage in the body of the
Gamboa Resolution that might have appeared
contrary to the fallo of the Gamboa Decision, the
definiteness and clarity of the fallo of the Gamboa
Decision must control over the obiter dictum in the
Gamboa Resolution.
The Gamboa Decision already held, in no uncertain
terms, that what the Constitution requires is "full
and legal beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent
of the voting rights must rest in the hands of Filipino
nationals." And, precisely that is what SEC-MC No. 8
provides, viz.: “For purposes of determining
compliance with the constitutional or statutory
ownership, the required percentage of Filipino
ownership shall be applied to BOTH (a) the total
number of outstanding shares of stock entitled to
vote in the election of directors; AND (b) the total
number of outstanding shares of stock, whether or
not entitled to vote." (Roy v. Herbosa, G.R. No.
207246, 18 Apr. 2017, J. Caguioa)
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 Corporation Law
2. DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY
The doctrine of corporate juridical personality
states that a corporation is a juridical entity with
legal personality separate and distinct from those
acting for and, in its behalf, and, in general, from the
people comprising it. (Francisco v. Mallen Jr., G.R. No.
173169, 22 Sept. 2010)
Q: An employee of Price Richardson Corporation
executed a sworn affidavit at the NBI’s Interpol
Division, alleging that Price Richardson was
"engaged in boiler room operations, wherein
the company sells non-existent stocks to
investors using high pressure sales tactics." The
SEC filed before the DOJ its complaint against,
among with its incorporators and directors,
Price Richardson, for violation of Art. 315(1)(b)
of the Revised Penal Code (RPC) and Secs.
26.3 and 28 of the Securities Regulation Code
(SRC). Velarde-Albert was its Director for
Operations and Resnick was its Associated
Person. Can Velarde-Albert and Resnick be
indicted for violations of the SRC and the RCC?
A: NO. Velarde-Albert and Resnick cannot be
indicted for violations of the SRC and the RPC.
Petitioner failed to allege the specific acts of
respondents Velarde-Albert and Resnick that could
be interpreted as participation in the alleged
violations. There was also no showing, based on the
complaints, that they were deemed responsible for
Price Richardson's violations. To be held criminally
liable for the acts of a corporation, there must be a
showing that its officers, directors, and
shareholders actively participated in or had the
power to prevent the wrongful act. A corporation’s
personality is separate and distinct from its officers,
directors, and shareholders. (SEC v. Price Richardson
Corp, G.R. No. 197032, 26 July 2017)
Q: Olongapo City filed a complaint for sum of
money and damages against Olongapo City
Water District (OCWD). It alleged that OCWD
failed to pay its electricity bills to Olongapo City
and remit its payment under the contract to pay,
pursuant to OCWD’s acquisition of Olongapo
City’s water system. In the interim, OCWD
103
entered into a Joint Venture Agreement with
SBMA, Biwater and DMCI. Pursuant to this
agreement, Subic Water – a new corporate entity
– was incorporated, with the following equity
participation from its shareholders: SBMA 20%;
OCWD 10%; Biwater 30%; and DMCI 40%.
Subic Water was granted the franchise to
operate and to carry on the business of
providing water and sewerage services in the
Subic Bay Free Port Zone, as well as in Olongapo
City. Hence, Subic Water took over OCWD’s
water operations in Olongapo City. To finally
settle their money claims against each other,
Olongapo City and OCWD entered into a
compromise agreement.
To enforce the compromise agreement,
Olongapo City filed a motion for the issuance of
a writ of execution with the RTC. OCWD’s former
counsel filed a manifestation alleging that
OCWD had already been dissolved and that
Subic Water is now the former OCWD. Because
of this assertion, Subic Water also filed a
manifestation informing the RTC that as borne
out by the articles of incorporation and general
information sheet of Subic Water, OCWD is not
Subic Water. The manifestation also indicated
that OCWD was only a ten percent (10%)
shareholder of Subic Water; and that its 10%
share was already in the process of being
transferred to Olongapo City pursuant to a Deed
of Assignment.
Can Subic Water be made liable under the writ
of execution issued by RTC in favor of Olongapo
City?
A: NO. OCWD and Subic Water are two separate and
different entities. Subic Water clearly demonstrated
that it was a separate corporate entity from OCWD.
OCWD is just a ten percent (10%) shareholder of
Subic Water. As a mere shareholder, OCWD’s
juridical personality cannot be equated nor
confused with that of Subic Water. It is basic in
Corporation Law that a corporation is a juridical
entity vested with a legal personality separate and
distinct from those acting for and, in its behalf, and,
in general, from the people comprising it. Under this
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
corporate reality, Subic Water cannot be held liable
for OCWD’s corporate obligations in the same
manner that OCWD cannot be held liable for the
obligations incurred by Subic Water as a separate
entity. (Olongapo City v. Subic Water and Sewerage
Co., Inc., G.R. No. 171626, 06 Aug. 2014)
Q: Puyat granted a loan to NS International, Inc.
(NSI). The loan was made pursuant to the
Memorandum of Agreement and Promissory
Note between Puyat and NSI, represented by
Nuccio. It was agreed that Puyat would extend a
credit line with a limit of P500,000.00 to NSI, to
be paid within thirty (30) days from the time of
the signing of the document. The loan carried an
interest rate of 17% per annum, or at an
adjusted rate of 25% per annum if payment is
beyond the stipulated period. NSI and Nuccio
received a total amount of P300,000.00 and
certain machinery intended for their business.
The proposed business, however, failed to
materialize.
When the petitioners defaulted in the payment
of the loan, Puyat filed a collection suit alleging
mainly that the NSI and Nuccio still owe him the
value of the machinery. The RTC ordered them,
jointly and severally, to pay the balance. The CA
also affirmed the RTC ruling that they are one
and the same. Did the CA commit a reversible
error in affirming the RTC’s decision holding
them jointly and severally liable for the amount
claimed?
A: YES. Piercing the veil of corporate fiction is not
justified. The NSI and Nuccio are not one and the
same. The records of the case do not show that
Nuccio had control or domination over NSI’s
finances. The mere fact that it was Nuccio who, on
behalf of the corporation, signed the MOA is not
sufficient to prove that he exercised control over the
corporation’s finances. Neither the absence of a
board resolution authorizing him to contract the
loan nor NSI’s failure to object thereto supports this
conclusion. These may be indicators that, among
others, may point to the proof required to justify the
piercing the veil of corporate fiction, but by
themselves, they do not rise to the level of proof
required to support the desired conclusion.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
It should be noted in this regard that while Nuccio
was the signatory of the loan and the money was
delivered to him, the proceeds of the loan were
unquestionably intended for NSI’s proposed
business plan. That the business did not materialize
is not also sufficient proof to justify a piercing, in the
absence of proof that the business plan was a
fraudulent scheme geared to secure funds from the
respondent for the petitioners’ undisclosed goals.
NSI’s liability should not attach to Nuccio. (Saverio v.
Puyat, G.R. No. 186433, 27 Nov. 2013)
Q: Richard owns 90% of the shares of the capital
stock of GOM Co. On one occasion, GOM
represented by Richard as President and
General Manager executed a contract to sell a
subdivision lot in favor of Tomas. For failure of
GOM to develop a subdivision, Tomas filed an
action for rescission and damages against GOM
and Richard. Will the action prosper? Explain
(1996 BAR)
A: The action will prosper against GOM Corporation
but not against Richard. Richard has a separate and
distinct personality from GOM. His mere ownership
of 90% of the shares of the capital stock of GOM does
not make him one and the same as the corporation.
Mere ownership by a single stockholder, or by
another corporation, of all or nearly all of the capital
stock of a corporation is not itself a sufficient ground
for disregarding the separate corporate personality.
(Secosa v. Heirs of Erwin Suarez Francisco, G.R. No.
160039, 29 June 2004)
Q: A contract of sale was entered into between
petitioner DHLFMC and respondent ASIAMED
whereby the former agreed to purchase
machines from the latter for a consideration of
P31 million to be paid no later than (2) days
from the date of delivery. Despite receiving the
machines, with invoices signed by Anthony and
Alejandro, DHLFMC did not pay the whole
consideration which led ASIAMED to file a
complaint for sum of money with a writ of
preliminary attachment against the DHLFMC
and Anthony demanding the payment of the
balance of the contract. The RTC found DHLFMC
and Anthony jointly and severally liable. On
appeal, the CA ruled that the DHLFMC and
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 Corporation Law
Anthony were estopped from raising the
separate juridical personality of DHLFMC in
view of their denial of the allegation that
DHLFMC "[was] an entity representing itself to
be a corporation duly organized and existing,"
stating that they "never represented that
[petitioner] DHLFMC [was] a corporate entity
duly organized and existing. Hence, he should be
held solidarily liable. Are the petitioners
estopped from invoking the separate juridical
personality of DHLFMC?
A: YES. Petitioners do not dispute that they
specifically denied the allegation regarding
petitioner DHLFMC's corporate circumstances, the
truth being that the petitioners never represented
that petitioner DHLFMC is a corporate entity duly
organized and existing under and by virtue of the
laws of the Republic of the Philippines. Petitioners
merely insist that petitioner Anthony was not
shown to have acted in bad faith, and thus, cannot
be held solidarily liable with petitioner
DHLFMC. However, petitioners do not point to
anything on record to counter their own specific
denial that would establish DHLFMC's existence as
a corporation with separate juridical personality.
(Dee Hwa Liong Foundation v. ASIAMED, G.R. No.
205638, 23 Aug. 2017)
Q: Rodriguez Tan, doing business under the
name and style of Yon Mitori, is a depositor
maintaining a Current Account with Union Bank.
In said account, Tan deposited P420,000
through BPI Check drawn against the account of
Angli Lumber & Hardware, Inc, which is one of
Tan’s clients. The BPI Check was entered in
Tan’s bank records. Tan withdrew from said
account the amount of P480,000.00. Later that
day, however, the BPI Check was returned to
Union Bank as the account against which it was
drawn had been closed. Union Bank discovered
that Tan’s account had been mistakenly credited
so their branch manager immediately called Tan
to recover the funds mistakenly released but
Tan refused. During Union Bank’s investigation,
it was discovered that Tan previously deposited
five BPI checks drawn by Angli Lumber against
the same BPI account, and these checks were all
previously dishonored. Union Bank sent Tan a
105
letter demanding the reimbursement of
P420,000, but Tan refused.
Union Bank then debited the available balance
in Tan’s account as a set-off, and thereafter
instituted a Complaint for Sum of Money for the
recovery of the remaining balance. Tan argues
that Union Bank should not be allowed to
recover the amount erroneously deposited in
his account because of Union Bank’s own gross
negligence. On an appeal before the CA, Tan
named Yon Mitori as co-appellant. In appealing
to the Supreme Court, Yon Mitori was named as
sole petitioner in the Petition.
a. Is Yon Mitori a real party in interest?
b. Is Tan obligated to return the value of the
BPI Check?
A:
a. NO. Yon Mitori has no separate juridical
personality. A single proprietorship is not
considered a separate juridical person under
the Civil Code. The Petition should have been
filed in Tan's name, the latter being the real
party in interest who possesses the legal
standing to file this Petition. Nevertheless, the
Court permits the substitution of Tan as
petitioner. Sec. 4, Rule 10 of the Rules of Court
provides that “a defect in the designation of the
parties and other clearly clerical or
typographical errors may be summarily
corrected by the court at any stage of the
action, at its initiative or on motion, provided
no prejudice is caused thereby to the adverse
party.”
b. YES. Tan is bound to return the proceeds of the
dishonored BPI Check based on the principle of
unjust enrichment. Art. 22 of the Civil Code
states that “every person who through an act of
performance by another, or any other means,
acquires or comes into possession of
something at the expense of the latter without
just or legal ground, shall return the same to
him.” For the principle to apply, the following
requisites must concur: (i) a person is unjustly
benefited; and (ii) such benefit is derived at the
expense of or with damages to another.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Here, it was unequivocally established that Tan
withdrew and utilized the proceeds of the BPI
Check fully knowing that he was not entitled
thereto. To note, Tan had deposited five other
checks drawn against the same account. He
was fully aware that Angli Lumber's account
with BPI had been closed. So he could not have
expected that the BPI Check in question would
be honored. (Yon Mitori International
Industries v. Union Bank of the Philippines, G.R.
No. 225538, 14 Oct. 2020, J. Caguioa)
Significance of the Doctrine of Separate Juridical
Personality
1. Liability for acts or contracts – As a general
rule, the obligation of the corporation is not the
liability of the stockholders, directors, or
officers. (1992, 1996, 2010 BAR)
A corporation may not, generally, be made to
answer for acts or liabilities of its stockholders
or those of the legal entities to which it may be
connected, and vice versa. (Cease v. CA, G.R. No.
L-33172, 18 Oct. 1979)
2. Right to bring actions – may bring civil and
criminal actions in its own name in the same
manner as natural persons. (Art. 46, NCC)
NOTE: Rights belonging to the corporation
cannot be invoked by the stockholders (or
directors and officers) even if the latter own
substantial majority of the shares in that
corporation; and rights of the stockholders,
directors and officers cannot be invoked by the
corporation. (Stonehill v. Diokno, G.R. No. L-
19550, 19 June 1967)
3. Right to acquire and possess property –
property conveyed to or acquired by the
corporation is in law the property of the
corporation itself as a distinct legal entity and
not that of the stockholders or members.
4. Acquisition of jurisdiction – When the
defendant is a corporation, partnership or
association organized under the laws of the
Philippines with a juridical personality, service
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
may be made on the president, managing
partner, general manager, corporate secretary,
treasurer, or in-house counsel of the
corporation wherever they may be found, or in
their absence or unavailability, on their
secretaries.
If such service cannot be made upon any of the
foregoing persons, it shall be made upon the
person who customarily receives the
correspondence for the defendant at its
principal office.
In case the domestic juridical entity is under
receivership or liquidation, service of summons
shall be made on the receiver or liquidator, as
the case may be.
Should there be a refusal on the part of the
persons above-mentioned to receive summons
despite at least three (3) attempts on two (2)
separate dates, service may be made
electronically, if allowed by the court, as
provided under Section 6 of Rule 14. (Sec. 12,
Rule 14, Rules of Court)
5. Changes in individual membership –
corporation remains unchanged and unaffected
in its identity by changes in its individual
membership or ownership of its stocks.
Stockholders are NOT the Owners of Corporate
Properties and Assets
A corporation is a juridical person distinct from the
members composing it. Properties in the name of
the corporation are owned by it as an entity
separate and distinct from its members. While
shares of stocks constitute personal property, they
do not represent property of the corporation. The
corporation has properties of its own. A share of
stock only represents an aliquot part of the
corporation’s property, or the right to share in its
proceeds but its holder is not the owner of any.
(Silverio v. Filipino Business Consultants, Inc., G.R. No.
143312, 12 Aug. 2005)
At the very least, the interest of stockholders is
purely inchoate, or in sheer expectancy of a right in
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 Corporation Law
the management of the corporation and to share in
the profits thereof and in the properties and assets
thereof on dissolution, after payment of the
corporate debts and obligations. The interest of the
stockholders over the properties are merely
inchoate. (Saw v. CA, G.R. No. 90580, 08 Apr. 1991;
1996, 2000 BAR)
Moreover, under the trust fund doctrine, the capital
stock, property, and other assets of a corporation
are regarded as equity in trust for the payment of
corporate creditors which are preferred over the
stockholders in the distribution of corporate assets.
The distribution of corporate assets and property
cannot be made to depend on the whims and
caprices of the stockholders, officers, or directors of
the corporation unless the indispensable conditions
and procedures for the protection of corporate
creditors are followed. (Yamamoto v. Nishino
Leather Industries, Inc., G.R. No. 150283, 16 Apr.
2008)
Q: RISCO ceased operation due to business
reverses. Due to Aznar et. al’s desire to
rehabilitate RISCO, they contributed a total
amount of P212,720.00 which was used in the
purchase of three (3) parcels of land located in
various areas in the Cebu Province. Pursuant to
the Minutes of the Special Meeting of the Board
of Directors of RISCO, the contributed amounts
constitute liens and encumbrances on the
aforementioned properties as annotated in the
titles of the said parcels of land. Thereafter,
various subsequent annotations were made on
the same titles in favor of PNB. As a result, a
Certificate of Sale was issued in favor of PNB,
being the lone and highest bidder of the three
(3) parcels of land and was also issued Transfer
Certificate of Title over the said parcels of land.
Aznar, et. al filed a complaint seeking the
quieting of their supposed title to the subject
properties. They alleged that the subsequent
annotations on the titles are subject to the prior
annotation of their liens and encumbrances. On
the other hand, PNB assert that, as mere
stockholders of RISCO, they do not have any
legal or equitable right over the properties of
the corporation. Do Aznar et. al. have the legal or
107
equitable rights over the subject properties?
A: NO. Aznar, et al., have no right to ask for the
quieting of title of the properties at issue because
they have no legal and/or equitable rights over the
properties that are derived from the previous
registered owner which is RISCO.
Aznar, et al., who are stockholders of RISCO, cannot
claim ownership over the properties at issue in this
case on the strength of the Minutes which, at most,
is merely evidence of a loan agreement between
them and the company. There is no indication or
even a suggestion that the ownership of said
properties were transferred to them which would
require no less that the said properties be registered
under their names. At the very least, their interest is
purely inchoate, or in sheer expectancy of a right in
the management of the corporation and to share in
the profits thereof and in the properties and assets
thereof on dissolution, after payment of the
corporate debts and obligations.
While a share of stock represents a proportionate or
aliquot interest in the property of the corporation, it
does not vest the owner thereof with any legal right
or title to any of the property, his interest in the
corporate property being equitable or beneficial in
nature. Shareholders are in no legal sense the
owners of corporate property, which is owned by
the corporation as a distinct legal person. (PNB v.
Aznar, et al, G.R. No. 171805, 30 May 2011)
NOTE: Where stockholders granted a loan to the
corporation to finance the acquisition of property
which was eventually mortgaged to a bank to secure
a corporate loan, the right of the stockholders is
subordinate to the mortgagee. The stockholder has
the right to be paid the loan but not to the property
of the corporation. (Divina, 2021 citing PNB v. Aznar,
supra)
Q: National Galleon Shipping Corporation
(Galleon) took out several loans from different
sources such as foreign financial institutions, its
shareholders and other entities. DBP
guaranteed Galleon's foreign loans. Galleon and
its stockholders, Sta. Ines, Cuenca Investment,
Universal Holdings, Cuenca, and Tinio, executed
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
a Deed of Undertaking and obligated themselves
to guarantee DBP's potential liabilities. Galleon
undertook to secure a first mortgage on its new
and second-hand vessels. Despite the loans,
Galleon’s financial condition did not improve.
President Marcos issued a Letter of Instruction
ordering NDC to acquire 100% of the
shareholdings of Galleon Shipping Corporation
from its present owners.
Galleon's stockholders, represented by Cuenca,
and NDC, through its then Chairman of the Board
of Directors, Ongpin, entered into a
Memorandum of Agreement where NDC and
Galleon undertook to prepare and sign a share
purchase agreement covering 100% of Galleon's
equity. DBP paid off Galleon's debts to its foreign
bank creditor. NDC took over Galleon's
operations "even prior to the signing of a share
purchase agreement." However, despite NDC's
takeover, the share purchase agreement was
never formally executed. President Marcos
issued another letter to DBP and NDC directing
that they take steps, including foreclosure of
Galleon vessels and other assets.
Sta. Ines, Cuenca, Tinio, Cuenca Investment and
Universal Holdings, major stockholders of
Galleon, filed a Complaint with Application for
Injunction. They claimed that DBP can no longer
go after them for any deficiency judgment since
NDC had been subrogated in their place as
borrowers, hence the Deed of Undertaking they
executed had been extinguished and novated.
Did the Memorandum of Agreement novate the
Deed of Undertaking executed between DBP and
respondents?
A: NO. The Court of Appeals erred when it ruled that
DBP was privy to the Memorandum of Agreement
since Ongpin was concurrently Governor of DBP and
chairman of NDC Board of Directors at the time the
Memorandum of Agreement was signed.
The general rule is that, "in the absence of an
authority from the board of directors, no person, not
even the officers of the corporation, can validly bind
the corporation." A corporation is a juridical person,
separate and distinct from its stockholders and
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
members, having "powers, attributes and
properties expressly authorized by law or incident
to its existence.”
Novation is a mode of extinguishing an obligation by
"changing its object or principal conditions,
substituting the person of the debtor or subrogating
a third person in the rights of the creditor." While
novation, "which consists in substituting a new
debtor in the place of the original one may be made
even without the knowledge or against the will of
the latter, it must be with the consent of the
creditor.”
Aside from Ongpin being the concurrent head of
DBP and NDC at the time the Memorandum of
Agreement was executed, there was no proof
presented that Ongpin was duly authorized by DBP
to give consent to the substitution by NDC as a co-
guarantor of Galleon's debts. Ongpin is not DBP,
therefore, it is wrong to assume that DBP impliedly
gave its consent to the substitution simply by virtue
of the personality of its Governor. (DBP v. Sta. Ines
Melale Forest Products Corp., G.R. No. 193068, 01 Feb.
2017)
Stockholders are NOT Real Parties in Interest to
Claim Damages and Recover Compensation
The stockholders were clearly not vested with any
direct interest in the personal properties coming
under the levy on attachment by virtue alone of
their being stockholders of the corporation. Their
stockholdings represented only their proportionate
or aliquot interest in the properties of the
corporation but did not vest in them any legal right
or title to any specific properties of the corporation.
Without doubt, the corporation remained the owner
as a distinct legal person. Given the separate and
distinct legal personality of the corporation, the
stockholders lacked the legal personality to claim
the damages sustained from the levy of the former’s
properties. (Stronghold Insurance Company, Inc. v.
Cuenca, G.R. No. 173297, 06 Mar. 2013)
Q: Ronald Sham, doing business under the name
of SHAMRON Machineries (Shamron), sold to
Turtle Mercantile (Turtle) a diesel farm tractor.
In payment, Turtle’s President and Manager
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 Corporation Law
Dick Seldon issued a check for P50,000 in favor
of Shamron. A week later, Turtle sold the tractor
to Briccio Industries (Briccio) for P60,000.
Briccio discovered that the engine of the tractor
was reconditioned so it refused to pay Turtle. As
a result, Dick Seldon ordered the “Stop
Payment” of the check issued to Shamron.
Shamron sued Turtle and Dick Seldon. Shamron
obtained a favorable judgment holding co-
defendants Turtle and Dick Seldon jointly and
severally liable. Comment on the decision of the
trial court. Discuss fully. (1995 BAR)
A: I disagree with the trial court’s ruling. Dick
Seldon should not be held solidarily liable with
Turtle in his capacity as President and Manager of
Turtle. Turtle has a separate juridical personality
from its officers. (Consolidated Bank and Trust Corp.
v. CA, G.R. No. 114286, 19 Apr. 2001)
Non-Applicability of Doctrine of Separate
Juridical Personality in Examination of Officers
to Ascertain Properties, Income which can be
Subjected to Execution
The doctrine of separate juridical personality does
not apply if the judgment creditor wanted the
officers to be examined not for the purpose of
passing unto them the liability of the judgment
obligor but to ascertain the properties and income
of the latter which can be subjected for execution in
order to satisfy the final judgment and nothing else.
(Linden Suites, Inc. v. Meridien Far East Properties,
Inc., G.R. No. 211969, 04 Oct. 2021)
Officers NOT liable for Dismissal of Employee
Except in Cases of Evident Malice and/or Bad
Faith
Q: Respondents had been employed as security
guards by petitioner Symex. They were not given
a rest day, and were not paid their overtime pay,
five-day service incentive leave pay, and 13th
month pay. Thus, respondents filed a complaint
against Symex and its President and Chairman of
the Board, Arcega. Capt. Cura, the operations
manager of Symex, told respondents that they
would not be given a duty assignment unless
they withdrew the complaint they filed.
109
Respondents refused to obey Capt. Cura, who
then told them that they were dismissed. Is
Arcega solidarily liable for the obligations of
Symex to respondents?
A: NO, there was no showing that Arcega, as
President of Symex, willingly and knowingly voted
or assented to the unlawful acts of the company. A
corporation is a juridical entity with a legal
personality separate and distinct from those acting
for and in its behalf and, in general, from the people
comprising it. Thus, as a general rule, an officer may
not be held liable for the corporation's labor
obligations unless he acted with evident malice
and/or bad faith in dismissing an employee. Sec. 31
of the Corporation Code (now Sec. 30 of the RCC) is
the governing law on personal liability of officers for
the debts of the corporation. To hold a director or
officer personally liable for corporate obligations,
two requisites must concur: (1) it must be alleged in
the complaint that the director or officer assented to
patently unlawful acts of the corporation or that the
officer was guilty of gross negligence or bad faith;
and (2) there must be proof that the officer acted in
bad faith.
Respondents failed to specifically allege either in
their complaint or position paper that Arcega, as an
officer of Symex, willfully and knowingly assented
to the acts of Capt. Cura, or that Arcega had been
guilty of gross negligence or bad faith in directing
the affairs of the corporation. In fact, there was no
evidence at all to show Arcega's participation in the
illegal dismissal of respondents. Clearly, the twin
requisites of allegation and proof of bad faith,
necessary to hold Arcega personally liable for the
monetary awards to the respondents, are lacking.
(Symex Security Services, Inc. v. Rivera, Jr., G.R. No.
202613, 08 Nov. 2017, J. Caguioa)
Entitlement of Corporations to Constitutional
Rights
Corporations are entitled to the following rights
under the Constitution:
1. Right to Due Process (Sec. 1, Art. III, 1987
Constitution);
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
2. Right against Unreasonable Searches and
Seizures. (Sec. 2, ibid.)
NOTE: Corporations are not entitled to the right
against self-incrimination, being a mere creature of
law. It is presumed to be incorporated for the
benefit of the public. It received certain special
privileges and franchises and holds them subject to
the laws of the state and the limitations of its
charter. Its powers are limited by law. It can make
no contract not authorized by its charter. Its rights
to act as a corporation are only preserved to it so
long as it obeys the laws of its creation. There is a
reserve right in the legislature to investigate its
contracts and find out whether it has exceeded its
powers. It would be a strange anomaly to hold that
a state, having chartered a corporation to make use
of certain franchises, could not, in the exercise of
sovereignty, inquire how these franchises had been
employed, and whether they had been abused, and
demand the production of the corporate books and
papers for that purpose. (Bataan Shipyard &
Engineering Co. v. PCGG, G.R. No. 75885, 27 May
1987)
LIABILITY FOR TORTS AND CRIMES
A Corporation may be held Liable for Torts
A corporation is liable whenever a tortious act is
committed by an officer or agent under express
direction or authority from the stockholders or
members acting as a body, or, generally, from the
directors as the governing body. (PNB v. CA, G.R. No.
L-27155, 18 May 1978)
Reason for Liability in Cases of Torts
A corporation is civilly liable in the same manner as
natural persons for torts, because generally
speaking, the rules governing the liability of a
principal or master for a tort committed by an agent
or servant are the same, whether the servant or
agent is a natural person or a corporation and
whether the servant or agent be a natural or
artificial person . (Ibid.)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Liability of a Corporation in Cases of Crimes
GR: If the crime is committed by a corporation or
other juridical entity, the directors, officers,
employees, or other officers thereof responsible
for the offense shall be charged and penalized for
the crime, precisely because of the nature of the
crime and the penalty therefor. A corporation
cannot be arrested and imprisoned; hence, cannot
be penalized for a crime punishable by
imprisonment. (Ching v. Secretary of Justice, G.R. No.
164317, 06 Feb. 2006)
XPN: However, a corporation may be charged and
prosecuted for a crime if the imposable penalty is
fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be
prosecuted and, if found guilty, may be fined. (Ibid.)
RECOVERY OF DAMAGES
Recovery of Moral Damages
GR: A corporation is not entitled to moral damages
because, being an artificial person and having
existence only in legal contemplation, it has no
feelings, no emotions, no senses. It cannot,
therefore, experience physical suffering and mental
anguish, which can be experienced only by one
having a nervous system. (ABS-CBN Broadcasting
Corp. v. CA, G.R. No. 128690, 21 Jan. 1999)
XPNs:
1. A corporation may recover moral damages
under item 7 of Art. 2219, of the NCC because
said provision expressly authorizes the
recovery of moral damages in cases of libel,
slander, or any other form of defamation.
NOTE: Art. 2219(7) does not qualify whether
the injured party is a natural or juridical person.
Therefore, a corporation, as a juridical person,
can validly complain for libel or any other form
of defamation and claim for moral damages.
(Filipinas Broadcasting Network, Inc. v. AMEC-
BCCM, G.R. No. 141994, 17 Jan. 2005)
2. When the corporation has a reputation that is
debased, resulting in its humiliation in the
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 Corporation Law
business realm. But in such a case, it is
imperative for the claimant to present proof to
justify the award. It is essential to prove the
existence of the factual basis of the damage and
its causal relation to petitioner’s acts. (MERALCO
v. T.E.A.M. Electronics Corp., et. al., G.R. No.
131723, 13 Dec. 2007)
NOTE: While the court may allow the grant of moral
damages to corporations, it is not automatically
granted; there must still be proof of the existence of
the factual basis of the damage and its causal
relation to the defendant’s acts. This is so because
moral damages, though incapable of pecuniary
estimation, are in the category of an award designed
to compensate the claimant for actual injury
suffered and not to impose a penalty on the
wrongdoer. (Crystal v. BPI, G.R. No. 172428, 28 Nov.
2008)
Q: "Exposé" is a radio documentary program
hosted by Rima and Alegre. It is aired every
morning over DZRC-AM which is owned by FBNI.
One morning, Rima and Alegre exposed various
alleged complaints from students, teachers and
parents against AMEC and its administrators
and called it the dumping ground for misfits.
Claiming that the broadcasts were defamatory,
AMEC and Ago, as Dean of AMEC’s College of
Medicine, filed a complaint for damages against
FBNI, Rima and Alegre. As a defense, FBNI claims
that AMEC is not entitled to moral damages
because it is a corporation. Is AMEC is entitled to
moral damages?
A: YES. AMEC is entitled to moral damages. A
juridical person is generally not entitled to moral
damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as
wounded feelings, serious anxiety, mental anguish,
or moral shock. Nevertheless, AMEC’s claim for
moral damages falls under item 7 of Art. 2219 of the
NCC. This provision expressly authorizes the
recovery of moral damages in cases of libel, slander,
or any other form of defamation. Art. 2219(7) does
not qualify whether the plaintiff is a natural or
juridical person. Therefore, a juridical person such
as a corporation can validly complain for libel or any
other form of defamation and claim for moral
111
damages. (Filipinas Broadcasting Network, Inc., v.
AMEC-BCCM, supra)
Q: Meralco and T.E.A.M. Electronics Corporation
(TEC) were parties to two separate contracts for
the sale of electric energy. Meralco undertook to
supply TEC’s building known as DCIM with
electric power. One day, Meralco conducted a
surprise inspection of the electric meters
installed at the DCIM building. Two meters
were found to be allegedly tampered with and
did not register the actual power consumption
in the building. Meralco informed TEC of the
results of the inspection and demanded from the
latter the payment of its unregistered
consumption. TEC failed to pay the same.
For failure to pay, Meralco disconnected the
electricity supply to the DCIM building. TEC
demanded from Meralco the reconnection of
electrical service, claiming that it had nothing to
do with the alleged tampering, but the latter
refused to heed the demand. The Energy
Regulatory Board (ERB) immediately ordered
the reconnection of the service, but Meralco did
not immediately comply. TEC filed a complaint
for damages against Meralco before the RTC.
The RTC ruled in favor of TEC, and it awarded,
among others, moral damages. Is TEC entitled to
moral damages?
A: NO. TEC is not entitled to moral damages. TEC’s
claim was premised allegedly on the damage to its
goodwill and reputation. As a rule, a corporation is
not entitled to moral damages because, not being a
natural person, it cannot experience physical
suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral
shock. The only exception to this rule is when the
corporation has a reputation that is debased,
resulting in its humiliation in the business realm.
But in such a case, it is imperative for the claimant
to present proof to justify the award. It is essential
to prove the existence of the factual basis of the
damage and its causal relation to Meralco’s acts. In
the present case, the records are bereft of any
evidence that the name or reputation of TEC/TPC
has been debased as a result of Meralco’s acts.
(MERALCO v. T.E.A.M. Electronics Corp. et al., supra)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
3. DOCTRINE OF PIERCING THE
CORPORATE VEIL
The doctrine of piercing the corporate veil is the
doctrine that allows the State to disregard, for
certain justifiable reasons, the notion that a
corporation has a personality separate and distinct
from the persons composing it.
Where it appears that business enterprises are
owned, conducted, and controlled by the same
parties, law and equity will disregard the legal
fiction that these corporations are distinct entities
and shall treat them as one. This is in order to
protect the rights of third persons. (Vicmar
Development Corporation v. Elarcosa, et al., G.R. No.
202215, 09 Dec. 2015)
Absent any allegation or proof of fraud or other
public policy considerations, the existence of
interlocking directors, officers and stockholders is
not enough justification to pierce the veil of
corporate fiction as in the instant case. (Hacienda
Luisita Incorporated v. Presidential Agrarian Reform
Council, G.R. No. 171101, 22 Nov. 2011)
Effect of Piercing the Corporate Veil
1. The corporation will be treated merely as an
association of persons, undertaking a business
and the liability will attach directly to the
officers and stockholders.
2. Where there are two (2) corporations, they will
be merged into one, the one being merely
regarded as the instrumentality, agency,
conduit, or adjunct of the other.
NOTE: Notwithstanding that the corporate veil has
been pierced, the corporation continues for other
legitimate objectives, the corporate character is not
necessarily abrogated. (Reynoso IV v. CA, G.R. Nos.
116124-25, 22 Nov. 2000)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Grounds for Application of Doctrine of Piercing
the Corporate Veil
It applies upon the following circumstances:
(F-A-C-O)
1. If the fiction is used to perpetrate fraud (Fraud
Test);
2. If the complete control of one corporate entity
to another which perpetuated the wrong is the
proximate cause of the injury (Control Test);
3. If a certain corporation is only an adjunct or an
extension of the personality of the corporation
(Alter Ego or Instrumentality Test); or
4. If the fiction is pierced to make the stockholders
liable for the obligation of the corporation
(Objective Test).
Q: Rosario Lorezo received, upon inquiry, a
letter from the Social Security System (SSS),
informing her that she cannot avail of their
retirement benefits since per their record she
has only paid 16 months. Aggrieved, Lorezo
then filed her Amended Petition before the
Social Security Commission (SSC), alleging that
she was employed as laborer in Cataywa
managed by Jose Marie Villanueva in 1970 but
was reported to the SSS only in 1978. She alleged
that SSS contributions were deducted from her
wages from 1970 to 1995, but not all were
remitted to the SSS which, subsequently, caused
the rejection of her claim. She also impleaded
Talisay Farms, Inc. by virtue of its Investment
Agreement with Mancy and Sons Enterprises.
She also prayed that the veil of corporate fiction
be pierced since she alleged that Mancy and Sons
Enterprises and Manuel and Jose Marie
Villanueva are one and the same. Should Mancy
and Sons Enterprises’ veil of corporate fiction be
pierced?
A: NO. It was not alleged nor proven that Mancy and
Sons Enterprises, Inc. functions only for the benefit
of Manuel Villanueva, thus, one cannot be an alter
ego of the other. The piercing doctrine when applied
to alter ego cases applies where the stock of a
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 Corporation Law
corporation is owned by one person whereby the
corporation functions only for the benefit of such
individual owner. In such case, the corporation and
the individual should be deemed one and the same.
There is no need to pierce the corporate veil since
Lorezo failed to substantiate her claim that Mancy
and Sons Enterprises, Inc. and Manuel and Jose
Marie Villanueva are one and the same. She based
her claim on the SSS form wherein Manuel
Villanueva appeared as employer. However, this
does not prove, in any way, that the corporation is
used to defeat public convenience, justify wrong,
protect fraud, or defend crime, or when it is made as
a shield to confuse the legitimate issues, warranting
that its separate and distinct personality be set
aside. (Hacienda Cataywa/Manuel Villanueva, et al.
v. Rosario Lorezo, G.R. No. 179640, 18 Mar. 2015)
Q: Mr. Pablo, a rich merchant in his early forties,
was a defendant in a lawful suit which could
subject him to substantial damages. A year
before the court rendered judgment, Pablo
sought his lawyer’s advice on how to plan his
estate to avoid taxes. He suggested that he
should form a corporation with himself, his wife,
and his children (all students and still
unemployed) as stockholders and then transfer
all his assets and liabilities to this corporation.
Mr. Pablo followed the recommendation of his
lawyer.
One year later, the court rendered judgment
against Pablo and the plaintiff sought to enforce
this judgment. The sheriff, however, could not
locate any property in the name of Pablo and
therefore returned the writ of execution
unsatisfied. What remedy, if any, is available to
the plaintiff? (1994 BAR)
A: The plaintiff can avail himself of the doctrine of
piercing the veil of corporate fiction which can be
invoked when a corporation is formed or used in
avoiding a just obligation.
The factual settings indicate the existence of a lawful
suit that could subject Pablo to a substantial amount
of damages. It would thus be difficult for Pablo to
convincingly assert that the incorporation of the
113
family corporation was intended merely as a case of
“estate tax planning.”
Accordingly, this separate personality of the
corporation may be disregarded, or the veil of
corporate fiction pierced, in cases where it is used
as a cloak or cover for fraud or illegality, or to work
an injustice, or where necessary to achieve equity or
when necessary for the protection of creditors.
Corporations are composed of natural persons and
the legal fiction of a separate corporate personality
is not a shield for the commission of injustice and
inequity. Likewise, this is true when the corporation
is merely an adjunct, business conduit or alter ego
of another corporation. In such case, the fiction of
separate and distinct corporation entities should be
disregarded. (Tan Boon Bee v. Jarencio, G.R. No. L-
41337, 30 June 1988)
Q: Romeo Morales was able to obtain a favorable
judgment for a sum of money against Kukan, Inc.
With the judgment attaining finality, the sheriff
levied on execution various personal properties
found at what was supposed to be Kukan’s office.
Kukan International Corporation (KIC) filed a
third-party complaint, alleging that it was the
owner of the levied properties. Morales prayed
that the principle of piercing the veil of
corporate fiction be applied in order to satisfy
the judgment debt of Kukan. The RTC granted
the motion of Morales and declared KIC and
Kukan as one and the same corporation. The CA
affirmed the RTC. Did the RTC properly apply the
doctrine?
A: NO. The principle of piercing the veil of
corporate fiction, and the resulting treatment of
two related corporations as one and the same
juridical person with respect to a given transaction,
is basically applied only to determine established
liability; it is not available to confer on the court a
jurisdiction it has not acquired over a party not
impleaded in a case. Elsewise put, a corporation not
impleaded in a suit cannot be subject to the courts
process by piercing the veil of its corporate fiction.
In that situation, the court has not acquired
jurisdiction over the corporation and, hence, any
proceedings taken against that corporation and its
property would infringe on its right to due process.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Two-fold Implication:
1. The court must first acquire jurisdiction over
the corporation or corporations involved
before its or their separate personalities are
disregarded; and
2. The doctrine of piercing the veil of corporate
entity can only be raised during a full-blown
trial over a cause of action duly commenced
involving parties duly brought under the
authority of the court by way of service of
summons or what passes as such service.
(Kukan International Corp v. Reyes, G.R. No.
182729, 29 Sept. 2010)
NOTE: The Supreme Court, however, ruled
differently in Gold Line Tours v. Lacsa (G.R. No.
159108, 18 June 2012). It held that if the RTC had
sufficient factual basis to conclude that the two
corporations are one and the same entity as when
they have the same president and controlling
shareholder and it is generally known in the place
where they do business that they are one, the third-
party claim filed by the other corporation was
properly set aside and the levy on its property held
valid even though the latter was not made a party
to the case. The judgment may be enforced against
the other corporation to prevent multiplicity of
suits and save the parties unnecessary expenses
and delays. (Divina, 2021)
Q: Ma. Concepcion Lacsa was riding a Goldline
passenger bus owned and operated by Travel &
Tours Advisers, Inc. (TTAI) when the bus collided
with a passenger jeepney, causing her instant
death. The Heirs of Concepcion instituted a suit in
the RTC for damages due to breach of contract,
with the complaint set against “Travel & Tours
Advisers, Inc. (Goldline)” and the bus driver. The
RTC ruled in favor of the Heirs, holding TTAI
liable to pay the heirs damages and expenses. A
writ of execution was served upon TTAI and
Cheng, operator of the Goldline bus. Cheng failed
to settle the judgment; thus a tourist bus was
levied.
Gold Line Tours Inc. filed a third-party claim,
claiming that the levied tourist bus be returned to
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
it because it was its owner, it had not been made
a party to the case, and it was a corporation
entirely different from TTAI. Is Gold Line’s
contention, correct?
A: NO. Whenever necessary for the interest of the
public or for the protection of enforcement of their
rights, the notion of legal entity should not and is not
to be used to defeat public convenience, justify
wrong, protect fraud or defend crime. There is
sufficient factual basis to find that Goldline and TTAI
were one and the same entity, specifically: (a)
documents submitted showing that Cheng, who
claimed to be the operator of TTAI, is also the
President/Manager and an incorporator of Gold Line;
and (b) Travel and Tours Advisers, Inc. had been
known in Sorsogon as Goldline.
The RTC was correct in finding that the two
companies are actually one and the same, hence the
levy for the bus in question was proper. The RTC thus
rightly ruled that Goldline might not be shielded from
liability under the final judgment through the use of
the doctrine of separate corporate identity. Truly,
this fiction of law could not be employed to defeat the
ends of justice. (Gold Line Tours, Inc. v. Heirs of Maria
Concepcion Lacsa, G.R. No. 159108, 18 June 2012)
Q: Eric Livesey filed a complaint for illegal
dismissal with money claims against CBB
Philippines Strategic Property Services, Inc.
(CBB) and Paul Dwyer, its president. Livesey and
CBB, through Keith Elliot, entered into a
compromise agreement. Unless and until the
agreement is fully satisfied, CBB shall not sell,
alienate, or otherwise dispose of all or
substantially all of its assets or business;
suspend its business operations; substantially
change the nature of its business; and declare
bankruptcy or insolvency.
CBB failed to pay the rest of the amount as the
company ceased operations. Livesey moved for
the issuance of an alias writ of execution,
alleging that CBB and Elliot have organized
another corporation, “Binswanger Philippines,
Inc.” He claimed that there was evidence
showing that CBB and Binswanger Philippines,
Inc. are one and the same corporation, pointing
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 Corporation Law
out that CBB stands for Chesterton Blumenauer
Binswanger. Is the doctrine of piercing the veil
of corporate fiction applicable?
A: YES. Shortly after Elliot forged the compromise
agreement with Livesey, CBB ceased operations.
There was an indubitable link between CBB’s
closure and Binswanger’s incorporation. CBB
ceased to exist only in name; it re–emerged - to
avoid payment by CBB of the last two installments
of its monetary obligation to Livesey, as well as its
other financial liabilities. A reasonable mind would
arrive at the conclusion that Binswanger is CBB’s
alter ego or that CBB and Binswanger are one and
the same corporation. There are also indications of
badges of fraud in Binswanger’s incorporation. It
was a business strategy to evade CBB’s financial
liabilities, including its outstanding obligation to
Livesey. (Livesey v. Binswanger Philippines, G.R. No.
177493, 19 Mar. 2014)
Tax Avoidance Does Not Justify Piercing
Corporate Veil
There is one case where it was held that the
corporation is a business conduit of the
stockholders when the latter transferred their
properties to a corporation in exchange for its
shares of stock. The Supreme Court said that what
the transferors did was to invest their properties
and change the nature of their ownership from
unincorporated to incorporated form by
organizing a corporation to take control of their
properties and at the same time save on estate tax.
There was no sale of property that would violate
the right of first refusal of the lessee over the said
properties. Even through the corporation is a
conduit of the shareholders, its corporate veil was
not pierced. Tax avoidance, being valid and
legitimate, does not justify piercing the veil of
corporate fiction. (Divina, 2020, citing Delphers
Traders Corp. v. Intermediate Appellate Court, G.R.
No. 69259, 26 Jan. 1988)
115
Circumstances which did NOT Result to the
Piercing of the Corporate Veil
The mere fact that: (Fi-Co-S)
1. A corporation owns Fifty (50%) of the capital
stock of another corporation, or the majority
ownership of the stocks of a corporation is not
per se a cause for piercing the veil.
2. Two corporations have Common directors or
same or single stockholder who has all or nearly
all of the capital stock of both corporations is
not in itself sufficient ground to disregard
separate corporate entities.
3. There is a Substantial identity of the
incorporators of the two (2) corporations does
not necessarily imply fraud and does not
warrant piercing the corporate veil.
Q: Land Bank of the Philippines (LBP) extended
a series of credit accommodations to ECO using
the trust funds of PVTA. The proceeds of the
credit accommodations were received on behalf
of ECO by Emmanuel Oñate. Upon maturity of the
loans, ECO failed to pay the same. ECO then
submitted a Plan of Payment to LBP, however,
the latter rejected the same. LBP filed a
complaint for collection of sum of money against
ECO and Oñate. LBP contends that the
personalities of Oñate and of ECO should be
treated as one holding Oñate liable for the loans
incurred by ECO from Land Bank. Is Oñate
jointly and severally liable with ECO for the
loans incurred from LBP?
A: NO. Oñate should not be held jointly and severally
liable with ECO. A corporation, upon coming into
existence, is invested by law with a personality
separate and distinct from those persons composing
it as well as from any other legal entity to which it
may be related. By this attribute, a stockholder may
not, generally, be made to answer for acts or
liabilities of the said corporation, and vice versa.
The mere fact that Oñate owned the majority of the
shares of ECO is not a ground to conclude that Oñate
and ECO are one and the same. Mere ownership by
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
a single stockholder of all or nearly all of the capital
stock of a corporation is not by itself sufficient
reason for disregarding the fiction of separate
corporate personalities. Neither is the fact that the
name “ECO” represents the first three letters of
Oñate’s name sufficient reason to pierce the
veil. Even if it did, it does not mean that the said
corporation is merely a dummy of Oñate. A
corporation may assume any name provided it is
lawful. There is nothing illegal in a corporation
acquiring the name or as in this case, the initials of
one of its shareholders. (Land Bank of the Philippines
v. CA, et al., G.R. No. 127181, 04 Sept. 2001)
Three-pronged Test to Determine the
Application of the Alter Ego or Instrumentality
Theory (C-F-H)
1. Control, not mere majority or complete stock
control, but complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
time no separate mind, will or existence of its
own (Instrumentality or Control test);
2. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act
in contravention of plaintiff’s legal right (Fraud
test); and
3. The aforesaid control and breach of duty must
have proximately caused the injury or unjust
loss complained of. (Harm test)
1. Instrumentality or Control Test
This test requires that the subsidiary be completely
under the control and domination of the parent. It
examines the parent corporation’s relationship with
the subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and its
affairs are so conducted as to make it a mere
instrumentality or agent of the parent corporation
such that its separate existence as a distinct
corporate entity will be ignored. It seeks to establish
whether the subsidiary corporation has no
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
autonomy and the parent corporation, though
acting through the subsidiary in form and
appearance, “is operating the business directly for
itself.”
2. Fraud Test
This test requires that the parent corporation’s
conduct in using the subsidiary corporation be
unjust, fraudulent, or wrongful. It examines the
relationship of the plaintiff to the corporation. It
recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way that
harms the plaintiff creditor. As such, it requires a
showing of “an element of injustice or fundamental
unfairness.”
3. Harm Test
This test requires the plaintiff to show that the
defendant’s control, exerted in a fraudulent, illegal,
or otherwise unfair manner toward it, caused the
harm suffered. A causal connection between the
fraudulent conduct committed through the
instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that,
unless the corporate veil is pierced, it would have
been treated unjustly by the defendant’s exercise of
control and improper use of the corporate form and,
thereby, suffer damages.
NOTE: Piercing the corporate veil based on the alter
ego theory requires the concurrence of the three
elements – (1) control, (2) fraud or fundamental
unfairness, and (3) harm or damage. The absence of
any of these elements prevents piercing the
corporate veil. (DBP v. Hydro Resources Contractors
Corp., G.R. Nos. 167603, 167561, & 167530, 13 Mar.
2013)
Piercing the Veil of Corporate Fiction On The
Basis Of Equity
Equity cases applying the piercing doctrine are what
are termed the "dumping ground," where no fraud
or alter ego circumstances can be culled by the
Court to warrant piercing.
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 Corporation Law
Specifically, the equity test can be applied when:
1. The corporate personality would be
inconsistent with the business purpose of the
legal fiction;
2. The piercing the corporate fiction is necessary
to achieve justice or equity for those who deal
in good faith with the corporation; or
3. The use of the separate juridical personality is
used to confuse legitimate issues.
Indications that a Subsidiary Corporation is a
Mere Instrumentality of its Parent Corporation
1. The parent corporation owns all or most of the
capital stock of the subsidiary;
2. The parent and subsidiary corporations have
common directors or officers;
3. The parent corporation finances the subsidiary;
4. The parent corporation subscribes to all the
capital stock of the subsidiary or otherwise
causes its incorporation;
5. The subsidiary has grossly inadequate capital;
6. The parent corporation pays the salaries and
other expenses or losses of the subsidiary;
7. The subsidiary has substantially no business
except with the parent corporation or no assets
except those conveyed to or by the parent
corporation;
8. In the papers of the parent corporation or in the
statements of its officers, the subsidiary is
described as a department or division of the
parent corporation, or its business or financial
responsibility is referred to as the parent
corporation’s own;
9. The parent corporation uses the property of the
subsidiary as its own;
10. The directors or executives of the subsidiary do
not act independently in the interest of the
subsidiary but take their orders from the parent
corporation;
11. The formal legal requirements of the subsidiary
are not observed. (PNB v. Ritratto Group, G.R.
No. 142616, 13 July 2001)
117
Piercing the Corporate Veil May Apply to Natural
Persons
When the Corporation is the Alter Ego of a
Natural Person – the piercing of the corporate veil
may apply to corporations as well as natural
persons involved with corporations. The "corporate
mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego
of a person or of another corporation."
Reverse Piercing of the Corporate Veil – from
American parlance of what is called reverse piercing
or reverse corporate piercing or piercing the
corporate veil "in reverse." As held in the U.S. Case,
C.F. Trust, Inc., v. First Flight Limited Partnership, "in
a traditional veil-piercing action, a court disregards
the existence of the corporate entity so a claimant
can reach the assets of a corporate insider. In a
reverse piercing action, however, the plaintiff seeks
to reach the assets of a corporation to satisfy claims
against a corporate insider. Reverse-piercing flows
in the opposite direction (of traditional corporate
veil-piercing) and makes the corporation liable for
the debt of the shareholders." (IAM/E v. Litton and
Company Inc., G.R. No. 191525, 13 Dec. 2017)
Two (2) Types of Reverse Piercing
1. Outsider reverse piercing occurs when a party
with a claim against an individual or
corporation attempts to be repaid with assets of
a corporation owned or substantially controlled
by the defendant.
2. Insider reverse piercing, the controlling
members will attempt to ignore the corporate
fiction in order to take advantage of a benefit
available to the corporation, such as an interest
in a lawsuit or protection of personal assets.
(IAM/E v. Litton and Company Inc., supra)
Q: Plaintiffs filed a collection action against X
Corporation. Upon execution of the court's
decision, X Corporation was found to be without
assets. Thereafter, the plaintiffs filed an action
against its present and past stockholder, Y
Corporation, which owned substantially all of
the stocks of X corporation. The two
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
corporations have the same board of directors
and Y Corporation financed the operations of X
corporation. May Y Corporation be held liable
for the debts of X Corporation? Why? (2001
BAR)
A: YES. Y Corporation may be held liable for the
debts of X Corporation. The doctrine of piercing the
veil of corporation fiction applies to this case. The
two corporations have the same board of directors,
Y Corporation owned substantially all of the stocks
of X Corporation, and Y Corporation controls the
finances of X Corporation. These facts justify the
conclusion that the latter is merely an extension of
the personality of the former, and that the former
controls the policies of the latter. An overall
appraisal of the circumstances presented by the
facts of the case, yields to the conclusion that the X
Corporation is merely an adjunct, business conduit
or alter ego, of Y Corporation and that the fiction of
corporate entities, separate and distinct from each,
should be disregarded. (CIR v. Norton & Harrison
Company, G.R. No. L‐17618, 31 Aug. 1964)
NOTE: There is no hard and fast rule when to apply
the doctrines of separate legal entity and piercing
the veil of corporate fiction. Each case must be
judged based on its own particular circumstances.
The undeniable yardstick though is that lacking any
harm or injury to another, or in the absence of
abuse of the legal fiction of the corporation, the
doctrine of separate legal entity stands. (Divina,
2020)
CLASSES OF CORPORATIONS
The following are the classes of corporations:
1. As to Existence of Shares of Stock:
a. Stock – one which has:
i. Capital stock divided into shares; and
ii. Are authorized to distribute to the
holders of such shares dividends or
allotments of the surplus profits on
the basis of the shares held. (Sec. 3,
RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
b. Nonstock – All other corporations not
classified as stock corporation are
nonstock corporations (Sec. 3, RCC). It is
one where no part of its income is
distributable as dividends to its members,
trustees, or officers (Sec. 86, RCC). These
corporations may be formed or organized
for charitable, religious, educational,
professional, cultural, fraternal, literary,
scientific, social, civic service, or similar
purposes. (Sec. 87, RCC)
2. As to Place of Incorporation:
a. Domestic – incorporated and organized
under the laws of the Philippines.
b. Foreign – formed, organized, or existing
under any laws other than those of the
Philippines and whose laws allow Filipino
citizens and corporations to do business in
its own country or state. (Sec. 140, RCC)
3. As to their Legal Status:
a. De jure – one that has fulfilled all the
requirements mandated by law and can
successfully resist a suit by the State to
challenge its existence. De jure means “a
matter of law” that validates the
corporation as a legal entity.
b. De facto – one organized with colorable
compliance with the requirements of a
valid law. Its existence cannot be inquired
collaterally. Such inquiry may be inquired
only by a direct attack by the State through
a quo warranto proceeding. (Sec. 19, RCC)
c. By Estoppel – exists when two or more
persons assume to act as a corporation
knowing it to be without authority to do
so. They are liable as general partners for
all debts, liabilities, and damages incurred
or arising as a result thereof: Provided,
however, that when any such ostensible
corporation is sued on any transaction
entered by it as a corporation or on any
tort committed by it as such, it shall not be
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 Corporation Law
allowed to use as a defense its lack of
corporate personality. (Sec. 20, RCC)
d. By Prescription – one which has exercised
corporate powers for an indefinite period
without interference on the part of the
sovereign power, e.g., Roman Catholic
Church. (Divina, 2020)
4. As to their Relationship of Management and
Control:
a. Holding Corporation – a corporation that
holds stocks in other companies for
purposes of control rather than for mere
investment.
b. Subsidiary Corporation – a company that
is owned or controlled by another
company, called the parent company.
c. Affiliates – two companies are affiliates
when one company owns less than the
majority of the voting stock of the other.
d. Parent Company – a corporation that
owns enough voting stock in another
company to control management and
operation by influencing or electing its
board of directors. Companies that
operate under this management are
deemed subsidiaries of the parent
company. (Divina, 2020)
5. As to whether they are for Public
(government) or Private Purpose or
Function: (2001, 2004 BAR)
a. Public – formed or organized for the
government of a portion of the State (like
cities and municipalities) for the purpose
of serving the general good and welfare.
(Aquino, 2014)
b. Private – one formed for some private
purpose, benefit, or end. It may either be a
stock or non-stock. (Ibid.)
119
6. Other Classifications:
a. Closed Corporation ‐ one whose AOI
provides that all of the corporation’s
issued stock of all classes, exclusive of
treasury shares, shall be held of record by
not more than a specified number of
persons, not exceeding twenty (20);
subject to specified restrictions on
transfers; and it shall not list in any stock
exchange or make any public offering of its
stocks of any class.
A corporation is “going private” when it is
adopting the features of a closed
corporation. (Divina, 2020)
b. Special Corporations – include
educational corporations and religious
corporations. (Secs. 105-107, RCC)
Religious corporations include
corporation sole and religious societies.
(Secs. 108, 114, RCC)
c. One-Person Corporation – a corporation
wherein all of the stocks are held directly
or indirectly by one person. It is not
necessarily illegal for as long as it follows
and observes the law throughout its
existence and conducts its business affairs
lawfully, otherwise, the doctrine of
piercing the veil may be applied in such a
case. (Divina, 2020; Sec. 116, RCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

entering into a subscription agreement,

B. DE FACTO CORPORATIONS VERSUS adopting by-laws, and electing directors.
CORPORATIONS BY ESTOPPEL
De Facto Corporation vs. De Jure Corporation

DE FACTO DE JURE
DE FACTO CORPORATION
One which actually
One created in strict or
exists for all practical
A de facto corporation is one that is organized with substantial conformity
purposes as a
colorable compliance with the requirements of with the mandatory
corporation, but which
incorporation under the law and allowed to exist statutory
has no legal right to
and exercise the powers of a corporation until its requirements for
corporate existence as
corporate existence is assailed by the State in a quo- incorporation.
against the State.
warranto proceeding. (Divina, 2021)
There is a colorable There is substantial
compliance with the compliance with the
Requisites of a De Facto Corporation (L-A-P)
requirements of the requirements of the
law creating the law creating the
1. Organized under a valid Law;
corporation. corporation.
As such, if the law under which it is Its right to exist as a
incorporated is declared unconstitutional, corporation cannot be
there is neither de jure nor de facto existence. successfully attacked
Can be attacked
For instance, if Congress enacts a law to create or questioned by any
directly but not
a private corporation, such corporation cannot party even in direct
collaterally.
be considered de facto because the law creating proceeding for that
it is unconstitutional. Congress can enact a law purpose by the State.
to create a corporation only if it is owned and (De Leon, 2010)
controlled by the government. (Divina, 2021) Stockholders enjoy exemption from personal
liability for corporate obligations.
2. Colorable Compliance – Bona fide Attempt in
good faith to form a corporation according to The Existence of a De Facto Corporation Cannot
the requirements of the law; and be Collaterally Attacked

The execution of the articles of incorporation
and adoption of bylaws, per se, are not enough
to warrant de facto existence. There is no bona
fide attempt to incorporate until the SEC at the
very least issues the certificate of incorporation
(Divina, 2021). The filing of articles of
incorporation and the issuance of the certificate
of incorporation are essential for the existence
of a de facto corporation. (Missionary Sisters of
Our Lady of Fatima v. Alzona, G.R. No. 224307, 06
Aug. 2018)
3. Actual Use – Use of corporate Powers.
The due incorporation of a de facto corporation shall
not be inquired into collaterally in any private suit
to which such corporation may be a party. Such
inquiry may be made by the Solicitor General in a
quo warranto proceeding. (Sec. 19, RCC)
Liabilities of Officers and Directors and/or
Trustees of a De Facto Corporation
The liabilities and penalties attending to officers
and directors/ trustees of a de jure corporation shall
be the same as those of a de facto corporation. This
includes the liability under the criminal law.

The corporation must have performed the acts Q: University Publishing Company (UPC),
which are peculiar to a corporation like through its president, entered into a contract
with Albert to publish the commentaries on the

UNIVERSITY OF SANTO TOMAS 120

2022 GOLDEN NOTES
 Corporation Law

Revised Penal Code. UPC published the be liable as general partners for all debts,
commentaries, but it did not remit the amount liabilities and damages incurred or arising as a
due to Albert. This prompted Albert to file a result;
collection suit. The RTC ruled against UPC. When
the Sheriff was about to implement the writ of 2. When any such ostensible corporation is sued
execution against the company, he discovered on any transaction entered by it as a
that UPC is not a registered corporation. corporation or on any tort committed by it as
Consequently, the president of UPC was such, it shall not be allowed to use as a defense
substituted in the writ of execution. The its lack of corporate personality; and
president invoked the separate legal
personality of the corporation as his defense. 3. One who assumes an obligation to an ostensible
corporation as such, cannot resist performance
a. Is UPC a de facto corporation? thereof on the ground that there was in fact no
b. Can the defense that UPC is a corporation by corporation. (Sec. 20, RCC)
estoppel be invoked by the president?
c. Who is liable for the debts of the NOTE: Where there is no third person involved and
corporation? the conflict arises only among those assuming the
form of a corporation who know that the
A: corporation has not been registered, there is NO
a. NO. UPC cannot be considered a de facto corporation by estoppel. (Lozano v. Santos, G.R. No.
corporation because it was not registered with 125221, 19 June 1997)
the SEC.
De Facto Corporation vs. Corporation by
b. NO. One who has induced another to act upon Estoppel
his willful misrepresentation that a corporation
was duly organized and existing under the law DE FACTO CORPORATION BY
cannot thereafter set up against his victim the CORPORATION ESTOPPEL
principle of corporation by estoppel. There is existence in There is no existence in
law. law.
c. The president who negotiated with Albert is The State reserves the
liable. A person acting or purporting to act on right to question its Quo warranto
behalf of a corporation which has no valid existence through a proceeding is NOT
existence assumes such privileges and quo warranto applicable.
obligations and becomes personally liable for proceeding.
contracts entered into or for other acts Stockholders in a de Stockholders are liable
performed as such agent. (Albert v. University facto corporation are as general partners for
Publishing Co., G.R. No. L-19118, 30 Jan. 1965) liable as a de jure all debts, liabilities, and
corporation. damages incurred.
CORPORATION BY ESTOPPEL
Q: On behalf of Ocean Quest Fishing Corporation
A corporation by estoppel is one that exists when
(Ocean Quest), Antonio Chua and Peter Yao
two or more persons assume to act as a corporation
entered into a contract for the purchase of
knowing it to be without authority to do so. (Divina,
fishing nets of various sizes from the Philippine
2021; Sec. 20, RCC)
Fishing Gear Industries, Inc. (PFGI) They
claimed that they were engaged in a business
Rules Governing a Corporation by Estoppel
venture with Lim Tong Lim, who however was
not a signatory to the agreement. The buyers
1. All persons who assume to act as a corporation
failed to pay for the fishing nets and the floats;
knowing it to be without authority to do so shall
hence, PFGI filed a collection suit against Chua,

121 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
Yao, and Lim Tong Lim. The suit was brought
against the three in their capacities as general
partners, on the allegation that Ocean Quest was
a nonexistent corporation.
The trial court ruled in favor of PFGI that Chua,
Yao and Lim are liable as general partners. Lim
contends that the Doctrine of Corporation by
Estoppel applies only to Yao and Chua. Lim
insists that only those who dealt in the name of
the ostensible corporation should be held
liable. Since his name does not appear on any of
the contracts and since he never directly
transacted with the Ocean Quest, he cannot be
held liable. Is Lim jointly liable with Chua and
Yao?
A: YES. Lim should be held liable jointly with Chua
and Yao. Unquestionably, Lim benefited from the
use of the nets found inside F/B Lourdes, the boat
which has earlier been proven to be an asset of the
partnership. Lim, Chua, and Yao decided to form a
corporation. Although it was never legally formed
for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting
parties in representation of it. Clearly, under the
law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to
be without valid existence, are held liable as general
partners. Technically, it is true that Lim did not
directly act on behalf of the corporation. However,
having reaped the benefits of the contract entered
into by persons with whom he previously had an
existing relationship, he is deemed to be part of said
association and is covered by the scope of the
Doctrine of Corporation by Estoppel. (Lim Tong Lim
v. Philippine Fishing Gear Industries, Inc., G.R. No.
136448, 03 Nov. 1999)
Q: Are all those who subscribed for the stock of
a proposed corporation which was never legally
formed liable as general partners?
A: The doctrine of corporation by estoppel does not
apply against a person who takes no part except to
subscribe for stock in the proposed corporation
which was never legally formed, and hence, cannot
be liable as a partner of those who engaged in
business under the name of the pretended
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
corporation. (Pioneer Insurance v. CA, G.R. No. 84197,
28 July 1989)
However, a passive subscriber who obtained benefit
from a contract entered into by others with whom
he previously had an existing relationship is
deemed to be part of said association and is covered
by the scope of the doctrine of corporation by
estoppel. (Lim Tong Lim v. PH Fishing Gear
Industries, supra in Divina, 2021)
Q: Francisco Co, Jr. sued Abante Tonite, a daily
tabloid of general circulation, and its publisher
and staff – claiming damages because of an
allegedly libelous article they published in an
issue. Macasaet, et al. moved, among others, to
drop Abante Tonite as a defendant by virtue of
its being neither a natural nor a juridical person
that could be impleaded as a party in a civil
action.
The RTC denied the motion, holding that
assuming “Abante Tonite” is not registered with
the SEC, it is deemed a Corporation by Estoppel
considering that it possesses attributes of a
juridical person, otherwise it cannot be held
liable for damages and injuries it may inflict to
other persons. The CA affirmed the RTC ruling.
Was the CA correct in upholding the inclusion of
Abante Tonite as a party defendant despite its
lack of juridical personality?
A: YES. The petitioners’ contention that Abante
Tonite could not be sued as a defendant due to its
not being either a natural or a juridical person
cannot be sustained. In rejecting the contention, the
CA categorized Abante Tonite as a corporation by
estoppel as the result of its having represented itself
to the reading public as a corporation despite its not
being incorporated. The non-incorporation of
Abante Tonite with the SEC was of no consequence,
for, otherwise, whoever of the public who would
suffer any damage from the publication of articles in
the pages of its tabloids would be left without
recourse. The SC cannot disagree with the CA,
considering that the editorial box of the daily tabloid
disclosed that although Monica Publishing
Corporation had published the tabloid on a daily
basis, nothing in the box indicated that Monica
122
 Corporation Law
Publishing Corporation had owned Abante Tonite.
(Macasaet, et al. v. Co, G.R. No. 156759, 05 June 2013)
Q: Who cannot invoke the doctrine of
corporation by estoppel?
A: The doctrine can only be invoked by the
aggrieved party who relied on the representations
by others that they are legally formed as a
corporation. It cannot be invoked by the one who
benefitted from the transaction.
In another case though, it was held that the doctrine
of corporation by estoppel is founded on principles
of equity and is designed to prevent injustice and
unfairness. It applies when a non-existent
corporation enters into contracts or dealings with
third persons. In which case, the person who has
contracted or otherwise dealt with the non-existent
corporation is estopped to deny the latter’s legal
existence in any action leading out of or involving
such contract or dealing. (Divina, 2021 citing
Missionary Sisters of Our Lady of Fatima v. Alzona,
supra)
Application of Doctrine of Corporation by
Estoppel in Reverse
While the doctrine is generally applied to protect
the sanctity of dealings with the public, nothing
prevents its application in the reverse, in fact the
very wording of the law which sets forth the
doctrine of corporation by estoppel permits such
interpretation. Such that a person who has assumed
an obligation in favor of a non-existent corporation,
having transacted with the latter as if it was duly
incorporated, is prevented from denying the
existence of the latter to avoid the enforcement of
the contract.
Jurisprudence dictates that the doctrine of
corporation by estoppel applies for as long as there
is no fraud and when the existence of the association
is attacked for causes attendant at the time the
contract or dealing sought to be enforced was
entered into, and not thereafter. (Missionary Sisters
of Our Lady of Fatima v. Alzona, G.R. No. 224307, 06
Aug. 2018)
123
C. CORPORATE POWERS
Kinds of Corporate Powers
1. Express Powers – granted by law, the
Corporation Code, and its Articles of
Incorporation or Charter, and administrative
regulations;
2. Inherent/Incidental Powers – not expressly
stated but are deemed to be within the capacity
of corporate entities; and
3. Implied/Necessary Powers – exists as a
necessary consequence of the exercise of the
express powers of the corporation or the
pursuit of its purposes as provided for in the
Charter.
1. HOW POWERS ARE EXERCISED
Q: Eliodoro Cruz was the former president of
Filport. During the general stockholders’
meeting, he wrote a letter to the corporation’s
Board of Directors questioning the board’s
creation of certain positions and their
corresponding monthly remuneration. Because
his letter was not heeded favorably, Cruz,
purportedly in representation of Filport and its
stockholders, filed with SEC a petition which he
describes as a derivative suit against the
incumbent members of Filport’s BOD, for
alleged acts of mismanagement detrimental to
the interest of the corporation and its
shareholders at large.
Did Filport’s BOD act within its powers in
creating the executive committee and the
positions of AVPs for Corporate Planning,
Operations, Finance and Administration, and
those of the Special Assistants to the President
and the Board Chairman, each with
corresponding remuneration?
A: YES. The governing body of a corporation is its
board of directors. Sec. 22 of the RCC provides that
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
unless otherwise provided in this Code, the Board of
directors or Trustees shall exercise the corporate
powers, conduct all business, and control all
properties of the corporation. Thus, with the
exception only of some powers expressly granted by
law to stockholders (or members, in case of non-
stock corporations), the board of directors (or
trustees, in case of non-stock corporations) has the
sole authority to determine policies, enter into
contracts, and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its
AOI, by-laws and relevant provisions of law. Verily,
the authority of the board of directors is restricted
to the management of the regular business affairs of
the corporation, unless more extensive power is
expressly conferred.
In the present case, the board’s creation of the
subject positions was in accordance with the regular
business operations of Filport as it is authorized to
do so by the corporation’s by-laws, pursuant to the
Corporation Code. (Filipinas Port Services, Inc., v. Go,
et al., G.R. No. 161886, 16 Mar. 2007)
Three (3) Levels of Control in the Corporate
Hierarchy
1. The board of directors – responsible for
corporate policies and the general
management of the business affairs of the
corporation;
2. The officers of the corporation – execution of
the policies laid down by the board, but in
practice often have wide latitude in
determining the course of business operations;
3. The stockholders – have the residual power
over fundamental corporate changes, like
amendments of the AOI. (Citibank, N.A. v. Chua,
G.R. No. 102300, 17 Mar. 1993)
GENERAL POWERS
Theory of General Capacity
Under the Theory of General Capacity, a corporation
holds such powers which are not prohibited or
withheld from it by general laws. (Divina, 2021)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The general powers of a corporation are the
following: (Su-Per-C-A-B-S-P-E-D-R-O)
1. To Sue and be sued;
2. To have Perpetual existence unless the
certificate of incorporation provides otherwise;
3. To adopt and use of Corporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its By-laws;
6. For stock corporations: issue and Sell stocks to
subscribers and treasury stocks; for non-stock
corporations: admit members;
7. To Purchase, receive, take, or grant, hold,
convey, sell, lease, pledge, mortgage and deal
with real and personal property, securities and
bonds subject to the Constitution and existing
laws;
8. To Enter into merger or consolidation, (To
enter into a partnership, joint venture, merger,
consolidation, or any other commercial
agreement with natural and juridical persons);
9. To make reasonable Donations, including those
for public welfare, or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
Provided, That no foreign corporation shall give
donations in aid of:
a. Any political party;
b. Candidate; or
c. Partisan political activity.
NOTE: It shall be unlawful for any foreigner,
whether judicial or natural person, to aid any
candidate or political party, directly or
indirectly, or take part in or influence in any
manner any election, or to contribute or make
any expenditure in connection with any
election campaign or partisan political activity.
(Sec. 81, Omnibus Election Code)
10. To establish pension, Retirement, and other
plans for the benefit of its directors, trustees,
officers, and employees – basis of which is the
Labor Code; and
11. To exercise Other powers essential or
necessary to carry out its purpose or purposes
as stated in the articles of incorporation. (Sec.
35, RCC)
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 Corporation Law
Limitation on Corporation’s Exercise of Acts of
Property of Ownership
The power of the corporation to exercise acts of
ownership over its assets and properties is limited
by the following:
1. The transaction of corporate property is
reasonably and necessarily required by the
lawful business of the corporation; and
2. The transaction is done within the limits
prescribed by law or Constitution. (Sec. 35(g),
RCC)
Commencement of the Power to Sue and be Sued
The power to sue and be sued commences upon
issuance by SEC of the Certificate of Incorporation.
The Power of the Corporation to Sue and be Sued
is Exercised by the Board of Directors
The power of the corporation to sue and be sued is
exercised by the board of directors. The physical
acts of the corporation, like the signing of
documents, can be performed only by natural
persons duly authorized for the purpose by
corporate by-laws or by a specific act of the board.
Absent the said board resolution, a petition may not
be given due course. (Esguerra, et al. vs Holcim
Philippines, Inc., G.R. No. 182571, 02 Sept. 2013)
If the real party in interest is a corporate body, an
officer of the corporation can sign the verification
against forum shopping so long as he has been duly
authorized by a resolution of its board of directors.
The court did not commit grave abuse of discretion
in dismissing the petition for lack of authority of the
officer who signed the certification of forum
shopping in representation of the corporation. (San
Miguel Bukid Homeowners Association, Inc. v. City of
Mandaluyong, et al., G.R. No. 153653, 02, Oct. 2009;
Republic v. Coalbrine International Philippines, et al.,
G.R. No. 161838, 07 Apr. 2010)
125
When Board Resolution is Required for the
Signing of the Verification and Certification
Against Forum Shopping
GR: The verification and certification against forum
shopping must be signed on behalf of the
corporation pursuant to a valid board resolution.
XPN: The following officers may sign even in the
absence of a board resolution:
1. Chairperson of the Board of Directors;
2. President;
3. General Manager;
4. Personnel Officer; or
5. Employment Specialist in labor cases.
These officers are in the position to verify the
truthfulness and correctness of the allegations in
the petition. (Mid Pasig Land and Development
Corporation v. Tablante, G.R. No. 162924, 04 Feb.
2010)
The chairperson and president of a corporation may
sign the verification and certification without need
of board resolution. Moreover, lack of authority of a
corporate officer to undertake an action on behalf of
the corporation may be cured by ratification
through the subsequent issuance of a board
resolution. (Jorgenetics Swine Improvement Corp. v.
Thick & Thin Agri-Products, Inc., G.R. Nos. 201044 &
222691, 5 May 2021)
Q: Steamship insures its members-shipowners
against "third party risks and liabilities" for
claims arising from (a) death or injury to
passengers; (b) loss or damage to cargoes; and
(c) loss or damage from collisions. Sulpicio
insured its fleet of inter-island vessels with
Steamship. One of these vessels, the M/V
Princess of the World, was gutted by fire
resulting in total loss of its cargoes. Sulpicio
claimed indemnity from Steamship. Steamship
denied the claim and subsequently rescinded
the insurance coverage.
Sulpicio filed a Complaint with the RTC against
Steamship. The RTC denied Steamship’s motion
to dismiss. Hence, Steamship assailed the trial
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
court’s orders and filed a Petition for Certiorari
with the Court of Appeals. Steamship's Petition's
Verification and Certification against forum
shopping was signed by its counsel. Did the
Verification and Certification against Forum
Shopping signed by Steamship's counsel
substantially comply with the requirements of
the Rules of Court?
A: YES. In case the petitioner is a private
corporation, the verification and certification may
be signed, for and on behalf of the corporation, by a
specifically authorized person, including its
retained counsel, who has personal knowledge of
the facts required to be established by the
documents.
In this case, Steamship's Petition's Verification and
Certification against forum shopping was signed by
its counsel. A Power of Attorney was appended to
the Petition, which purportedly authorized "Atty.
Charles Jay D. Dela Cruz or any of the partners of Del
Rosario & Del Rosario to sign the verification or
certification" against forum shopping of petitions
and appeals in appellate courts necessary in
representing and defending Steamship. It was
notarized, in accordance with the law of Bermuda
and authenticated by the Philippine consulate in
London, United Kingdom. However, a closer look
into the Power of Attorney reveals that the
signatory of the document was not identified. This
was pointed out by Sulpicio in its Comment.
Nonetheless, in Steamship’s reply, it attached two
Secretary's Certificates signed by Davis containing
excerpts of board resolutions showing Davis'
authority to execute the Power of Attorney on its
behalf, and Davis' reappointment as Corporate
Secretary, respectively. The Court holds that there is
substantial compliance with the rules on
verification and certification against forum
shopping. Steamship's subsequent submission of
the Secretary's Certificates showing Davis'
authority to execute the Power of Attorney in favor
of Del Rosario & Del Rosario cured the defect in the
verification and certification appended to the
petition. Under the circumstances of this case,
Steamship's counsel would be in the best position to
determine the truthfulness of the allegations in the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
petition and certify on non-forum shopping
considering that "it has handled the case for
Steamship since its inception." (Steamship Mutual
Underwriting Association v. Sulpicio Lines, G.R. No.
196072, 20 Sept. 2017)
An Unregistered Corporation has No Right to Sue
or be Sued for Want of Corporate Personality
“Lideco Corporation” had no personality to
intervene since it had not been duly registered as a
corporation. If petitioner “Laureano Investment &
Development Corporation” legally and truly wanted
to intervene, it should have used its corporate name
as the law requires and not another name which it
had not registered. (Laureano Investment &
Development Corp. v. CA, G.R. No. 100468, 06 May
1997)
Limitations of the Corporation in Dealing with
Property
1. It must be in the furtherance of the purpose for
which the corporation was organized;
2. Constitutional limitations – Private
corporations or associations may not hold such
alienable lands of the public domain except by
lease; (Sec. 3, Article XII, 1987 Constitution)
With regard to private land, 60% of the
corporation must be owned by the Filipinos,
same with the acquisition of a condominium
unit.
NOTE: No law disqualifies a person from purchasing
shares in a landholding corporation even if the latter
will exceed the allowed foreign equity, what the law
disqualifies is the corporation from owning land. (JG
Summit Holdings, Inc. v. CA, G.R. No. 124293, 31 Jan.
2005)
3. Special law – subject to the provisions of the
Bulk Sales Law and law against monopoly,
illegal combination, or restraint of trade.
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 Corporation Law

Requisites for a Valid Donation (P-A-I-R) 9. Enter into management contract with another
corporation;(Sec. 43, RCC) and
1. The donation must be Reasonable; 10. Amend Articles of Incorporation. (Sec. 15, RCC)
2. It must be for valid Purposes including public 11. Elect, Appoint, and Remove Directors and
welfare, hospital, charitable, cultural, scientific, Corporate Officers. (Secs. 23, 24, and 27, RCC)
civic, or similar purposes; 12. Create Executive Committees and Special
3. The donation must bear a reasonable relation to Committees. (Sec 34, RCC)
the corporation’s Interest and must not be so 13. Adopt and Amend Bylaws. (Secs. 45 and 46, RCC)
remote and fanciful; and 14. Enter into merger and consolidation. (Sec. 75,
4. For foreign corporations, it must not be an Aid RCC)
in any: 15. Apply for voluntary dissolution. (Secs. 134 and
a. Political party; 135, RCC)
b. Candidate; or
c. Partisan political activity. (Divina, 2020) Power to Extend or Shorten Corporate Term

Implied Powers of a Corporation

Procedural Requirements in Extending or
Shortening Corporate Term
A corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter
1. Majority vote of the Board of Directors or Board
but has the power to do what is reasonably
of Trustees;
necessary or proper to promote the interest or
welfare of the corporation. (NAPOCOR v. Vera, G.R.
2. Ratification by shareholders representing at
No. 83558, 27 Feb. 1989)
least 2/3 of the outstanding capital stock (OCS),
or by at least 2/3 of the members in case of non-
SPECIFIC POWERS
stock corporation;

Theory of Specific Capacity

3. Written notice of the proposed action and of the
time and place of the meeting shall be
Under the Theory of Specific Capacity, a corporation
addressed to each stockholder or member at his
cannot exercise powers except those expressly or
place of residence as shown on the books of the
impliedly given to it. (Divina, 2021)
corporation and deposited to the addressee in
the post office with postage prepaid, or served
The specific powers of a corporation are the
personally or when allowed in the bylaws or
following:
done with the consent of the stockholder, sent
electronically in accordance with the rules and
1. Power to extend or shorten corporate term;
regulations of the Commission on the use of
(Sec. 36, RCC)
electronic data messages;
2. Increase or decrease capital stock; (Sec. 37, RCC)
3. Incur, create, or increase bonded indebtedness;
4. Copy of the amended AOI shall be submitted to
(Sec. 37, RCC)
the SEC for its approval; (Sec. 36, RCC)
4. Deny pre-emptive right; (Sec. 38, RCC)
5. Sell, dispose, lease, encumber all or
5. In case of banks, banking, and quasi-banking
substantially all of corporate assets; (Sec. 39,
institutions, preneed, insurance and trust
RCC)
companies, NSSLAS, pawnshops, and other
6. Purchase or acquire own shares; (Sec. 40, RCC)
financial intermediaries, a favorable
7. Invest corporate funds in another corporation
recommendation of appropriate government
or business or for other purpose other than
agency; (Sec. 16, RCC)
primary purpose; (Sec. 41, RCC)
8. Declare dividends; (Sec. 42, RCC)

127 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

6. The extension must be done during the lifetime Power to Increase or Decrease Capital Stock or
of the corporation not earlier than 3 years prior Incur, Create, Increase Bonded Indebtedness
to the expiry date unless there is justifiable
reason for an earlier extension (Sec. 11, RCC)
Procedural Requirements in Increasing or
Decreasing Capital Stock
Q: What is the effect of the failure of the
corporation to extend its corporate term?
1. Approved by majority vote of the Board of
Directors;
A: In the case of PNB v. CFI of Rizal, Pasig (G.R. No.
63201, 27 May 1992), the Supreme Court ruled that
2. Approved by stockholders representing at least
upon the expiration of the period fixed in the AOI, in
2/3 of the OCS;
the absence of compliance with the legal requisites
for the extension of the period, the corporation
3. Written notice of the time and place of the
ceases to exist and is dissolved ipso facto.
stockholder’s meeting and the purpose of the
said meeting must be sent to the stockholders
The automatic dissolution of the corporation is
at their places of residence as shown in the
no longer applicable under the RCC given the
books of the corporation and served on the
option available to the corporation to revive the
stockholders personally or through electronic
corporate term (Sec. 11, RCC). Since the period of
means recognized in the corporation’s bylaws
revival is not indicated in the RCC, the option may
and/or the Commission’s rules as a valid mode
be exercised within a reasonable period, but prior to
for service of notices;
the dissolution and liquidation of the corporation.
What is a reasonable period is for the SEC to
4. A certificate in duplicate must be signed by a
determine. (Divina, 2021)
majority vote of the directors of the corporation
and countersigned by the chairperson and the
Remedy of the Stockholder Not in Favor of
secretary of the stockholders’ meeting, setting
Extending or Shortening the Corporate Term
forth:

The stockholder not in favor of extension of the

a.
corporate term may exercise his appraisal right,
that is, he may get out of the corporation and
b.
demand for the payment of the fair value of his
shares subject to the conditions specified in Sec. 80
c.
of the RCC. (Ibid.)
A stockholder may also exercise appraisal right in
case of shortening of the corporate term. While Sec.
36 of the RCC refers to the remedy of appraisal right
only in case of extension of corporate term, Sec. 80
of the RCC also provides for the same remedy in case
a stockholder votes against the shortening of
corporate term. (Ibid.)
d.
e.
That the requirements of Sec. 37 of the RCC
have been complied with;
The amount of increase or decrease of the
capital stock;
In case of an increase of the capital stock,
the amount of capital stock or number of
shares of no par stock actually subscribed,
the names, nationalities and residences of
the persons subscribing, the amount of
capital stock or number of no par stock
subscribed by each, and the amount paid by
each on his subscription in cash or
property, or the amount of capital stock or
number of shares of no par stock allotted to
each stockholder if such increase is for the
purpose of making effective stock dividend
authorized;
Any bonded indebtedness to be incurred,
created, or increased;
The amount of stock represented at the
meeting; and

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2022 GOLDEN NOTES
 Corporation Law
f. The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating, or increasing of any
bonded indebtedness. (Sec. 37, RCC)
Prior to the approval of the SEC of the increase in the
authorized capital stock, such payments cannot yet
be deemed part of the corporation’s paid-up capital,
technically speaking, because its capital stock has
not yet been legally increased. Such payments
constitute deposits on future subscriptions, money
which the corporation will hold in trust for the
subscribers until it files a petition to increase its
capitalization and a certificate of filing of increase of
capital stock is approved and issued by the SEC.
(Central Textile Mills, Inc. v. NWPC, et al., G.R. No.
104102, 07 Aug. 1996)
Additional Requirement with Respect to
Increase of Capital Stock – Treasurer’s Affidavit
(25%-25% Rule)
The application to be filed with the SEC shall be
accompanied by the sworn statement of the
treasurer of the corporation, showing that at least
25% of the increase in the capital stock was
subscribed and that at least 25% of the said amount
has been paid either in actual cash to the
corporation or that property, the valuation of which
is equal to 25% of the subscription. (Sec. 37, RCC)
Ways of Effecting the Increase or Decrease of the
Capital Stock
By increasing or decreasing the:
1. Number of shares and retaining the par value;
2. Par value of existing shares and retaining the
number of shares; or
3. Number of shares as well as the par value.
NOTE: The following will result to decrease in
capital stock, provided the shares are cancelled or
retired thereafter:
1. Redemption of redeemable shares; (Sec. 8, RCC)
2. Purchase of own shares; (Sec. 40, RCC)
3. Cancelling shares which have not yet been
issued.
129
Limitation on Power to Decrease Authorized
Capital Stock
No decrease in the capital stock shall be approved
by the Commission if its effect shall prejudice the
rights of corporate creditors. (Sec. 37, RCC)
Q: If the subscribed capital stock is P60,000,000
divided into 60,000,000 shares with par value of
Php 1.00 per share and the paid-up capital stock
is Php 50,000,000 divided into 50,000,000
shares with par value of P 1.00 per share, can the
corporation reduce the capital stock to Php
50,000,000?
A: NO, the capital stock of the corporation may be
decreased only if it will not result in prejudice to
corporate creditors. In this case, the reduction of the
capital stock to 50,000,000 will mean the release or
condonation of the 10,000,000 unpaid subscription,
thereby causing prejudice to the creditors as
subscriptions to the capital stock are funds held in
trust for their benefit under the trust fund doctrine.
(Divina, 2021)
The Board of Directors may Issue Additional
Shares of Stock Without Stockholder Approval
A stock corporation is expressly granted the power
to issue or sell stocks. The power to issue stocks is
lodged with the Board of Directors and no
stockholders’ meeting is required to consider it
because additional issuance of stock (unlike
increase in capital stock) does not need approval of
the stockholders. What is only required is the board
resolution approving the additional issuance of the
shares. The corporation shall also file the necessary
application with the SEC to exempt these from the
registration requirements under the SRC. (Majority
Stockholders of Ruby Industrial Corp. v. Miguel Lim
and Minority Stockholders of Ruby Industrial Corp.,
G.R. Nos. 165887 & 165929, 06 June 2011)
Q: The stockholders of People Power, Inc. (PPI)
approved two resolutions in a special
stockholders' meeting:
1. Resolution increasing the authorized capital
stock of PPI; and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

2. Resolution authorizing the Board of Registration of the Bonds Issued by the

Directors to issue, for cash payment, the new
shares from the proposed capital stock
increase in favor of outside investors who
are non‐stockholders.
The foregoing resolutions were approved by
stockholders representing 99% of the total
outstanding capital stock. The sole dissenter
was Jimmy Morato who owned 1% of the stock.
Corporation
Bonds issued by a corporation shall be registered
with the SEC which shall have the authority to
determine the sufficiency of the terms thereof. (Sec.
37, RCC)
Power to Deny Pre-emptive Right

Pre-emptive Right
a. Are the resolutions binding on the
corporation and its stockholders including
All stockholders shall enjoy the pre-emptive right to
Jimmy Morato, the dissenting stockholder?
subscribe to all issues or disposition of shares of any
b. What remedies, if any, are available to
class in proportion to their present shareholdings,
Morato? (1998 BAR)
unless such right is denied by the articles of
incorporation or an amendment thereto. (Sec. 38,
A:
RCC)
a. The resolutions are not binding on the
corporation and its stockholders including
This means that except in the cases provided by law,
Jimmy Morato. While these resolutions were
shares of stock of the corporation should first be
approved by the stockholders, there is no
offered to the stockholders prior to any offer to non-
showing that directors' approval, which is
stockholders. (2019 BAR)
required by law, exists.

Purpose of Pre-emptive Right

b. Jimmy Morato can petition the Securities and
Exchange Commission to declare the two (2)
The purpose of pre-emptive right is to enable the
resolutions, as well as any and all actions taken
shareholder to retain his proportionate control in
by the Board of Directors thereunder, null and
the corporation and to retain his equity in the
void.
surplus.

Bonded Indebtedness
NOTE: Pre-emptive right shall not extend to shares
issues in compliance with laws requiring stock
It is a borrowing by the corporation which is long
offerings or minimum stock ownership by the
term in nature involving a large number of lenders
public; or to shares issued in good faith with the
and secured by the encumbrance on corporate
approval of the stockholders representing two-
assets. Since bonds are securities, they should also
thirds (2/3) of the OCS, in exchange for property
be registered with the SEC. (Divina, 2020)
needed for corporate purposes or in payment of a
previously contracted debt; (Sec. 38, RCC)
NOTE: The requirements for the power to incur,
create or increase bonded indebtedness is also the
Pre-emptive Right is Available on the Re-
same with the power to increase or decrease capital
issuance of Treasury Shares
stock, except that this power may also be exercised
by a non-stock corporation.
Since Sec. 38 of the RCC uses the phrase “all issues
or disposition of shares of any class”, pre-emptive
right extends not only to the issuance of new shares
resulting from an increase in capital stock but also
to the issuance of previously subscribed shares
which form part of the existing authorized capital

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2022 GOLDEN NOTES
 Corporation Law

stock, as well as to the disposition of treasury appraisal right as such action restricts his rights as
shares. (Divina, 2020) a stockholder. (Sec. 80(a), RCC)

Pre-emptive Right may be Waived (2019 BAR) Non-Existence of Pre-Emptive Right does NOT
Bar Challenge to Validity of Issuance of
1. The pre-emptive right may be waived by the Additional Shares if done in Breach of Trust
stockholder. However, the waiver should be given
individually by the stockholder concerned or by Even if pre-emptive right does not exist either
another by way of Special Power of Attorney. Being because the issue comes within the exceptions in
a personal right, the waiver cannot be waived by the Sec. 38, RCC or because it is denied in the AOI, an
corporation itself through a stockholders’ issue of shares may still be objectionable if the
resolution. (SEC Opinion, 12 Dec. 1994) directors acted in breach of trust and their primary
2. purpose is to perpetuate or shift control of the
3. A stockholder cannot be forced to waive the right corporation or to “freeze out” the minority interest.
even if the majority of the stockholders opt to waive The issuance of unissued shares out of the original
it. (SEC Opinion No. 08-08, 31 Mar. 2008) authorized capital stock pursuant to a rehabilitation
plan the propriety or validity of which was on
NOTE: If the board resolution approving the question by the minority stockholders and
issuance of shares prescribes a certain number of subsequently disapproved by the Supreme Court
days to exercise pre-emptive right and the amounts to unlawful dilution of the minority
stockholder fails to exercise such right within the shareholdings. (Majority Stockholders of Ruby
fixed period, the stockholder is deemed to have Industrial Corp. v. Miguel Lim and Minority
impliedly waived his right. (Divina, 2020) Stockholders of Ruby Industrial Corp., supra; Divina,
2014)
Q: X Corporation has already issued the 1000
originally authorized shares of the corporation Pre-emptive Right vs. Right of First Refusal
so that its Board of Directors and stockholders
wish to increase X's authorized capital stock. RIGHT OF FIRST
PRE-EMPTIVE RIGHT
After complying with the requirements of the REFUSAL
law on increase of capital stock, X issued an Description
additional 1000 shares of the same value.
Assume that stockholder A presently holds 200 Right to subscribe to all
out of the 1000 original shares. Would A have a issuance or
Right to purchase
pre‐emptive right to 200 of the new issue of dispositions of shares
shares of a
1000 shares? Why? of the corporation even
stockholder.
to the subsequent sale
A: YES. A would have a pre‐emptive right to 200 of of treasury stocks.
the new issue of 1000 shares. A is a stockholder of
record holding 200 shares in X Corporation. To What does it Pertain
According to the RCC, each stockholder has the pre‐
Pertains to Pertains to the sale of
emptive right to all issues of shares made by the
unsubscribed portion the stocks already
corporation in proportion to the number of shares
of the authorized owned by another
he holds on record in the corporation.
capital stock. stockholder.

NOTE: A stockholder whose pre-emptive right is Against Whom is it Exercised

violated may maintain an action to compel the
corporation to give him that right. If the denial is by Right exercised against Right exercised against
amendment to the AOI, he may exercise his the corporation. a co-stockholder.

131 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

Effect of the Absence of Express into any transaction authorized by this section. (Sec.
Provision in the AOI 39, RCC)

May be exercised even Can only be exercised Substantially All of Corporate Assets
when there is no when so provided in
express provision in the AOI, by-laws and A sale or other disposition shall be considered shall
the AOI or amendment printed in the stock be deemed to cover substantially all the corporate
thereto. certificate. property and assets if in the process thereof, the
corporation would be rendered:
Treasury Shares
1. Incapable of continuing the business; or
It includes treasury Does not include
2. Incapable of accomplishing the purpose for
shares. treasury shares.
which it was incorporated. (Sec. 39, RCC)

Power to Sell or Dispose Corporate Assets Instances When Approval of Stockholders or

Members is NOT Required

Procedural Requirements for Sale, Lease,

1. If sale is necessary in the usual and regular
Exchange, Mortgage, Pledge, and any Other
course of business; or
Disposition (Sa-L-E-M-P-O) of All or
2. If the proceeds of the sale or other disposition
Substantially All of Corporate Assets
of such property and assets are to be
appropriated for the conduct of the remaining
1. Majority vote of the BOD or BOT;
business.

2. Approval by stockholders representing at least

Abandonment of the Plan for SaLEMPO Even
2/3 of the OCS, or by at least 2/3 of the
After Approval of the Stockholders or Members
members in case of nonstock corporation; and
The BOD, in its discretion, may abandon the plan for
3. Written notice of the proposed action and of the
SaLEMPO even after such authorization or approval
time and place of the meeting addressed to each
by the stockholders, subject to the rights of third
stockholder or member at his place of residence
parties under any contract relating thereto, without
as shown on the books of the corporation and
further action or approval by the stockholders or
deposited to the addressee in the post office
members. (Sec. 39, RCC)
with postage prepaid, served personally, or
when allowed by the bylaws or done with the
Nell Doctrine (2017 BAR)
consent of the stockholder, sent electronically:
Provided, That any dissenting stockholder may
GR: Where one corporation sells or otherwise
exercise the right of appraisal under the
transfers all of its assets to another corporation, the
conditions provided in this Code. (Sec. 39, RCC)
latter is not liable for the debts and liabilities of the
transferor.
NOTE: The sale of the assets shall be subject to the
provisions of existing laws on illegal combinations
XPNs: The transferee of corporate assets or
and monopolies, including R.A. No. 10667,
property is liable for the debts of the transferor in
otherwise known as the “Philippine Competition
case of:
Act.”
1. Express assumption of liability - where the
Further, in case of non-stock corporations, where
purchaser expressly or impliedly agrees to
there are no members with voting rights, the vote of
assume such debts;
at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter

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 Corporation Law
2. Transaction amounts to a consolidation or
merger of the corporations - The surviving or
the consolidated corporation shall possess all
the rights, privileges, immunities and franchises
of each constituent corporation; and all real or
personal property, all receivables due on
whatever account, including subscriptions to
shares and other choses in action, and every
other interest of, belonging to, or due to each
constituent corporation, shall be deemed
transferred to and vested in such surviving or
consolidated corporation without further act or
deed; (Sec. 79 (d), RCC)
3. Business Enterprise Transfer – where the
purchasing corporation is merely a provisions of the Bulk Sales Law must be
continuation of the selling corporation; and
4. Entered Fraudulently - Where the transaction
is entered into fraudulently in order to escape
liability for such debts. (Nell v. Pacific Farms,
G.R. No. L-20850, 29 Nov. 1965)
Q: Divine Corporation, engaged in the
manufacture of garments for export, was able to
obtain loans from individuals and financing
institutions. However, due to the drop in the
demand for garments in the international
market, Divine Corporation could not meet its
obligations. It decided to sell all its equipment
such as sewing machines, permapress machines,
high-speed sewers, cutting tables, ironing
tables, etc., as well as its supplies and materials
to Top Grade Fashion Corporation, its
competitor.
a. How would you classify the transaction?
b. Can Divine Corporation sell aforesaid items
to its competitor, Top Grade Fashion
Corporation? What are the requirements to
validly sell the items? Explain. (2005 BAR)
A:
a. The transaction is deemed classified as a sale of
all or substantially all of the corporate assets
because the corporation would be rendered
incapable of continuing the business or
133
accomplishing the purpose for which it was
incorporated.
b. YES. The law does not prohibit sale of all or
substantially all of corporate assets to
competitor-company provided said sale is
subject to laws against illegal combination,
monopoly, or restraint of trade and Bulk Sales
Law. The facts did not state that the
competitor-company lies within the
restrictions provided for by law. For the
transaction to be valid, it needs a majority vote
of its board of directors and approval of the
stockholders representing at least 2/3 of
outstanding capital stock. Further, the
complied with:
a. The seller must provide the buyer with a
verified list containing the name of the
creditors, their addresses, amounts owing
to each of them, and the respective
maturity dates;
b. A full detailed inventory of the properties
or assets to be sold, including their cost or
acquisition price; and
c. The list of inventory must be filed with the
DTI.
Where an asset constitutes the only property of the
corporation, its sale to a 3rd party is a sale or
disposition of all the corporate property and assets
of the corporation falling squarely within the
contemplation of Sec. 39 of the RCC. Hence, for the
sale to be valid, the majority vote of the legitimate
Board of Trustees, concurred in by the vote of at
least 2/3 of the bona fide members of the
corporation should have been obtained. (Islamic
Directorate of the Philippines, et al., v. CA, G.R. No.
117897, 14 May 1997)
Power to Acquire Own Shares
Q: May a corporation acquire its own shares of
stock?
A: Ordinarily, a stock corporation has no power to
acquire its own shares as it is illogical for the
corporation to be its own stockholder. Moreover,
the funds of the corporation should be devoted to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
attain the purposes of incorporation. However, the
RCC allows the corporation to acquire or purchase
its own shares in certain instances. (Divina, 2020)
Instances When a Corporation May Acquire its
Own Shares (1991, 1992, 2005 BAR)
1. To eliminate fractional shares arising out of
stock dividends; (Sec. 40, RCC)
2. To collect or compromise an indebtedness to
the corporation, arising out of unpaid
subscription, in a delinquency sale and to
purchase delinquent shares sold during said
sale; (Ibid.)
3. To pay dissenting or withdrawing stockholders;
(Ibid.)
4. To acquire treasury shares; (Sec. 9, RCC)
5. To acquire redeemable shares; (Sec. 8, RCC)
6. To effect a decrease of capital stock; (Sec. 37,
RCC) and
7. In close corporations, when there is a deadlock
in the management of the business, the SEC may
order the purchase at their fair value of the
shares of any stockholder by a corporation (Sec.
103 par. 1(d), RCC)
Rule in Acquisition of Own Shares
GR: The corporation may only acquire its own
stocks if there are unrestricted retained earnings
(URE).
XPNs: (R-D-L-D)
1. Redemption of redeemable shares;
2. Donation of shares to the corporation;
3. Levy/garnishment of shares to satisfy the
judgment in favor of the corporation;
4. Conveyance of shares to the corporation in
payment of a Debt. (Divina, 2020)
Unrestricted Retained Earnings (URE)
Unrestricted Retained Earnings represent the
amount of accumulated profits and gains realized
out of the normal and continuous operations of the
company after deducting therefrom distributions of
stockholders and transfers to capital stock or other
accounts, and which are:
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
1. Not appropriated by its BOD for corporate
expansion projects or programs;
2. Not covered by a restriction for dividend
declaration under a loan agreement; and
3. Not required to be retained under special
circumstances obtaining in the corporation
such as when there is a need for a special
reserve for probable circumstances. (SEC
Circular No. 11, Series of 2008)
Guidelines for Acquisition of Own Shares
1. The capital of the corporation must not be
impaired. There shall be URE’s to purchase the
shares.
2. Legitimate or proper corporate objective is
advanced.
3. Condition of the corporate affairs warrants it.
4. Transaction is designed and carried out in good
faith.
5. Interest of creditors is not impaired, that is, the
same is not violative of the trust fund doctrine.
(Sec. 41, SEC Opinions, 12 Oct. 1992, 11 Sept.
1985, and 11 Apr. 1994)
Trust Fund Doctrine
The requirement of unrestricted retained earnings
to cover the share is based on the trust fund doctrine
which means that the capital stock, property, and
other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors. The
reason is that the creditors of a corporation are
preferred over the stockholders in the distribution
of corporate assets. (Boman Environmental
Development Corp v. CA, G.R. No. 77860, 22 Nov.
1988)
See also discussion on Trust Fund Doctrine – page
145.
134
 Corporation Law

Power to Invest Corporate Funds in A:

Another Corporation or Business a. Since a powerplant project and a concrete road
project are neither primary purposes nor
reasonably necessary for the accomplishment
Statutory Requirements for Investing In
thereof, majority votes of the board of directors
Another Corporation, Business, or Purpose
plus the ratification of the stockholders
Other Than Primary Purpose (1995, 1996 BAR)
representing 2/3 of the outstanding capital
stock are needed.
1. Approval by the majority vote of the BOD or
BOT;
On the other hand, quarry operations for
limestone are reasonably necessary or
2. Ratification by stockholders representing at
incidental to attain the primary purpose of the
least 2/3 of the OCS or by at least 2/3 of the
corporation, i.e. the manufacture of cement.
members in case of non-stock corporations;
Hence, only the majority approval of the board
of directors is needed. The ratification by the
3. Ratification must be made at a meeting duly
stockholders is no longer necessary.
called for the purpose; and

b. Notice of the proposed investment and the time

4. Notice of the proposed investment and the time
and place of the meeting shall be addressed to
and place of the meeting shall be addressed to
each stockholder or member at the place of
each stockholder or member at the place of
residence as shown in the books of the
residence as shown in the books of the
corporation and deposited to the addressee in
corporation and deposited to the addressee in
the post office with postage prepaid, served
the post office with postage prepaid, served
personally, or sent electronically in accordance
personally, or sent electronically in accordance
with the rules and regulations of the
with the rules and regulations of the
Commission on the use of electronic data
Commission on the use of electronic data
message, when allowed by the bylaws or done
message, when allowed by the bylaws or done
with the consent of the stockholders. (Sec. 41,
with the consent of the stockholders. (Sec. 41,
RCC)
RCC)

In the case of pawnshops organized as corporations

NOTE: Any dissenting stockholder shall have
and partnerships, they may be allowed to engage in
appraisal right as provided in the RCC. Ratification
ancillary activity of directly purchasing or selling
of stockholders is not needed where the investment
goods or articles. The Pawnshop Regulation Act
by the corporation is reasonably necessary to
contains no prohibition to engage in ancillary
accomplish its primary purpose as stated in the AOI.
activities. Hence, by implication, their scope may be
extended to other unrelated business unless clearly
Q: Stikki Cement Co. was organized primarily for
prohibited by the said Act.
cement manufacturing. Anticipating substantial
profits, its President proposed that Stikki invest
The only requirement is that the person or entity
in: a) a powerplant project; b) a concrete road
engaged at the same time in other business not
project; and c) quarry operations for limestone
directly related or not incidental to pawnshop
in the manufacture of cement.
business, shall keep such business distinct and
separate from his pawnshop operations. (SEC
a. What corporate approvals or votes are
Opinion, 28 Mar. 1985)
needed for the proposed investments?
Explain.
b. Describe the procedure in securing these
approvals. (1992 BAR)

135 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
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Power to Declare Dividends Form of Dividends

1. Cash
Dividends
2. Stock
3. Property
Dividends are corporate profits allocated, lawfully
declared, and ordered by the directors to be paid
Cash Dividends vs. Stock Dividends
proportionately to the stockholders in the form of
cash, property, or stocks. (Divina, 2020)
CASH DIVIDENDS STOCK DIVIDENDS
As to Where it Forms Part
Q: Are profits the same as dividends?
Part of general fund. Part of capital.
A: Profits are the sources of dividends. Profits are
As to Cash Outlay
dividends only when they have been set aside for
distribution to stockholders under the conditions Results in cash
No cash outlay.
specified by law. outlay.
As to Levy by Corporate Creditors
Profits belong to the corporation while dividends
once declared, belong to the stockholder. (Divina, Once issued, can be levied
2020; 2005 BAR) Not subject to levy by creditors of the
by corporate corporate stockholder
Q: Under what circumstances may a corporation creditors. because they are part of
declare dividends? (2005 BAR) corporate asset.

A: A corporation may declare dividends when there As to how Approvals Needed

are unrestricted retained earnings, a resolution of Declared only by the Declared by the board
the Board of Directors, and in case of stock board of directors at with the concurrence of
dividends, the declaration must likewise be its discretion. the stockholders
approved by the stockholders representing at least (majority of the representing at least 2/3
two-thirds (2/3) of the outstanding capital stock. quorum only, not of the outstanding capital
majority of all the stock at a regular/special
Q: During the annual stockholders meeting, board) meeting.
Riza, a stockholder proposed that a part of the
corporation’s unreserved earned surplus be As to Effect on Corporate Capital
capitalized, and stock dividends be distributed
Does not increase Corporate capital is
to the stockholders, arguing that as owners of
the corporate capital increased.
the company, the stockholders, by a majority
vote, can do anything. As chairman of the As to whether Declaration creates Debt
meeting, how would you rule on the motion to Its declaration
declare stock dividends? (1991, 2001 BAR) creates a debt from
No debt is created by its
the corporation to
declaration.
A: As the chairman of the meeting, I would rule each of its
against the motion considering that a declaration of stockholders.
stock dividends should initially be taken by the BOD As to Taxability
and thereafter to be concurred in by the vote of the If received by
stockholders representing 2/3 of the outstanding individual: subject to Not subject to tax
capital stock (RCC, Sec. 42). The stockholders cannot tax; Whether received by
compel the corporation to declare dividends as the If received by individual or a
determination thereof rests with the sound corporation: not corporation.
discretion of the board (business judgment rule). subject to tax.

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 Corporation Law

As to Revocation Q: Can the board be compelled to declare

Can be revoked despite
Cannot be revoked
announcement but before
after announcement.
issuance.
As to Application on Unpaid Balance
Can be withheld until
Applied to the
payment of unpaid
unpaid balance if
balance if delinquent
delinquent shares.
shares.
NOTE: Declaration of cash dividends may not be
revoked since, upon declaration, a creditor-debtor
relationship is established between the stockholder
and the corporation. Hence, the debtor-corporation
is bound to make good its obligation to the creditor-
stockholder to pay the cash dividends. Stock
dividends may be revoked even after declaration
but prior to the actual issuance of shares because
what consummates stock dividend is not the
declaration but the share issuance.
Q: From what funds are cash and stock dividends
sourced? Explain why. (2005 BAR)
A: Dividends either cash or stock dividend must be
declared out of unrestricted retained earnings
because of the Trust Fund Doctrine. The Trust Fund
Doctrine provides that subscriptions to the capital
stock of a corporation constitute a fund to which the
creditors have the right to look for the satisfaction
of their claims. (Ong v. Tiu, G.R. No. 144476, 18 Apr.
2003) Thus, dividends must never impair the
subscribed capital stock.
dividends every year?
A: NO. Declaration of dividends is discretionary
upon the board. Dividends are payable only when
there are profits earned by the corporation and as a
general rule, even if there are existing profits, the
Board of Directors has the discretion to determine
whether or not dividends are declared. (Republic
Planters Bank v. Agana, G.R. No. 51765, 03 Mar. 1997)
Prohibition Imposed by Law on UREs of a Stock
Corporation
GR: Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock.
XPNs: (2001 BAR)
1. When justified by definite corporate
expansion projects or programs approved by
the board of directors;
2. When the corporation is prohibited under any
loan agreement with any financial institution
or creditor, whether local or foreign, from
declaring dividends without its/his consent,
and such consent has not yet been secured; or
3. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is need for special reserve
for probable contingencies. (Sec. 42, RCC)

STOCK SPLIT STOCK DIVIDENDS Q: For the past three years of its commercial
A mere increase in the Capitalization of operation, X, an oil company, has been earning
number of shares earnings or profits, tremendously in excess of 100% of the
which evidence together with a corporation’s paid-in capital. All of the
ownership without distribution of the stockholders have been claiming that they must
altering the amount of added shares which share in the profits of the corporation by way of
the capital, surplus, or evidence the assets dividends, but the Board of Directors failed to
segregated earnings. transferred to capital. lift its finger. Is Corporation X guilty of violating
a law? If in the affirmative, state the basis. (2001
BAR)

A: YES. Corporation X is guilty of violating Sec. 42 of

the RCC. This provision prohibits stock corporations

137 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

from retaining surplus profits in excess of 100% of
their paid-in capital, except on certain situations
provided under the RCC.
Wrongful or Illegal Declaration of Dividends
The Board of Directors is liable in case of wrongful
or illegal declaration of dividends. The stockholders
should return the dividends to the corporation
based on the principle of solutio indebiti.
Persons Entitled to Receive Dividends
Dividends are payable to the stockholders of record
as of the date of the declaration of dividends or
holders of record on a certain future date, as the
case may be, unless the parties have agreed
otherwise. (Cojuangco and Prime Holdings, Inc., v.
Sandiganbayan G.R. No. 183278, 24 Apr. 2009)
A: NO. Only stockholders are entitled to payment of
stock dividends. (Nielson & Co., Inc. v. Lepanto
Consolidated Mining Co., G.R. No. L-217601, 17 Dec.
1966)
Distinction between Distribution in Liquidation
and Ordinary Dividend
If the distribution is in the nature of a recurring
return on stock, it is an ordinary dividend. However,
if the corporation is really winding up its business
or recapitalizing and narrowing its activities, the
distribution may properly be treated as incomplete
or partial liquidation and as payment by the
corporation to the stockholder for his stock or as
return of the capital invested by him. (Wise & Co.,
Inc. v. Meer, G.R. No. 48231, 30 June 1947)
Power to Enter into Management Contract

Transfers of Shares Unrecorded in the Books of

Management Contract
the Corporation

A Management Contract is any contract whereby a

Transfer of shares which is not recorded in the
corporation undertakes to manage or operate all or
books of the corporation is valid only as between
substantially all of the business of another
the parties, hence, the transferor has the right to
corporation, whether such contracts are called
dividends as against the corporation without notice
service contracts, operating agreements or
of transfer, but it serves as trustee of the real owner
otherwise. (Sec. 43, RCC)
of the dividends, subject to the contract between the
transferor and transferee as to who is entitled to
NOTE: Sec. 43 refers only to a management contract
receive the dividends. (Ibid.)
with another corporation. Hence, it does not apply
to management contracts entered into by a
Receipt of Dividends in Case of Mortgaged or
corporation with natural persons.
Pledged Shares

Requirements for Validity of Management

GR: The mortgagor or the pledgor has the right to
Contract
receive the dividends.

1. The contract must be approved by at least

XPN: When the mortgagor or pledgor defaults and
majority of the BOD or BOT of both managing
the mortgagee or pledgee acquires the pledged
and managed corporation;
stocks and the transfer is recorded in the books of
the corporation, the mortgagee or pledgee is
2. The contract must be approved by the
entitled to receive the dividends.
stockholders owning at least the majority of the
OCS, or members in case of a non-stock
Q: May stock dividends be issued to a person
corporation, of both the managing and the
who is not a stockholder in payment of services
managed corporation, at a meeting duly called
rendered?
for the purpose;

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 Corporation Law
3. The contract must be approved by the
stockholders of the managed corporation
owning at least 2/3 of the OCS entitled to vote
or 2/3 of the members when:
a. Stockholders representing the same
interest in both of the managing and the
managed corporation own or control more
than 1/3 of the total outstanding capital
stock entitled to vote of the managing
corporation (Interlocking Stockholders);
b. Majority of the members of the BOD of the
managing corporation also constitute a
majority of the BOD of the managed
corporation. (Interlocking Directors)
4. No management contract shall be entered into
for a period longer than five (5) years for any
one (1) term except for service contracts or
operating agreements which relate to the
exploration, development, exploitation or
utilization of natural resources may be entered
into for such periods as may be provided by the
pertinent laws or regulations. (Sec. 43, RCC)
Q: ABC Management Inc. presented to the DEF
Mining Co, the draft of its proposed Management
Contract. As an incentive, ABC included in the
terms of compensation that ABC would be
entitled to 10% of any stock dividend which DEF
may declare during the lifetime of the
Management Contract. Would you approve of
such provision? If not, what would you suggest
as an alternative? (1991 BAR)
A: NO. I would not approve of a proposed
stipulation in the management contract that the
managing corporation, as an additional
compensation to it, should be entitled to 10% of any
stock dividend that may be declared. Stockholders
are the only ones entitled to receive stock dividends.
(Nielson & Co., Inc. v. Lepanto Consolidated Mining,
G.R. No. L-21601, 17 Dec. 1966)
I would add that the unsubscribed capital stock of a
corporation may only be issued for cash or property
or for services already rendered constituting a
demandable debt. (Sec. 61, RCC) As an alternative, I
139
would suggest that the managing corporation
should instead be given a net profit participation
and, if it later so desires, to then convert the amount
that may be due thereby to equity or shares of stock
at no less than the par value thereof.
a. ULTRA VIRES DOCTRINE
No corporation shall possess or exercise any
corporate powers except those conferred by this
Code or by its articles of incorporation and except
such as are necessary or incidental to the exercise of
the powers so conferred. (Sec. 44, RCC)
Ultra Vires Act
An ultra vires act is one committed outside the
object for which a corporation is created as defined
by the law of its organization and therefore beyond
the power conferred upon it by law. (Atrium
Management Corporation v. CA, G.R. No. 109491, 28
Feb. 2001)
Unlike illegal acts which contemplate the doing of an
act that is contrary to law, morals, or public policy
or public duty, and are void, ultra vires acts are not
illegal and void ab initio but are not merely within
the scope of the articles of incorporation. They are
merely voidable and may become binding and
enforceable when ratified by the stockholders.
(Maria Clara Pirovana, et al. v. the De La Rama
Steamship Co., G.R. No. L-5377, 29 Dec. 1954)
Types of Ultra Vires Acts
1. Acts done beyond the powers of the corporation
as provided in the law or its articles of
incorporation;
2. Acts entered into on behalf of the corporation
by persons who have no corporate authority or
exceeded the scope of their authority; and
3. Acts or contracts which are per se illegal as
being contrary to law. (Divina, 2020)
Q: When is there an ultra vires act on the part of
(a) the corporation; (b) the board of directors;
and (c) the corporate officers? (2009 BAR)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

A: Ratification
a. The Corporation – Under Sec. 45 (now Sec. 44,
Can be ratified. Cannot be ratified.
RCC) of the Corporation Code, no corporation
shall possess or exercise any corporate power Binding Effect
except those conferred by the Code or by its AOI
Can bind the parties if
and except such as are necessary or incidental Cannot bind the
wholly or partly
to the exercise of the powers so conferred. parties.
executed.
When a corporation does an act or engages in
an activity which is outside of its express,
implied, or incidental powers set out in its AOI, Acts that Do Not Comply With Formalities vs.
the act is deemed to be ultra vires. Unauthorized Acts

b. The Board of Directors – When the Board ACTS THAT DO NOT

UNAUTHORIZED
engages in an activity or enters into a contract COMPLY WITH
ACTS
without the ratificatory vote of the stockholders FORMALITIES
in those instances where the Corporation Code The act may be within
so requires such ratificatory vote, such as when If certain procedures the powers of the
the corporation is made to invest in another or formalities are corporation but not
corporation or engage in a business which is not prescribed in the AOI within the powers of
in pursuit of its primary purpose, the board or bylaws and the same the particular officer.
resolution not ratified by stockholders owning are not complied with, The latter is sometimes
or representing at least two-thirds (2/3) of the the resulting act is not referred to as ultra
outstanding capital stock would make the an ultra vires act of the vires act of the officer.
transaction void, as being ultra vires. corporation. The law on agency
applies.
c. The Corporate Officers – When a corporate
officer enters into a contract on behalf of the Q: The board of directors of Lopez Realty, Inc.
corporation without having been so expressly passed a resolution providing gratuity pay for
or impliedly authorized by the Board of its employees in a special meeting called for the
Directors, even when the act or contract falls purpose. At the time, however, Asuncion (a
within the corporation’s express, implied or member of the board), was still out of the
incidental power, then the unauthorized act of country. Asuncion assailed the validity of the
the corporate officer is deemed to be ultra vires. said board resolution contending that the same
was ultra vires on the ground that she was not
Ultra Vires Acts by Reason of Lack of Authority duly notified of the special meeting in which it
vs. Ultra Vires Acts by Reason of Illegality (Illegal was passed. Is the disputed board resolution
Acts) ultra vires as urged by Asuncion?

ULTRA VIRES ACT ILLEGAL ACTS A: NO. The assailed resolution covers a subject
Lawfulness which concerns the benefit and welfare of the
Unlawful; against company’s employees. To stress, providing gratuity
Not necessarily unlawful, pay for its employees is one of the express powers
law, morals, public
but outside the powers of of the corporation under the Corporation Code,
policy, and public
the corporation. hence, Asuncion cannot invoke the doctrine of ultra
order.
Enforceability vires to avoid any liability arising from the issuance
Merely voidable and may of the subject resolution. (Lopez Realty, Inc. v.
be enforced by Void; cannot be Fontecha, G.R. No. 76801, 11 Aug. 1995)
performance, ratification, validated.
or estoppel.

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2022 GOLDEN NOTES
 Corporation Law
Q: Sea Lion International Port Terminal
Services, Inc. filed a complaint for prohibition
and mandamus against National Power
Corporation (NPC) and Philippine Ports
Authority (PPA), wherein Sea Lion alleged that
NPC had acted in bad faith and with grave abuse
of discretion in not renewing its contract for
stevedoring services for coal-handling
operations at NPC's plant, and in taking over its
stevedoring services. NPC seeks to annul the
order of the RTC in issuing a writ of preliminary
injunction which enjoined NPC from further
undertaking stevedoring and arrastre services
in its pier and directing it either to enter into a
contract for stevedoring and arrastre services
or to conduct a public bidding therefor. Does
NPC have the power to undertake stevedoring
and arrastre services in its pier?
A: YES. NPC has the power to undertake stevedoring
and arrastre services. To carry out the national
policy of total electrification of the country, the NPC
was created and empowered not only to construct,
operate and maintain power plants, reservoirs,
transmission lines, and other works, but also to
exercise such powers and do such things as may be
reasonably necessary to carry out the business and
purposes for which it was organized, or which, from
time to time, may be declared by the Board to be
necessary, useful, incidental or auxiliary to
accomplish said purpose. If that act is one which is
lawful in itself and not otherwise prohibited and is
done for the purpose of serving corporate ends, and
reasonably contributes to the promotion of those
ends in a substantial and not in a remote and fanciful
sense, it may be fairly considered within the
corporation's charter powers. The rule is that a
corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter
but has the power to do what is reasonably
necessary or proper to promote the interest or
welfare of the corporation. The stevedoring services
which involve the unloading of the coal shipments
into the NPC pier for its eventual conveyance to the
power plant are incidental and indispensable to the
operation of the plant. (NPC v. Vera, et al., G.R. No.
83558, 27 Feb. 1989)
141
Instances When the Acts of Officers Bind the
Corporation (P-R-A-D-A)
1. If it is Provided in the By-laws;
2. When the act was Ratified;
3. If Authorized by the board; or
4. Under the Doctrine of Apparent Authority
Doctrine of Apparent Authority (2015 BAR)
If a corporation knowingly permits one of its
officers or any other agent to act within the scope of
an apparent authority, it holds him out to the
public possessing the power to do those acts; and
thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be
estopped from denying the agent’s authority.
Its existence may be ascertained through:
1. The general manner in which the corporation
holds out an officer or agent as having the
power to act, or in other words, the apparent
authority to act in general, with which it clothes
him; or
2. The acquiescence in his acts of a particular
nature, with actual or constructive notice
thereof, within or beyond the scope of his
ordinary powers.
It requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other
parties. It is not the quantity of similar acts which
establishes apparent authority but the vesting of a
corporate officer with the power to bind the
corporation. (Advance Paper Corp. v. Arma Traders
Corp., GR No. 176897, 11 Dec. 2013)
Apparent Authority is Determined by Acts of
Principal, Not by Acts of Agent
The Doctrine of Apparent Authority is determined
by the acts of the principal and not by the acts of the
agent." As applied to corporations, the doctrine of
apparent authority provides that “a corporation is
estopped from denying the officer's authority if it
knowingly permits such officer to act within the
scope of an apparent authority, and it holds him out
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
to the public as possessing the power to do those
acts.” (Agro Food and Processing Corp. v. Vitarich
Corp., G.R. No. 217454, 11 Jan. 2021, J. Caguioa)
When Corporation is Estopped to Deny
Ratification of Acts Entered by Officers or Agents
Generally, when the corporation has knowledge
that its officers or agents exceed their power, it must
promptly disaffirm the contract or act, and allow the
other party or third person to act in the belief that it
was authorized or has been ratified. Otherwise, if it
acquiesces, with knowledge of the facts, or if it fails
to disaffirm, ratification will be implied. (Premiere
Development Bank v. CA, G.R. No. 159352, 14 Apr.
2004)
So settled is the precept that ratification can be
made by the corporate board either expressly or
impliedly. Implied ratification may take various
forms - like silence or acquiescence; by acts showing
approval or adoption of the contract; or by
acceptance and retention of benefits flowing
therefrom. (MWSS v. CA, G.R. No. 126000, 07 Oct.
1998)
Where the practice of the corporation has been to
allow its general manager to negotiate and execute
contracts in its copra trading activities for and on
behalf of the corporation without board approval,
the board itself, by its acts through acquiescence,
practically laid aside the by-law requirement of
prior approval. Settled is the rule that where similar
acts have been approved by the directors as a
matter of general practice, custom, and policy, the
general manager may bind the company without
formal authorization from the board of directors.
(Board of Liquidators v. Heirs of Kalaw, et al., G.R. No.
L-18805, 14 Aug. 1967)
A corporation cannot deny the authority of a lawyer
when they clothed him with apparent authority to
act in their behalf such as when he entered his
appearance accompanied by the corporation’s
general manager and the corporation never
questioned his acts and even took time and effort to
forward all the court’s documents to him. The
lawyer may not have been armed with a board
resolution, but the doctrine of apparent authority
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
imposes liability not as a result of contractual
relationship but rather because of the actions of the
principal or an employer in somehow misleading
the public that the relationship or authority exists.
(Megan Sugar Corporation v. RTC Iloilo Br. 68, G.R.
No. 170352, 01 June 2011)
Q: May the board of directors of a rural banking
corporation be compelled to confirm a deed of
absolute sale of real property owned by the
corporation whose deed of sale was executed by
the bank manager without prior authority of the
board of directors of the rural banking
corporation?
A: YES. A bank is liable to innocent third persons
where representation is made in the course of its
normal business by an agent like the bank manager,
even though such agent is abusing her
authority. Clearly, persons dealing with her could
not be blamed for believing that she was authorized
to transact business for and on behalf of the bank.
The bank is estopped from questioning the
authority of the bank manager to enter into the
contract of sale. If a corporation knowingly permits
one of its officers or any other agent to act within the
scope of an apparent authority, it holds the agent
out to the public as possessing the power to do those
acts; thus, the corporation will, as against anyone
who has in good faith dealt with it through such
agent, be estopped from denying the agent’s
authority. Unquestionably, the bank has authorized
its manager to enter into the Deed of Sale.
Accordingly, it has a clear legal duty to issue the
board resolution sought by. Having authorized her
to sell the property, it behooves the bank to confirm
the Deed of Sale so that the buyers may enjoy its full
use. (Rural Bank of Milaor v. Ocfemia, et al., G.R. No.
137686, 08 Feb. 2000)
Q: Associated Bank (the Bank) purchased in a
foreclosure sale the real properties of Sps. Vaca
mortgaged in its favor. The Sps. Vaca, however,
prayed for the nullification of the mortgage and
foreclosure sale. In the meantime, the Bank
advertised for sale the subject properties, and
the Sps. Pronstroller offered to buy the same.
The offer was made through Atty. Soluta, the
Bank’s Vice-President, Corporate Secretary, and
142
 Corporation Law
a member of its BOD. The Bank accepted the Sps.
Pronstroller’s offer.
Sps. Pronstroller and Atty. Soluta executed two
Letters-Agreement wherein the balance of the
purchase price will be paid upon receipt of a
final order from the Supreme Court in the Vaca
case and the delivery of the property to the Sps.
Pronstroller free from occupants.
The Bank was later on reorganized, and Atty.
Soluta was relieved from his duties. The Bank,
through its Assistant Vice-President, Atty.
Dayday, informed Sps. Pronstroller that their
request for extension was disapproved and, in
view of their breach of the contract, the Bank
was rescinding the same and forfeiting their
deposit. Is Associated Bank bound by the Letter-
Agreement signed by Atty. Soluta under the
doctrine of apparent authority?
A: YES. The authority of a corporate officer or agent
in dealing with third persons may be actual or
apparent. Accordingly, the authority to act for and
to bind a corporation may be presumed from acts of
recognition in other instances, wherein the power
was exercised without any objection from its board
or shareholders. Undoubtedly, Associated Bank
had previously allowed Atty. Soluta to enter into the
first agreement without a board resolution
expressly authorizing him; thus, it had clothed him
with apparent authority to modify the same via the
second letter-agreement. It is not the quantity of
similar acts which establishes apparent authority,
but the vesting of a corporate officer with the power
to bind the corporation. (Associated Bank v. Spouses
Pronstroller, G.R. No. 148444, 14 July 2008)
Q: Sps. Magsalang obtained a loan from
Philippine Countryside Rural Bank (PCRB),
secured by a real estate mortgage over their
property, including the house constructed
thereon owned by the Sps. Cortel. Sps.
Magsalang and Sps. Cortel asked permission
from PCRB to sell the subject properties.
Mondigo, Branch Manager of PCRB, verbally
agreed to their request but first required full
payment of the loan. The subject properties
were later sold to Banate. The title issued to
143
Banate, however, carried over the mortgage lien
in PCRB’s favor. PCRB refused to release the
property from the lien.
Did the purported agreement between Banate
and Mondigo novate the mortgage contract over
the subject properties in a manner binding upon
PCRB?
A: NO. The Court would be unduly stretching the
doctrine of apparent authority if the Court would
consider the power to undo or nullify solemn
agreements validly entered into as within the
doctrine’s ambit. Although a branch manager,
within his field and as to third persons, is the
general agent and is in general charge of the
corporation, with apparent authority
commensurate with the ordinary business
entrusted him and the usual course and conduct
thereof, yet the power to modify or nullify corporate
contracts remains generally in the board of
directors.
Being a mere branch manager alone is insufficient
to support the conclusion that Mondigo has been
clothed with “apparent authority” to verbally alter
terms of written contracts, especially when viewed
against the telling circumstances of this case: the
unequivocal provision in the mortgage contract;
PCRB’s vigorous denial that any agreement to
release the mortgage was ever entered into by it;
and, the fact that the purported agreement was not
even reduced into writing considering its legal
effects on the parties’ interests. To put it simply, the
burden of proving the authority of Mondigo to alter
or novate the mortgage contract has not been
established. (Banate, et al., v. Philippine Countryside
Rural Bank, Inc., et al., G.R. No. 163825, 13 July 2010)
Q: PPI, a fertilizer manufacturer, entered into an
arrangement with Janet Layson for the delivery
of fertilizers to her, payable from the proceeds
of the loan that UCPB extended to her. Layson
executed a document called “pagares,” written
on the dorsal side of a UCPB promissory note.
The pagares stated that Layson had an approved
loan with UCPB-Iloilo Branch. The second
portion of the pagares, signed by that branch’s
manager Gregory Grey, stated that the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
assignment has been duly accepted and
payment duly guaranteed within 60 days from
PPI’s Invoice. But contrary to her undertakings,
Layson withdrew with branch manager Grey’s
connivance, the loan that UCPB granted her.
On the strength of the three documents, PPI
delivered quantities of fertilizers to Layson.
When PPI presented the documents of the
financed transactions to UCPB for collection, the
bank denied the claim on the ground that it
neither authorized the transactions nor the
execution of the documents which were not part
of its usual banking transactions. UCPB claimed
that branch manager Grey exceeded his
authority in guaranteeing payment of Layson’s
purchases on credit. It contended that the
pagares were illegal and void since banking laws
prohibit bank officers from guaranteeing loans
of bank clients. Is UCPB bound by Grey’s
undertaking on its behalf to deliver to PPI the
proceeds of the bank’s loan in payment for the
fertilizers Layson bought?
A: NO. UCPB is not bound. A corporation like UCPB
is liable to innocent third persons where it
knowingly permits its officer, or any other agent, to
perform acts within the scope of his general or
apparent authority, holding him out to the public as
possessing power to do those acts. But, here, it is
plain from the guarantee Grey executed that he was
acting for himself, not in representation of UCPB.
The latter cannot be bound by Grey’s above
undertaking since he appears to have made it in his
personal capacity. He signed it under his own name,
not in UCPB’s name or as its branch manager.
Indeed, the wordings of the undertaking do not at all
make any allusion to UCPB. (UCPB v. Planters
Products, Inc., et al., G.R. No. 179015, 13 June 2012)
Consequences of Ultra Vires Acts
These are the effects for the specific acts:
1. If the contract is executed on both sides – the
courts will not set aside or interfere to deprive
either party of what has been acquired under
them.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
2. If the contract is executory on both sides – it
will not be enforced at the suit of either party,
because their enforcement is not required by
any equitable principles and will be contrary to
public policy.
3. If the contract is executed on one side, and
executory on the other – courts in some
jurisdictions, although not in all, will enforce in
favor of the party who has executed the same on
his part against the other party who has
received and retained the benefits on the
ground that equitable principles and
outweighing considerations of public policy
require that the latter should not be permitted,
while retaining the benefits of the contract, to
escape liability on the ground that it was ultra
vires.
4. Contracts, whether wholly executory or
executed on one side, apparently authorized,
but in fact, ultra vires because they are made
for a purpose not within the scope of the
business of the corporation, the ultra vires
purpose being unknown to the other party –
enforceable against the corporation. (Divina,
2020)
Remedies in Case of Ultra Vires Acts
If the act is yet to be done, the remedy is one of
injunction to enjoin the performance or continued
performance of the ultra vires act.
If the act has already been performed, a stockholder
may file a derivative suit on behalf of the
corporation to set aside the ultra vires act. (Divina,
2020)
Q: X Corp., whose business purpose is to
manufacture and sell vehicles, invested its funds
in Y Corp., an investment firm, through a
resolution of its Board of Directors. The
investment grew tremendously on account of Y
Corp.'s excellent business judgment. But a
minority stockholder in X Corp. assails the
investment as ultra vires. Is he right and, if so,
what is the status of the investment? (2011 BAR)
144
 Corporation Law
A: YES. It is an ultra vires act of its Board of Directors
but voidable only, subject to stockholders’
ratification.
Q: Which of the following corporate acts is valid,
void, or voidable?
a. XL Foods Corporation, which is engaged in
the fast-food business, entered into a
contract with its President, Jose Cruz,
whereby the latter would supply the
corporation with its meat and poultry
requirements.
A: Voidable – A contract of the corporation with
one or more of its directors or trustees or officers is
voidable, at the option of such corporation (Sec. 31,
RCC). Such contract can be ratified by the vote of the
stockholders representing at least two-thirds of the
outstanding capital stock in a meeting called for the
purpose: Provided, that full disclosure of the
adverse interest of the directors or trustees
involved is made at such meeting: Provided,
however, That the contract is fair and reasonable
under the circumstances.
b. The Board of Directors of XL Foods
Corporation declared and paid cash
dividends without approval of the
stockholders.
A: Valid – Approval of the stockholders is not
required in declaring cash dividends.
c. XL Foods Corporation guaranteed the loan
of its sister company XL Meat Products, Inc.
(2002 BAR)
A: Voidable – This is an ultra vires act on part of XL
Foods Corporation and is not one of the powers
provided for in Sec. 35 of the RCC. It can be ratified
provided it is not illegal per se but merely beyond
the powers of the corporation by the approval of the
majority of the board and vote of the stockholders
representing at least two thirds of the outstanding
capital stock. Where the contract or act is not illegal
per se but merely beyond the power of the
corporation, the same is merely voidable and may
be enforced by performance, ratification, or
145
estoppels, or on equitable especially if no creditors
are prejudiced thereby and no rights of the state or
the public are involved. (Fletcher, p.585; Republic v.
Acoje Mining Co., Inc., G.R. No. L-18062, 28 Feb. 1963)
b. TRUST FUND DOCTRINE
The trust fund doctrine provides that subscriptions
to the capital stock of a corporation constitute a
fund to which the creditors have a right to look for
the satisfaction of their claims. (Ong v. Tiu, G.R. Nos.
144476 and 144629, 08 Apr 2003)
In a sense, they have to be unimpaired for the
protection of creditors. These cover the entire
consideration received for the issuance of no par
value shares or the aggregate amount for the par
value shares issued by the corporation. (Divina,
2020)
Trust fund doctrine is not limited to the
stockholders’ subscriptions. The scope of the
doctrine when the corporation is insolvent
encompasses not only the capital stock, but also
other property and assets generally regarded in
equity as a trust fund for the payment of corporate
debts. All assets and property belonging to the
corporation held in trust for the benefit of creditors
that were distributed or in the possession of the
stockholders, regardless of full payment of their
subscriptions, may be reached by the creditor in
satisfaction of its claim. (Halley v. Printwell, Inc., G.R.
No. 157549, 30 May 2011; 2015, 2019 BAR)
Effects of the Trust Fund Doctrine
1. Dividends must never impair the subscribed
capital stock; (NTC v. CA, G.R. No. 127937, 28 July
1999)
2. Subscription commitments cannot be condoned
or remitted; (Ibid.)
3. GR: The corporation cannot buy its own shares
using the subscribed capital as the
consideration therefor. (Ibid.)
XPNs:
a. Redeemable shares may be acquired even
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

without surplus profit for as long as it will
not result to the insolvency of the
Corporation; (Republic Planters Bank v.
Hon. Agana, G.R. No. 51765, 03 March
1997)
Nishino Leather Industries, Inc., G.R. No. 150283, 16
April 2008)
When Creditor is Allowed to Maintain an Action
Upon Unpaid Subscriptions

b. In a close corporation, a stockholder may
demand the payment of the fair value of
shares regardless of existence of retained
earnings for as long as it will not result to
the insolvency of the corporation; (Sec.
104, RCC)
c. In case of a close corporation, if the
directors or stockholders are so divided
on the management of the corporation’s
business and affairs that the votes
required for a corporate action cannot be
obtained, with the consequence that the
business and affairs of the corporation can
no longer be conducted to the advantage
of the stockholders generally, the SEC,
upon written petition by any stockholder,
may require the purchase at their fair
value of shares of any stockholder, either
by the corporation regardless of the
availability of unrestricted retained
earnings in its books, or by the other
stockholders. (Sec. 103(d), RCC)
A corporate creditor cannot immediately invoke the
trust fund doctrine to proceed against unpaid
subscriptions of stockholders of the debtor
corporation except in these two (2) instances when
the creditor is allowed to maintain an action upon
any unpaid subscriptions based on the trust fund
doctrine:
1. Where the debtor corporation released the
subscriber to its capital stock from the
obligation of paying for their shares, in whole
or in part, without a valuable consideration, or
fraudulently, to the prejudice of creditors; and
2. Where the debtor corporation is insolvent or
has been dissolved without providing for the
payment of its creditors. (Enano-Bote v.
Alvarez, G.R. No. 223572, 10 Nov. 2020, J.
Caguioa)

4. Rescission of a subscription agreement is not

allowed since it will effectively result in the
unauthorized distribution of the capital assets
and property of the corporation. (Ong v. Tiu, G.R.
No. 144476, 08 April 2003)

When negotiations ensued in the light of a planned

takeover of a company and the counsel of the buyer
advised the stockholder through a letter that he may
take the machineries he brought to the corporation
out with him for his own use and sale, the previous
stockholder cannot recover said machineries and
equipment because these properties remained part
of the capital property of the corporation. Under the
trust fund doctrine, the capital stock, property, and
other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors
which are preferred over the stockholders in the
distribution of corporate assets. (Yamamoto v.

UNIVERSITY OF SANTO TOMAS 146

2022 GOLDEN NOTES
 Corporation Law

of number, will have to delegate the power to

D. BOARD OF DIRECTORS AND TRUSTEES manage the corporation to the board. (Divina, 2020)

XPNs to Doctrine of Centralized Management

Unless otherwise provided in the RCC, the board of

The doctrine is not applicable to the following
directors or trustees shall exercise the corporate
instances:
powers, conduct all business, and control all
properties of the corporation. (Sec. 22, RCC)
1. In case of delegation to the Executive
Committee duly authorized in the by-laws; (Sec.
Stated otherwise, corporate acts must be approved
34, RCC)
by the board of directors, otherwise, such acts are
2. Authorization pursuant to a contracted
generally not binding on the corporation. They do
manager which may be an individual, a
not create rights nor impose obligations upon the
partnership, or another corporation; and
corporation. Thus, if a corporation will enter into
3. In case of close corporations, the stockholders
contracts, initiate legal action or perform any of the
may manage the business of the corporation
corporate acts under the RCC, the same must be
instead of a board of directors, if the articles of
supported by a resolution that the board has duly
incorporation so provide. (Sec. 96, RCC)
adopted authorizing such acts and designating the
person who will carry them out on behalf of the
Rationale: The concentration in the board of the
corporation. (Divina, 2020)
powers of control of corporate business and of
appointment of corporate officers and managers is
The general rule is that a corporation, through its
necessary for efficiency in any large organization.
Board of Directors, should act in a manner and
Stockholders are too numerous, scattered, and
within the formalities, if any, prescribed by its
unfamiliar with the business of a corporation to
charter or by the general law. Directors must act as
conduct its business directly. And so the plan of
a body in a meeting called for the pursuant to the
corporate organization is for the stockholders to
law or the corporation’s by laws, otherwise, any
choose the directors who shall control and
action taken therein may be questioned by any
supervise the conduct of corporate business.
objecting director or shareholder; but an action of
(Filipinas Port Services, Inc. v. Go, G.R. No. 161886, 16
the Board of Directors during a meeting, which was
Mar. 2007)
illegal for lack of notice, may be ratified expressly,
by the action of directors in a subsequent legal
Stockholders or members periodically elect the
meeting, or impliedly, by the corporation’s
board of directors or trustees, who are charged with
subsequent course of conduct. (Lopez Realty, Inc., v.
the management of the corporation. The board, in
Fontecha, et al., GR No. 76801, 11 August 1995)
turn, periodically elects officers to carry out
management functions on a day-to-day basis. As
1. BASIC PRINCIPLES
owners though, the stockholders or members have
residual powers over fundamental and major
a. DOCTRINE OF CENTRALIZED MANAGEMENT corporate changes. While stockholders and
members (in some instances) are entitled to receive
The doctrine means that corporate powers are profits, the management and direction of the
vested in a body, called board of directors for a stock corporation are lodged with their representatives
corporation and board of trustees for a nonstock and agents -- the board of directors or trustees. In
corporation. Except in those instances where other words, the acts of management pertain to the
stockholders’ or members’ approval is required for board; and those of ownership, to the stockholders
certain acts under the RCC or the corporation’s or members. In the latter case, the board cannot act
bylaws, it is the board which exercises corporate alone, but must seek approval of the stockholders or
powers. The stockholders or members, regardless

147 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
members. (Tan v. Sycip, G.R. No. 153468, 17 Aug.
2006)
b. BUSINESS JUDGMENT RULE
Questions of policy or management are left solely to
the honest decision of officers and directors of a
corporation and the courts are without authority to
substitute their judgment for the judgment of the
board of directors. The board is the business
manager of the corporation and so long as it acts in
good faith, its orders are not reviewable by the
courts or the SEC. (Montelibano v. Bacolod-Murcia
Milling Co., G.R. No. L-15092, 18 May 1962; Phil. Stock
Exchange, Inc. v. CA, G.R. No. 125469, 27 Oct. 1997)
Similarly, under the same business judgment rule,
stockholders cannot interfere with the board in
conducting the business affairs of the corporation.
They cannot, for instance, revoke resolutions of the
board or repudiate their acts on account of mere
disagreement. If the stockholders are not satisfied
with the way the board exercises its powers or
manages the corporation, their remedies consist of
replacing the board members upon expiration of
their term or vote for their removal under Sec. 27 of
the RCC or file a derivative suit on behalf of the
corporation to set aside the board’s wrongful acts
but not to supplant the board’s business judgment
for their own.
To repeat, save for the authority granted to them by
law and the bylaws, stockholders cannot exercise
corporate powers and have no management rights.
In the absence of gross negligence or bad faith, the
board may not even be held liable for mistakes or
errors in directing the affairs of the corporation.
(Divina, 2020)
XPNs: The doctrine cannot be invoked:
1. When the act is unconscionable and oppressive
as to amount to wanton destruction to the
rights of the minority; (Ong v Tiu, ibid.)
2. When there is bad faith or gross negligence by
the directors; (Republic Communications Inc. v.
CA, G.R. No. 135074, 29 Jan. 1999)
3. To declare dividends when there is no surplus
profit or to declare dividends out of re-
appraisal surplus; (Divina, 2020)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
4. To pay compensation to directors, as the power
is lodged with the stockholders; (Ibid.)
5. To support a request for a new stock and
transfer book on the pretext that the original is
lost (when in fact it is not) and declare entries
in the supposed lost stock and transfer book as
invalid. (Ibid., citing Provident International
Resources v. Venus, G.R. No. 167041, 17 June
2008)
Interference of Third Parties, Including the SEC,
in the Decrease of Capital Stock Without
Reasonable Ground Violates Business Judgment
Rule
The SEC only has the ministerial duty to approve
the decrease of a corporation’s authorized
capital stock. After a corporation faithfully
complies with the requirements laid down in Sec. 38
(now Sec. 37, RCC), the SEC has nothing more to do
other than approve the same. Pursuant to Sec. 38
(now Sec. 37, RCC), the scope of the SEC's
determination of the legality of the decrease in
authorized capital stock is confined only to the
determination of whether the corporation
submitted the requisite authentic documents to
support the diminution. Simply, the SEC's function
here is purely administrative in nature.
For third persons or parties outside the corporation
like the SEC to interfere to the decrease of the capital
stock without reasonable ground is a violation of the
"business judgment rule." (Metroplex Berhad v.
Sinophil Corp., G.R. No. 208281, 28 June 2021)
Consequences of Business Judgment Rule
1. Resolutions and transactions entered into by
the Board within the powers of the corporation
cannot be reversed by the courts not even on
the behest of the stockholders;
2. Directors and officers acting within such
business judgment cannot be held personally
liable for such acts;
3. If the cause of the losses is merely error in
business judgment, not amounting to bad faith
or negligence, directors and/or officers are not
liable; (Filipinas Port Services v. Go, G.R. No.
161886, March 16, 2007)
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 Corporation Law
4. The Board of Directors has the power to create
positions not provided for in the corporation's
by-laws since the board is the corporation’s
governing body, clearly upholding the power of
its board to exercise its prerogatives in
managing the business affairs of the
corporation; (Ibid.)
5. Directors and officers who purport to act for the
corporation, keep within the lawful scope of
their authority and act in good faith, do not
become liable, whether civilly or otherwise, for
the consequences of their acts, which are
properly attributed to the corporation alone;
(Benguet Electric Cooperative, Inc. v. NLRC, G.R.
No. 89070, 18 May 1992) and
6. The power to elect corporate officers was a
discretionary power that the law exclusively
vested in the Board of Directors and could not
be delegated to subordinate officers or agents.
(Matling Industrial and Commercial
Corporation, et al. v. Coros, G.R. No. 157802, 13
Oct. 2010)
Requirements for Application of Business
Judgment Rule
1. Presence of a business decision including
decisions on policy management and
administration;
2. The decision must be intra vires and must
comply with the procedural and substantive
requirements of law;
3. Good faith;
4. Due care in making the decision; and
5. The director must not have personal interest or
nor self-dealing or otherwise on breach of the
duty of loyalty. (Villanueva, 2018)
Q: PALI sought to offer its shares to the public in
order to raise funds for development of
properties and pay its loans with several banks.
To facilitate the trading of its shares, PALI
applied for a listing in the Philippine Stock
Exchange Inc. (PSE), a non-profit corporation.
Subsequently, PSE received a letter from the
Heirs of Marcos, requesting PSE to defer PALI’s
registration, contending that certain properties
of PALI are owned by Marcos. Consequently, PSE
149
rejected PALI’s application. The SEC reversed
the ruling of the PSE. Is the SEC correct?
A: NO. In applying the business judgment rule, the
SEC and the courts are barred from intruding into
business judgments of corporations, when the same
are made in good faith. The said rule precludes the
reversal of the decision of the PSE to deny PALI's
listing application, absent a showing of bad faith on
the part of the PSE.
Under the listing rules of the PSE, to which PALI had
previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing.
(PSE v. CA, G.R. No. 125469, 27 Oct. 1997)
2. TENURE AND QUALIFICATIONS OF
DIRECTORS OR TRUSTEES
Term of Office
Directors shall be elected for a term of one (1) year
from among the holders of stocks registered in the
corporation’s books, while trustees shall be elected
for a term not exceeding three (3) years from among
the members of the corporation. (Sec. 22, RCC)
If no election is held, the directors and officers will
continue to occupy position even after the lapse of
one (1) year under a hold-over capacity until their
successors are elected and qualified.
Term, Tenure, and Holdover Period
Term – time during which the officer may claim to
hold the office as a matter of right, and fixes the
interval after which the several incumbents shall
succeed one another. The term of office is not
affected by the holdover. It is fixed by statute and
does not change simply because the office may have
become vacant, nor because the incumbent holds
office beyond his term when a successor has not
been elected.
Tenure – represents the term during which the
incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the
incumbent.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Holdover Period – the time from the lapse of one
year from a member’s election to the Board and
until his successor’s election and qualification. It is
not part of the director’s original term of office, nor
is it a new term; the holdover period, however,
constitutes part of his tenure. (Valle Verde Country
Club v. Africa, G.R. No. 151969, 04 Sept. 2009)
Common Qualifications of Directors and Trustee
The directors and trustees must have all the
qualifications provided under Sec. 22, in relation to
Secs. 10, 13, and 91, of the RCC as well as those
provided under the bylaws, and none of the
disqualifications under Sec. 26 of the RCC and the
bylaws. (Divina, 2020)
Below are the qualifications for directors or trustees
under the RCC:
1. The director or trustee must be of legal age.
(Sec. 10, RCC)
2. The director must own at least one (1) share of
stock of the corporation and the trustee must be
a member of the corporation, (Sec. 22, RCC),
except with respect to independent trustees of
nonstock corporations vested with public
interest. (Sec. 91, RCC)
NOTE: A provision in the bylaws which allots a
permanent seat in the board to a non-member
of the association is contrary to law. Similarly,
the fact that said permanent seat was held for
fifteen (15) years cannot give rise to a vested
right and estoppel cannot forestall a challenge
against an act that is contrary to law. (Grace
Christian High School v. CA, et al., G.R. No.
108905, 23 Oct. 1997),
3. Trustees of educational institutions organized
as nonstock corporations or religious societies
shall not be less than five (5) nor more than
fifteen (15). However, with respect to
educational institutions, the number of trustees
shall only be in multiples of five (5). (Secs. 106
and 114, RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Disqualifications
On disqualification, the RCC expanded and qualified
the grounds such that a person shall be disqualified
from being a director, trustee or officer of any
corporation if, within five (5) years prior to the
election or appointment as such, the person was:
a. Convicted by final judgment:
i. Of an offense punishable by imprisonment
for a period exceeding six (6) years;
ii. For violating the RCC; and
iii. For violating R.A. No. 8799, otherwise
known as “The Securities Regulation Code”;
b. Found administratively liable for any offense
involving fraudulent acts; and
c. By a foreign court or equivalent foreign
regulatory authority for acts, violations, or
misconduct similar to those enumerated in
paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications
or other disqualifications, which the SEC, the
primary regulatory agency, or the Philippine
Competition Commission may impose in its
promotion of good corporate governance or as a
sanction in its administrative proceedings. (Sec. 26,
RCC)
Director Must Be Stockholder
A person who does not own a stock at the time of his
election or appointment does not disqualify him as
director if he becomes a shareholder before
assuming the duties of his office. (SEC Opinions, 09
Nov. 1987 & 05 Apr. 1990)
Q: Is it necessary that the director be the owner
of the share of the corporation in his own right
to qualify as such director?
A: In order to be eligible as a director, what is
material is the legal title to, not beneficial ownership
of, the stock as appearing on the books of the
corporation (Lee v. CA, G.R. No. 93695, 04 Feb. 1992)
Similarly, when a director loses his legal title over
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 Corporation Law
all his shares, he automatically forfeits his director
position. (Divina, 2020)
Additional Qualifications Provided by the
Revised Code of Corporate Governance (RCCG)
A director should have the following: (C-P-M-P)
1. College education or equivalent academic
degree;
2. Practical understanding of the business of the
corporation;
3. Membership in good standing in relevant
industry, business, or professional
organizations; and
4. Previous business experience. (Art. 3[D], RCCG)
Q: John Gokongwei Jr., as stockholder of San
Miguel Corporation, filed with SEC a petition for
declaration of nullity of amended by-laws
against the majority of the members of the
Board of Directors and San Miguel Corporation.
Gokongwei claimed that prior to the questioned
amendment, he had all the qualifications to be a
director of the corporation, being a substantial
stockholder thereof, Gokongwei had acquired
rights inherent in stock ownership, such as the
rights to vote and to be voted upon in the
election of directors, and that in amending the
by-laws, Soriano, et. al. purposely provided for
Gokongwei's disqualification and deprived him
of his vested right as aforementioned, hence the
amended by-laws are null and void.
Is a provision on the by-laws disqualifying a
person for a position in the board of directors on
the ground that he is engaged in a business
which competes with that of the Corporation
valid?
A: YES. A corporation is authorized to prescribe the
qualifications of its directors. A provision in the by-
laws of the corporation that no person shall qualify
or be eligible for nomination for elections to the
board of directors if he is engaged in any business
which compete with that of the Corporation is valid;
provided, however, that before such nominee is
disqualified, he should be given due process to show
that he is covered by the disqualification. A director
151
stands in fiduciary relation to the corporation and
its stockholders. The disqualification of a
competitor from being elected to the board of
directors is a reasonable exercise of corporate
authority. Sound principles of corporate
management counsel against sharing sensitive
information with a director whose fiduciary duty to
loyalty may well require that he discloses this
information to a competitive rival. When a person
buys stock in a corporation, he does so with the
knowledge that its affairs are dominated by a
majority of the stockholders. (Gokongwei v. SEC, et
al., G.R. No. L-45911, 11 Apr. 1979)
Disqualification of Foreigners
While foreigners are disqualified from being
elected/ appointed as corporate officers in wholly
or partially nationalized business activities, they are
allowed representation in the BOD or governing
body of said entities in proportion to their
shareholding. (Sec. 2-A, Anti-Dummy Law; Sec. 11,
Art. XII, 1987 Constitution, Art. XII, Sec. 11)
Q: Are directors or trustees required to be
residents of the Philippines?
A: The requirement of the OCC which provides that
“[a] majority of the directors or trustees of all
corporations organized under this Code must be
residents of the Philippines” was removed under
the RCC. As such, it is possible that a majority or
even all directors or trustees may be non-residents.
(Divina, 2020)
Q: Are directors or trustees required to be
Filipino citizens?
A: Similar to the OCC, the RCC does not require
Filipino citizenship for the directors or trustees of a
corporation. However, if the corporation is engaged
in nationalized activities, citizenship becomes a
qualification. Foreigners cannot be appointed to the
board of corporations engaged in wholly-
nationalized activities. For partly nationalized
activities, foreigners can be elected to the board of
directors in proportion to their foreign equity, as
allowed by law. (Divina, 2020)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Q: A Korean national joined a corporation and
was elected to the Board of Directors. To
complement its furniture manufacturing
business, the corporation also engaged in the
logging business. With the additional logging
activity, can the Korean national still be a
member of the Board of Directors? Explain
(2005 BAR)
A: YES. The Korean national can still be a member of
the Board of Directors as long as sixty percent
(60%) of the Board of Directors are Filipinos and
there is at least 20% foreign ownership justifying
one (1) board seat for a foreigner. Corporations that
are sixty percent (60%) owned by Filipinos can
engage in the business of exploration, development,
and utilization of natural resources (Sec. 2, Art. XII,
1987 Constitution). The election of aliens as
members of the Board of Directors engaging in
partially nationalized activities is allowed in
proportion to their allowable participation or share
in the capital of such entities (Sec. 2-A, Anti-Dummy
Law). There is also nothing in the facts that shows
that more than forty percent (40%) of the Board of
Directors are foreigners.
Independent Directors
An independent director is a person who apart from
shareholdings and fees received from the
corporation, is independent of management and
free from any business or other relationship which
could or could reasonably be perceived to
materially interfere with the exercise of
independent judgment in carrying out the
responsibilities as a director. (Sec. 22, RCC)
Independent directors must be elected by the
shareholders present or entitled to vote in absentia
during the election of directors. Independent
directors shall be subject to rules and regulations
governing their qualifications, disqualifications,
voting requirements, duration of term and term
limit, the maximum number of board memberships,
and other requirements that the SEC will prescribe
to strengthen their independence and align with
international best practices. (Sec. 22, RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Requirement of Independent Directors
The board of the following corporations vested with
public interest shall have independent directors
constituting at least twenty percent (20%) of the
board: (Co-B-O)
1. Corporations covered by Sec. 17.2 of R.A. No.
8799, otherwise known as “The Securities
Regulation Code,” such as (Re-Li-Ass):
a. Corporations whose securities are
Registered with the Commission;
b. Corporations Listed with an exchange;
c. Public Companies; meaning, Corporations
with:
i. Assets of at least P50 million;
ii. Having 200 or more shareholders;
iii. Each shareholder holding at least 100
shares of a class of its equity shares.
2. Banks, quasi-banks, Preneed, Insurance and
trust companies, Nonstock savings and loan
associations, Pawnshops, corporations
Engaged in money service business and other
Financial intermediaries; (B-P-I-N-P-E-F) and
3. Other corporations engaged in business vested
with public interest similar to the above, as may
be determined by the Commission, after taking
into account relevant factors which are
germane to the objective and purpose of
requiring the election of independent director,
such as the extent of minority ownership, type
of financial products or securities issued or
offered to investors, public interest involved in
the nature of business operations, and other
analogous factors.
Q: Two years since it began to operate, a
corporation has amassed assets valued at over
Php 60,000,000.00. It also has 250 shareholders,
each holding at least 150 shares. Under the
Revised Corporation Code, is the corporation
required to have an independent director?
Explain briefly. (2020-21 BAR)
A: Under Sec. 23 of the RCC, corporations vested
with public interest are required to have
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 Corporation Law
independent directors in their Boards. Corporations
vested with public interest include public
companies as described under the Securities
Regulation Code.
A public company is any corporation with class of
equity shares listed for trading on an exchange OR
with assets in excess of Php 50,000,000.00 and has
200 or more stockholders, at least 200 of which hold
at least 100 shares each. (Sec. 23, RCC)
Based on the facts provided, the corporation has
assets of more than P50 million with 250
shareholders, each one holding more than 100
shares each. Thus, being a public company, the
corporation is required to have independent
directors.
Q: May the composition of the board of directors
of the National Power Corporation be validly
reduced to three? (2008 BAR)
A: YES. NPC is a government owned and controlled
corporation created by a special charter. Its charter
allows composition of its board of directors to be
reduced. Since NPC is not governed by the
Corporation Code, the standard number of directors
is not required.
3. ELECTION AND REMOVAL OF
DIRECTORS OR TRUSTEES
ELECTION OF DIRECTORS OR TRUSTEES
Requirements and Limitations for the Election
of Directors or Trustees
1. Presence of stockholders representing a
majority of the outstanding capital stock of the
corporation or majority of the members, either
in person or by proxy;
NOTE: Sec. 23 of the RCC also provides for
voting through remote communication or in
absentia. When so authorized in the bylaws or by
a majority of the board of directors,
The right to vote through such modes (remote
communication or in absentia) may be
153
exercised in corporations vested with public
interest notwithstanding the absence of a
provision in the bylaws of such corporations
2. The election must be by ballot, if requested by
any voting stockholder or member;
3. Stockholders entitled to vote shall have the
right to vote the number of shares of stock
standing in their own names in the stock books
of the corporation at the time fixed in the
bylaws or where the bylaws are silent, at the
time of the election;
4. The said stockholder may: (a) vote such number
of shares for as many persons as there are
directors to be elected; (b) cumulate said shares
and give one (1) candidate as many votes as the
number of directors to be elected multiplied by
the number of the shares owned; or (c)
distribute them on the same principle among as
many candidates as may be seen fit: Provided,
That the total number of votes cast by him must
not exceed the number of shares owned by him
as shown in the books of the corporation
multiplied by the whole number of directors to
be elected;
5. No delinquent stock shall vote or be voted for;
and
6. Except when the exclusive right is reserved for
holders of founders’ shares under Section 7 of
this Code, each stockholder or member shall
have the right to nominate any director or
trustee who possesses all of the qualifications
and none of the disqualifications set forth in this
Code. (Sec. 24, RCC)
Reportorial Requirement
Within thirty (30) days after the election of
directors, trustees and officers of the corporation,
the secretary, or any other officer of the corporation,
shall submit to the Commission the names,
nationality, shareholdings, and residence addresses
of the directors, trustees and officers elected. (Sec.
25, RCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Jurisdiction Over Election Contests
As amended by R.A. 8799 (SRC), the jurisdiction of
the SEC under Sec. 5 P.D. No. 902‐A (SEC
Reorganization Act) is now transferred to courts of
general jurisdiction (RTC). Thus, RTC now has
jurisdiction over election contests.
Q: In case where there are two (2) sets of
persons claiming to be the Board of Directors,
which one is controlling?
A: It is the Board of Directors as reported to the SEC
through the filing of a general information sheet.
By the express mandate of the Corporation Code
(Sec. 26) (now Sec. 25, RCC), all corporations duly
organized pursuant thereto are required to submit
within the period therein stated (30 days) to the SEC
the names, nationalities and residences of the
directors, trustees and officers elected. Evidently,
the objective sought to be achieved by Sec. 26 is to
give the public information, under sanction of oath
of responsible officers, of the nature of business,
financial condition and operational status of the
company together with information on its key
officers or managers so that those dealing with it
and those who intend to do business with it may
know or have the means of knowing facts
concerning the corporation’s financial resources
and business responsibility. (Premium Marble
Resources, Inc. v. CA, G.R. No. 96551, 04 Nov. 1996)
Q: At the annual meeting of ABC Corporation for
the election of five directors as provided for in
its articles of incorporation, A, B, C, D, E, F and G
were nominated. A, B, C, D and E received the
highest number of votes and were proclaimed
elected. F received ten votes less than E.
Subsequently, E sold all his shares to F. In the
next Board of Directors’ meeting following the
transfer of the shares in the books of the
corporation, both E and F appeared. E claimed
that notwithstanding the sale of his shares to F,
he remained a director since the Corporation
Code provides that directors “shall hold office
for 1 year and until their successors are elected
and qualified.” On the other hand, F claimed that
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
since he would have been elected as a director
had it not been for E’s nomination and election,
then he (F) should now be considered a director
as he had acquired all the shares of E. Decide
with reasons. (1984 BAR)
A: Neither E nor F are directors of ABC Corporation.
E automatically ceased to be a director upon the
transfer of all his shares to F in the books of the
corporation. Every director must own at least one
share of the capital stock of the corporation of which
he is a director, which share shall stand in his name
on the books of the corporation. Any director who
ceases to be the owner of at least one share of the
capital stock of the corporation of which he is a
director shall thereby cease to be a director. F’s
claims are without merit since he was not duly
elected as a director at the stockholders’ meeting.
Only the candidates receiving the highest number of
votes shall be declared elected.
Methods of Voting
1. Straight voting – every stockholder may vote
such number of shares for as many persons as
there are directors to be elected.
2. Cumulative voting for one candidate – a
stockholder is allowed to concentrate his votes
and give one candidate, as many votes as the
number of directors to be elected multiplied by
the number of his shares shall equal.
3. Cumulative voting by distribution – a
stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and distribute
the same among as many candidates as he shall
see fit. (Sec. 23, RCC)
EXAMPLE: A owns 100 shares of stock in ABC Corp.
There are ten (10) directors to be elected. A has in
his power to cast 1,000 votes.
1. Straight voting: A may give 100 votes for each
candidate.
2. Cumulative voting for one candidate: A may
give 1,000 votes to one preferred candidate.
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 Corporation Law
3. Cumulative voting by distribution: A may
give 500 votes each to two candidates.
Cumulative Voting in Stock vs. Non-stock
Members of nonstock corporations may cast as
many votes as there are trustees to be elected but
may not cast more than one (1) vote for one (1)
candidate, unless otherwise provided in the AOI or
in the bylaws
Cumulative voting is mandatory in stock
corporations to protect the rights of minority
stockholders. Through cumulative voting, the
minority stockholders are given an opportunity to
cumulate their shares to improve the chance of
getting a seat in the board of directors. (Divina,
2020)
Non-Holding of Elections
Report
1. Within thirty (30) days from the date of the
scheduled election. The report shall specify
a new date for the election, which shall not
be later than sixty (60) days from the
scheduled date. (Sec. 25, RCC)
2. 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 corporation, shall, within
seven (7) days from knowledge thereof,
report in writing such fact to the
Commission.
Summary Order of Commission
If:
1. No new date has been designated, or
2. The rescheduled election is likewise not held –
The Commission, may, upon the application of the
stockholder, member, director, or trustee, and after
verification of the unjustified non-holding of the
election, summarily order that an election be held.
155
The Commission shall have the power to issue
orders as may be appropriate, including orders:
1. Directing the issuance of a notice stating the
time and place of election;
2. The designated presiding officer; and
3. The record date or dates for the determination
of stockholders or members entitled to vote.
(Sec. 25, RCC)
NOTE: Notwithstanding any provision of the AOI or
bylaws to the contrary, the shares of stock or
membership represented at such meeting and
entitled to vote shall constitute a quorum for
purposes of conducting an election under this
section.
Quorum
Quorum Required in a Stock or Non-stock
corporation
Unless otherwise provided in this Code or in the
bylaws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital
stock or a majority of the members in the case of
nonstock corporations. (Sec. 51, RCC)
For stock corporations, the quorum is based on
the number of outstanding voting stocks while for
non-stock corporations, only those who are actual,
living members with voting rights shall be counted in
determining the existence of a quorum. To be clear,
the basis in determining the presence of quorum in
non-stock corporations is the numerical equivalent
of all members who are entitled to vote, unless some
other basis is provided by the By-Laws of the
corporation. The qualification "with voting rights"
simply recognizes the power of a non-stock
corporation to limit or deny the right to vote of any
of its members. (Mary Lim v. Moldex Land, Inc., G.R.
No. 206038, 25 Jan. 2017)
AOI as Basis in Determining Quorum
When the stock and transfer book is inaccurate and
deficient, it cannot be the sole basis of determining
the shareholdings for purposes of quorum. The AOI
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
may be used as basis in determining the
shareholdings.
To base the computation of quorum solely on the
obviously deficient, if not inaccurate stock and
transfer book, and completely disregarding the
issued and outstanding shares as indicated in the
articles of incorporation would work injustice to the
owners and/or successors in interest of the said
shares. This case is one instance where resort to
documents other than the stock and transfer books
is necessary. The stock and transfer book of PMMSI
cannot be used as the sole basis for determining the
quorum as it does not reflect the totality of shares
which have been subscribed, more so when the
articles of incorporation show a significantly larger
amount of shares issued and outstanding as
compared to that listed in the stock and transfer
book. (Lanuza, et al. v. CA, et al., G.R. No. 131394, 28
Mar. 2005)
REMOVAL OF DIRECTORS AND TRUSTEES
Power to Remove
The power to remove belongs to the stockholders
representing at least 2/3 of the OCS of a stock
corporation, or if a non-stock corporation, by a vote
of at least 2/3 of the members entitled to vote. (Sec.
27, RCC)
GR: Removal may be with or without cause.
XPN: If the director was elected by the minority,
there must be cause for removal because the
minority may not be deprived of the right to
representation to which they may be entitled under
Sec. 23 of the Code. (Sec. 27, RCC)
NOTE: The right of representation referred to is the
right to cumulative voting for one candidate under
Sec. 23 of the Code.
Requisites for Removal of Directors or Trustees
The removal of a director or trustee by the
stockholders or members is subject to the following
requisites:
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
1. There must be a previous notice of the meeting
to stockholders or members, and the
procedures prescribed by the RCC and bylaws
must be followed.
2. The notice of the meeting must specify the
intention to propose the removal of a director.
NOTE: The RCC does not require that the name
of the director proposed to be removed be
specified. Thus, it is enough to include in the
agenda that there is such an intention to remove
a director.
3. The removal must be approved by stockholders
representing at least two-thirds (2/3) of the
OCS or by at least two-thirds (2/3) of the
members entitled to vote for non-stock
corporation.
4. The removal may be with or without just cause.
Provided, That removal without cause may not
be used to deprive minority stockholders or
members of the right of representation to which
they may be entitled under Sec. 23 of the RCC.
5. The vacancy brought about by the removal of
the director may be filled at the same
stockholders’ meeting where the removal was
effected as long as this fact is similarly stated in
the agenda and notice of the said meeting, or in
a separate meeting called for that purpose. (Sec.
28, RCC)
NOTE: Only a majority of the outstanding capital
stock of the corporation must be present to have a
quorum on the election to be held to fill the
aforesaid vacancy. (Divina, 2020)
The SEC may order the removal, after due notice and
hearing, of a director who has been elected despite
his disqualification, or whose disqualification arose
or is discovered subsequent to an election. (Sec. 28,
RCC)
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 Corporation Law
Remedy if there is Refusal to Call a Meeting to
Remove Director
If there is:
1. No secretary; or
2. If the secretary, despite demand, fails or
refuses to call the special meeting or to give
notice thereof
The stockholder or member signing the demand
may call for the meeting by directly addressing the
stockholders or members
Power of the SEC
The Commission shall, motu proprio or upon
verified complaint, and after due notice and hearing,
order the removal of a director or trustee elected
despite the disqualification, or whose
disqualification arose or is discovered
subsequent to an election. The removal of a
disqualified director shall be without prejudice to
other sanctions that the Commission may impose on
the board of directors or trustees who, with
knowledge of the disqualification, failed to remove
such director or trustee. (Sec. 27, RCC)
Q: Henry is a board director in XYZ Corporation.
For being a fiscalizer in the Board, the majority
of the directors want him removed and his
shares be sold at auction, so he can no longer
participate even in the stockholder’s meetings.
Henry approaches you for advice on whether he
can be removed as board of director and
stockholder without cause. What is your advice?
Explain “amotion” and the procedure in
removing a director. (2016 BAR)
A: Henry cannot be removed by his fellow directors.
The power to remove belongs to the stockholders.
He can only be removed by the stockholders owning
at least 2/3 of the outstanding capital stock in a
meeting called for that purpose. The removal may
be with or without cause except that in this case, the
removal must be with cause because it is intended
to deprive the minority of the right of
representation.
157
Amotion is the premature ousting of a director or
officer from his post in the corporation.
FILLING OF VACANCIES
Ways of Filling up Vacancies
1. Vacancies to be filled up by stockholders or
members: (E-R-O-R-I)
a. Expiration of term;
b. Removal;
c. Grounds Other than removal or expiration
of term, where the remaining directors do
not constitute a quorum for the purpose of
filling the vacancy;
d. If the vacancy may be filled by the
remaining directors or trustees but the
board Refers the matter to stockholders or
members; or
e. Increase in the number of directors.
2. Vacancies filled up by members of the board:
Any vacancy occurring in the board of directors
or trustees other than by removal or by
expiration of term may be filled by the vote of at
least a majority of the remaining directors or
trustees, if still constituting a quorum. (Sec. 28,
RCC)
NOTE: The phrase “may be filled” in Sec. 28, RCC
indicates that the filling of vacancies in the board by
the remaining directors constituting a quorum is
merely permissive. Corporations may choose how
vacancies in their boards may be filled up, either by
the remaining directors or trustees constituting a
quorum or by the stockholders or members, unless
a specific mode if provided in the bylaws.
Term of Replacement Director
A director elected to fill a vacancy shall serve the
unexpired term of the predecessor in office. (Sec. 28,
RCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

Vacancy Caused by Resignation of Director in When Vacancy Should be Filled

Hold-Over Position
WHEN VACANCY SHOULD BE FILLED
Q: Who should fill the vacancy due to the Term
Removal Other cases
resignation of a holdover director? Expiration
May be on the
A: In the case of Valle Verde Country Club, Inc., et al. same day the
vs. Africa (G.R. No. 151969, 04 Sept. 2009), the No later than meeting Forty-five
Supreme Court ruled the resignation as a holdover the day of such authorizing the (45) days
director will not change the nature of the cause of expiration at a removal; from the
the vacancy which is due to the expiration of meeting called provided this time the
director's term. The term of a hold-over director has for the fact is stated in vacancy
expired. The holdover period is not part of his term. purpose. (Sec. the agenda and arose. (Sec.
So, the cause of the vacancy is not resignation but 28, RCC) notice of said 28, RCC)
the expiration of term. As such, the vacancy must be meeting. (Sec.
filled by the stockholders in a regular or special 28, RCC)
meeting called for the purpose pursuant to Sec. 29
of OCC (now Sec. 28, RCC). (Divina, 2020) 4. DUTIES, RESPONSIBILITIES, AND
LIABILITIES FOR UNLAWFUL ACTS
Emergency Board (Sec. 28, RCC)
DUTIES AND RESPONSIBILITIES
EMERGENCY BOARD
When to call for an Emergency Board Fiduciary Nature of Obligation
When the vacancy prevents the remaining
directors from constituting a quorum and The directors’ character is that of a fiduciary insofar
emergency action is required to prevent grave, as the corporation and the stockholders as a body
substantial, and irreparable loss or damage to the are concerned. As agents entrusted with the
corporation. management of the corporation for the collective
benefit of the stockholders, they occupy a fiduciary
Who may fill the vacancy
relation, and in this sense the relation is one of trust.
It may be temporarily filled from among the
officers of the corporation. The ordinary trust relationship of directors of a
Voting requirement corporation and stockholders springs from the fact
that directors have the control and guidance of
He will be elected by a UNANIMOUS vote of the
corporate affairs and property and hence of the
remaining directors or trustees.
property interests of the stockholders. Equity
Limitations and Cessation recognizes that stockholders are the proprietors of
It shall be limited to the emergency action the corporate interests and are ultimately the only
necessary and term shall cease within: beneficiaries thereof. (Gokongwei v. SEC, et al., G.R.
(a) Reasonable time from the termination of the No. L-45911, 11 Apr. 1979)
emergency action; or
(b) Upon election of the replacement director or Majority Rule Doctrine
trustee,
whichever comes earlier. The majority rule states that a director has a
Reportorial Requirement fiduciary duty with respect to the corporation as an
The corporation must notify the SEC within three entity, and not to the stockholders as individuals.
(3) days from the creation of the emergency Consequently, he is subject to the duty to disclose all
board, stating therein the reason for its creation. material facts only to the corporation and not to the
stockholders. (American T. Co. v. California etc. Ins.

UNIVERSITY OF SANTO TOMAS 158

2022 GOLDEN NOTES
 Corporation Law

Co., 15 Cal. 2d 42, 1940) Sec. 30 vs. Sec. 33, RCC

Three-Fold Duties of Directors

LIABILITY OF
DIRECTORS, DISLOYALTY OF A
In this jurisdiction, the members of the board of
TRUSTEES OR DIRECTOR
directors have a three-fold duty:
OFFICERS SEC. 33
SEC. 30
1. Duty of Obedience – shall direct the affairs of
the corporation only in accordance with the Applicable to directors, Applicable to directors
purposes for which it was organized; (Basis: Sec. trustees, and officers. only.
24, RCC)
Covers stock and non- Covers only stock
stock corporations. corporations.
2. Duty of Diligence – shall not willfully and
knowingly vote for or assent to patently Transaction cannot be Transaction may be
unlawful acts of the corporation or act in bad ratified. ratified.
faith or with gross negligence in directing the
affairs of the corporation; (Basis: Sec. 30, RCC)
LIABILITIES
and

Liability For Official Acts

3. Duty of Loyalty – shall not acquire any personal
or pecuniary interest in conflict with their duty
GR: The officers of a corporation are not personally
as such directors or trustees. (Basis: Secs. 30 and
liable for their official acts.
33, RCC) (Strategic Alliance Development
Corporation v. Radstock Securities Ltd., G.R. No.
XPNs: The officers may be held liable if it is shown
178158, 04 Dec. 2009)
that they exceeded their authority.

Disloyalty of Directors
In the following instances, the directors/ trustees
may be held personally liable for damages:
GR: Where a director, by virtue of such office,
acquires a business opportunity which should
1. When they willfully and knowingly vote for or
belong to the corporation, thereby obtaining profits
assent to patently unlawful acts of the
to the prejudice of such corporation, the director
corporation;
must account for and refund to the latter all such
profits.
2. When they are guilty of gross negligence or bad
faith in directing the affairs of the corporation;
XPN: Unless the act has been ratified by a vote of the
stockholders owning or representing at least two-
NOTE: Bad faith or negligence is a question of
thirds (2/3) of the OCS. (Sec. 33, RCC)
fact. Bad faith does not simply mean bad
judgment or negligence. It imparts a dishonest
NOTE: This provision shall be applicable,
purpose or some moral obliquity and conscious
notwithstanding the fact that the director risked
doing of wrong. It means breach of a known
one's own funds in the venture. (Ibid.)
duty through some motive or interest or ill-will;
it partakes of the nature of fraud. (Ford Phils.,
Inc., et al. v. CA, G.R. No. 99039, 03 Feb. 1997)

3. When they acquire any personal or pecuniary

interest in conflict with their duty as such
directors or trustees; (Sec. 30, RCC)

159 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
4. When they consent to the issuance of watered
stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary
his written objection thereto; (Sec, 64, RCC)
5. When they are made, by a specific provision of
law, to personally answer for their corporate
action; (Sec. 144, CC; Sec.13, P.D. 115; Uichico v.
NLRC, G.R. No. 121434, 02 June 1997)
6. When they agree to hold themselves personally
and solidarily liable with the corporation;
(Tramat Mercantile, Inc. vs. CA, G.R. No. 111008,
07 Nov. 1994) or
7. When the corporate fiction is used to defeat
public convenience, justify wrong, protect
fraud, or defend crime. (Carag v. NLRC, GR No.
147590, 02 Apr. 2007)
NOTE: When the officers of the corporation
exceeded their authority, their actions are not
binding upon the corporation unless ratified by the
corporation or is estopped from disclaiming them.
(Reyes v. RCPI Credit Employees Union, G.R. No.
146535, 18 Aug. 2006)
Q: BF Corporation, in a collection complaint filed
against Shangri-La and its Board of Directors,
alleged that Shangri-La induced BF Corporation
to continue with the construction of the
buildings using its own funds and credit despite
Shangri-La’s default. It claims that Shangri-La
misrepresented that it had funds to pay for its
obligations with BF Corporation. The latter
eventually completed the construction of the
buildings. Shangri-La took possession of the
same while still owing BF Corporation an
outstanding balance.
Shangri-La’s BoD based their defense on the
separate personality given to juridical persons
vis-à-vis their directors, officers, stockholders,
and agents. Since they did not sign the
arbitration agreement in any capacity, they
cannot be forced to submit to the jurisdiction of
the Arbitration Tribunal in accordance with the
arbitration agreement. The Arbitral Tribunal
rendered a decision, finding that BF Corporation
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
failed to prove the existence of circumstances
that render Shangri-La and the other directors
solidarily liable. It ruled that Shangri-La’s Board
of Directors is not liable for the contractual
obligations of Shangri-La to BF Corporation.
Are Shangri-La’s directors liable for the
contractual obligations of Shangri-La to BF
Corporation?
A: NO. Indeed, as petitioners point out, their
personalities as directors of Shangri-La are separate
and distinct from Shangri-La. A corporation is an
artificial entity created by fiction of law. This means
that while it is not a person, naturally, the law gives
it a distinct personality and treats it as such. A
corporation, in the legal sense, is an individual with
a personality that is distinct and separate from
other persons including its stockholders, officers,
directors, representatives, and other juridical
entities. (Lanuza, Jr. v. BF Corporation, G.R. No.
174938, 01 Oct. 2014)
Participation in Arbitration
As a general rule, a corporation’s representative
who did not personally bind himself or herself to an
arbitration agreement cannot be forced to
participate in arbitration proceedings made
pursuant to an agreement entered into by the
corporation. He or she is generally not considered a
party to that agreement. However, there are
instances when the distinction between
personalities of directors, officers, and
representatives, and of the corporation, are
disregarded. We call this piercing the veil of
corporate fiction. Hence, when the directors, as in
this case, are impleaded in a case against a
corporation, alleging malice or bad faith on their
part in directing the affairs of the corporation,
complainants are effectively alleging that the
directors and the corporation are not acting as
separate entities. They are alleging that the acts or
omissions by the corporation that violated their
rights are also the directors' acts or omissions. They
are alleging that contracts executed by the
corporation are contracts executed by the directors.
Complainants effectively pray that the corporate
160
 Corporation Law
veil be pierced because the cause of action between
the corporation and the directors is the same.
In that case, complainants have no choice but to
institute only one proceeding against the parties.
Under the Rules of Court, filing of multiple suits for
a single cause of action is prohibited. Institution of
more than one suit for the same cause of action
constitutes splitting the cause of action, which is a
ground for the dismissal of the others (Lanuza, Jr. v.
BF Corporation, supra)
NOTE: However, in ruling that petitioners may be
compelled to submit to the arbitration proceedings,
the Supreme Court is not overturning Heirs of
Augusto Salas Jr. v. Laperal Realty Corporation, et al.
(G.R. No. 135362, 13 Dec. 1999) wherein the court
affirmed the basic arbitration principle that only
parties to an arbitration agreement may be
compelled to submit to arbitration.
Requisites for Holding Directors or Officers
Personally Liable:
Before a director or officer of a corporation can be
held personally liable for corporate obligations, the
following requisites must concur:
1. The complainant must allege in the complaint
that the director or officer assented to patently
unlawful acts of the corporation, or that the
officer was guilty of gross negligence or bad
faith; and
2. The complainant must clearly and convincingly
prove such unlawful acts, negligence, or bad
faith. (Heirs of Fe Tan Uy v. International
Exchange Bank, G.R. No. 166282, G.R. No. 166283,
13 Feb. 2013)
NOTE: The fact that the corporation ceased
operations the day after the promulgation of the SC
resolution finding the corporation liable does not
prove bad faith on the part of the incorporator of the
corporation. (Polymer Rubber Corp. v. Ang
Salamuding, G.R. No. 185160, 24 July 2013)
Q: Rana and Burgos are the President and
General Manager of SKILLEX. The latter entered
161
into a service contract with Robinsons Land
Corporation. Halfway through the service
contract, Skillex asked the respondents-
employees Seva, et al. to execute individual
contracts which stipulated that their respective
employments shall end at the last day of the
year. Skillex and Robinsons no longer extended
their contract of janitorial services.
Consequently, Skillex dismissed Seva, et al. as
they were project employees whose duration of
employment was dependent on the former's
service contract with Robinsons. Seva, et al. filed
a complaint for illegal dismissal with the NLRC.
Should Rana and Burgos be held solidarily liable
with the corporation for respondents-
employees’ monetary claims against the
corporation?
A: NO. Seva, et al. failed to show the existence of the
first requisite. They did not specifically allege in
their complaint that Rana and Burgos willfully and
knowingly assented to petitioner’s patently
unlawful act of forcing the respondents to sign the
dubious employment contracts in exchange for their
salaries. The respondents also failed to prove that
Rana and Burgos had been guilty of gross negligence
or bad faith in directing the affairs of the
corporation.
To hold an officer personally liable for the debts of
the corporation, and thus pierce the veil of
corporate fiction, it is necessary to clearly and
convincingly establish the bad faith or wrongdoing
of such officer, since bad faith is never presumed.
(FVR Skills and Services Exponents, Inc. [SKILLEX], et.
Al. v. Seva, et al., G.R. No. 200857, 22 Oct. 2014)
Q: LMN Corporation hired X as Assistant Stage
Manager under a four-month contract on board
a vessel. While on board, X started to feel back
pains after he moved several boxes. As the pain
persisted, X was sent to an orthopedic doctor
where he was initially assessed to have lumbar
disc disorder. The company-designated
physician issued a medical report declaring X
partially and permanently disabled with Grade
8 Impediment. Unsatisfied, X consulted another
doctor who declared him as permanently and
totally disabled. Thereafter, X informed LMN
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Corporation of the findings of his doctor and
requested that his case be referred to a third
doctor. However, since LMN Corporation
ignored his request, X filed a complaint for
payment of total and permanent disability
benefits. LMN Corporation contended that only
those with Grade 1 disability assessment are
entitled to full disability compensation, thus X
was not entitled to the benefits under POEA
Standard employment contract.
Can a corporate officer who entered a contract
on behalf of a corporation be held solidarily
liable with the corporation?
A: YES. Generally, corporate directors, trustees, or
officers who entered into contracts on behalf of the
corporation cannot be personally held liable for the
liabilities of the latter. However, their personal
liability may validly attach when they are
specifically made by a particular provision of law.
Here, RA 8042 expressly provides for joint and
solidary liability of corporate directors and officers
with the recruitment/placement agency for all
money claims or damages that may be awarded to
OFWs.
Thus, the owner of LMN Corporation, is solidarily
liable with the latter for X’s partial and permanent
disability benefits. (United Philippines Lines, Inc. v.
Alkuino, Jr., G.R. No. 245960, 14 July 2021)
Liability of Director for Termination of
Employees
Without any evidence of bad faith or malice,
directors may not be held personally liable. Only
when the termination is done with malice or in bad
faith on the part of the director may the director be
held solidarily liable with the corporation.
(Equitable Banking Corporation vs. NLRC, G.R. No.
02467, 13 June 1997; Rolando DS Torres v. Rural
Bank of San Juan, Inc., et al., G.R. No. 184520, 13 Mar.
2013)
Q: Rivera was employed by Genesis Transport
Service, Inc. (Genesis) as a bus conductor. He
acknowledged in his Position Paper before the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Labor Arbiter that he was dismissed by Genesis
on account of a discrepancy in the amount he
declared on bus ticket receipts. Genesis gave
him a Memorandum to explain within twenty-
four (24) hours why he should not be sanctioned
for reporting and remitting the amount of
P198.00 instead of the admittedly correct
amount of P394 worth of bus ticket receipts.
Rivera responded that it was an honest mistake,
which he was unable to correct “because the bus
encountered mechanical problems.” Despite
Rivera’s explanations, his employment was
terminated through a written notice. Rivera
filed a complaint for illegal dismissal against
Genesis and Riza Moises, the General Manager
and President of Genesis. Should Riza Moises be
solidarily liable with Genesis?
A: NO. As a rule, corporate directors and officers are
not liable for the illegal termination of a
corporation’s employees. It is only when they acted
in bad faith or with malice that they became
solidarily liable with the corporation. Rivera, in this
case, has not produced proof to show that Moises
acted in bad faith or with malice as regards the
termination of his employment. Thus, she did not
incur any personal liability. (Rivera v. Genesis
Transport Service, Inc., G.R. No. 215568, 03 Aug.
2015)
Q: Jacob and Fernandez are STI officers, the
former being the President and CEO and the
latter as the Senior VP. Ico was hired as Faculty
Member by STI College Makati, Inc., a wholly-
owned subsidiary of STI. Ico was subsequently
promoted as Dean of STI College-Parañaque
and, thereafter, as COO of STI-Makati. However,
after the merger between STI and STI College
Makati (Inc.), Ico received a memorandum
cancelling her COO assignment, citing the
management’s decision to undertake an
"organizational restructuring" in line with the
merger, and further ordering Ico to turn over
her work to one Victoria Luz, who shall function
as STI-Makati’s School Administrator.
Based on a report, it was recommended that an
investigation committee be formed to
investigate Ico for grave abuse of authority,
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 Corporation Law
falsification, gross dishonesty, maligning and
causing intrigues, and other charges. The LA
found Ico to have been illegally, constructively
and in bad faith, dismissed by STI, Jacob and
Fernandez. On appeal, the NLRC reversed the
ruling of the LA. CA affirmed the ruling of the
NLRC. Is Jacob, as the President and CEO of STI,
solidarily liable with STI?
A: NO. The Court fails to discern any bad faith or
negligence on the part of respondent Jacob. The
principal character that figures prominently in this
case is Fernandez; he alone relentlessly caused
petitioner’s hardships and suffering. He alone is
guilty of persecuting petitioner. His superior, Jacob,
may have been, for the most part, clueless of what
Fernandez was doing to petitioner. A corporation,
as a juridical entity, may act only through its
directors, officers, and employees. Obligations
incurred as a result of the directors’ and officers’
acts as corporate agents, are not their personal
liability but the direct responsibility of the
corporation they represent. As a rule, they are only
solidarily liable with the corporation for the illegal
termination of services of employees if they acted
with malice or bad faith. (Girly Ico v. STI, Inc., et al.,
G.R. No. 185100, 09 July 2014)
Liability of Directors for Issuance of Watered
Stocks
Watered Stock –is a stock issued in exchange for
cash, property, share, stock dividends, or services
lesser than its par value or issued value (no par
value) or for a consideration other than cash, valued
in excess of its fair value. (Sec. 64, RCC)
A director or trustee who:
1. Consents to the issuance of stocks for a
consideration less than its par or issued value;
2. Consents to the issuance of stocks for a
consideration other than cash, valued in excess
of its fair value; or
3. Having knowledge of the insufficient
consideration, does not file a written objection
with corporate secretary
Shall be liable to the corporation or its creditors,
solidarily with the stockholder concerned for the
163
difference between the value received at the
issuance of the stock and the par or issued value of
the same. (Sec. 64, RCC)
NOTE: The prohibition to issue “watered stock”
refers only to the original issue of stocks (primary
issuance) but not to a subsequent transfer of such
stocks by the corporation (secondary market or
transaction).
See also discussion on Watered Stocks – page 210.
Liability for Attempting to Acquire Adverse
Interest on Confidential Matters
When a director, trustee, or officer attempts to
acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any
matter which has been reposed in him in
confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable
as a trustee for the corporation and must account
for the profits which otherwise would have accrued
to the corporation. (Sec. 30, RCC)
NOTE: Private or secret profits obtained must be
accounted for, even though the transaction on
which they are made is advantageous or is not
harmful to the corporation, or even though the
director/ trustee or officer acted without intent to
injure the corporation.
NOTE: The members of the board of directors who
approved the payment of the cash dividends despite
the insolvency of the corporation and the
stockholders who received the payment should
make good the losses. (Steinberg v. Velasco, G.R. No.
L-30460, 12 March 1929)
Q: International Air Transport Association
(IATA) and Morning Star entered a Passenger
Sales Agency Agreement such that the latter
must report all air transport ticket sales to the
former and account all payments received
through the centralized system called Billing
and Settlement Plan. IATA obtained a Credit
Insurance policy from Pioneer to assure itself of
payments by accredited travel agents for tickets
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
sales and monies due to the airline companies
under the Billing and Settlement Plan.
The policy was made known to Morning Star,
through its President, Benny Wong, who was
among those that declared itself liable to
indemnify Pioneer for any and all claims under
the policy. Morning Star had an accrued billing
of P49,021,641.80 and US$325,865.35 for the
period from Dec. 16, 2002 to Dec. 31, 2002. It
failed to remit these amounts through the
Billing and Settlement Plan.
IATA demanded from Pioneer the sums of
P109,728,051.00 and US$457,834.14
representing Morning Star’s overdue account as
of April 30, 2003. Pioneer investigated,
ascertained, and validated the claims, then paid
IATA the amounts of P100,479,171.59 and
US$457.834.14. Consequently, Pioneer
demanded these amounts from Morning Star
through a letter. IATA executed a Release of
Claim and Subrogation Receipt in favor of
Pioneer.
Pioneer filed a Complaint for Collection of Sum
of Money and Damages against Morning Star and
its shareholders and directors. Should the
shareholders and directors of Morning Star be
jointly and severally liable with Morning Star?
A: NO. Under Sec. 31 of the Corporation Code (now
Sec. 30, RCC), Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the
corporation, its stockholders or members and other
persons.
The mere fact that Morning Star has been incurring
huge losses and that it has no assets at the time it
contracted large financial obligations to IATA,
cannot be considered that its officers, Estelita Co
Wong, Benny H. Wong, Arsenio Chua, Sonny Chua
and Wong Yan Tak, acted in bad faith or such
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
circumstance would amount to fraud, warranting
personal and solidary liability of its corporate
officers.
Piercing the corporate veil in order to hold
corporate officers personally liable for the
corporation’s debts requires that "the bad faith or
wrongdoing of the director must be established
clearly, and convincingly as bad faith is never
presumed. (Pioneer Insurance v. Morning Star Travel
and Tours, G.R. No. 198436, 08 July 2015)
Disloyalty
GR: The director must account for and refund to the
office all such profits, which such director, by virtue
of such office;
1. Acquires a business opportunity which should
belong to the corporation;
2. Thereby obtaining profits to the prejudice of
such corporation. (Sec. 33, RCC)
XPN: Unless the act has been ratified by a vote of the
stockholders owning or representing at least two-
thirds (2/3) of the OCS. (Ibid.)
NOTE: This rule shall be applicable,
notwithstanding the fact that the director risked
one’s own funds in the venture. (Ibid.)
Doctrine of Corporate Opportunity
Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong
to the corporation, thereby obtaining profits to the
prejudice of such corporation, is guilty of disloyalty
and should, therefore, account to the latter for all
such profits by refunding the same, notwithstanding
that he risked his funds in the venture. (Sec. 33, RCC)
A director shall refund to the corporation all the
profits he realizes on a business opportunity which:
1. The corporation is financially able to
undertake;
2. From its nature, is in line with corporation’s
business and is of practical advantage to it; and
164
 Corporation Law
3. The corporation has an interest or a reasonable
expectancy. (Ibid.)
Q: Malyn, Schiera and Jaz are the directors of
Patio Investments, a close corporation formed
to run the Patio Cafe, an al fresco coffee shop in
Makati City. In 2000, Patio Cafe began
experiencing financial reverses, consequently,
some of the checks it issued to its beverage
distributors and employees bounced.
In October 2003, Schiera informed Malyn that
she found a location for a second cafe in Taguig
City. Malyn objected because of the dire financial
condition of the corporation.
Sometime in April 2004, Malyn learned about
Fort Patio Cafe located in Taguig City and that its
development was undertaken by a new
corporation known as Fort Patio, Inc., where
both Schiera and Jaz are directors. Malyn also
found that Schiera and Jaz, on behalf of Patio
Investments, had obtained a loan of P500,000,
from PBCom Bank, for the purpose of opening
Fort Patio Cafe. This loan was secured by the
assets of Patio Investments and personally
guaranteed by Schiera and Jaz.
Malyn then filed a corporate derivative action
before the RTC of Makati City against Schiera
and Jaz, alleging that the two directors had
breached their fiduciary duties by
misappropriating money and assets of Patio
Investments in the operation of Fort Patio Cafe.
Did Schiera and Jaz violate the principle of
corporate opportunity? Explain. (2005 BAR)
A: YES. Schiera and Jaz violated the Doctrine of
Corporate Opportunity because they used Patio
Investments to obtain a loan, mortgaged its assets
and used the proceeds of the loan to acquire a coffee
shop through a corporation they formed.
Responsibility for Crimes
Where a law requires a corporation to do a
particular act, failure of which on the part of the
responsible officer to do so constitutes an offense,
165
the responsible officer is criminally liable, therefore.
The reason is that a corporation can act through its
officers and agents and where the business itself
involves a violation of law all who participate in it
are liable. While the corporation may be fined for
such criminal offense if the law so provides, only the
responsible corporate officer can be imprisoned.
(People v. Tan Boon Kong, G.R. No. L-35262, 15 Mar.
1930)
However, a director or officer can be held liable for
a criminal offense only when there is a specific
provision of law making a particular officer liable
because being a corporate officer by itself is not
enough to hold him criminally liable.
Liability of Officers Under Trust Receipts Law
The Trust Receipts Law (P.D. 115) recognizes the
impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the
entrustee is a corporation, the law makes the
officers or employees or other persons responsible
for the offense liable to suffer the penalty of
imprisonment. (Ong v. CA, G.R. No. 119858, 29 Apr.
2003)
Though the entrustee is a corporation, nevertheless,
the law specifically makes the officers, employees or
other persons responsible for the offense, without
prejudice to the civil liabilities of such corporation
and or board of directors, officers, or other officials
or employees responsible for the offense. The
rationale is that such officers or employees are
vested with the authority and responsibility to
devise means necessary to ensure compliance with
the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in
the violations of the law. (Ching v. the Secretary of
Justice, et al., G.R. No. 164317, 06 Feb. 2006)
A trust receipt transaction imposes upon the
entrustee the obligation to deliver to the entruster
the price of the sale, or if the merchandise is not
sold, to return the same to the entruster. There are
two obligations in a trust receipt transaction: the
first, refers to money received under the obligation
involving the duty to turn it over to the owner of the
merchandise sold, while the second refers to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
merchandise received under the obligation to
"return" it to the owner. A violation of any of these
undertakings constitutes estafa defined under Art.
315 (1) (b) of the RPC, as provided by Sec. 13 of P.D.
115.
Although these pieces of evidence show that Choa
signed the Trust Receipt Agreements, they do not
show that he signed them in his personal capacity.
Without any evidence that respondent personally
bound himself to the debts of the company he
represented, this Court cannot hold him civilly liable
under the Trust Receipt Agreements. (BDO Unibank,
Inc. v. Choa, G.R. No. 237553, 10 July 2019)
Special Fact Doctrine
The special fact doctrine is an exception to the
majority rule doctrine. It states that where special
circumstances or facts are present which make it
inequitable for the director to withhold information
from the stockholder, the duty to disclose arises,
and concealment is fraud.
See also discussion on Majority Rule Doctrine – page
158.
Application of Special Fact Doctrine
In foreign U.S. jurisprudence, the special fact
doctrine was applied in the following cases:
1. Where a director actively participates in the
negotiations for a transfer of the corporate
property. (Strong v. Repide, 213 U.S. 419, 29 S.Ct.
521, 53 L.Ed. 853)
2. Where a director undertakes to speak or
becomes active in inducing the sale, he must
speak fully, frankly, and honestly, and conceal
nothing to the disadvantage of the selling
stockholder. (Poole v. Camden, 79 W. Va. 310)
3. Where a director personally seeks a
stockholder for the purpose of buying his
shares without making disclosure of material
facts within his peculiar knowledge and not
within reach of the stockholders, the
transaction will be closely scrutinized, and
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
relief may be granted in appropriate instances.
(Strong v. Repide, supra)
Inside Information
Any material non-public information about the
issuer of the securities (corporation) or the security
obtained by being an insider, which includes:
(I-D-Re-Go-L)
1. The Issuer;
2. A Director or officer (or any person performing
similar functions) of, or a person controlling the
issuer;
3. A person whose Relationship or former
relationship to the issuer gives or gave him
access to material information about the issuer
or the security that is not generally available to
the public;
4. A Government employee, director, or officer of
an exchange, clearing agency and/or self-
regulatory organization who has access to
material information about an issuer or a
security that is not generally available to the
public; or
5. A person who Learns such information by a
communication from any forgoing insiders (Sec.
3.8, SRC)
Dealings of Directors, Trustees or Officers with
the Corporation
A contract of the corporation with one or more of its
directors, trustees, officers, or their spouses and
relatives within the fourth civil degree of
consanguinity or affinity is voidable, at the option of
the corporation unless all the following conditions
are present:
1. In case of a director or trustee:
a. That the presence of such director or
trustee in the board meeting in which the
contract was approved was not necessary
to constitute a quorum for such meeting;
b. That the vote of such director or trustee
was not necessary for the approval of the
contract;
c. That the contract is fair and reasonable
under the circumstances;
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 Corporation Law
NOTE: In case of corporations vested with
public interest, material contracts are
approved by at least 2/3 of the entire
membership of the board, with at least a
majority of the independent directors voting
to approve the material contract; and
2. In case of officer: That in the case of an officer,
the contract with the officer has been
previously authorized by the board of directors.
(Sec. 31, par. 1, RCC)
NOTE: Sec. 31 does not require that the corporation
suffers injury or damage as a result of the contract.
Ratification of Contract With Director, or
Trustee
A contract of the corporation with one or more of its
directors or trustees may be ratified by the vote of
the stockholders representing at least 2/3 of the
OCS or 2/3 of the members in a meeting called for
the purpose where any of the first three (3)
conditions is absent.
Provided: There is full disclosure of the adverse
interest of the directors or trustees involved is made
at the stockholders’ meeting called for the purpose;
and the contract is fair and reasonable under the
circumstances. (Sec. 31, par. 2, RCC)
Q: Suppose that the by-laws of X Corporation, a
mining firm, provides that "The directors shall
be relieved from all liability for any contract
entered into by the corporation with any firm in
which the directors may be interested." Thus,
director A acquired claims which overlapped
with X's claims and were necessary for the
development and operation of X's mining
properties. Is the by-law provision valid? Why?
(2001 BAR)
A: NO. It is in violation of Sec. 31 of the RCC.
Q: What happens if director “A” is able to
consummate his mining claims over and above
that of the corporation’s claims? (2001 BAR)
167
A: “A” should account for and refund to the
corporation all the profits which he realized from
the transaction. He grabbed the business
opportunity from the corporation (Sec. 33, RCC).
Contracts between Corporations with
Interlocking Directors
A contract between two or more corporations
having interlocking directors shall not be
invalidated on that ground alone. Provided that:
1. Contract is not fraudulent;
2. Contract is fair and reasonable under the
circumstances; and
3. If the interest of the interlocking director in one
corporation or corporations is substantial and
the interest in the other corporation or
corporations is merely nominal, he shall be
subject to the provisions of Sec. 32 insofar as the
latter corporation or corporations are
concerned. (Sec. 32, RCC);
NOTE: Stockholdings exceeding 20% of the
outstanding capital stock shall be considered
substantial for purposes of interlocking
directors.
When a mortgagee bank foreclosed the mortgage on
the real and personal property of the debtor and
thereafter assigned the properties to a corporation
it formed to manage the foreclosed assets, the
unpaid seller of the debtor cannot complain that the
assignment is invalid simply because the mortgagee
and the assignee have interlocking directors. There
is no bad faith on the part of DBP by its creation of
Nonoc Mining, Maricalum and Island Cement as the
creation of these three corporations was necessary
to manage and operate the assets acquired in the
foreclosure sale lest they deteriorate from non-use
and lose their value. (DBP v. CA, G.R. No. 126200, 16
Aug. 2001)
EXECUTIVE COMMITTEE
Executive Committee
An executive committee is a body created by the by-
laws and composed of not less than three (3)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
members of the board which, subject to the
statutory limitations, has all the authority of the
board to the extent provided in the board resolution
or by-laws. The committee may act by a majority
vote of all of its members. (Sec. 34, RCC)
A Foreigner is Allowed to be a Member of the
Executive Committee
A foreigner can be allowed representation in the
executive committee since he can be allowed in the
BOD. An Executive Committee is a governing body
which functions as the board itself. Thus,
membership therein shall be governed by the same
law/ rules applicable to the BOD as provided in Sec.
35. (SEC Opinion, June 3, 1998)
Limitations on the Powers of the Executive
Committee
The executive committee cannot act on the
following:
1. Matters needing stockholder approval;
2. Filling up of board vacancies;
3. Amendment, repeal, or adoption of by-laws;
4. Amendment or repeal of any resolution of the
Board which by its express terms is not
amendable or repealable; and
5. Cash dividend declaration (Sec. 34, RCC)
Creation of Special Committees
The Board of directors may create special
committees of temporary or permanent nature and
determine the members’ term, composition,
powers, and responsibilities. (Sec. 34, RCC)
Decisions of the Executive Committee are NOT
Subject to Appeal to the Board
Decisions of the executive committee are not subject
to appeal to the board. However, if the resolution of
the Executive Committee is invalid, i.e. not one of the
powers conferred to it, it may be ratified by the
board. (SEC Opinion, 29 July 1995)
Q: Pursuant to its By-Laws, Soei Corporation’s
Board of Directors created an Executive
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Committee to manage the affairs of the
corporation in between board meetings. The
Board of Directors appointed the following
members of the Executive Committee: the
President, Sarah L; the Vice-President, Jane L;
and a third member from the board, Juan Riles.
in December 1, 2013, the Executive Committee,
with Sarah L and Jane L present, met and
decided on the following matters:
1. Purchase of a delivery van for use in the
corporation’s retail business;
2. Declaration and approval of the 13th month
bonus;
3. Purchase of an office condominium unit at
the Fort; and
4. Declaration of P10.00 per share cash
dividend.
Are the actions of the Executive Committee
valid? (2014 BAR)
A: NO. All the actions taken by the Executive
Committee in the problem are not valid. The
Executive Committee was not properly created and,
therefore, its acts are invalid. Sec. 35 of the
Corporation Code requires that at least three
members of an Executive Committee be directors of
the corporation. In the problem, only Member Sarah
L (who is a director as she is the president) and
Member Juan Riles (who is clearly identified in the
problem as a director) are directors of Soei
Corporation. Member Jane L is not identified as a
director. As the Executive Committee in the problem
was not properly created, it could not act at all as the
minimum quorum would be three. As stated earlier,
the Executive Committee lacks one qualified
member.
If the Executive Committee were properly
organized and a quorum was present, all the actions
taken by the Executive Committee in the problem,
except the declaration of P10.00 per share cash
dividend, would have been valid. The distribution of
cash dividends to the shareholders may not be
delegated by the Board of Directors to the Executive
Committee pursuant to Sec. 34 of the RCC
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 Corporation Law
MEETINGS OF DIRECTORS OR TRUSTEES
REGULAR SPECIAL
When
At any time upon call
Monthly, unless the
of the President or as
bylaws provide
may be provided in
otherwise.
the bylaws.
Notice Requirement
1. It must state the date, time and place of the
meeting;
2. It must be sent to every director or trustee
a. Within the period provided in the by-
laws.
b. at least two (2) days prior to the
scheduled meeting, unless a longer
period is provided in the bylaws
NOTE: A director or trustee may waive this
requirement, either expressly or impliedly. (Sec.
52, RCC)
Attendance in Meetings
Directors or trustees who cannot physically
attend or vote at board meetings can participate
and vote through remote communication such as
videoconferencing, teleconferencing, or other
alternative modes of communication that allow
them reasonable opportunities to participate.
Directors or trustees cannot attend or vote by
proxy at board meetings.
Venue
May be held anywhere in or outside of the
Philippines, unless the bylaws provide otherwise.
Consequence of Lack of Notice, Absence
A meeting held in the absence of some of the
directors and without any notice given to them is
illegal, and the action at such meeting although by a
majority of the directors, is invalid unless:
1. Subsequently ratified or waived, expressly or
impliedly, by the absent directors; or
2. Rights have been acquired by innocent third
persons, as against whom the corporation must
169
be held estopped to set up the failure to observe
formalities. (Divina, 2020)
Attendance, Voting by Proxy at Board Meetings
Directors or trustees cannot attend or vote by proxy
at board meetings. (Sec. 52, par. 5, RCC)
The members of the BOD are required to exercise
their judgment and discretion in running the affairs
of the corporation and they cannot be substituted by
others. (SEC Opinion, 27 May 1970)
Who Presides Meeting
The chairman or, in his absence, the president shall
preside at all meetings of the directors or trustees
as well as of the stockholders or members, unless
the bylaws provide otherwise (Sec. 53, RCC).
Q: Under the articles of incorporation of Manila
Industrial Corp., its principal place of business
shall be in Pasig, Metro Manila. The principal
corporate offices are at Ortigas Center, Pasig,
Metro Manila, while factory processing leather
products is in Manila. The corporation holds its
annual stockholders’ meeting at the Manila
Hotel in Manila and its BOD meeting at a hotel in
Makati, Metro Manila. The by-laws are silent as
to the place of meeting of the stockholders and
directors.
a. Who shall preside at the meeting of the
directors?
b. Can Ting, a stockholder, who did not attend
the stockholders’ annual meeting in Manila,
question the validity of the corporate
resolutions passed at such meeting?
c. Can the same stockholder question the
validity of the resolutions adopted by the
BOD at the meeting held in Makati? (1993
BAR)
A:
a. Sec. 53 of the RCC provides that it is the
chairman or, in his absence, the president who
shall preside at all meetings, unless the bylaws
provide otherwise.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
b. NO. Sec. 50 of the RCC provides that the
stockholders’ or members’ meetings, whether
regular or special, shall be held in the principal
office of the corporation as set forth in the AOI,
or, if not practicable, in the city or municipality
where the principal office of the corporation is
located. Provided, That any city or municipality
in Metro Manila, Metro Cebu, Metro Davao, and
other Metropolitan areas shall, for purposes of
this section, be considered a city or municipality
Since the principal office or business of MIC is
Pasig, Metro Manila, the holding of the annual
stockholders’ meeting in Manila, which is
within Metro Manila, is proper.
c. NO. Ting cannot question the validity of
corporate resolutions passed in the BOD
meeting because Sec. 52 of the RCC does not
require that the meeting must be held within
the city or municipality where the principal
office of the corporation is located. The
meetings of directors or trustees may be held
anywhere in or outside of the Philippines unless
the bylaws provide otherwise.
Quorum in Board Meetings
GR: Majority of the number of directors or trustees
as stated in the articles of incorporation.
XPN: If AOI or the by-laws provide for a greater
number. (Sec. 52, RCC)
NOTE: The quorum is the same even if there is
vacancy in the board.
Rule as to Vote Needed for a Decision
GR: Every decision of at least a majority of the
directors or trustees present at a meeting at which
there is quorum shall be valid as a corporate act.
XPNs:
1. The election of officers which shall require the
vote of a majority of all the members of the
board; or
2. Unless greater majority is required under the
RCC, AOI, or by-laws.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Three (3) out of five (5) directors of the board of
directors present in a special meeting do not
constitute a quorum to validly transact business
when its by-laws require at least four members to
constitute a quorum. Under Sec. 25 of the CC (now
Sec. 52, RCC), the articles of incorporation or by-
laws may fix a greater number than the majority of
the number of directors to constitute a quorum. Any
number less than the number provided in the
articles or by-laws cannot constitute a quorum; any
act therein would not bind the corporation; all that
the attending directors could do is to adjourn (Pena
v. CA, G.R. No. 91478, 07 Feb. 1991)
Effect of Abstention
No inference can be drawn in a vote of abstention.
When a director or trustee abstains, it cannot be
said that he intended to acquiesce in the action
taken by those who voted affirmatively. Neither, for
that matter, can such inference be drawn from the
abstention that he was abstaining because he was
not then ready to make a decision. (Lopez v. Ercita,
G.R. No. L-32991, 29 June 1972)
When Director is Required to Abstain
Whenever a director believes he/she has a conflict
of interest, the director should abstain from voting
on the issue and make sure his/her abstention is
noted in the minutes. (Robert's Rules, 10th ed.)
The other reason a director might abstain is that
he/she believes there was insufficient information
for making a decision. Otherwise, directors should
cast votes on all issues put before them. Failure to
do so could be deemed a breach of their fiduciary
duties.
Example: To avoid insider trading, insiders are
obligated to abstain from trading the shares of his
corporation. This duty to abstain is based on two
factors:
1. The existence of a relationship giving access,
directly or indirectly, to information intended
to be available only for a corporate purpose and
not for the personal benefit of anyone; and
170
 Corporation Law

2. The inherent unfairness involved when a party

takes advantage of such information knowing it E. STOCKHOLDERS AND MEMBERS
is unavailable to those with whom he is dealing.
(SEC v. Interport Resources Corporation, G.R. No.
135808, 06 Oct. 2008)
A person becomes a shareholder the moment he:

1. Enters into a subscription contract with an

existing corporation (he is a stockholder upon
acceptance of the corporation of his offer to
subscribe whether the consideration is fully
paid or not);
2. Purchase treasury shares from the corporation;
or
3. Acquires shares from existing shareholders by
sale or any other contract or acquires shares by
operation of law like succession. (Sundiang Sr. &
Aquino, 2009)

1. RIGHTS AND OBLIGATIONS OF A

STOCKHOLDER AND MEMBER

Rights of a Stockholder and Member

1. Management Rights
a. To attend and vote in person or by proxy
at a stockholders’ meetings; (Sec. 49, 57,
RCC)
b. To elect and remove directors; (Sec. 23, 27,
RCC)
c. To approve certain corporate; (Sec. 57,
RCC)
d. To adopt and amend or repeal the by-laws
of adopt new by-laws; (Sec. 45, 47, RCC)
e. To compel the calling of the meetings; (Sec.
49, RCC)
f. To enter into a voting trust agreement;
(Sec. 58, RCC) and
g. To have the corporation voluntarily
dissolved. (Sec. 117, 118, RCC)

2. Proprietary Rights
a. To transfer stock in the corporate book;
(Sec. 62, RCC)
b. To receive dividends when declared; (Sec.
42, RCC)
c. To the issuance of certificate of stock or
other evidence of stock ownership; (Sec.
63, RCC)

171 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

d. To participate in the distribution of While a stockholder has no personal liability for the
corporate assets upon dissolution; (Sec. debts of the corporation beyond the amount of his
117, 118, RCC) and capital investment, he is personally liable for the
e. To pre-emption in the issue of shares. (Sec. above obligations. In addition, he may become
38, RCC) personally liable for damages or otherwise for any
wrongful disposition of corporate assets, breaches
3. Remedial Rights of fiduciary duties, fraud, gross negligence,
a. To inspect corporate books; (Sec. 73, RCC) unauthorized acts, violations of law, or improper
b. To recover stock unlawfully sold for use of the corporate form.
delinquent payment of subscription; (Sec.
68, RCC)
c. To be furnished with most recent financial
statements or reports of the corporation’s
operation; (Sec. 73, 74, RCC)
d. To bring suits (derivative suit, individual
suit, and representative suit); and
e. To demand payment in the exercise of
appraisal right. (Sec. 40, 81, RCC)

a. DOCTRINE OF EQUALITY OF SHARES

Under the doctrine of equality of shares, all stocks

issued by the corporation are presumed equal with
the same privileges and liabilities, provided that the
Articles of Incorporation is silent on such
differences. (CIR v. CA, G.R. No. 108576, 20 Jan. 1999)

In considering the proposed dividend distribution

system, the entitlement of certain kind of stocks to
preferences and benefits must be clearly and
expressly stated in the articles of incorporation of
BFDC. (SEC Opinion No. 10-20)

Obligations of a Stockholder

The following are the obligations of the stockholder:

1. Liability to the corporation for unpaid

subscription; (Sec. 65-69, RCC)
2. Liability to the corporation for interest on
unpaid subscription if so required by the
subscription contract; (Sec. 65, RCC)
3. Liability to the creditors of the corporation for
unpaid subscription; (Sec. 59, RCC)
4. Liability for watered stock; (Sec. 64, RCC)
5. Liability for dividends unlawfully paid; (Sec. 42,
RCC) and
6. Liability for failure to create corporation.
(Sundiang Sr. & Aquino, 2014; Sec. 10, RCC)

UNIVERSITY OF SANTO TOMAS 172

2022 GOLDEN NOTES
 Corporation Law
STOCKHOLDERS’/MEMBERS’ MEETINGS
DATE AND PLACE
Regular Meeting
1. Annually on date fixed in the by-laws; or
2. If not so fixed, on any date after April 15
of every year as determined by the board
of directors or trustees. (Sec. 49, RCC)
Venue:
Stock Corporations: In the principal office of
the corporation as set forth in the articles of
incorporation, or, if not practicable, in the city
or municipality where the principal office of
the corporation is located. (Sec. 50, RCC)
NOTE: Any city or municipality in Metro
Manila, Metro Cebu, Metro Davao, and other
Metropolitan areas shall, for purposes of this
section, be considered a city or municipality.
(Ibid.)
Non-stock Corporations: Any place even
outside the place where the principal office of
the corporation is located, as long as within
Philippine territory and proper notice is sent
to all members. (Sec. 92, RCC)
1. Any time deemed necessary; or
2. As provided in the by-laws.
Venue: in the principal office of the
corporation as set forth in the AOI, or, if not
practicable, in the city or municipality where
the principal office of the corporation is
located. (Sec. 50, RCC) In the city or
municipality where the principal office is
located, and if practicable in the principal
office of the corporation: Provided, that Metro
Manila shall be considered a city or
municipality.
REQUIRED WRITTEN NOTICE
The notice of meetings shall be in writing, and the time and
place thereof stated therein.
NOTE: The written notice of regular meetings may be sent
through electronic mail or such other manner as the
commission shall allow under its guidelines. (Sec. 49, RCC)
The notice shall be sent to the stockholder or member:
1. At least twenty-one (21) days prior to the meeting;
2. Unless a different period is required in the bylaws, law,
or regulation (Sec. 49, RCC)
Notice may be waived, expressly or impliedly, by any
stockholder or member.
Each notice of meeting shall further be accompanied by the
following:
1. Agenda for the meeting;
2. Proxy form which shall be submitted to the corporate
secretary within a reasonable time prior to the meeting;
3. When attendance, participation, and voting are allowed by
remote communication or in absentia, the requirements
and procedures to be followed when a stockholder or
member elects either option; and
4. When the meeting is for the election of directors or
trustees, the requirements and procedure for nomination
and election. (Sec. 50, RCC)
Special Meeting
The notice of meetings shall be in writing, and the time and
place thereof stated therein.
The notice shall be sent to the stockholder or member:
1. At least one (1) week prior to the meeting;
2. Unless a different period is provided in the bylaws, law
or regulation.
Notice may be waived, expressly or impliedly, by any
stockholder or member.
173 UNIVERSITY OF SANTO TOMAS
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 Commercial Law
NOTE: Any city or municipality in Metro
Manila, Metro Cebu, Metro Davao, and other
Metropolitan areas shall, for purposes of this
section, be considered a city or municipality.
(Sec. 50, Ibid.)
Requirements for a Valid Meeting
1. It must be held in the proper place;
2. It must be held at the stated date and at the
appointed time or at a reasonable time
thereafter;
3. It must be called by the proper person.
Rules Applicable to Certain Shares
1. Delinquent shares – shall not be entitled to
vote. (Sec. 23, RCC)
2. Treasury shares – have no voting rights while
they remain in the treasury. (Sec. 56, RCC)
3. Fractional shares – shall not be entitled to
vote.
4. Escrow shares – shall not be entitled to vote
before the fulfillment of the condition imposed
thereon.
5. Unpaid shares – if not delinquent, are entitled
to all the rights of a stockholder including the
right to vote.
6. Sequestered shares
GR: The registered owner of the shares of a
corporation, even if they are sequestered by the
government through the PCGG, exercises the
right and the privilege of voting on them.
As a mere conservator, the PCGG cannot, as a
rule, exercise acts of dominion by voting these
shares.
XPN: Two-tiered test: The registered owner of
sequestered shares may only be deprived of
these voting rights, and the PCGG authorized to
exercise the same, only if it is able to establish
that:
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
a. There is prima facie evidence showing
that the said shares are ill-gotten and thus
belong to the State; and
b. There is an imminent danger of
dissipation, thus necessitating the
continued sequestration of the shares and
authority to vote thereupon by the PCGG
while the main issue is pending before
the Sandiganbayan. (Trans Middle East
[Phils.] v. Sandiganbayan, G.R. No. 172556,
09 June 2006)
However, the two-tiered test contemplates a
situation where the registered stockholders
were in control and had been dissipating
company assets and the PCGG wanted to vote
the sequestered shares to save the company.
This was not the situation in ETPI in 1997. It
was the PCGG elected board that remained in
control during that year and it apparently had
done well in the preceding years guarding
company assets. (Africa v. Sandiganbayan, G.R.
No. 172222, 174493 & 184636, 11 Nov. 2013)
XPN to the XPN: The two-tiered test does not
apply in cases involving funds of public
character (public character exception). In such
cases, the government is granted the authority
to vote said shares, namely:
a. Where the government shares are taken
over by private persons or entities who or
which registered them in their own
names; and
b. Where the capitalization of shares that
were acquired with public funds somehow
landed in private hands. (Republic v.
Sandiganbayan, G.R. No. 107789, 30 Apr.
2003)
7. Secured Creditors and Administrators – In
case a stockholder grants security interest in his
or her shares in stock corporations, the
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 Corporation Law
stockholder-grantor shall have the right to
attend and vote at meetings of stockholders,
unless the secured creditor is expressly given
by the stockholder-grantor such right in writing
which is recorded in the appropriate corporate
books.
Executor, administrators, receivers, and other
legal representatives may attend and vote in
behalf of the stockholder or members without
need of any written proxy (Sec. 54, RCC). In
Gochan v. Young, G.R. No. 131889, 12 Mar. 2001,
it was held that heirs are not prohibited from
representing the deceased in a suit, especially
when no administrator has yet been appointed.
8. Shares jointly owned – consent of all the co-
owners is necessary, unless there is a written
proxy signed by all the co-owners authorizing
one (1) or some of them or any other person to
vote such share or shares. If shares are owned
in an “and/or” capacity by the holders thereof,
any one of the joint owners can vote or appoint
a proxy thereof. (Sec. 55, RCC)
Q: On March 15, 2002, a general stockholders'
meeting was held wherein Lao, Ong, Henry Sy, Sy
Tian Tin, Sy Tian Tin, Jr. and Paul Chua were
elected as members of the board of directors,
with Chua Lian as chairman of the board.
Yao Bio Lim and King filed a Petition against the
newly elected board of directors. They sought,
among others, to annul: (1) "the elections held
on March 15, 2002 and all corporate acts of the
supposedly new board of directors and officers
of PSI. The CA affirmed the RTC Decision holding
that there were valid grounds to nullify the
March 15, 2002 stockholders' meeting. First, the
Notice of meeting did not state the purpose of
the stockholders' meeting as required by Art.
VIII (5) of PSI's by-laws. Additionally, it was not
sent to the stockholders at least two (2) weeks
prior to the meeting as required under Sec. 50 of
the Corporation Code.
Is the 2002 Meeting a special meeting, and thus
require the purpose to be specified? Does it need
to follow the 2-week notice requirement?
175
A: NO. The agenda for the meeting, which includes
the elections of the new board of directors and
ratification of acts of the incumbent board of
directors and management, was the standard order
of business in a regular annual meeting of
stockholders of a corporation. Thus, the March 15,
2002 annual stockholders' meeting was a regular
meeting. Hence, the requirement to state the object
and purpose in case of a special meeting as provided
for in Art. VIII (5) of the PSI’s by-laws does not apply
to the Notice for the March 15, 2002 annual
stockholders' meeting.
Regarding the time for serving notice of the meeting
to all the stockholders, Sec. 50 of B.P. No. 68 reads in
part:
Sec. 50 [now Sec. 49, RCC]. Regular and Special
Meetings of Stockholders or Members. – Regular
meetings of stockholders or members shall be
held annually on a date fixed in the by-laws, or
if not so fixed, on any date in April of every year
as determined by the board of directors or
trustees: Provided, that written notice of regular
meetings shall be sent to all stockholders or
members of record at least two (2) weeks prior
to the meeting, unless a different period is
required by the by-laws.
Under PSI's by-laws, notice of every regular or
special meeting must be mailed or personally
delivered to each stockholder not less than five (5)
days prior to the date set for the meeting.
In this case, the PSI's by-laws providing only for a
five (5)-day prior notice must prevail over the two
(2)-week notice under the Corporation Code. By its
express terms, the Corporation Code allows "the
shortening (or lengthening) of the period within
which to send the notice to call a special (or regular)
meeting." Thus, the mailing of the Notice to
respondents on March 5, 2002 calling for the annual
stockholders' meeting to be held on March 15, 2002
is not irregular, since it complies with what was
stated in PSI's by-laws. (Lao v. Lim, G.R. No. 201306,
09 Aug. 2017)
NOTE: Sec. 49 of the RCC provides that written
notice of regular meetings shall be sent at least
twenty-one (21) days prior to the meeting, unless a
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
different period is required in the bylaws, law, or
regulation.
Who Calls the Meeting
The “call” for a meeting is exercised by the person
who has the power to call the meeting. The
following persons may exercise the power to “call”
for a meeting:
1. The person or persons designated in the by-
laws to have the authority to call stockholders’/
members’ meeting;
2. In the absence of such provision in the by-laws,
the director/trustee or officer entrusted with
the management of the corporation unless
otherwise provided by law;
A stockholder/member may make the call on
order of the SEC whenever for any cause, there
is no person authorized to call a meeting (Sec.
49, RCC) or the officers authorized fail or refuse
to call a meeting; and
NOTE: SEC may compel the officers of any
corporation registered by it to call meetings of
stockholders/members thereof under its
supervision. (Sec. 6 [f], P.D. No. 902-A)
3. Corporate Secretary on order of the president,
or upon written demand of the stockholders
representing or holding at least a majority of
the outstanding capital stock, or a majority of
the members entitled to vote for a special
meeting intended for the removal of directors
or trustees, provided:
a. There must be a previous notice;
b. There must be a quorum. (Sec. 27, RCC)
NOTE: If there is no secretary, or if the secretary,
despite demand, fails or refuses to call the special
meeting or to give notice thereof, the stockholder or
member of the corporation signing the demand may
call for the meeting by directly addressing the
stockholders or members (Sec. 27, RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Quorum
GR: Quorum shall consist of the stockholders
representing at least majority of the outstanding
capital stock or a majority of the actual and living
members with voting rights, in the case of non-stock
corporation. (Tan v. Sycip, G.R. No. 153468, 17 Aug.
2006).
XPN: A different quorum may be provided for in the
by-laws.
Minutes of the Meeting
The minutes are a brief statement not only of what
transpired at a meeting, usually of stockholders/
members or directors/trustees, but also at a
meeting of an executive committee.
The minutes are usually kept in a book especially
designed for that purpose, but they may also be kept
in the form of memoranda or in any other manner in
which they can be identified as minutes of a
meeting. (People v. Dumlao, GR 168918, 02 March
2009)
Probative Value of Meetings
The minutes of board meetings should be signed by
the corporate secretary. Without such signature,
neither probative value nor credibility could be
accorded such minutes. (Union of Supervisors [RB]-
NATU v. Sec. of Labor, G.R. No. L- 39889, 12 Nov.
1981)
Minutes of meetings without the signature of the
corporate secretary have no probative value, and
therefore cannot be demanded for inspection or
examination. (Villanueva, 2018)
2. PARTICIPATION IN MANAGEMENT
Under the RCC, stockholders or members
periodically elect the board of directors or trustees,
who are charged with the management of the
corporation. The board, in turn, periodically elects
officers to carry out management functions on a
day-to-day basis. As owners, though, the
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 Corporation Law
stockholders or members have residual powers
over fundamental and major corporate changes.
While stockholders and members (in some
instances) are entitled to receive profits, the
management and direction of the corporation are
lodged with their representatives and agents -- the
board of directors or trustees. In other words, acts
of management pertain to the board; and those of
ownership, to the stockholders or members. In the
latter case, the board cannot act alone, but must
seek approval of the stockholders or members. (Tan
v. Sycip, G.R. No. 153468, 17 Aug. 2006)
a. PROXY
Stockholders and members may vote in person or
by proxy in all meetings of stockholders or
members. (Sec. 57, RCC)
However, the right of members to vote by proxy
may be denied under the AOI or by-laws of a non-
stock corporation. (Sec. 88, RCC)
The term “proxy” designates the formal written
authority given by the owner or holder of the stock,
who has a right to vote it, or by a member, as
principal, to another person, as agent, to exercise
the voting rights of the former.
It is also used to apply to the holder of the authority
or person authorized by an absent stockholder or
member to vote for him at a stockholders’ or
members’ meeting.
NOTE: A proxy is a special form of agency. A proxy
holder is an agent and as such a fiduciary.
Since a proxy acts for another, he may act as such
although he himself is disqualified to vote his
shares. A proxy-stockholder disqualified to vote
because his stock has been declared delinquent may
vote the stocks of his principal which are not
delinquent.
Purposes of Proxies
1. Assures the presence of a quorum in meetings
of stockholders of large corporations;
177
2. Enables those who do not wish to attend a
stockholders’/ members’ meeting to protect
their interest by exercising their right to vote
through a representative; and
3. One of the devices in securing voting control or
management control in the corporation. (Ibid.)
Who May Be a Proxy
Any person whom the stockholder or member sees
fit to represent him.
NOTE: By-laws restricting the stockholder’s or
member’s right in this respect are void.
Further, same person may act as proxy for one or
several stockholders or members.
Duration of Proxy
1. Specific proxy – authority granted to the proxy
holder to vote only for a particular meeting on a
specific date.
2. Continuing proxy – authority granted a proxy
to appear and vote for and on behalf of a
shareholder for a continuing period which
should not be more than five (5) years at any
one time. By-laws may provide for a shorter
duration of a continuing proxy.
Extent of Authority
1. General Proxy – A general discretionary power
to attend and vote at an annual meeting, with all
the powers the undersigned would possess if
personally present, to vote for directors and all
ordinary matters that may properly come
before a regular meeting.
NOTE: A holder of a general proxy has no
authority to vote for a fundamental change in
the corporate charter or other unusual
transactions such as merger or consolidation.
2. Limited Proxy – Restrict the authority to vote
to specified matters only and may direct the
manner in which the vote shall be cast. (Ibid.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Requirements of a Valid Proxy
1. Proxies shall be in writing and shall be signed
by the stockholder or member concerned. Oral
proxies are NOT valid;
2. The proxy shall be filed within a reasonable
time before the scheduled meeting with the
corporate secretary;
3. Unless otherwise provided (continuing in
nature) in the proxy, it shall be valid only for the
meeting for which it is intended. The authority
may be general or limited; and
4. No proxy shall be valid and effective for a period
longer than 5 years at any one time. (Sec. 57,
RCC)
Instances when the Right to Vote by Proxy may
be Exercised
1. Election of the BOD/BOT; (Sec. 23, RCC)
NOTE: When proxies are solicited in relation to
the election of corporate directors, the resulting
controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation,
should be properly seen as an election
controversy within the original and exclusive
jurisdiction of the trial courts by virtue of Sec.
5.2 of the SRC in relation to Sec. 5(c) of P.D. No.
902-A. From the language of Sec. 5(c) of P.D. No.
902-A, it is indubitable that controversies as to
the qualification of voting shares, or the validity
of votes cast in favor of a candidate for election
to the board of directors are properly
cognizable and adjudicable by the regular
courts exercising original and exclusive
jurisdiction over election cases. (GSIS v. CA, G.R.
No. 183905, 06 Apr. 2009)
2. Voting in case of joint ownership of stock; (Sec.
55, RCC)
3. Voting by trustee under Voting Trust
Agreements; (Sec. 58, RCC) and
4. Voting by members in nonstock corporations.
(Sec. 88, RCC)
NOTE: In nonstock corporations the right to
vote by proxy, or even the right to vote may be
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
denied to members in the AOI or the by-laws as
long as the denial is not discriminatory.
5. In considering other matters:
a. Pledge or mortgage of shares; (Sec. 54,
RCC)
b. In all other matters as may be provided in
the by-laws; and
c. In all meetings of stockholders or
members. (Sec. 57, RCC)
Power to Appoint a Proxy is a Purely Personal
Right
The right to vote is inseparable from the right of
ownership of stock. The appointment of proxy is,
therefore, purely personal and to be valid, a proxy to
vote stock must have been given by the person who
is the legal owner of the stock entitled to vote the
same at the time it is voted. (SEC Opinion, 03 Dec.
1993, citing 5 Fletcher, Sec. 2053)
Unless the stockholder or member who executed a
proxy gives his consent in writing, a designated
proxy may not further re-designate another under
the same proxy. An alternate proxy can only act as
proxy in case of non-attendance of the other
designated proxy. (De Leon, supra)
Revocation of Proxy
A proxy may be revoked in writing, orally or by
conduct.
GR: One who has given a proxy the right to vote may
revoke the same at any time.
XPN: If said proxy is coupled with interest, even if it
may appear by its terms to be revocable. (De Leon,
supra)
Last proxy given revokes all previous proxies. (SEC
Opinion, 14 Oct. 1991)
SEC may Pass Upon Validity of Issuance and Use
of Proxies
PD 902-A empowers the SEC, among others, “to pass
upon the validity of the issuance and use of proxies
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 Corporation Law
and voting trust agreements for absent
stockholders or members.” (P.D. No. 902-A, Sec. 5[d])
Procedural Matters Relating to Proxies
1. “Proxy Solicitation” involves the securing and
submission of proxies, while “Proxy Validation”
concerns the validation of such secured and
submitted proxies;
2. The SEC’s power to pass upon the validity of
proxies in relation to election controversies has
effectively been withdrawn, tied as it is to its
abrogated jurisdictional powers and has been
transferred to the RTC Special Commercial
Courts pursuant to the terms of Sec. 5.2 of the
Securities Regulation Code;
3. However, although an intra-corporate
controversy may animate a disgruntled
shareholder to complain to the SEC a
corporation’s violations of SEC rules and
regulations, that motive alone should not be
sufficient to deprive the SEC of its investigatory
and regulatory powers, especially so since such
powers are exercisable on a motu proprio basis.
The fact that the jurisdiction of the regular courts
under Sec. 5(c) is confined to the voting on election
of officers, and not on all matters which may be
voted upon by stockholders, elucidates that the
power of the SEC to regulate proxies remains
extant and could very well be exercised when
stockholders vote on matters other than the
election of directors. (GSIS v. CA, G.R. No. 183905, 16
Apr. 2009)
NOTE: It must be noted however that directors or
trustees cannot vote by proxy at board meetings.
(Sec. 52, RCC)
b. VOTING TRUST
Voting Trust Agreement
A voting trust agreement (VTA) is an agreement
whereby one or more stockholders transfer their
shares of stocks to a trustee, who thereby acquires
for a period of time the voting rights (and/or any
179
other specific rights) over such shares; and in
return, trust certificates are given to the
stockholder/s, which are transferable like stock
certificates, subject, to the trust agreement.
Principal Purpose: To acquire control of the
corporation.
Other Purposes
1. To make possible a unified control of the affairs
of the corporation and a consistent policy by
binding stockholders to vote as a unit;
2. To assure continuity of policy and management
especially of a new corporation desirous of
attracting investors;
3. To enable the owners of the majority of the
stock of the corporation to control the
corporation;
4. To vest and retain the management of the
corporation in the persons originally promoting
it;
5. To prevent a rival concern from acquiring
control of the corporation;
6. To carry out a proposed sale of the
corporation’s assets and to facilitate its
dissolution;
7. To enable two holding companies to operate
jointly a corporation controlled by them;
8. To effect a plan for reorganization of a
corporation in financial difficulty or in
bankruptcy proceedings;
9. To aid a financially embarrassed corporation to
obtain a loan and protect its creditors.
Procedural Requirements and Limitations on
VTAs
1. The agreement must be in writing and
notarized and specify the terms and conditions
thereof;
2. A certified copy of such agreement shall be filed
with the corporation and with the SEC,
otherwise, it is ineffective and unenforceable;
3. The certificate/s of stock covered by the VTA
shall be cancelled;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

4. A new certificate shall be issued in the name of
the trustee/s stating that they are issued
pursuant to the VTA;
5. The transfer shall be noted in the books of the
corporation, that it is made pursuant to said
VTA;
6. The trustee/s shall execute and deliver to the
transferors voting trust certificates, which shall
be transferable in the same manner and with
the same effect as certificates of stock;
7. GR: No VTA shall be entered into for a period
exceeding 5 years at any one time (i.e., for every
voting trust);
the right to receive dividends. (Lee v. CA, G.R. No.
93695, 04 Feb. 1992)
NOTE: The voting trust agreement filed with the
corporation shall be subject to examination by any
stockholder in the same manner as any other
corporate book or record. Both the transferor and
the trustee may exercise the right of inspection of all
corporate books and records. (Sec. 58, RCC)
Trustor has the right to terminate a voting trust
agreement when the trustee has committed a
breach of trust. (Everett v. Asia Banking Corp., G.R.
No. L-25241, 03 Nov. 1926)

XPN: In case of a voting trust specifically

requiring a longer period as a condition in a
loan agreement, the period may exceed 5 years
but shall automatically expire upon full
payment of the loan; and

8. No VTA shall be entered into for the purpose of

circumventing the laws against anti-
competitive agreements, abuse of dominant
position, anti-competitive mergers and
acquisitions, violation of nationality and capital
requirements, or for the perpetuation of fraud.
(Sec. 58, RCC)

NOTE: Unless expressly renewed, all rights granted

in a voting trust agreement shall automatically
expire at the end of the agreed period, and the
voting trust certificates as well as the certificates of
stock in the name of the trustee or trustees shall
thereby be deemed cancelled and new certificates of
stock shall be reissued in the name of the trustors.
(Sec. 58, RCC)

Effects of Voting Trust Agreement With Respect

to Trustee

It is the trustee of the shares who acquires legal title

to the shares under the voting trust agreement and
thus entitled to the right to vote and the right to be
elected in the board of directors while the trustor-
stockholder has the beneficial title which includes

UNIVERSITY OF SANTO TOMAS 180

2022 GOLDEN NOTES
 Corporation Law

Voting Trust Agreement vs. Proxy

VOTING TRUST PROXY

Revocability
If validly executed, VTA is intended to be
A proxy, unless coupled with interest, is revocable at any
irrevocable for a definite and limited period of
time.
time.
Legal Title
Trustee acquires legal title to the shares of the
Proxy has no legal title to the shares of the principal.
transferring stockholder.
Rights Included

Right to vote as well as other rights may be given

except the right to receive dividends. The trustee
Only the right to vote is given.
may vote in person or by proxy unless the
agreement provides otherwise.

Notarization Requirement

The agreement must be notarized. Proxy need not be notarized.

Limitations to Act

Trustee is not limited to act at any particular

Proxy can only base on authority given.
meeting.

Cancellation of Stock Certificate

The stock certificate shall be cancelled and a new

one in the name of the trustee shall be issued No cancellation of the certificate shall be made.
stating that they are issued pursuant to a VTA.

Extent of Right

A trustee can vote and exercise all the rights of the

A proxy can only vote in the absence of the stockholder.
stockholder even when the latter is present.

Term or Duration

An agreement must not exceed 5 years at any one A proxy is usually of shorter duration although under
time except when the same is made a condition of Sec. 58 it can be for a longer period not to exceed 5 years
a loan. at any one time.

Governing Law

Governed by the law on trust. Governed by the law on agency.

Right to Inspect
A proxy does not have a right of inspection of corporate
A trustee has the right to inspect corporate books.
books.

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FACULTY OF CIVIL LAW
 Commercial Law
Pooling Agreement
Pooling or voting agreements are agreements by
which two or more stockholders agree that their
shares shall be voted as a unit. They are usually
concerned with the election of directors to gain
control of the management. The parties remain the
legal owners of their stocks with the right to vote
them. (De Leon, supra)
NOTE: This does not involve a transfer of stocks but
is merely a private agreement. (Sec. 99, RCC)
Example: Shareholders A, B, C, D, and E hold 50% of
the outstanding capital stock, entered into a pooling
agreement to vote for F as a member of the board of
directors.
Validity of Pooling Agreements
Pooling agreements are valid as long as they do not
limit the discretion of the BOD in the management
of corporate affairs or work any fraud against
stockholders not party to the contract.
The validity and legality of such pooling agreements
depend upon the objects sought to be attained and
the acts which are done under them, and the other
circumstances. There is some authority for holding
pooling agreements to be invalid if the
consideration for entering into the same gives a
private benefit to the stockholder.
Pooling Agreement vs. Voting Trust Agreement
In a Pooling Agreement, the stockholders
themselves exercise their right to vote. On the other
hand, the trustees are the ones who exercise the
right to vote under the Voting Trust Agreement.
Q: A distressed corporation executed a VTA for a
period of three years over 60% of its
outstanding paid-up shares in favor of a bank to
which it was indebted, naming the Bank as
trustee. The Company mortgaged all its
properties to the Bank. The Bank foreclosed the
mortgaged properties, and as the highest
bidder, acquired said properties and assets of
the Company.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The three-year period having expired, the
company demanded the turn-over and transfer
of all its assets and properties, including the
management and operation of the company,
claiming that under the Voting Trust Agreement,
the bank was constituted as trustee of the
management and operations of the Company. Is
the company correct? (1992 BAR)
A: NO. The company’s demand does not tally with
the concept of VTA because such agreement merely
conveys to the trustee the right to vote the shares of
the grantor. The consequence of the foreclosure of
the mortgaged properties would not be in
consonance with the VTA and its effects.
c. CASES WHEN STOCKHOLDERS’ ACTION
IS REQUIRED
Under Sec. 6 of the Corporation Code, each share of
stock is entitled to vote, unless otherwise provided
in the AOI or declared delinquent under Sec. 67 of
the Corporation Code (now Sec. 66, RCC). (Tan v.
Sycip, G.R. No. 153468, 17 Aug. 2006)
Right to Vote
The stockholders can exercise their right to vote
through the election, replacement and removal of
Board of Directors or Trustees and on other
corporate acts which require stockholders’
approval.
Nature of Right to Vote
One of the rights of a stockholder is the right to
participate in the control and management of the
corporation that is exercised through his vote. The
right to vote is a right inherent in and incidental to
the ownership of corporate stock, and such is a
property right. The stockholder cannot be deprived
of the right to vote his stock nor may the right be
essentially impaired, either by the legislature or by
the corporation, without his consent, through
amending the charter, or the by-laws (Castillo v.
Balinghasay, G.R. No. 150976, 18 Oct. 2004)
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 Corporation Law

Conditions for Issuance of Non-Voting Shares b. Shares subject of a settlement of estate

Non-voting shares may be issued provided the
following conditions under Sec. 6 of the RCC are
complied with:
1. No share may be deprived of voting rights
except those classified and issued as
“preferred” or “redeemable” shares, unless
otherwise provided in this Code; and
2. There shall always be a class or series of shares
with complete voting rights; and
3. Holders of nonvoting shares shall nevertheless
be entitled to vote on certain matters provided
in the RCC.
Instances when Non-Voting Shares shall
nevertheless be Entitled to Vote
The non-voting shares may still vote in the following
matters: (A-A-S-I-I-M-I-D)
1. Amendment of the articles of incorporation;
2. Adoption and amendment of By-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with the
corporation code; and
8. Dissolution of the corporation (Sec. 6, RCC)
proceeding or under receivership:
Executors, administrators, receivers, and other
legal representatives duly appointed by the
court may attend and vote in behalf of the
stockholders or members without need of any
written proxy. (Sec. 54, RCC)
c. Shares under joint ownership: The consent of
all the co-owners shall be necessary in voting
shares of stock owned jointly by two (2) or
more persons, unless there is a written proxy,
signed by all the co-owners, authorizing one (1)
or some of them or any other person to vote
such share or shares: Provided, That when the
shares are owned in an "and/or" capacity by the
holders thereof, any one of the joint owners can
vote said shares or appoint a proxy therefor.
(Sec. 55, RCC)
d. Treasury shares: Treasury shares shall have
no voting right as long as such shares remain in
the treasury. (Sec. 56, RCC)
i. BY A MAJORITY VOTE
Refer to the Vote Requirement table on page 184.
ii. BY A TWO-THIRDS VOTE
Refer to the Vote Requirement table on page 184.

Right to vote in the following cases:

a. Shares under security interest: In case a

stockholder grants security interest in his or
her shares in stock corporations, the
stockholder-grantor shall have the right to
attend and vote at meetings of stockholders,
unless the secured creditor is expressly given
by the stockholder-grantor such right in writing
which is recorded in the appropriate corporate
books. (Sec. 54, RCC)

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FACULTY OF CIVIL LAW
 Commercial Law

Corporate Powers Exercised Jointly by the BOD and Stockholders (I4-P-A2-G-E2-S-M-A-V)

VOTE REQUIREMENT
BOARD OF DIRECTORS STOCKHOLDERS
Amendments, Repeal, or Adoption of New By-laws

GR: Majority vote of the outstanding capital stock.

Majority vote of the BOD.
XPN: If delegated by the stockholders to the board.

Entering into Management Contract

GR: Vote of the majority of the outstanding shares of

stock or members of both the managing and the
managed corporation.

XPN: The vote required for the managed corporation

is not merely majority but 2/3 of the outstanding
capital stock in cases where:

Majority of the quorum of the BOD. 1. A stockholder or stockholders representing the

same interest of both the managing and the
managed corporations own or control more than
one-third (1/3) of the total OCS entitled to vote of
the managing corporation; or
2. Majority of the members of the board of directors
of the managing corporation also constitute a
majority of the members of the board of directors
of the managed corporation.

Issuance of Stock Dividends

Majority of the quorum of the BOD. Vote representing 2/3 of the OCS.

Amendment to Articles of Incorporation

Majority vote of the BOD. Vote representing 2/3 of the OCS.

Grant of Compensation to Directors

Approval of the Board. Majority vote of the OCS.

Extending or Shortening the Corporate Term

Majority vote of the BOD. Vote representing 2/3 of the OCS.

Increase or Decrease of Capital Stock

Majority vote of the BOD. Vote representing 2/3 of the OCS.

Incur, Create, or Increase Bonded Indebtedness

Majority vote of the BOD. Vote representing 2/3 of the OCS.

Deny Pre-emptive Right

Majority vote of the BOD. Vote representing 2/3 of the OCS.

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 Corporation Law

Investment of Corporate Funds in Another Corporation or Business or

for Any Other Purpose other than the Primary Purpose

Majority vote of the BOD. Vote representing 2/3 of the OCS.

The Sale or Other Disposition of All or Substantially All of the Corporate Assets

Majority vote of the board. Vote representing 2/3 of the OCS.

Merger or Consolidation
Majority vote of the BOD Vote representing 2/3 of the OCS.

Voluntary Dissolution
Majority vote of the BOD. Vote representing 2/3 of the OCS.

To Adopt a Plan of Distribution of Assets of a Non-stock Corporation

Majority vote of the Trustees. 2/3 of the members having voting rights.

Corporate Powers Exercised Solely by the To revoke the power delegated to the BOD to
Stockholders amend or repeal the by-laws
or adopt new by laws
CORPORATE POWERS
Majority of the OCS or of the members.
Election of directors or trustees; Filling up of
vacancies by the stockholders due to the To call a special meeting to
expiration of term, removal from office or remove directors or trustees
increase in the number of board seats
Majority of the OCS or of the members entitled to
Candidates receiving the highest number of votes vote.
from the outstanding capital stock or members
entitled to vote. (plurality, NOT majority) Removal of directors

To elect officers of the corporation
Plurality vote of the BOD listed in the AOI, not
merely those present constituting a quorum.
Fixing the issued price of no-par value shares
Majority of the quorum of the BOD if authorized
by the AOI or in the absence of such authority, by
a majority of the outstanding capital stock.
Vote representing 2/3 of the OCS or of members
entitled to vote.
Delegation of the power to amend by-laws
to the board of directors
Vote representing 2/3 of the OCS.
Ratification of corporate contract
with a director

Declaration of cash and other dividends other Vote representing 2/3 of the OCS.
than stock dividends

Majority of the quorum of the board. To delegate to the BOD the power to amend or
repeal the by-laws or adopt new by laws
To adopt by-laws

Majority of the OCS or of the members. 2/3 of the OCS or of the members.

185 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

iii. BY CUMULATIVE VOTING
Cumulative Voting
In stock corporations, stockholders entitled to vote
shall have the right to vote the number of shares of
stock standing in their own names in the stock
books of the corporation at the time fixed in the
bylaws or where the bylaws are silent, at the time of
the election.
The said stockholder may:
a. Vote such number of shares for as many
persons as there are directors to be elected;
b. Cumulate said shares and give one (1)
candidate as many votes as the number of
directors to be elected multiplied by the
number of the shares owned; or
c. Distribute them on the same principle among
as many candidates as may be seen fit.
GR: Members of nonstock corporations may cast as
many votes as there are trustees to be elected but
may not cast more than one (1) vote for one (1)
candidate.
XPN: Cumulative voting is allowed in the AOI or in
the bylaws.
3. PROPRIETARY RIGHTS
The following are the proprietary rights of the
stockholders:
and not on the amount paid for the shares. (SEC
Opinion, 10 Oct. 1992 and 16 July 1996)
GR: Stock corporations are prohibited from
retaining surplus profits in excess of 100% of their
paid-in capital stock.
XPNs:
1. When justified by definite corporate
expansion projects or programs approved by
the board of directors;
2. When the corporation is prohibited under any
loan agreement with any financial institution
or creditor, whether local or foreign, from
declaring dividends without its/his consent,
and such consent has not yet been secured; or
3. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is need for special reserve
for probable contingencies. (Sec. 42, RCC)
Entitlement to Receive Dividends
GR: Those stockholders at the time of declaration
are entitled to dividends. (Sundiang Sr. & Aquino,
2009, citing SEC Opinion, 15 July 1994)
NOTE: Dividends declared before the transfer of
shares belongs to the transferor and those declared
after the transfer, belong to the transferee. (Ibid.)
XPN: In case a record date is provided for.

1. Right to Dividends; A record date is the date fixed in the resolution

2. Right of Appraisal; declaring dividends, when the dividend shall be
3. Right to Inspect; payable to those who are stockholders of record on
4. Pre-emptive Right; and a specified future date or as of the date of the
5. Right of First Refusal. meeting declaring said dividend. (De Leon, supra)

Right of Holders of Non-Delinquent, But Not

a. RIGHT TO DIVIDENDS
Fully Paid Shares

It is the right of the stockholder to demand payment

Holders of shares not fully paid which are not
of dividends after the board’s declaration.
delinquent shall have all the rights of a stockholder.
Stockholders are entitled to dividends pro rata
based on the total number of shares that they own

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 Corporation Law
GR: Prior to the declaration of a dividend, a
stockholder cannot maintain an action at law to
recover his share of the accumulated profits
because such stockholder has no individual interest
in the profits of a corporation until a dividend has
been declared.
XPN: An action at law may be maintained where it
is alleged that sufficient net profits have been
earned to obligate the corporation to pay, however,
there must be a prior application with the directors
for the relief sought. If it appears that the directors
have wantonly violated their duty, and such
application would be inefficacious, such application
need not be made.
No dividends can be declared out of capital, except
when liquidating dividends distributed at
dissolution. (Sec. 139, RCC)
Applying Dividends to Delinquent Shares
Cash
Cash dividends due on delinquent stock shall first
be applied to the unpaid balance on the
subscription plus cost and expenses.
Stock
Stock dividends are withheld from the delinquent
stockholder until his unpaid subscription is fully
paid.
b. RIGHT OF APPRAISAL
The right of a stockholder to dissent and demand
payment of the fair value of the shares in the certain
instances provided in the RCC. (Sec. 80, RCC)
Requisites: (G-W-A-F-U)
1. Any of the Grounds for appraisal must be
present;
2. A Written demand on the corporation must be
made within 30 days after the date when the
vote was taken;
3. The dissenting stockholders Attend the meeting
of the stockholders and voted against the
proposed action;
187
4. The price of the Fair Market Value of the shares
on the day before the date of voting;
NOTE: In case of disagreement, the value will be
determined by appraisal of 3 disinterested
persons. (Sec. 81, RCC)
5. The corporation has sufficient Unrestricted
retained earnings to pay. The trust fund
doctrine backstops the requirement of
unrestricted retained earnings to fund the
payment of the shares of stocks of the
withdrawing stockholders (Turner vs. Lorenzo
G.R. No. 157479, 24 Nov. 2010)
Instances of Exercise of Appraisal Right
Any stockholder of a corporation shall have the right
to dissent and demand payment of the fair value of
his shares in the following instances:
1. In case any amendment to the AOI has the effect
of changing or restricting the rights of any
stockholder or class of shares, or of authorizing
preferences in any respect superior to those of
outstanding shares of any class, or of extending
or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code;
3. In case of merger or consolidation; and
4. In case of investment of corporate funds for any
purpose other than the primary purpose of the
corporation; (Sec. 80, RCC)
NOTE: Any stockholder of a close corporation may,
for any reason, compel said corporation to purchase
his shares at their fair value, which shall not be less
than their par or issued value, when the corporation
has sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock. (Sec. 104,
RCC)
Q: Assuming a stockholder disagrees with the
issuance of new shares and the pricing for the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
shares; may the stockholder invoke his
appraisal rights and demand payment for his
shareholdings? (1999 BAR)
A: NO. The stockholder may not invoke his appraisal
right because disagreement with the issuance of
new shares and its pricing do not fall under any of
the instances where the appraisal right is available.
Effects of Exercise
1. Once the dissenting stockholder demands
payment of the fair value of his shares:
a. All rights accruing to such shares including
voting and dividend rights shall be
suspended; and
b. He shall be entitled to receive payment of
the fair value of his shares as agreed upon
between him and the corporation or as
determined by the appraisers chosen by
him;
c. GR: He is not allowed to withdraw his
demand for payment of his shares
XPN: Unless the corporation consents
thereto.
2. If the dissenting stockholder was not paid the
value of his shares within 30 days after the
award, his voting and dividend rights shall be
immediately restored until payment of his
shares (Sec. 82, RCC);
NOTE: Even if his rights as stockholder are
suspended after his demand in writing is made,
he cannot be considered as an ordinary creditor
of the corporation (SEC Opinion, 11 Jan 1982);
3. Upon payment of the stockholder’s shares, all
his rights as stockholders are terminated, not
merely suspended (Sec. 81, RCC); and
4. If before the stockholder is paid, the proposed
corporate action is abandoned, his rights and
status as a stockholder shall thereupon be
permanently restored. (Sec. 83, RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Disagreement As to Valuation of Shares
If within a period of 60 days from the date the
corporate action was approved by the stockholders,
the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall
be determined and appraised by three (3)
disinterested persons, one of whom shall be named
by the stockholder, another by the corporation, and
the third by the two thus chosen.
The findings of the majority of the appraisers shall
be final, and their award shall be paid by the
corporation within 30 days after such award is
made. (Sec. 81, RCC)
Cost of Appraisal
The costs and expenses of appraisal shall be borne
as follows:
1. By the corporation –
a. Where the price which the corporation
offered to pay the dissenting stockholder
is lower than the fair value as determined
by the appraisers named by them;
b. Where an action is filed by the dissenting
stockholder to recover such fair value and
the refusal of the stockholder to receive
payment is found by the court to be
justified.
2. By the dissenting stockholder –
a. Where the price offered by the
corporation is approximately the same as
the fair value ascertained by the
appraisers;
b. Where the same action is filed by the
dissenting stockholder and his refusal to
accept payment is found by the court to be
unjustified. (Divina, 2020)
Q: In case of disagreement between the
corporation and a withdrawing stockholder
who exercises his appraisal right regarding the
fair value of his shares, a three-member group
shall by majority vote resolve the issue with
finality. May the wife of the withdrawing
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 Corporation Law

stockholder be named to the three member inspection of the corporate records. (Terelay v. Yulo,
group? (2011 BAR) G.R. No. 160924, 05 Aug. 2015)

A: NO. The wife of the withdrawing shareholder is
not a disinterested person.
1.
Q: When does the right to payment cease?
2.
A: The right of the dissenting stockholder to be paid
the fair value of his shares shall cease, his status as 3.
a stockholder shall thereupon be restored, and all 4.
dividend distributions which would have accrued
on his shares shall be paid to him if: 5.
1. Demand for payment is withdrawn with the
consent of the corporation;
2. The proposed corporate action is abandoned by
the corporation;
3. The proposed corporate action is rescinded by
the corporation;
4. The proposed corporate action is disapproved
by the SEC where such approval is necessary; or
5. The SEC determines that the dissenting
stockholder is not entitled to the appraisal right.
(Sec. 83, RCC)
NOTE: A dissenting stockholder who demands
payment of his shares is no longer allowed to
withdraw from his decision unless the corporation
consents thereto.
c. RIGHT TO INSPECT
The stockholder’s right of inspection of the
corporation’s book and records is based upon his
ownership of shares in the corporation and the
necessity for self-protection. (Puno v. Puno
Enterprises, Inc., G.R. No, 177066, 11 Sept. 2009)
The stockholder's right of inspection of the
corporation's books and records is based upon their
ownership of the assets and property of the
corporation. It is, therefore, an incident of
ownership of the corporate property. (Republic v.
Sandiganbayan, G.R. No. 88809, 10 July 1991)
The mere fact that the shareholding of a stockholder
is merely .001 per cent of the issued shares of stock
does not justify the denial of the request of
Valid Purposes for Inspection
Ascertainment of financial condition of
corporation or propriety of dividends
Value of the shares of stock for sale or
investment.
Existence of mismanagement.
Obtainment of list of stockholders to solicit
proxies or influence voting.
Obtainment of information in aid of litigation
with the corporation or its officers regarding
corporate transactions.
Books and Records Required to be Kept
The following are the books and records required to
be kept by private corporations:
1. The AOI and bylaws of the corporation and all
their amendments;
2. The current ownership structure and voting
rights of the corporation, including lists of
stockholders or members, group structures,
intra-group relations, ownership data, and
beneficial ownership;
3. The names and addresses of all the members of
the board of directors or trustees and the
executive officers;
4. A record of all business transaction;
5. A record of the resolutions of the board of
directors or trustees and of the stockholders or
members;
6. Copies of the latest reportorial requirements
submitted to the Commission;
7. The minutes of all meetings of stockholders or
members, or of the board of directors or
trustees;
8. Corporate records; and
9. Stock and transfer book, in case of stock
corporations. (Sec. 73, RCC)
NOTE: The duty to keep these books is imperative
and mandatory. The stockholder can likewise
inspect the financial statements of the corporation.
(Sec. 73, RCC).

189 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
Place Where Books and Records Shall be Kept
GR: All the above books and records must be kept at
the principal office of the corporation.
XPN: The stock and transfer book may be kept in the
principal office of the corporation or in the office of
its stock transfer agent, if one has been appointed by
the corporation. (Sec. 73, RCC)
Requirements for the Exercise of the Right of
Inspection
1. The right must be exercised during reasonable
hours on business days;
2. The person demanding the right has not
improperly used any information obtained
through any previous examination of the books
and records of the corporation;
3. The demand is made in writing and good faith
or for legitimate purpose germane to his
interest as a stockholder. (Sec. 73, RCC)
Good purposes may be:
a. To investigate acts of management;
b. To investigate financial conditions; fix
value of shares;
c. Mailing list for proxies; or
d. Information for litigation.
4. It should follow the formalities that may be
required in the by-laws;
5. The right does not extend to trade secrets; and
6. The inspecting or reproducing party shall
remain bound by confidentiality rules under
prevailing laws, such as the rules on trade
secrets or processes under R.A. No. 8293,
otherwise known as the “Intellectual Property
Code of the Philippines”, as amended, R.A. No.
10173, otherwise known as the “Data Privacy
Act of 2012”, R.A. No. 8799, otherwise known as
“The Securities Regulation Code”, and the Rules
of Court.
7. It is subject to limitations under special laws,
e.g. Secrecy of Bank Deposits and FCDA or the
Foreign Currency Deposits Act.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
NOTE: The right extends, in compliance with equity,
good faith, and fair dealing, to a foreign subsidiary
wholly-owned by the corporation.
Extent of Right
The right to inspect extends to the books and
records of the wholly-owned subsidiary of the
corporation. It would be more in accord with equity,
good faith and fair dealing to construe the statutory
right of the stockholder to inspect the books and
records of the corporation as extending to books
and records of its wholly-owned subsidiary which
are in the corporation’s possession and control.
(Gokongwei v. SEC, et al., G.R. No. L-45911, 11 Apr.
1979)
Persons Entitled to Right
The following are entitled to inspect the corporate
books:
1. Any director, trustee, or stockholder or member
of the corporation at reasonable hours on
business day (Sec. 73, RCC);
2. Voting trust certificate holder – The term
“stockholder”, as used in Sec. 73, RCC means not
only a stockholder of record; it includes a voting
trust certificate holder who has become merely
an equitable owner of the shares transferred
(Sec. 58, RCC);
3. Stockholder of a sequestered company
(Republic v. Sandiganbayan, supra); and
4. Beneficial owner of shares – pledgee, judgment
debtor, buyer from record owner. This is
provided that his interest is clearly established
by evidence.
Q: The deceased Carlos Puno, was an
incorporator of Puno Enterprises, Inc. (Puno,
Inc). Joselito Musni Puno, claiming to be an heir
of Carlos Puno, initiated a complaint for specific
performance against Puno, Inc. Joselito averred
that he is the son of the deceased with the
latter’s common-law wife, Amelia Puno. As
surviving heir, he claimed entitlement to the
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 Corporation Law
rights and privileges of his late father as
stockholder of Puno, Inc. The complaint thus
prayed that Joselito be allowed to inspect its
corporate book, and be given an accounting and
all the profits pertaining to the shares of Puno.
May an heir of a stockholder automatically
exercise the rights (inspection, accounting,
dividends) pertaining to the deceased?
A: NO. The stockholder’s right of inspection of the
corporation’s books and records is based upon his
ownership of shares in the corporation and the
necessity for self-protection. After all, a shareholder
has the right to be intelligently informed about
corporate affairs. Such right rests upon the
stockholder’s underlying ownership of the
corporation’s assets and property. Similarly, only
stockholders of record are entitled to receive
dividends declared by the corporation, a right
inherent in the ownership of the shares.
Upon the death of a shareholder, the heirs do not
automatically become stockholders of the
corporation and acquire the rights and privileges of
the deceased as shareholder of the corporation. The
stocks must be distributed first to the heirs in estate
proceedings, and the transfer of the stocks must be
recorded in the books of the corporation. During
such interim period, the heirs stand as the equitable
owners of the stocks, the executor or administrator
duly appointed by the court being vested with the
legal title to the stock. (Puno v. Puno Enterprises, Inc.,
G.R. No. 177066, 11 Sept. 2009)
Q: Who are the persons who may be held liable
under Sec. 73, RCC?
A: It is clear that a criminal action based on the
violation of the second or fourth paragraphs of Sec.
74 (now Sec. 73) can only be maintained against
corporate officers or such other persons that are
acting on behalf of the corporation. Violations of the
second and fourth paragraphs of Sec. 74 (now Sec.
73) contemplates a situation wherein a corporation,
acting thru one of its officers or agents, denies the
right of any of its stockholders to inspect the
records, minutes and the stock and transfer book of
191
such corporation. (Yujuico v. Quiambao, G.R. No.
180416, 02 June 2014)
Remedies for Enforcement
1. Action for mandamus or damages; and
2. Civil and criminal liability.
Q: PASARC filed an Amended Petition for
Injunction and Damages with prayer for
Preliminary Injunction and/or Temporary
Restraining Order seeking to restrain
respondents, who are stockholders of the
corporation, from demanding inspection of its
confidential and inexistent records. The RTC
issued an Order granting PASAR's prayer for a
writ of preliminary injunction. On appeal, the CA
held that there was no basis to issue an
injunctive writ. Will injunction lie to prevent the
respondents from invoking their right to
inspect?
A: NO. An action for injunction filed by a corporation
generally does not lie to prevent the enforcement by
a stockholder of his or her right to inspection. This
is the case since the Corporation Code provides that
a stockholder has the right to inspect the records of
all business transactions of the corporation and the
minutes of any meeting at reasonable hours on
business days. However, this right is not absolute
and may be refused when the information is not
sought in good faith or is used to the detriment of
the corporation. But the "impropriety of purpose
such as will defeat enforcement must be set up the
corporation defensively if the Court is to take
cognizance of it as a qualification.
In other words, corporations may raise their
objections to the right of inspection through
affirmative defense in an ordinary civil action for
specific performance or damages, or through a
comment (if one is required) in a petition for
mandamus. In this case, the petitioner did not raise
such limitations as a matter of defense. (PASARC v.
Lim, G.R. No. 172948, 05 Oct. 2016)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Liability for Violation of Right
The unjustified failure or refusal by the corporation,
or by those responsible for keeping and maintaining
corporate records, to comply with Secs. 45, 73, 92,
128, 177 and other pertinent rules and provisions of
this Code on inspection and reproduction of records
shall be punished with a fine ranging from Ten
thousand pesos (P10,000.00) to Two hundred
thousand pesos (P200,000.00), at the discretion of
the court, taking into consideration the seriousness
of the violation and its implications. When the
violation of this provision is injurious or
detrimental to the public, the penalty is a fine
ranging from Twenty thousand pesos (P20,000.00)
to Four hundred thousand pesos (P400,000.00).
(Sec. 161, RCC)
Requisites for Existence of Probable Cause to
File a Criminal Case of Violation of a
Stockholder’s Right to Inspect Corporate Books
1. A director, trustee, stockholder or member has
made a prior demand in writing for a copy or
excerpts from the corporation’s records or
minutes;
2. Any officer or agent of the concerned
corporation shall refuse to allow the said
director, etc., to examine and copy said
excerpts;
3. If such refusal is made pursuant to a resolution
or order of the BOD’s the liability for such action
shall be imposed upon the directors or trustees
who voted such refusal; and
4. Where the officer or agent of the corporation
sets up the defense that the person demanding
to examine and copy excerpts from the records
and minutes has improperly used any
information secured through any prior
examination of the same or was not acting in
good faith or for a legitimate purpose in making
his demand, the contrary must be shown or
proved. (Ang-Abaya v. Ang, G.R. No. 178511, 04
Dec. 2008)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The Corporation Code has granted to all
stockholders the right to inspect the corporate
books and records, and in so doing has not required
any specific amount of interest for the exercise of
the to inspect. (Terelay Investment and Development
Corp. v. Yulo, G.R. No. 160924, 05 Aug. 2015)
Defenses that can be set up against inspecting party:
1. Improper use of the information obtained in the
past;
2. Not acting in good faith or legitimate purpose;
and
3. Is a competitor, director, officer, controlling
stockholder or otherwise represents the
interests of a competitor. (Sec. 73, RCC)
d. PREEMPTIVE RIGHT
It is the right of shareholders to subscribe to all
issues or disposition of shares of any class in
proportion to their respective shareholdings, unless
such right is denied by the AOI or an amendment
thereto, and subject to certain exceptions. (Sec. 38,
RCC)
NOTE: The preemptive right of stockholders in
close corporations shall extend to all stock to be
issued, including reissuance of treasury shares,
whether for money, property or personal services,
or in payment of corporate debts, unless the AOI
provide otherwise. (Sec.101, RCC)
Purpose of Preemptive Right
To enable the shareholder to retain his
proportionate control in the corporation (non-
dilution) and to retain his equity in the surplus.
Exercise of Preemptive Right
Preemptive right must be exercised in accordance
with the AOI or the By-Laws. When the AOI and the
By-Laws are silent, the Board may fix a reasonable
time within which the stockholders may exercise
the right.
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 Corporation Law
Stock transactions covered includes:
1. The issuance of shares pursuant to an increase
in the authorized capital stock;
2. Opening for subscription the unissued portion
of existing authorized capital stock; and
3. Re-issuance of treasury shares.
Transferability of Preemptive Right
Preemptive right is transferable unless there is an
express restriction in the AOI.
Waiver of Preemptive Right by the Stockholder
The stockholder may waive his pre-emptive right
either expressly or impliedly as when the
stockholder fails to exercise his pre-emptive right
within the applicable period after being notified and
given an opportunity to avail of such right.
The stockholder must be given a reasonable time
within which to exercise their preemptive rights.
Upon the expiration of said period, any stockholder
who has not exercised such right is deemed to have
waived it. (Majority Stockholders of Ruby Industrial
Corp. v. Lim, G.R. Nos. 165887 & 165929, 06 June
2011)
Denial of Preemptive Right
There is preemptive right, unless such right is
denied by the AOI or an amendment thereto.
e. RIGHT OF FIRST REFUSAL
A right granting the existing stockholders or the
corporation the option to purchase the shares of the
transferring stockholder with such reasonable
terms, conditions or period stated. If, upon the
expiration of said period, the existing stockholders
or the corporation fails to exercise the option to
purchase, the transferring stockholder may sell
their shares to any third person. (Sec. 97, RCC)
Right of First Refusal is a right that arises only by
virtue of contractual stipulations, in which case the
right is construed strictly against the right of
persons to dispose of or deal with their property. It
193
may also be provided for in specified statutory
provisions, such as that provided for in Sec. 98 (now
Sec. 97) of the Code on close corporations. Unlike
preemptive right which pertains to stockholders by
common law and does not require any statutory
enabling provision, the right of first refusal, if not
provided for by law or by the AOI, does not exist at
all. (SEC-OGC Opinion No. 19-51, 11 Oct. 2019, citing
Villanueva 2001)
See also discussion on Pre-emptive Right vs. Right of
First Refusal – page 131.
4. REMEDIAL RIGHTS
Actions Available to Stockholders or Members
1. Derivative suit – one brought by one or more
stockholders or members in the name and on
behalf of the corporation to redress wrongs
committed against it or to protect or vindicate
corporate rights, whenever the officials of the
corporation refuse to sue or are the ones to be
sued or hold control of the corporation.
2. Individual suit – an action brought by a
stockholder against the corporation for direct
violation of his contractual rights as such
individual stockholder, such as the right to vote
and be voted for, the right to share in the
declared dividends, the right to inspect
corporate books and records, and others.
3. Representative suit – one brought by a person
on his own behalf and on behalf of all similarly
situated.
Where a stockholder or member is denied the right
of inspection, his suit would be individual because
the wrong is done to him personally and not to the
other stockholders or the corporation. Where the
wrong is done to a group of stockholders, as where
preferred stockholders' rights are violated, a class
or representative suit will be proper for the
protection of all stockholders belonging to the same
group. But where the acts complained of constitute
a wrong to the corporation itself, the cause of action
belongs to the corporation and not to the individual
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
stockholder or member. (Legaspi Towers 300, Inc. v.
Muer, G.R. No. 170783, 18 June 2012)
5. INTRA-CORPORATE DISPUTES
(INDIVIDUAL vs. REPRESENTATIVE vs.
DERIVATIVE SUITS)
To determine whether a case involves an intra-
corporate controversy, and is to be heard and
decided by the branches of the RTC specifically
designated by the court to try and decide such cases,
two (2) elements must concur:
1. The status or relationship of the parties
(Relationship Test); and
2. The nature of the question that is the subject of
their controversy (Nature of the Controversy
Test). (Reyes v. Zenith Insurance Co., G.R. No.
165744, 11 Aug. 2008)
Relationship Test
Initially, the main consideration in determining
whether a dispute constitutes an intra-corporate
controversy was limited to a consideration of the
intra-corporate relationship existing between or
among the parties. The types of relationships, as
declared in the case of Union Glass & Container Corp.
v. SEC (G.R. No. L-64013, 28 Nov. 1983), were as
follows:
1. Between the corporation, partnership, or
association and the public;
2. Between the corporation, partnership, or
association and its stockholders, partners,
members, or officers;
3. Between the corporation, partnership, or
association and the State as far as its franchise,
permit or license to operate is concerned; and
4. Among the stockholders, partners, or associates
themselves. (Ibid.)
Nature of the Controversy Test
Under the nature of the controversy test,
the incidents of that relationship must also be
considered for the purpose of ascertaining whether
the controversy itself is intra-corporate. The
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
controversy must not only be rooted in the
existence of an intra-corporate relationship but
must as well pertain to the enforcement of the
parties’ correlative rights and obligations under the
Corporation Code and the internal and intra-
corporate regulatory rules of the corporation. If the
relationship and its incidents are merely incidental
to the controversy or if there will still be conflict
even if the relationship does not exist, then no intra-
corporate controversy exists. (Ibid.)
Q: Santos, claiming to be a stockholder and co-
owner of Belo’s share in Belo Medical Group, Inc.
since such were acquired when they are
cohabitating as husband and wife, demanded for
inspection of the corporation’s book. However,
Belo claims that it is her who paid for the shares
and that there’s conflict of interest with respect
to the demand of Santos for inspection since the
latter owned 90% of The Obagi Skin Health Inc.
Belo Medical Group filed a complaint for
interpleader claiming the complaint was filed to
protect its interest and to compel Belo and
Santos to litigate their conflicting claims of
ownership. Belo argued that the proceedings
should not have been classified as intra-
corporate because it ceased to be that and
becomes a full-blown civil law question of
competing rights of ownership.
Santos filed for the dismissal of the case claiming
that there’s no cause of action and it is merely an
afterthought for BMG to escape criminal liability
for not allowing him to inspect the records. The
RTC dismissed the case. Is the dispute intra-
corporate?
A. YES. The conflict is clearly intra-corporate.
Applying the relationship test, both Belo and Santos
are named shareholders in Belo Medical Group's
Articles of Incorporation and General Information
Sheet for 2007. The conflict is clearly intra-
corporate as it involves two (2) shareholders
although the ownership of stocks of one stockholder
is questioned. Applying the nature of the
controversy test, this is still an intra-­corporate
dispute. The Complaint for interpleader seeks a
determination of the true owner of the shares of
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 Corporation Law
stock registered in Santos' name. Ultimately,
however, the goal is to stop Santos from inspecting
corporate books. This goal is so apparent that, even
if Santos is declared the true owner of the shares of
stock upon completion of the interpleader case, Belo
Medical Group still seeks his disqualification from
inspecting the corporate books based on bad faith.
Therefore, the controversy shifts from a mere
question of ownership over movable property to the
exercise of a registered stockholder's proprietary
right to inspect corporate books. (Belo Medical
Group v. Santos, G.R. No. 185894, 30 Aug. 2017)
Q: Subic Bay Golf and Country Club, Inc. (SBGCCI)
and Universal International Group
Development Corporation (UIGDC) entered into
a Development Agreement. UIGDC agreed to
"finance, construct and develop the golf course,
for and in consideration of the payment by
SBGCCI of its 1,530 (SBGCCI) shares of stock."
Upon SBGCCI's application, SBGCCI was issued a
Certificate of Permit to Offer Securities for Sale
to the Public of its 1,530 no par value
proprietary shares. SBGCCI would use the
proceeds of the sale of securities to pay UIGDC
for the development of the golf course.
In the letter addressed to the Director of SEC's
Corporation Finance Department, complainants
Regina Filart and Margarita Villareal informed
the SEC that they had been asking UIGDC for the
refund of their payment for their SBGCCI shares
because they failed to deliver the promised
amenities. Should the issue of refund be litigated
in the RTC?
A: YES. Jurisdiction over intra-corporate disputes
and all other cases enumerated in Sec. 5 of P.D. No.
902-A had already been transferred to designated
Regional Trial Courts. Hence, actions pertaining to
intra-corporate disputes should be filed directly
before designated Regional Trial Courts. Intra-
corporate disputes brought before other courts or
tribunals are dismissible for lack of jurisdiction.
This case also involves corporate rights and
obligations. The nature of the action — whether it
involves corporate rights and obligations — is
determined by the allegations and reliefs in the
complaint.
195
Villareal and Filart's right to a refund of the value of
their shares was based on SBGCCI and UIGDC's
alleged failure to abide by their representations in
their prospectus. Specifically, Villareal and Filart
alleged in their letter-complaint that the world-class
golf course that was promised to them when they
purchased shares did not materialize. This is an
intra-corporate matter that is under the designated
Regional Trial Court's jurisdiction. It involves the
determination of a shareholder's rights under the
Corporation Code or other intra-corporate rules
when the corporation or association fails to fulfill its
obligations. (SEC v. Subic Bay Golf and Country Club,
G.R. No. 179047, 11 Mar. 2015)
Q: Arevalo set up Broadcom with Cosare, his
former employee, as an incorporator. Cosare
was later promoted to the position of Assistant
Vice-President for Sales and Head of the
Technical Coordination. Abiog was appointed as
Broadcom’s VP for Sales and thus, became
Cosare’s immediate superior. Later, Cosare sent
a confidential memo to Arevalo to inform him of
the anomalies which were allegedly being
committed by Abiog against the company.
Subsequently, Cosare was totally barred from
entering the company premises.
Cosare attempted to furnish the company with a
memo by which he addressed and denied the
accusations cited in Arevalo’s memo. Soon after,
Cosare filed a labor complaint, claiming that he
was constructively dismissed from employment
by Broadcom and Arevalo. CA ruled that the case
is an intra-corporate controversy and is under
the RTC’s jurisdiction. Is the CA correct?
A: NO. The Court has determined that contrary to
the ruling of the CA, it is the LA, and not the regular
courts, which has the original jurisdiction over the
subject controversy. An intra-corporate
controversy, which falls within the jurisdiction of
regular courts, has been regarded in its broad sense
to pertain to disputes that involve any of the
following relationships:
a. between the corporation, partnership or
association and the public;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
b. between the corporation, partnership or
association and the state in so far as its
franchise, permit or license to operate is
concerned;
c. between the corporation, partnership or
association and its stockholders, partners,
members or officers; and
d. among the stockholders, partners or associates,
themselves.
Settled jurisprudence, however, qualifies that when
the dispute involves a charge of illegal dismissal, the
action may fall under the jurisdiction of the LA’s
upon whose jurisdiction, as a rule, falls termination
disputes and claims for damages arising from
employer-employee relations as provided in Art.
217 of the Labor Code. Consistent with this
jurisprudence, the mere fact that Cosare was a
stockholder and an officer of Broadcom at the time
the subject controversy developed failed to
necessarily make the case an intra-corporate
dispute.
In Matling Industrial and Commercial Corporation v.
Coros, the Court distinguished between a “regular
employee” and a “corporate officer” for purposes of
establishing the true nature of a dispute or
complaint for illegal dismissal and determining
which body has jurisdiction over it. Succinctly, it
was explained that “[t]he determination of whether
the dismissed officer was a regular employee or
corporate officer unravels the conundrum” of
whether a complaint for illegal dismissal is
cognizable by the LA or by the RTC. “In case of the
regular employee, the LA has jurisdiction;
otherwise, the RTC exercises the legal authority to
adjudicate.
Applying the foregoing to the present case, the LA
had the original jurisdiction over the complaint for
illegal dismissal because Cosare, although an officer
of Broadcom for being its AVP for Sales, was not a
“corporate officer” as the term is defined by law.
(Cosare v. Broadcom Asia, Inc., et al., G.R. No. 201298,
05 Feb. 2014)
Under Sec. 8, Rule 1 of the Interim Rules of
Procedure for Intra-Corporate Controversies, a
motion to dismiss is a prohibited pleading. As this
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
case involves an intra-corporate dispute, the motion
to dismiss is undeniably a prohibited pleading.
Moreover, the Court finds no justification for the
dismissal of the case based on the mere issuance of
a board resolution by the incumbent members of
the Board of Trustees of petitioner corporation
recommending its dismissal, especially considering
the various issues raised by the parties before the
court a quo. Hence, the RTC should not have
entertained, let alone have granted the subject
motion to dismiss. (Aldersgate College v. Gauuan,
G.R. No. 192951, 14 Nov. 2012)
Q: Jaka Investments bought 3 lots in Urdaneta
Village from Urdaneta Village Association,
subject to uniform restrictions annotated on the
transfer certificates of title covering the lots. On
March 15, 2007, the Association's Board of
Governors held a meeting, where it approved
the extension of the Association's corporate life
after its expiration on Aug. 13, 2008 and the
term of the Deed Restrictions from June 1, 2008,
both for another 25 years. The extensions were
approved by the members of the Association.
Jaka Investments filed before the RTC a Petition
for the cancellation of restrictions annotated in
the Transfer Certificate of Titles of the lots
bought.
The Association opposed the petition and
claimed that it was an intra-corporate dispute
on the validity of the uniform restrictions' term
extension. It argued that the HLURB, not the
trial court, had exclusive and original
jurisdiction over the case. Is the contention of
the Association correct?
A: YES. Pursuant to E.O. No. 535, the HIGC assumed
the regulatory and adjudicative functions of the SEC
over homeowners' associations. Moreover, by
virtue of this amendatory law, the HIGC also
assumed the SEC's original and exclusive
jurisdiction under Sec. 5 of P.D. No. 902-A to hear
and decide cases involving controversies arising out
of intra-corporate or partnership relations, between
and among stockholders, members, or associates;
between any and/or all of them and the corporation,
partnership or association of which they are
stockholders, members or associates, respectively;
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 Corporation Law

and between such corporation, partnership or REPRESENTATIVE SUIT

association and the state insofar as it concerns their
individual franchise or right to exist as such entity.
Where the wrong is done to a group of stockholders,
Later on, the above-mentioned powers and
as where preferred stockholders' rights are
responsibilities, which had been vested in the HIGC
violated, a class or representative suit will be proper
with respect to homeowners' associations, were
for the protection of all stockholders belonging to
transferred to the HLURB pursuant to R.A. No. 8763,
the same group. (Legaspi Towers 300, Inc. v. Muer,
entitled "Home Guaranty Corporation Act of 2000."
supra)
(JAKA Investments Corporation v. Urdaneta Village
Association Inc., G.R. Nos. 204187 and 206606, 01
NOTE: Right of pre-emption is personal to each
Apr. 2019)
stockholder. While a stockholder may maintain a
suit to compel the issuance of his proportionate
NOTE: HLURB is now the Human Settlements
share of stock, it has been ruled, nevertheless, that
Adjudication Commission pursuant to Republic Act
he may not maintain a representative action on
No. (RA) 11201 or the Department of Human
behalf of other stockholders who are similarly
Settlements and Urban Development Act.
situated.

Award of Damages in Intra-Corporate Disputes

Remedies of Direct Action (Individual or
Representative Suit) and Derivative Suit are
As can be gleaned from the title of A.M. No. 01-2-04-
Mutually Exclusive
SC, the amendment of Sec. 4, Rule 1 of the Interim
Rules of Procedure Governing Intra-Corporate
A derivative suit, on one hand, and individual and
Controversies was crafted precisely to clarify the
class suits, on the other, are mutually exclusive. The
previous rule that decisions on intra-corporate
two actions are mutually exclusive: i.e., the right of
disputes are immediately executory, by specifically
action and recovery belongs to either the
providing for an exception. Thus, the prevailing rule
shareholders (direct action) or the corporation
now categorically provides that awards for moral
(derivative action). (Cua v. Tan, G.R. No. 182008, 04
damages, exemplary damages, and attorney’s fees in
Dec. 2009)
intra-corporate controversies are not immediately
executory. (Heirs of Santiago Divinagracia, v. Ruiz,
G.R. No. 172508, 12 Jan. 2011) DERIVATIVE SUIT

INDIVIDUAL SUIT Where the acts complained of constitute a wrong to

the corporation itself, the cause of action belongs to
the corporation and not to the individual
Where a stockholder or member is denied the right
stockholder or member. (Legaspi, supra)
of inspection, his suit would be individual because
the wrong is done to him personally and not to the
A stockholder's right to institute a derivative suit is
other stockholders or the corporation. (Legaspi
not based on any express provision of the
Towers 300, Inc. v. Muer, G.R. No. 170783, 18 June
Corporation Code, or even the Securities Regulation
2012)
Code, but is impliedly recognized when the said
laws make corporate directors or officers liable for
NOTE: Authorization from the board of directors of
damages suffered by the corporation and its
the CMH in the case at bar was not necessary
stockholders for violation of their fiduciary duties.
inasmuch as private respondent was not acting on
Hence, a stockholder may sue for mismanagement,
behalf of the corporation but in his own personal
waste or dissipation of corporate assets because of
capacity; and precisely he was suing the corporation
a special injury to him for which he is otherwise
itself (CMH) to preserve his successional rights.
without redress.
(CMH Agricultural Corp. v. CA, G.R. No. 112625, 07
March 2002)

197 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

In effect, the suit is an action for specific
performance of an obligation owed by the
corporation to the stockholders to assist its rights of
action when the corporation has been put in default
by the wrongful refusal of the directors or
management to make suitable measures for its
protection. The basis of a stockholder's suit is
always one in equity. However, it cannot prosper
without first complying with the legal requisites for
its institution. (Yu v. Yukayguan, G.R. No. 177549, 18
June 2009)
A derivative suit is an exception to the general rule
that the corporation’s power to sue is exercised only
by the board of directors or trustees. (Divina, 2020)
Requisites for Derivative Suit
A stockholder or member may bring an action in the
name of a corporation or association, as the case
may be, provided, that:
1. He was a stockholder or member at the time the
acts or transactions subject of the action
occurred and at the time the action was filed.
must be "in the name of [the] corporation or
association." (Divina, 2020, citing Reyes v. Hon. RTC
of Makati, Br. 142, G.R. No. 165744, 11 Aug. 2008)
NOTE: This requirement has already been settled in
jurisprudence. Thus, in Western Institute of
Technology, Inc., et al v. Solas, et al, the Supreme
Court said that "among the basic requirements for a
derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the
corporation must allege in his complaint before the
proper forum that he is suing on a derivative cause
of action on behalf of the corporation and all other
shareholders similarly situated who wish to join
him. (Villamor v. Umale, G.R. No. 172843, 24 Sept.
2014)
NOTE: Corporate cause of action: the cause of action
must devolve upon the corporation itself; the
wrongdoing or harm having been caused to the
corporation and not to the particular stockholder
bringing the suit. (Reyes v. Hon. RTC of Makati Br.
142, supra)
Representative Suit vs. Derivative Suit

NOTE: If the cause of action is continuing in DIRECT ACTION DERIVATIVE SUIT

nature, the only requisite is that the party is a Initiated by the
Initiated by the
stockholder at the time the action was filed stockholder under his
stockholder on behalf
(Dean Divina’s Lecture, 29 Apr. 2015) own name or on behalf
of the corporation.
of other stockholders.
2. He exerted all reasonable efforts, and alleges Seeks to recover for the
the same with particularity in the complaint, to benefit of the
exhaust all remedies available under the AOI, corporation and its
by-laws, laws or rules governing the whole body of
Seeks vindication for
corporation or partnership to obtain the relief shareholders when
injury to his or her
he desires; injury is caused to the
interest as a
corporation that may
shareholder.
3. No appraisal rights are available for the act or not otherwise be
acts complained of; and redressed because of
failure of the
4. The suit is not a nuisance or harassment suit. corporation to act.
(Rule 8, Sec. 1, Interim Rules of Procedure for Deals with individual
Intra-Corporate Controversies (“Interim Rules”) Deals with corporate
stockholders or a class
rights. (Ibid.)
of stockholder’s rights .
The fifth requisite for filing derivative suits, while
not included in the enumeration, is implied in the
first paragraph of Rule 8, Sec. 1 of the Interim Rules:
The action brought by the stockholder or member

UNIVERSITY OF SANTO TOMAS 198

2022 GOLDEN NOTES
 Corporation Law
Q: Royal Links Golf Club obtained a loan from a
bank which is secured by a mortgage on a titled
lot where holes 1, 2, 3 and 4 are located. The
bank informed the Board of Directors (Board)
that if the arrearages are not paid within thirty
(30) days, it will extra-judicially foreclose the
mortgage. The Board decided to offer to the
members 200 proprietary membership shares,
which are treasury shares, at the price of
P175,000.00 per share even when the current
market value is P200,000.00.
In behalf and for the benefit of the corporation,
Peter, a stockholder, filed a derivative suit
against the members of the Board for breach of
trust for selling the shares at P25,000.00, lower
than its market value, and asked for the
nullification of the sales and the removal of the
board members. Peter claims the Club incurred
a loss of P5 million. The Board presented the
defense that in its honest belief any delay in the
payment of the arrearages will be prejudicial to
the Club as the mortgage on its assets will be
foreclosed and the sale at a lower price is the
best solution to the problem. Decide the suit and
explain. (2016 BAR)
A: The derivative suit will not prosper. There is no
indication in the Complaint that they had exerted all
reasonable efforts to exhaust all remedies available
under the AOI, by-laws, and laws or rules governing
the corporation to obtain the relief they desire. The
Complaint contained no allegation whatsoever of
any effort to avail of intra-corporate remedies.
Indeed, even if petitioners thought it was futile to
exhaust intra-corporate remedies, they should have
stated the same in the Complaint and specified the
reasons for such opinion. a derivative suit cannot
prosper without first complying with the legal
requisites for its institution. (Ching v. Subic Bay Golf
and Country Club, G.R. No. 174353, 10 Sept. 2014)
NOTE: Although the shareholdings of petitioners
are indeed only two out of the 409 alleged
outstanding shares or 0.24%, the Court has held that
it is enough that a member or a minority of
stockholders file a derivative suit for and in behalf
of a corporation. (Villamor v. Umale, supra)
199
Q: Ranier Madrid, a shareholder, wrote the
Board of Directors of FHGCCI two demand
letters because of the delay in construction and
asked them to initiate legal actions against
FEGDI and FEDI. The Board of Directors,
however, failed and/or refused to act on the
demand letters. Madrid, in a derivative capacity
on behalf of petitioner FHGCCI, filed with the
RTC a Complaint for Specific Performance with
Damages.
FEGDI argued that there is no cause of action and
it is not a proper derivative suit as Madrid on
behalf of FHGCCI failed to exhaust all remedies
available under the AOI and by-laws and failed
to implead its Board of Directors as
indispensable parties. Is there compliance with
requirements of derivative suit?
A: NO. Madrid, as a shareholder of FHGCCI, failed to
allege with particularity in the Complaint, and even
in the Amended Complaint, that he exerted all
reasonable efforts to exhaust all remedies available
under the articles of incorporation, by-laws, or rules
governing the corporation; that no appraisal rights
are available for the acts or acts complained of; and
that the suit is not a nuisance or a harassment suit.
Although the Complaint alleged that demand letters
were sent to the Board of Directors of petitioner
FHGCCI and that these were unheeded, these
allegations will not suffice. (Forest Hills Golf and
Country Club, Inc. v. Fil- Estate Properties, Inc. G.R.
No. 206649, 20 July 2016)
Q: MC Home Depot occupied a prime property
(Rockland area) in Pasig. The property was part
of the area owned by Mid-Pasig Development
Corporation (Mid-Pasig). PPC obtained an
option to lease portions of Mid-Pasig's property,
including the Rockland area. PPC's board of
directors issued a resolution waiving all its
rights, interests, and participation in the option
to lease contract in favor of the law firm of Atty.
Alfredo Villamor, Jr. (Villamor). PPC,
represented by Villamor, entered into a
memorandum of agreement (MOA) with MC
Home Depot. Under the MOA, MC Home Depot
would continue to occupy the area as PPC's
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
sublessee for four (4) years, renewable for
another four (4) years.
In compliance with the terms of the MOA, MC
Home Depot issued 20 post-dated checks
representing rental payments for one year and
the goodwill money. The checks were given to
Villamor who did not turn these or the
equivalent amount over to PPC, upon
encashment.
Hernando Balmores, a stockholder and director
of PPC, filed with the RTC an intra-corporate
controversy complaint. Balmores prayed that a
receiver be appointed from his list of nominees.
He also prayed for petitioners' prohibition from
selling, encumbering, transferring or disposing
in any manner any of PPC's properties, including
the MC Home Depot checks and/or their
proceeds. He further prayed for the accounting
and remittance to PPC of the MC Home Depot
checks or their proceeds and for the annulment
of the board's resolution waiving PPC's rights in
favor of Villamor's law firm. Is Balmores' action
a derivative suit?
A: NO. A derivative suit is an action filed by
stockholders to enforce a corporate action. It is an
exception to the general rule that the corporation's
power to sue is exercised only by the board of
directors or trustees. Individual stockholders may
be allowed to sue on behalf of the corporation
whenever the directors or officers of the
corporation refuse to sue to vindicate the rights of
the corporation or are the ones to be sued and are in
control of the corporation. It is allowed when the
directors or officers are guilty of breach of trust, and
not of mere error of judgment.
In derivative suits, the real party in interest is the
corporation, and the suing stockholder is a mere
nominal party. Moreover, it is important that the
corporation be made a party to the case. While it is
true that the basis for allowing stockholders to file
derivative suits on behalf of corporations is based
on equity, the legal requisites for its filing must
necessarily be complied with for its institution.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Respondent Balmores did not bring the action for
the benefit of the corporation. Instead, he was
alleging that the acts of PPC's directors, specifically
the waiver of rights in favor of Villamor's law firm
and their failure to take back the MC Home Depot
checks from Villamor, were detrimental to his
individual interest as a stockholder. In filing an
action, therefore, his intention was to vindicate his
individual interest and not PPC's or a group of
stockholders. (Villamor v. Umale, G.R. No. 172843, 24
Sept. 2014)
Derivative Suit is a Remedy of Last Resort
As a general rule, corporate litigation must be
commenced by the corporation itself, with the
imprimatur of the board of directors, which,
pursuant to the law, wields the power to sue.
Therefore, since the derivative suit is a remedy of
last resort, it must be shown that the board, to the
detriment of the corporation and without a valid
business consideration, refuses to remedy a
corporate wrong. A derivative suit may only be
instituted after such an omission. Simply put,
derivative suits take a back seat to board-
sanctioned litigation whenever the corporation is
willing and able to sue in its own name. (Ago Realty
& Development Corp. v. Ago, G.R. Nos. 210906 &
211203, 16 Oct. 2019)
Stockholder is NOT Real Party-in-Interest
The corporation is the real party-in-interest while
the suing stockholder, on behalf of the corporation,
is only a nominal party. (Hi-Yield Realty v. CA, G.R.
No. 168863, 23 June 2009)
Time When Person Must Be Stockholder to
Institute Derivative Suit
He must be a stockholder at the time the cause of
action accrued. If the cause of action is general and
continuing, said person must be a stockholder at the
time of filing of the suit and at the time the cause of
action accrued.
The implicit argument - that a stockholder, to be
considered as qualified to bring a derivative suit,
must hold a substantial or significant block of stock
200
 Corporation Law
- finds no support whatever in the law. The bona fide
ownership by a stockholder of stock in his own right
suffices to invest him with standing to bring a
derivative action for the benefit of the corporation.
The number of his shares is immaterial since he is
not suing in his own behalf, or for the protection or
vindication of his own particular right, or the
redress of a wrong committed against him,
individually, but in behalf and for the benefit of the
corporation. (San Miguel Corporation v. Khan, G.R.
No. 85339, 11 Aug. 1989)
Q: A became a stockholder of Prime Real
Estate Corporation (PREC) on July 10, 1991,
when he was given one share by another
stockholder to qualify him as a director. A was
not re-elected director in the July 1, 1992 annual
meeting but he continued to be a registered
shareholder of PREC.
When he was still a director, A discovered that
on Jan 5, 1991, PREC issued free of charge
10,000 shares to X, a lawyer who assisted in a
court case involving PREC.
a. Can A now bring an action in the name of the
corporation to question the issuance of the
shares to X without receiving any payment?
b. Can X question the right of A to sue him in
behalf of the corporation on the ground that
A has only one share in his name?
c. Can the shares issued to X be considered as
watered stock? (1993 BAR)
A:
a. As a general rule, A cannot bring a derivative
suit in the name of the corporation concerning
an act that took place before he became a
stockholder. However, if the act complained of
is a continuing one, A may do so.
b. NO. In a derivative suit, the action is instituted/
brought in the name of a corporation and reliefs
are prayed for therein for the corporation, by a
minority stockholder. The law does not
qualify the term “minority” in terms of the
number of shares owned by a stockholder
201
bringing the action in behalf of the corporation.
(SMC v. Khan, G.R. No. 85339, 11 Aug. 1989)
c. NO. Watered shares are those sold by the
corporation for less than the par/book value. In
the instant case, it will depend upon the value of
services rendered in relation to the total par
value of the shares.
Allegation of Tort can Co-Exist With Derivative
Suit in Same Petition
Personal injury suffered by a stockholder cannot
disqualify him from filing a derivative suit on behalf
of the corporation. It merely gives rise to an
additional cause of action for damages against the
erring directors. (Gochan v. Young, G.R. No. 131889,
12 Mar. 2001)
Jurisdiction
A derivative suit is an intra-corporate controversy
hence under the jurisdiction of the RTC acting as a
special commercial court.
Q: AA, a minority stockholder, filed a suit against
BB, CC, DD, and EE, the holders of majority
shares of MOP Corporation, for alleged
misappropriation of corporate funds. The
complaint averred, inter alia, that MOP
Corporation is the corporation in whose behalf
and for whose benefit the derivative suit is
brought. In their capacity as members of the
Board of Directors, the majority stockholders
adopted a resolution authorizing MOP
Corporation to withdraw the suit. Pursuant to
said resolution, the corporate counsel filed a
Motion to Dismiss in the name of the MOP
Corporation. Should the motion be granted or
denied? Reason briefly.
A: The motion to dismiss should be denied. A
derivative suit has been the principal defense of the
minority shareholder against abuses by the
majority. It is a remedy designed by equity for those
situations where the management, through fraud,
neglect of duty, or other cause, declines to take the
proper and necessary steps to assert the
corporation’s rights.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Indeed, to grant to MOP the right of withdrawing or
dismissing the suit, at the instance of majority
stockholders and directors who themselves are the
persons alleged to have committed breaches of trust
against the interest of the corporation, would be to
emasculate the right of minority stockholders to
seek redress for the corporation. To consider the
Notice of Dismissal filed by MOP as quashing the
complaint filed by AA in favor of the corporation
would be to defeat the very nature and function of a
derivative suit and render the right to institute the
action illusory. (Commart (Phils.) Inc. v. SEC, G.R. No.
85318, 03 June 1991)
Q: Oscar and Rodrigo Reyes are two of the four
children of the spouses Pedro and Anastacia
Reyes. Pedro, Anastacia, Oscar, and Rodrigo
each owned shares of stock of Zenith Insurance
Corporation (Zenith), a domestic corporation
established by their family. Pedro and Anastacia
died. Thus, Pedro’s estate was judicially
partitioned among his heirs, however, no
similar settlement and partition appear to have
been made with Anastacia’s estate, which
included her shareholdings in Zenith.
Zenith and Rodrigo filed a complaint with the
SEC against Oscar. The complaint stated that it is
a derivative suit initiated and filed by the
complainant Rodrigo to obtain an accounting of
the funds and assets of Zenith which are now or
formerly in the control, custody, and/or
possession of Oscar and to determine the shares
of stock of deceased spouses Pedro and
Anastacia Reyes that were arbitrarily and
fraudulently appropriated by Oscar. Oscar
denied the charge. Furthermore, Oscar claimed
that the suit is not a bona fide derivative suit
because the requisites therefor have not been
complied with. Is the complaint filed by Rodrigo
a derivative suit?
A: NO. First, Rodrigo, in so far as the shares of
Anastacia is concerned, is not a shareholder; he only
stands as a transferee-heir whose rights to the share
are inchoate and unrecorded. In addition, the claims
tell the Court unequivocally that the present
controversy arose from the parties' relationship as
heirs of Anastacia and not as shareholders of Zenith.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Rodrigo, in filing the complaint, is enforcing his
rights as a co-heir and not as a stockholder of Zenith.
The injury he seeks to remedy is one suffered by an
heir (for the impairment of his successional rights)
and not by the corporation nor by Rodrigo as a
shareholder on record. (Oscar Reyes v. RTC of
Makati, Br. 142, supra)
Q: Pursuant to the by-laws of Legaspi Towers
300, Inc. (Legaspi), petitioners Lilia Marquinez
Palanca, et al., the incumbent Board of Directors,
fixed the annual meeting of the members of the
condominium corporation and the election of
the new Board of Directors. Out of a total
number of 5,723 members who were entitled to
vote, 1,358 were supposed to vote through their
respective proxies and their votes were critical
in determining the existence of a quorum.
The Committee on Elections of Legaspi,
however, found most of the proxy votes, at its
face value, irregular, thus, questionable; and for
lack of time to authenticate the same, Palanca, et
al., adjourned the meeting for lack of quorum.
Despite Palanca et al.'s insistence that no
quorum was obtained during the annual
meeting, Muer, et al., pushed through with the
scheduled election and were elected as the new
Board of Directors and officers of Legaspi.
Subsequently, they submitted a General
Information Sheet to the SEC with the new set of
officers. Palanca, et al., filed a complaint for the
declaration of nullity of elections against Muer,
et al., in a form of a derivative suit. Is the
derivative suit proper?
A: NO. Petitioners’ complaint seek to nullify the said
election, and to protect and enforce their individual
right to vote. Petitioners seek the nullification of the
election of the Board of Directors, composed of
herein respondents, who pushed through with the
election even if petitioners had adjourned the
meeting allegedly due to lack of quorum.
Petitioners are the injured party, whose rights to
vote and to be voted upon were directly affected by
the election of the new set of board of directors. The
party-in-interest are the petitioners as
stockholders, who wield such right to vote. The
cause of action devolves on petitioners, not the
202
 Corporation Law
condominium corporation, which did not have the
right to vote. Hence, the complaint for nullification
of the election is a direct action by petitioners, who
were the members of the Board of Directors of the
corporation before the election, against
respondents, who are the newly-elected Board of
Directors. Under the circumstances, the derivative
suit filed by petitioners in behalf of the
condominium corporation in the Second Amended
Complaint is improper. (Legaspi Towers 300, Inc., et
al., v. Muer, et al., supra)
Incorporator vs. Corporator
INCORPORATOR
Who are they
Those stockholders or members mentioned in the
AOI as originally forming and composing the
corporation and who are signatories thereof.
Signatory of the AOI
A signatory of the AOI.
203
F. CAPITAL STRUCTURE
Number and the Qualifications of Incorporators
in a Stock Corporation
1. The RCC provides that any person, partnership,
association, or corporation, singly or jointly
with others.
NOTE: The word “singly” pertains to a One
Person Corporation, which may only be
incorporated by a natural person, trust, or
estate.
2. Incorporators must not be more than 15.
3. A natural person incorporator must be of legal
age
4. Each must own or subscribe to at least one (1)
share of the capital stock. (Sec. 10, RCC)
Q: Must all incorporators and directors be
residents of the Philippines? (2006 BAR)
A: NO. The RCC has removed the residency
requirement. Thus, incorporators and directors do
not need to be residents of the Philippines
CORPORATOR
Those who compose a corporation, whether as
stockholders or as members.
A stockholder may or may not be a subscriber.
Subscribers are persons who have agreed to take and
pay for original, unissued shares of a corporation
formed or to be formed.
May or may not be signatory of the AOI.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

Effect upon the Sale of his Shares

Ceases to be a corporator by sale of his shares in case

of stock corporation.
Does not cease to be an incorporator upon sale of his
shares.
In case of non-stock corporation, the corporator
ceases to be a member.

Number of Incorporators/Corporators
GR: No limit.

XPN: Close corporations – not more than a specified

Not more than 15. number of persons, not exceeding 20. (Sec. 95, RCC)

NOTE: There must only be one stockholder in a One

Person Corporation.
Filipino Citizenship
GR: Filipino citizenship is not a requirement.

XPN: When engaged in a business which is wholly or partly-nationalized. In the case of partly-nationalized,
the requisite percentage of Filipino stockholdings /membership must be attained, and the Board of Directors
/ Trustees must be to the same extent.

Capital Stock Requirements Q: In order to comply with the 60% capital

requirement for ownership by Filipinos of
GR: Stock corporations shall not be required to have certain corporations, what does the term capital
a minimum capital stock. (Sec. 12, RCC) refer to?

XPN: As otherwise specifically provided by special
law.
1. SHARES OF STOCK
Share of stock is one of the units in which the capital
stock is divided. It represents the interest or right
which the owner has:
1. In the management of the corporation in which
he takes part through his right to vote (if voting
rights are permitted for that class of stock by
the AOI);
2. In a portion of the corporate earnings, if and
when, segregated in the form of dividends; and
3. Upon its dissolution and winding up, in the
property and assets of the corporation
remaining after the payment of corporate debts
and liabilities to creditors. (De Leon, 2010, citing
11 Fletcher, 1971)
A. The term “capital” refers to shares with voting
rights, and with full beneficial ownership, which
must be owned and held by citizens of the
Philippines. (Gamboa v. Teves, G.R. No. 176579, 28
June 2011)
Rationale: The right to vote in the election of
directors, coupled with full beneficial ownership of
stocks, translates to effective control of a
corporation.
Legal Title Without Beneficial Title Insufficient
to Comply With Ownership Requirement
Mere legal title is insufficient to meet the 60%
Filipino-owned “capital” required in the
Constitution. Full beneficial ownership of 60% of
the outstanding capital stock, coupled with 60%
of the voting rights, is required. The legal and
beneficial ownership of 60% of the outstanding

UNIVERSITY OF SANTO TOMAS 204

2022 GOLDEN NOTES
 Corporation Law
capital stock must rest in the hands of Filipino
nationals in accordance with the constitutional
mandate. Otherwise, the corporation is “considered
as non-Philippine nationals. Full beneficial
ownership of the stocks, coupled with appropriate
voting rights, is essential.”
NOTE: Since the constitutional requirement of at
least 60% Filipino ownership applies not only to
voting control of the corporation but also to the
beneficial ownership of the corporation, it is
therefore imperative that such requirement apply
uniformly and across the board to all classes of
shares, regardless of nomenclature and category,
comprising the capital of a corporation.
Under the RCC, capital stock consists of all classes of
shares issued to stockholders, that is, common
shares as well as preferred shares, which may have
different rights, privileges or restrictions as stated
in the articles of incorporation. The RCC allows
denial of the right to vote to preferred and
redeemable shares, but disallows denial of the right
to vote in specific corporate matters. Thus, common
shares have the right to vote in the election of
directors, while preferred shares may be denied
such right. Nonetheless, preferred shares, even if
denied the right to vote in the election of directors,
are entitled to vote on certain corporate matters.
Since a specific class of shares may have rights and
privileges or restrictions different from the rest of
the shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Sec. 11,
Art. XII of the Constitution must apply not only to
shares with voting rights but also to shares without
voting rights. (This is because when only preferred
shares without voting rights are issued, the
requirement of full beneficial ownership will be
used as the standard). Preferred shares denied the
right to vote in the election of directors are anyway
still entitled to vote on the eight specific corporate
matters under Sec. 6. (Heirs of Gamboa v. Teves, G.R.
No. 176579, 09 Oct. 2012)
The Court upheld SEC-MC No. 8, s. 2013, which
requires percentage of Filipino ownership shall be
applied to BOTH:
205
(a) total number of outstanding shares of stock
entitled to vote in the election of directors; AND
(b) the total number of outstanding shares of stock,
whether or not entitled to vote in the election of
directors (Roy III v. Herbosa, G.R. No. 207246, 22
Nov. 2016)
a. NATURE OF SHARES OF STOCK
Shares of stock are units of capital stock. Once
issued, they are considered personal property of the
stockholder owning it. While shares of stock
constitute personal property, they do not represent
the property of the corporation. The corporation
has property of its own. A share of stock only
typifies an aliquot part of the corporation's
property, or the right to share in its proceeds to that
extent when distributed according to law and
equity.
As personal property, shares of stock may be
transferred, either through sale, donation or
succession, or encumbered or otherwise be subject
to a security interest. (Divina, 2020)
Does Not Constitute Indebtedness
They are in the nature of choses in action but are not
in a strict sense. They do not constitute an
indebtedness of the corporation to the shareholder
and are therefore, not credits as to make the
stockholder a creditor of the corporation. (De Leon,
2010)
BOD May Issue Additional Shares
A stock corporation is expressly granted the power
to issue or sell stocks. The power to issue shares of
stock in a corporation is lodged in the board of
directors and no stockholders’ meeting is required
to consider it because additional issuances of shares
of stock do not need approval of the stockholders.
The only requirement is the board resolution
approving the additional issuance of shares. The
corporation shall also file the necessary application
with the SEC to exempt these from the registration
requirements under the Revised Securities Act (now
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
the Securities Regulation Code). (Majority
Stockholders of Ruby Industrial Corp. v. Lim, G.R. No.
165887, 06 June 2011)
b. CONSIDERATION FOR SHARES OF STOCK
Valid Considerations in a Subscription
Agreement
1. Actual cash paid to the corporation;
2. Property, tangible, or intangible (i.e. patents or
copyrights), provided:
a. The property is actually received by the
corporation
b. The property is necessary or convenient
for its use and lawful purposes
c. It must be subject to a fair valuation equal
to the par or issued value of the stock
issued
NOTE: The valuation thereof shall initially be
determined by the stockholders or directors
and subject to the approval of the SEC.
3. Labor performed for or services actually
rendered to the corporation.
4. Previously incurred indebtedness of the
corporation.
5. Amounts transferred from unrestricted
retained earnings to stated capital (in case of
declaration of stock dividends).
6. Outstanding shares exchanged for stocks in the
event of reclassification or conversion.
7. Shares of stock in another corporation; and/or
8. Other generally accepted form of consideration
(Sec. 61, RCC)
NOTE: Promissory notes or future services are not
valid considerations.
In view of nos. 1 and 2 of Sec. 61, payment of shares
of stock must be actually received by the
corporation. Hence, receivables cannot be treated as
cash actually received. They may, however, be
considered as property payment subject to
verification by SEC and the condition that it be held
in escrow until actual payment of the amount.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Amount of Consideration
Shares of stock shall not be issued for a
consideration less than the par or issued price
thereof, except treasury shares so long as the price
is reasonable.
Persons Required to Pay in Full
1. Non‐resident foreign subscribers upon
incorporation must pay in full their
subscriptions unless their unpaid subscriptions
are guaranteed by a surety bond or by an
assumption by a resident stockholder through
an affidavit of liability.
2. In case of no‐par value shares, they are deemed
fully paid and non‐assessable. (Sec. 6, RCC)
NOTE: The issued price of no-par value shares may
be fixed in the AOI or by the BOD pursuant to
authority conferred upon it by the AOI or the by-
laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding
capital stock at a meeting duly called for the
purpose. (Sec. 61, RCC)
Doctrine of Individuality or Indivisibility of
Subscription
Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-
in-fact or any other person legally authorized to
make the transfer. No transfer, however, shall be
valid, except as between the parties, until the
transfer is recorded in the books of the corporation
showing the names of the parties to the transaction,
the date of the transfer, the number of the certificate
or certificates and the number of shares transferred.
(Sec. 62, RCC)
No certificate of stock shall be issued to a subscriber
until the full amount of the subscription together
with interest and expenses (in case of delinquent
shares), if any is due, has been paid. (Sec. 63, RCC)
The doctrine of indivisibility of subscription
contract implicitly set forth under Sec. 64 (now Sec.
206
 Corporation Law
63) of the Code, that is, as subscription is one, entire
and indivisible contract. It cannot be divided into
portions so that the stockholder shall not be entitled
to a certificate of stock until he has remitted the full
payment of his subscription together with the
interest and expenses if any is due.
The purpose of the prohibition is to prevent the
partial disposition of a subscription which is not
fully paid, because if it is permitted, and the
subscriber subsequently becomes delinquent, in the
payment of his subscription, the corporation may
not be able to sell as many as his subscribed shares
as would be necessary to cover the total amount due
from his, which is authorized under Sec. 68 (now,
Sec. 67). (SEC OGC Opinion No. 16-05 dated March 31,
2016, citing previous SEC opinions)
Q: Ayala Corporation instituted a complaint for
sum of money with an application for a writ of
attachment against the Spouses Dee. The RTC
rendered a decision adverse to the Spouses Dee,
thus, a writ of execution was issued by the RTC.
Subsequently, a Notice of Levy on Execution was
issued addressed to the RD of Antipolo to levy on
the properties registered in the name of Vonnel
Industrial Park, Inc. (VIP).
Dewey Dee was an incorporator of VIP. Tee Ling
Kiat filed a Third-Party Claim alleging that even
though Dewey Dee was an incorporator of VIP,
Dewey Dee was no longer a stockholder of VIP
by virtue of a sale of shares made by Dewey Dee
in favor of Tee Ling Kiat as evidenced by a
cancelled check issued by Dewey Dee in favor of
Tee Ling Kiat. The RTC and the CA ruled against
Tee Ling Kiat holding that Tee Ling Kiat was not
able to prove the alleged sale of shares. Is Tee
Ling Kiat a stockholder of VIP?
A: NO. Sec. 63 (now Sec. 62, RCC) of the Corporation
Code of the Philippines provides that: "No transfer,
x x x shall be valid, except as between the parties,
until the transfer is recorded in the books of the
corporation showing the names of the parties to the
transaction, the date of the transfer, the number of
the certificate or certificates and the number of
shares transferred."
207
Here, the records show that the purported
transaction between Tee Ling Kiat and Dewey Dee
has never been recorded in VIP's corporate books.
Thus, the transfer, not having been recorded in the
corporate books in accordance with law, is not valid
or binding as to the corporation or as to third
persons. (Tee Ling Kiat v. Ayala Corporation, G.R. No.
192530, 07 Mar. 2018, J. Caguioa)
Time When Balance of the Subscription Should
Be Paid
1. On the date specified in the subscription
contract, without need of demand or call;
2. If no date of payment has been specified, on the
date specified in the call made by the BOD; (Sec.
66, RCC)
3. If no date of payment has been specified in the
call made, within 30 days from the date of call;
and
4. When insolvency supervenes upon a
corporation and the court assumes jurisdiction
to wind it up, all unpaid subscriptions become
payable on demand, and are at once
recoverable, without necessity of any prior call.
Accrual of Interest
Unpaid balance will accrue interest if so required by
the subscription contract and at the rate of interest
fixed in the subscription contract. If no rate of
interest is fixed in the subscription contract, such
rate shall be deemed to be the legal rate. (Sec. 65,
RCC)
The above interest is different from the interest
contemplated by Sec. 66, the unpaid balance
involved in which, will only accrue interest, by way
of penalty, from the date specified in the contract of
subscription or from the date stated in the call made
by the board.
Effect of Failure to Pay
Failure to pay on such date (specified in the
subscription contract or specified in the call) shall
render the entire balance due and payable and shall
make the stockholder liable for interest at the legal
rate on such balance, unless a different interest rate
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
is provided in the subscription contract. (Sec. 66,
RCC)
Remedies to Enforce Payment
1. Extra-judicial sale at public auction (Sec. 66,
RCC); and
2. Judicial action (Sec. 69, RCC)
Call for Payment
A call is made in a form of board resolution that
unpaid subscriptions to the capital stock are due
and payable and the same or such percentage
thereof shall be collected, together with all accrued
interest, on a specified date and that if no payment
is made within 30 days from said date, all stocks
covered by said subscription shall thereupon
become delinquent and shall be subject to public
auction sale.
Stocks become delinquent when the unpaid
subscription and accrued interests thereon are not
paid within 30 days from their due date as specified
in the subscription contract or in the call by the
board of directors.
There is no need of a formal declaration of the Board
for an unpaid subscription to become delinquent in
the event of failure to pay the unpaid subscription
within the prescribed 30 day period from the date
specified in the subscription contract or the date
stated in the call. Henceforth, the subscription
becomes automatically delinquent upon the lapse of
the 30 day period in the call, with the stockholder
failing to pay. (SEC OGC Opinion No. 16-05 dated
March 31, 2016 citing previous SEC opinions)
A call made upon some of the subscribers is void or
which requires some to pay a higher rate than the
others, pursuant to the rule that calls must operate
uniformly upon all stockholders. A call cannot be of
such character as to permit the directors to practice
favoritism or act oppressively. In like manner, if a
call cannot be made discriminatorily, so should the
removal of the delinquency status. (ibid)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Unpaid claim
The term "unpaid claim" under Sec. 63 (now Sec. 62,
RCC) refers to "any unpaid claim arising from
unpaid subscription, and not to any indebtedness
which a subscriber or stockholder may owe the
corporation arising from any other transaction." In
the case at bar, the subscription for the share in
question has been fully paid as evidenced by the
issuance of Membership Certificate No. 1219. What
Calapatia owed the corporation were merely the
monthly dues. Hence, the aforequoted provision
does not apply. (China Bank v. CA, G.R. No. 117604,
26 Mar. 1997)
The term "unpaid claim" only refers to "any unpaid
claim arising from unpaid subscription. It does not
include any indebtedness which a subscriber or
stockholder may owe the corporation arising from
any other transaction. It does not, for instance,
include monthly dues imposed by the corporation
for the use of its facilities. (China Bank, supra.)
Call Not Always Necessary to Effect Payment of
Unpaid Subscription
The due date for the payment of the balance is either
the stipulated date or in the absence of such
stipulation, the call or demand by the Board of
Directors.
Demand is not necessary to put the subscriber in
default if the due date of payment is specified in the
contract of subscription based on Article 1169 of the
Civil Code that demand is not necessary to put the
debtor in default when the law so declares. (Divina,
2020)
When Shares become Delinquent
If no payment is made within thirty (30) days from
the date specified in the subscription contract or on
the date stated in the call made by the board, all
stocks covered by the subscription shall thereupon
become delinquent and shall be subject to sale,
unless the board of directors orders otherwise. (Sec.
66, RCC)
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 Corporation Law
Effect of Delinquency
1. Render the entire balance due and payable and
shall make the stockholder liable for interest at
the legal rate on such balance, unless a different
interest rate is provided in the subscription
contract (Sec. 66, RCC)
2. Disenfranchises the shares from any right that
inheres to a stockholder, except the right to
dividends (Sec. 70, RCC)
NOTE: Any cash dividends due on delinquent stock
shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent
stockholders until their unpaid subscription is fully
paid. (Sec. 42, RCC)
Q: Ace Cruz subscribed to 100,000 shares of
stock of JP Development Corporation, which has
a par value of P 1 per share. He paid P25,000.00
and promised to pay the balance before
December 31, 2008. JP Development
Corporation declared cash dividends on October
15, 2008 payable on December 1, 2008.
a. For how many shares is Ace Cruz entitled to
be paid cash dividends? Explain.
b. On December 1, 2008, can Ace Cruz compel
JP Development Corporation to issue to him
the stock certificate corresponding to the
P25,000 paid by him? (2008 BAR)
A:
a. Ace is entitled cash dividends pertaining to the
entire 100,000 shares. A contract of
subscription is an indivisible contract. Even if
only partial payment for the subscription was
made, the whole subscription remain eligible to
cash dividend.
b. NO. No certificate of stock shall be issued to a
subscriber until the full amount of subscription
together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
(Sec 63, RCC) Clearly, since Ace Cruz did not pay
the full subscription yet, he cannot compel the
corporation to issue the certificate of stock.
209
Procedure for Sale of Delinquent Stocks
1. Resolution – the board shall issue a resolution
ordering the sale of delinquent stock.
2. Notice – notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
stockholder either personally or by registered
mail or through other means provided in the
bylaws.
3. Publication – the notice shall be published once
a week for two consecutive weeks in a
newspaper of general circulation in the
province or city where the principal office of the
corporation is located
4. Sale – the delinquent stock shall be sold at a
public auction to be held not less than 30 days
nor more than 60 days from the date the stocks
become delinquent to such bidder who shall
offer to pay the full amount of the balance on the
subscription together with accrued interest,
costs of advertisement and expenses of sale, for
the smallest number of shares or fraction of a
share.
5. Transfer – the stock so purchased shall be
transferred to such purchaser in the books of
the corporation and a certificate for such stock
shall be issued in his favor.
6. Remaining Shares – the remaining shares, if
any, shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to
the issuance of a certificate of stock covering the
same. (Sec. 67, RCC).
NOTE: Should there be no bidder at the public
auction who offers to pay the full amount of the
balance on the subscription together with
accrued interest, costs of advertisement, and
expenses of sale, for the smallest number of
shares or fraction of a share, the corporation
may, subject to the provisions of this Code, bid
for the same, and the total amount due shall be
credited as fully paid in the books of the
corporation.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Discontinuance or Cancellation of Delinquency
Sale
Delinquency sale may be discontinued or cancelled
if the delinquent stockholder pays the unpaid
balance plus interest, costs, and expenses on or
before the date specified for the sale of the
delinquent stocks or when the BOD orders
otherwise. (Sec. 67, RCC)
NOTE: A call cannot be of such character as to
permit the directors to practice favoritism or act
oppressively. In like manner, if a call cannot be
made discriminatorily, so should the removal of the
delinquency status. (SEC Opinion, supra)
When Sale may be Questioned
An action to recover delinquent stock sold can be
sustained upon the ground of irregularity or defect
in the notice of sale, or in the sale itself of the
delinquent stock, PROVIDED:
1. Party seeking to maintain such action first pays
or tenders to the party holding the stock the
sum for which the same was sold, with interest
from the date of sale at the legal rate.
2. The complaint is filed within six (6) months
from the date of sale. (Sec. 68, RCC)
c. WATERED STOCKS
A watered stock is a stock issued in exchange for
cash, property, share, stock dividends, or services
lesser than its par value or issued value (no par
value) or for a consideration other than cash, valued
in excess of its fair value. (Sec. 64, RCC)
Watered Stocks include stocks:
1. Issued without consideration ;
2. Issued for a consideration other than cash, the
fair valuation of which is less than its par or
issued value;
3. Issued as stock dividend when there are no
sufficient retained earnings to justify it; and
4. Issued as fully paid when the corporation has
received a lesser sum of money than its par or
issued value.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Reason Behind Prohibition from Issuance of
Watered Stock
The issuance of Watered Stocks violates the Trust
Fund Doctrine.
It is an established doctrine that subscriptions to the
capital stock of a corporation constitute a fund to
which creditors have a right to look for satisfaction
of their claims, and that the assignee in insolvency
can maintain an action upon any unpaid stock
subscription in order to realize assets for the
payment of its debts (Halley v. Printwell, G.R. No.
157549, 30 May 2011)
Treasury Shares NOT Covered
Trust fund doctrine is not violated in case treasury
shares are reacquired and subsequently re-issued
for a lesser consideration by the corporation since
this does not involve original issuance or primary
issuance of shares. The only limitation for the
reissuance of treasury shares is that their price must
be reasonable.
Treasury shares are not original issuances. They are
shares of stocks which have been issued and fully
paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation, or
through some other lawful means. (Sec. 9, RCC)
Since they do not lose their status as issued shares,
they cannot be treated as new issues when disposed
of or reissued.
Issuance of Watered Stocks Not Ratifiable
It is not merely ultra vires but is illegal per se as it is
a violation of Sec. 61, RCC.
Liability of Directors for Watered Stocks
Any director or officer of a corporation shall be
solidarily liable with stockholder concerned to the
corporation and its creditors for difference between
the value received at the time of the issuance of the
stock and the par or issued value of the same, if:
1. He consents to the issuance of stocks for
consideration less than its par or issued value;
210
 Corporation Law

2. He consents to the issuance of stocks for a Who may Classify Shares

consideration in any form other than cash,
valued in excess of its fair value; or
3. Who, having knowledge thereof, does not
forthwith express his objection in writing and
file the same with the corporate secretary. (Sec.
64, RCC)
NOTE: The solidary liability of the directors
emanates from the fiduciary character of the
position of director or corporate officer.
d. SITUS OF SHARES OF STOCK
GR: The situs of shares of stock is the country where
the corporation is domiciled. (Wells Fargo Bank v.
CIR, G.R. No. L-46720, 28 June 1940)
The residence of the corporation is the place
where the principal office of the corporation is
located as stated in its AOI even though the
corporation has closed its office therein and
relocated to another place. (Hyatt Elevators and
Escalators Corp. v. Goldstar Elevator Phils., Inc., G.R.
No. 161026, 24 Oct. 2005)
NOTE: For purposes of the estate tax, the gross
estate of a resident decedent, whether citizen or
alien, or a citizen decedent, whether resident or
nonresident, includes his intangible personal
property wherever situated.
1. Incorporators – the classes and number of
shares which a corporation shall issue are first
determined by the incorporators as stated in
the AOI filed with the SEC.
2. Board of directors and stockholders – after
the corporation comes into existence,
classification of shares may be altered by the
board of directors and the stockholders by
amending the AOI pursuant to Sec. 15, RCC.
1. PAR VALUE SHARES
Shares with a value fixed in the AOI and the
certificates of stock. The par value fixes the
minimum issue price of the shares.
2. NO PAR VALUE SHARES
These are shares having no stated par value in the
AOI.
Shares of capital stock issued without par value
shall be deemed fully paid and nonassessable and
the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto
(Sec. 6, RCC)
Limitations on No Par Value Shares

1. The issued price of no-par value shares may be

e. CLASSES OF SHARES OF STOCK
fixed in the AOI or by the board of directors
pursuant to authority conferred by the AOI or
Kinds or Classifications of Shares the bylaws, or if not so fixed, by the
stockholders representing at least a majority of
1. Par value shares; the outstanding capital stock at a meeting duly
2. No par value shares; called for the purpose provided that the issued
3. Common shares; price of no-par value shares shall not be less
4. Preferred shares; than P5.00. (Sec. 6 in relation to Sec. 61, RCC)
5. Redeemable shares;
6. Treasury shares; 2. The entire consideration received by the
7. Founder’s share; corporation for its no-par value shares shall be
8. Voting shares; treated as capital and shall not be available for
9. Non-voting shares; distribution as dividends. (Sec. 6, RCC) Banks,
10. Convertible shares; trust, insurance, and pre-need companies,
public utilities, building and loan associations,
and other corporations authorized to obtain or

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FACULTY OF CIVIL LAW
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access funds from the public, whether publicly b. Non-participating preferred shares – not
listed or not, shall not be permitted to issue no- entitled to participate with the common
par value shares of stock. (ibid.) shares in excess distribution.

NOTE: Preferred shares of stock may be issued 3. As to Cumulation –

only with a stated par value.
3. COMMON SHARES
Common shares are the basic class of stock
ordinarily and usually issued without privileges or
advantages except that they cannot be denied the
right to vote. Owners are entitled to a pro-rata share
in the profits of the corporation and in its assets
upon dissolution and liquidation, and in the
management of its affairs. (Divina, 2020)
4. PREFERRED SHARES
a. Cumulative preferred shares – if a
dividend is omitted in any year, it must be
made up in a later year before any dividend
may be paid on the common shares in the
later year.
b. Non-cumulative preferred shares – there
is no need to make up for undeclared
dividends.
Holders of Preferred Shares are Not Creditors of
the Corporation

Preferred shares are par-value shares given Preferences granted to preferred stockholders do
preference in the distribution of dividends and in not give them a lien upon the property of the
the distribution of corporate assets in case of corporation nor make them creditors of the
liquidation, or such other preferences. The board of corporation, the right of the former being always
directors, where authorized in the AOI, may fix the subordinate to the latter. Dividends are thus
terms and conditions of preferred shares of stock or payable only when there are profits earned by the
any series thereof: Provided, further, That such corporation and as a general rule, even if there are
terms and conditions shall be effective upon filing of existing profits, the board of directors has the
a certificate thereof with the SEC. . (Sec. 6, RCC) discretion to determine whether or not dividends
are to be declared. Shareholders, both common and
Kinds of Preferred Shares preferred, are considered risk takers who invest
capital in the business and who can look only to
1. As to Preference – what is left after corporate debts and liabilities are
fully paid. (Republic Planters Bank v. Agana, Sr., G.R.
a. Preferred shares as to assets – gives the No. 51765, 03 Mar. 1997)
holder preference in the distribution of the
assets of the corporation in case of Common vs. Preferred shares
liquidation.
COMMON SHARES PREFERRED SHARES
b. Preferred shares as to dividends – Definition
entitled to receive dividends on said share
to the extent agreed upon before any Stock which entitles
dividends at all are paid to the holders of Stock which entitles the holder to some
common stock. the owner to an equal preference, either in
pro rata division of the dividends, or in
2. As to Participation – profits. distribution of assets,
or both.
a. Participating preferred shares – entitled Value
to participate with the common shares in Depends if it is a par or
excess distribution. Par value.
no-par value share.

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2022 GOLDEN NOTES
 Corporation Law

Voting Rights 2. The Terms and conditions affecting said shares

must be stated both in the AOI and in the
May be deprived of
certificates of stock.
Usually vested with the voting rights except in
exclusive right to vote. the instances provided
3. Redeemable shares may be deprived of Voting
by law. (Sec. 6, RCC)
rights in the AOI, unless otherwise provided in
Preference upon liquidation the Code. (Sec. 6, RCC)
No advantage, priority,
Has preference over
or preference over any 4. Redemption may not be made where the
dividends/profits/
other stockholder in corporation is Insolvent or if such redemption
distribution of assets.
the same class. will cause insolvency or inability of the
corporation to meet its debts as they mature.
(Republic Planters Bank v. Agana, Sr., G.R. No.
5. REDEEMABLE SHARES
51765, 03 Mar. 1997)

These are shares which may be purchased by the

Q: Planters Bank issued preferred redeemable
corporation from the holders of such shares upon
shares with a feature that entitles them to be
the expiration of a fixed period, regardless of the
preferred in the payment of dividends.
existence of unrestricted retained earnings in the
Subsequently, the bank experienced liquidity
books of the corporation, and upon such other terms
problems. The Central Bank ruled that the bank
and conditions stated in the AOI and the certificate
has a reserve deficiency. Despite the condition,
of stock representing the shares, subject to rules
one of the stockholders holding the preferred
and regulations issued by the Commission. (Sec. 8,
shares filed an action against the corporation to
RCC)
redeem his shares and pay the dividends due.
Will the suit prosper?
Kinds of Redeemable Shares

A: NO. While redeemable shares may be redeemed

1. Mandatory – the issuing corporation must
regardless of the existence of unrestricted retained
redeem the shares after the expiration of a
earnings, this is subject to the condition that the
stated period or when demanded by the holder;
corporation has, after such redemption, assets in its
provided that the corporation has sufficient
books to cover debts and liabilities inclusive of
assets to pay for the shares or the redemption
capital stock. Redemption, therefore, may not be
will not bring about the insolvency of the
made where the corporation is insolvent or if such
corporation.
redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.
2. Optional – the issuing corporation may or may
not redeem the shares after a stated period.
Reissuance of Redeemed Shares

If the terms of the preferred shares are silent, the

In the case of redeemable shares reacquired, the
redemption is at the option of the corporation.
same shall be considered retired and no longer
(Divina, 2020)
issuable, unless otherwise provided in the Articles
of Incorporation. (SEC-OGC Opinion 19-20 dated 17
Limitations on Redeemable Shares (A-T-V-I)
May 2019, citing 1982 SEC Rules Governing
Redeemable and Treasury Shares)
1. The issuance of redeemable shares must be
expressly provided in the Articles of
incorporation.

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6. TREASURY SHARES
Shares that have been earlier issued and fully paid
for, but have been reacquired by the corporation
through purchase, donation, redemption or through
some other lawful means. (Sec. 9, RCC)
NOTE: Treasury shares do not revert to the
unissued shares of the corporation but are regarded
as property acquired by the corporation which may
be reissued or sold by the corporation at a price to
be fixed by the Board of Directors. (SEC-OGC Opinion
19-20 dated 17 May 2019, citing 1982 SEC Rules
Governing Redeemable and Treasury Shares)
Legitimate Purpose to Acquire Own Share
1. To collect or compromise unpaid indebtedness
to the corporation arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale;
2. To eliminate fractional shares arising out of
stock dividends;
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the
provisions of this Code;
4. Redemption of Redeemable Shares; and
5. Purchase of Shares when ordered by the SEC
due to a deadlock in a Close corporation.
Limitations on Treasury Shares
1. It may be re-issued or sold again as long as it is
for a reasonable price fixed by the BOD;
2. Cannot participate in dividends;
3. It has no voting right as long as such remains in
the Treasury, hence cannot participate in
meetings as voting stocks; and
4. The amount of unrestricted retained earnings
(URE) equivalent to the cost of treasury shares
being held shall be restricted from being
declared and issued as dividends.
Apart from reacquiring the shares through some
lawful means, the Corporation Code is also explicit
that while a corporation has the power to purchase
or acquire its own shares, the corporation must
have unrestricted retained earnings in its books to
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
cover the shares to be purchased or acquired. In
addition, in cases where the reason for reacquiring
the shares is because of the unpaid subscription,
the Corporation Code is likewise explicit that the
corporation must purchase the same during a
delinquency sale. (Salido, Jr. v. Aramaywan Metals
Development Corp., G.R. No. 233857, 18 Mar. 2021, J.
Caguioa)
Treasury Shares Distributed via Dividends
They can be distributed only as property dividends.
They cannot be declared as stock or cash dividends
because they are not considered part of earned or
surplus profits. The distribution of cash or stock
dividends out of treasury shares would be
converting the corporation into both a debtor and
creditor for the same amount at the same time or
requiring it to take money or stock from one of its
pockets and putting it in another, which is absurd.
Treasury shares may be declared as property
dividend to be issued out of the retained earnings
previously used to support their acquisition
provided that the amount of the said retained
earnings has not been subsequently impaired by
losses. (SEC Opinion, 17 July 1984)
NOTE: Although a treasury share, not having been
retired by the corporation re-acquiring it, may be
re-issued or sold again, such share, as long as it is
held by the corporation as a treasury share,
participates neither in dividends, because dividends
cannot be declared by the corporation to itself, nor
in the meetings of the corporation as voting stock,
for otherwise equal distribution of voting powers
among stockholders will be effectively lost and the
directors will be able to perpetuate their control of
the corporation, though it still represents a paid-for
interest in the property of the corporation(CIR v.
Manning, G.R. No. L-28398, 06 Aug. 1975)
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 Corporation Law

Treasury Shares vs. Redeemable Shares 8. VOTING SHARES

TREASURY SHARES REDEEMABLE SHARES Shares with a right to vote on all corporate acts.
Description Usually refers to common shares, although the
corporation may also grant voting rights to
Shares so acquired by
preferred shares under its AOI.
the corporation Issued by the
through purchase, corporation when
9. NON-VOTING SHARES
donation, redemption, expressly so provided in
or any other lawful the AOI.
Shares without the right to vote. The law only
means.
authorizes the denial of voting rights in the case of
Manner of Acquisition redeemable shares and preferred shares, provided
that there shall always be a class or series of shares
Redeemable shares may
which have complete voting rights (common
Can only be acquired be acquired even
shares). (Sec. 6, RCC)
in the presence of without URE for as long
unrestricted retained as it will not result in the
Instances when Holders of Non-voting Shares
earnings (URE). insolvency of the
are Still Entitled to Vote
corporation.

Applicability of the Trust Fund Doctrine
Must comply with the Is an exception to the
trust fund doctrine. trust fund doctrine.
Effect of Redemption
While redeemable, they
Are not redeemable;
are not re-issued, unless
they may be re-issued.
otherwise provided.
7. FOUNDERS' SHARES
Shares classified as such in the AOI, and which may
be given certain rights and preferences not enjoyed
by the owner of other stocks. (Sec. 7, RCC)
NOTE: Where the exclusive right to vote and be
voted for in the election of directors is granted, it
must be for a limited period not to exceed five (5)
years from the date of incorporation: Provided, That
such exclusive right shall not be allowed if its
exercise will violate Commonwealth Act No. 108,
otherwise known as the “Anti-Dummy Law”; R.A.
No. 7042, otherwise known as the “Foreign
Investments Act of 1991”; and other pertinent laws.
(Sec. 7, RCC)
These redeemable and preferred shares, when such
voting rights are denied, shall nevertheless be
entitled to vote on the following fundamental
matters: (A-A-S-I-I-M-I-D)
1. Amendment of articles of incorporation;
2. Adoption and amendment of By-laws;
3. Sale, Lease, Exchange, Mortgage, Pledge or
Other disposition (Sa-Le-M-P-O) of all or
substantially all of the corporate property;
4. Incurring, creating, or increasing bonded
Indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this
Code; and
8. Dissolution of the corporation. (Sec. 6, RCC)
NOTE: Except as provided in the foregoing eight (8)
instances, the vote required under the RCC to
approve a particular corporate act shall be deemed
to refer only to stocks with voting rights (Sec. 6, RCC)
10. CONVERTIBLE SHARES

A share that is changeable by the stockholder from

one class to another at a certain price and within a
certain period. (Divina, 2020)

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Other Kinds of Shares: a. NATURE OF THE CERTIFICATE

1. Fractional Share – A fractional share is a share
of equity that is less than one full share.
2. Shares in Escrow – A stock deposited with a
third person to be delivered to a stockholder or
his assign, after complying with certain
conditions, usually the full payment of
subscription or purchase price. (Divina, 2020)
NOTE: The classification of shares, their
corresponding rights, privileges, or restrictions, and
their stated par value, if any, must be indicated in
the AOI. A corporation may further classify its
shares for the purpose of ensuring compliance with
constitutional or legal requirements. (Sec. 6, RCC)
2. CERTIFICATE OF STOCK
The certificate of stock itself once issued is a
continuing affirmation or representation that the
stock described therein is valid and genuine and is
at least prima facie evidence that it was legally
issued in the absence of evidence to the contrary.
However, this presumption may be rebutted.
(Bitong v. CA, G.R. No. 123553, 13 July 1998)
Transfer of Partially Paid Shares
The subscriber, as the owner of the shares, may
assign his right to the contract of subscription in
favor of the assignee. Partially paid shares are not
covered yet by a stock certificate, and as such, there
is no certificate which can be endorsed and
delivered to the transferee as required by Sec. 62,
RCC.

A certificate of stock is the paper representative or The corporation may, however, refuse the transfer
tangible evidence of the stock itself and of the of shares based on Sec. 62, RCC, which provides that
various interests therein. The certificate is not stock the corporation may refuse the transfer if it holds
in the corporation but is merely evidence of the unpaid claim over the shares. The term “unpaid
holder’s interest and status in the corporation, his claim” means unpaid subscription.
ownership of the share represented thereby, but is
not in law the equivalent of such ownership. It Consent Required in the Sale of Unpaid Shares
expresses the contract between the corporation and
the stockholder, but it is not essential to the 1. If the subscription is fully paid, the
existence of a share in stock or the creation of the stockholder may sell or dispose of his shares
relation of shareholder to the corporation. (Tan v. without having to secure the consent of the
SEC, G.R. No. 95696, 03 March 1992) corporation. In fact, the corporation cannot
require its consent for the transfer of the shares.
Shares of Stock vs. Certificates of Stock It will be contrary to law and public policy. To
be valid, the restriction on transfer cannot be
CERTIFICATE OF more onerous than the option granted to a
SHARE OF STOCK
STOCK stockholder to purchase the shares of a
Evidence of the transferring stockholder on reasonable terms
holder’s ownership of and conditions, or simply, the right of first
Unit of interest in a the stock and of his refusal. Requiring the consent of the
corporation. right as a shareholder corporation is certainly more onerous than the
and of his extent right of first refusal.
specified therein.
It is an incorporeal or It is concrete and 2. If the subscription is not fully paid, the
intangible property. tangible. consent of the corporation is necessary
It may be recognized before the subscriber may assign his right to
It may be issued only if
by the corporation the contract of subscription. Assignment of
the subscription is fully
even if the subscription shares with unpaid subscription basically
paid.
is not fully paid. amounts to novation as there will be a change of

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2022 GOLDEN NOTES
 Corporation Law
debtor from the subscriber to the assignee. The
obligation to pay the balance of the subscription
will be assumed by the assignee. To be valid,
novation requires consent of the creditor,
which in this case is the corporation. (Divina,
2020)
Alienation Despite Absence of Certificate of
Stock
A stockholder may alienate his shares even if there
is no certificate of stock issued by the corporation.
The absence of a certificate of stock does not
preclude the stockholder from alienating or
transferring his shares of stock.
Transfers Involving Fully Paid Subscriptions
In case of a fully paid subscription, without the
corporation having issued a certificate of stock, the
transfer may be effected by the subscriber or
stockholder executing a contract of sale or deed of
assignment covering the number of shares sold and
submitting said contract or deed to the corporate
secretary for recording.
In case of subscription not fully paid, the
corporation may record such transfer, provided that
the transfer is approved by the board of directors
and the transferee executes a verified assumption of
obligation to pay the unpaid balance of the
subscription.
b. UNCERTIFICATED SHARES
The SEC may require corporations whose securities
are traded in trading markets, and which can
reasonably demonstrate their ability to do so, to
issue their securities or shares of stock in
uncertificated or in scripless form in accordance
with the rules imposed by SEC. (Sec. 62, RCC)
217
c. NEGOTIABILITY; REQUISITES FOR VALID
TRANSFER OF STOCKS
Stock Certificate is NOT Negotiable
Although a stock certificate is sometimes regarded
as quasi-negotiable, in the sense that it may be
transferred by delivery, it is well-settled that the
instrument is non-negotiable, because the holder
thereof takes it without prejudice to such rights or
defenses as the registered owner or creditor may
have under the law, except insofar as such rights or
defenses are subject to the limitations imposed by
the principles governing estoppel. (Republic v.
Sandiganbayan, G.R. No. 107789 & 147214, 30 Apr.
2003)
Certificates of stock may be issued only to registered
owners of stock. The issuance of “bearer” stock
certificates is not allowed under the law. (SEC
Opinion No. 05-02, 31 Jan. 2005)
Requirements for Valid Transfer of Stocks
The following are the requirements for valid
transfer of stocks:
1. If represented by a certificate, the following
must be strictly complied with:
a. Delivery of the certificate or certificates;
b. Indorsed by the owner, his attorney-in-fact,
or any other person legally authorized to
make the transfer;
c. No transfer, however, shall be valid, except
as between the parties, until the transfer is
recorded in the books of the corporation
showing the names of the parties to the
transaction, the date of the transfer, the
number of the certificate or certificates, and
the number of shares transferred. (Sec. 62,
RCC)
2. If NOT represented by a certificate (such as
when the certificate has not yet been issued or
where for some reason is not in the possession
of the stockholder):
a. By means of deed of assignment; and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
b. Such is duly recorded in the books of the
corporation. (Divina, 2020)
Effect of Non-Payment of Documentary Stamp
Tax
No sale, exchange, transfer, or similar transaction
intended to convey ownership of, or title to any
share of stock shall be registered in the books of the
corporation unless the receipts of payment of the
tax herein imposed is filed with and recorded by the
stock transfer agent or secretary of the corporation.
(Sec. 11, Revenue Regulations No. 6-2008)
Ministerial Duty of Corporate Secretary to
Register Transfer of Stocks
In transferring stock, the secretary of a corporation
acts in purely ministerial capacity and does not try
to decide the question of ownership. If a corporation
refuses to make such transfer without good cause, it
may, in fact, even be compelled to do so by
mandamus. (Teng v. SEC, G.R. No. 184332, 17 Feb.,
2016)
Remedies When Corporation Refuses to Record
Transfer
If the corporation wrongfully refuses to issue a
certificate of stock, the assignee or transferee of
shares of stock may:
1. File a suit for specific performance of an express
or implied contract;
2. File for an alternative relief by way of damages
where specific performance cannot be granted;
and
3. File a petition for mandamus to compel
issuance of a certificate. (SEC-OGC Opinion No.
21-06, Mar. 23, 2006, cited in Divina, 2020)
The fact that the corporate secretary asked for leave
to register the transfer five years after the sale did
not make the transfer irregular. This Court held in
Lee E. Won v. Wack Wack Golf & Country Club, Inc.,
that since the law does not prescribe a period for
such kind of registration, the action to enforce the
right to have it done does not begin to toll until a
demand for it had been made and was refused. This
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
did not happen in this case. (Africa v.
Sandiganbayan, G.R. Nos. 17222, 11 Nov. 2013)
Q: Nemesio Garcia filed an action for injunction
against spouses Jose and Sally Atinon and
Nicolas Jomouad, ex-officio sheriff. Said action
stemmed from an earlier case for collection of
sum of money, filed by the spouses Atinon
against Jaime Dico. In that case, the trial court
rendered judgment ordering Dico to pay the
spouses Atinon. After said judgment became
final and executory, the sheriff proceeded with
its execution. In the course thereof, the
Proprietary Ownership Certificate (POC) in the
Cebu Country Club, which was in the name of
Dico, was levied on and scheduled for public
auction.
Claiming ownership over the subject certificate,
Garcia filed the action for injunction to enjoin
the spouses Antinon from proceeding with the
auction. Garcia contends that the subject stock
of certificate, albeit in the name of Dico, cannot
be levied upon the execution to satisfy his
judgment debt because even prior to the
institution of the case for collection of sum of
money against him, the spouses Atinon had
knowledge that Dico already conveyed back the
ownership of the subject certificate to Garcia
and that Dico executed a deed of transfer
covering the subject certificate in favor of
Garcia.
Is a bona fide transfer of the shares of a
corporation, not registered or noted in the
books of the corporation, valid as against a
subsequent lawful attachment of said shares,
regardless of whether the attaching creditor had
actual notice of said transfer or not?
A: NO. A transfer of shares not registered in the
books of the corporation is not valid as against
subsequent attachment of the shares. All transfers
of shares not so entered in the books of the
corporation are invalid as to attaching or execution
creditors of the assignors, as well as to the
corporation and to subsequent purchasers in good
faith, and, indeed, as to all persons interested,
except the parties to such transfers. Hence, the
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 Corporation Law
transfer of the subject certificate made by Dico to
Garcia was not valid as to the spouses Atinon, the
judgment creditors, as the same still stood in the
name of Dico, the judgment debtor, at the time of the
levy on execution. (Nemesio Garcia v. Nicolas
Jomouad, et al., G.R. No. 133969, 26 Jan. 2000)
Q: Fil-Estate Golf and Development, Inc. (FEGDI)
is a stock corporation whose primary business
is the development of golf courses. Fil-Estate
Land, Inc. (FELI) is also a stock corporation, but
is engaged in real estate development. FEGDI
was the developer of the Forest Hills Golf and
Country Club (Forest Hills) and, in consideration
for its financing support and construction
efforts, was issued several shares of stock of
Forest Hills.
FEGDI sold on installment, to RS Asuncion
Construction Corporation (RSACC) one common
share of Forest Hills. Prior to the full payment of
the purchase price, RSACC sold the share to
Vertex Sales and Trading, Inc. (Vertex). RSACC
advised FEGDI of the sale to Vertex and FEGDI, in
turn, instructed Forest Hills to recognize Vertex
as a shareholder. For this reason, Vertex
enjoyed membership privileges in Forest Hills.
Despite Vertex’s full payment on Feb. 11, 1999,
the share remained in the name of FEGDI. As the
demands to issue a certificate in its name went
unheeded, Vertex filed a Complaint for
Rescission with Damages and Attachment
against FEGDI, FELI and Forest Hills. It averred
that the petitioners defaulted in their obligation
as sellers when they failed and refused to issue
the stock certificate covering the subject share
despite repeated demands. Only thereafter that
the stock certificates were delivered (on Jan. 23,
2002).
Is the delay in the issuance of the stock
certificate a substantial breach of the sale which
entitles Vertex to the rescission thereof?
A: YES. Sec. 63 (now Sec 62, RCC) provides, among
others, that shares of stock may be transferred by
delivery of the certificate or certificates indorsed by
219
the owner or his attorney-in-fact or other person
legally authorized to make the transfer.
In this case, Vertex fully paid the purchase price by
Feb. 11, 1999 but the stock certificate was only
delivered on Jan. 23, 2002 after Vertex filed an
action for rescission against FEGDI.
Under these facts, considered in relation to the
governing law, FEGDI clearly failed to deliver the
stock certificates, representing the shares of stock
purchased by Vertex, within a reasonable time from
the point the shares should have been delivered.
This was a substantial breach of their contract that
entitles Vertex the right to rescind the sale under
Art. 1191 of the Civil Code. It is not entirely correct
to say that a sale had already been consummated as
Vertex already enjoyed the rights a shareholder can
exercise. The enjoyment of these rights cannot
suffice where the law, by its express terms, requires
a specific form to transfer ownership.
Mutual restitution is required in cases involving
rescission under Art. 1191 of the Civil Code; such
restitution is necessary to bring back the parties to
their original situation prior to the inception of the
contract. Accordingly, the amount paid to FEGDI by
reason of the sale should be returned to Vertex. (Fil-
Estate Golf and Development, Inc. and Fil-Estate
Land, Inc. v. Vertex Sales and Trading, Inc., G.R. No.
202079, 10 June 2013)
Q: May Forest Hills appeal the CA decision which
ordered the recission of the sale?
A: NO. It was not a party to the sale even though the
subject of the sale was its share of stock. The
corporation whose shares of stock are the subject
of a transfer transaction (through sale, assignment,
donation, or any other mode of conveyance) need
not be a party to the transaction, as may be inferred
from the terms of Sec. 63 (now Sec. 62, RCC) of the
Corporation Code. However, to bind the
corporation as well as third parties, it is necessary
that the transfer is recorded in the books of the
corporation. In the present case, the parties to the
sale of the share were FEGDI as the seller and
Vertex as the buyer (after it succeeded RSACC). As
party to the sale, FEGDI is the one who may appeal
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
the ruling rescinding the sale.
The remedy of appeal is available to a party who
has "a present interest in the subject matter of the
litigation and is aggrieved or prejudiced by the
judgment. A party, in turn, is deemed aggrieved or
prejudiced when his interest, recognized by law in
the subject matter of the lawsuit, is injuriously
affected by the judgment, order or decree." The
rescission of the sale does not in any way prejudice
Forest Hills in such a manner that its interest in the
subject matter – the share of stock – is injuriously
affected. (Forest Hills Golf & Country Club v. Vertex
Sales and Trading, Inc., G.R. No. 202205, 06 March
2013)
d. ISSUANCE
Issuance of Certificate of Stock
No certificate of stock shall be issued to a subscriber
until the full amount of the subscription together
with interest and expenses (in case of delinquent
shares), if any is due, has been paid. (Sec. 63, RCC)
Requisites for Issuance of Stock Certificates for
Fully-paid Shares
1. Signed by the president or vice president
2. Countersigned by the secretary or assistant
secretary; and
3. Sealed with the seal of the corporation
4. Issued in accordance with the bylaws. (Sec. 62,
RCC)
Stock and Transfer Book
Stock corporations must also keep a stock and
transfer book, which shall contain:
1. A record of all stocks in the names of the
stockholders alphabetically arranged;
2. The installments paid and unpaid on all stocks
for which subscription has been made, and the
date of payment of any installment;
3. A statement of every alienation, sale or transfer
of stock made, the date thereof, by and to whom
made; and
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
4. Such other entries as the by-laws may
prescribe. (Sec. 73, RCC)
Entries
It is the corporate secretary’s duty and obligation to
register valid transfers of stocks and if said
corporate officer refuses to comply, the transferor-
stockholder may rightfully bring suit to compel
performance. In other words, there are remedies
within the law that petitioners could have availed of,
instead of taking the law in their own hands, as the
cliche goes. (Torres, Jr. v. CA, G.R. No. 120138, 05 Sept.
1997)
Probative Value of Stock and Transfer Book
Similarly, books and records of a corporation which
include even the stock and transfer book are
generally admissible in evidence in favor of or
against the corporation and its members to prove
the corporate acts, its financial status and other
matters including one’s status as a stockholder.
They are ordinarily the best evidence of corporate
acts and proceedings.
However, the books and records of a corporation
are not conclusive even against the corporation but
are prima facie evidence only. Parol evidence may
be admitted to supply omissions in the records,
explain ambiguities, or show what transpired where
no records were kept, or in some cases where such
records were contradicted. The effect of entries in
the books of the corporation which purport to be
regular records of the proceedings of its board of
directors or stockholders can be destroyed by
testimony of a more conclusive character than mere
suspicion that there was an irregularity in the
manner in which the books were kept.
The foregoing considerations are founded on the
basic principle that stock issued without authority
and in violation of law is void and confers no rights
on the person to whom it is issued and subjects him
to no liabilities. Where there is an inherent lack of
power in the corporation to issue the stock, neither
the corporation nor the person to whom the stock is
issued is estopped to question its validity since an
estoppel cannot operate to create stock which
220
 Corporation Law
under the law cannot have existence. (Bitong v. CA,
G.R. No. 123553, 13 July 1998)
e. LOST OR DESTROYED CERTIFICATES
Procedure for Issuance of New Stock Certificate
in Lieu of Lost, Stolen or Destroyed Certificate
1. The registered owner of a certificate of stock in
a corporation or his legal representative shall
file with the corporation an affidavit in
triplicate setting forth:
a. If possible, the circumstances as to how the
certificate was lost, stolen or destroyed;
b. The number of shares represented by such
certificate;
c. The serial number of the certificate and the
name of the corporation which issued the
same.
He shall also submit such other information and
evidence which he may deem necessary.
2. After verifying the affidavit and other
information and evidence with the books of the
corporation, the latter shall publish a notice in a
newspaper of general circulation published in
the place where the corporation has its
principal office, once a week for three (3)
consecutive weeks at the expense of the
registered owner of the Certificate of Stock.
Contents of notice:
a. Name of the corporation;
b. Name of the registered owner;
c. Serial number of the certificate of stock;
and
d. Number of shares represented by the
certificate of stock.
e. A statement that after the expiration of
one (1) year from the date of the last
publication, if no contest has been
presented to the corporation regarding
the certificate of stock, the right to make
such contest shall be barred and the
corporation shall cancel the lost,
destroyed or stolen certificate of stock in
its books
221
3. After the expiration of one (1) year from the
date of the last publication, if no contest has
been presented to said corporation regarding
said certificate of stock or if no action is pending
in court regarding the ownership of the
certificate of stock which has been lost, stolen
or destroyed, the corporation shall cancel in its
books the certificate of stock which has been
lost, stolen or destroyed and issue in lieu
thereof new certificate of stock.
NOTE: if a contest has been presented to said
corporation or if an action is pending in court
regarding the ownership of said certificate of stock
which has been lost, stolen, or destroyed, the
issuance of the new certificate of stock in lieu
thereof shall be suspended until the final decision by
the court regarding the ownership of said certificate
of stock which has been lost, stolen, or destroyed.
A new certificate may be issued even before the
expiration of the one (1) year period provided the
registered owner files a bond or other security as
may be required, effective for a period of one (1)
year, for such amount and in such form and with
such sureties as may be satisfactory to the board of
directors. (Sec. 72, RCC)
Liability of Corporation for Issuance of New
Certificates in Lieu of Lost, Stolen or Destroyed
Ones
GR: No action may be brought against any
corporation which has issued a certificate of stock in
lieu of those lost, stolen, or destroyed pursuant to
the procedure under Sec. 72, RCC.
XPN: In case of fraud, bad faith, or negligence on the
part of the corporation and its officers. (Ibid.)
Q: A stockholder claimed that his stock
certificate was lost. After going through with the
procedure for the issuance of lost certificate,
and no contest was presented within one (1)
year from the last publication, the corporation
issued a new certificate of stock in lieu of the
supposed lost certificate. The stockholder
immediately sold his shares and endorsed the
replacement certificate to a buyer. It turned out
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
that the original certificate was not lost but sold
and endorsed to another person.
a. May the corporation be made liable by the
aggrieved party?
b. Who will have a better right over the shares,
the endorsee of the original certificate or the
endorsee of the replacement certificate?
A:
a. NO. The corporation cannot be made liable,
unless there is fraud, bad faith or negligence.
Under Sec. 72 of the RCC, except in cases of
fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be
brought against any corporation which has
issued certificates of stock in lieu of those lost,
stolen, or destroyed pursuant to the procedure
prescribed therein.
b. The endorsee of the replacement certificate has
a better right to the shares. After the expiration
of one (1) year from the date of the last
publication, and no contest has been presented
to corporation regarding said certificate, the
right to make such contest is consequently
barred and said corporation is deemed to have
already canceled in its books the certificate
which have been lost, stolen, or destroyed and
issued in lieu thereof a new certificate.
Q: Juan was a stockholder of X Co. He owned a
total of 500 shares evidenced by Certificate of
Stock No. 1001. He sold the shares to Pedro.
After getting paid, Juan indorsed and delivered
said Certificate of Stock No. 1001 to Pedro. The
following day, Juan went to the office of the
corporation and claimed that his Certificate of
Stock No. 1001 was lost and that, despite diligent
efforts, the certificate could not be located. The
formalities prescribed by law for the
replacement of the lost certificate were
complied with.
Eventually X Co. issued in substitution of the lost
certificate, Certificate of Stock No. 2002. Juan
forthwith transferred for valuable
consideration the new certificate to Jose who
knew nothing of the previous sale to Pedro. In
time, the corporation was confronted with the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
conflicting claims of Jose and Pedro. The BOD of
X Co. invited you to enlighten them on these
questions; viz:
a. If a suit were to be initiated in order to
resolve the controversy between Pedro and
Jose, should the matter be submitted to the
SEC or to the regular courts?
b. Between Jose and Pedro, whom should the
corporation so recognize as the rightful
stockholder? How would you respond to the
above queries? (1997 BAR)
A:
a. The jurisdiction of the matter belongs to the
regular courts. Under Sec. 5.2 of the SRC as
amended, the jurisdiction for intra-corporate
controversies was transferred from the SEC to
the regular courts.
b. The corporation should recognize both Pedro
and Jose as rightful stockholders if there is no
over-issuance of shares resulting from the two
transactions without prejudice to the right of
the corporation to claim against Juan for the
value of the shares sold to Jose.
3. DISPOSITION AND ENCUMBRANCE
OF SHARES
a. SALE OF SHARES
Registration of Transfer in Case of Sale
No transfer shall be valid, except as between the
parties, until the transfer is recorded in the books of
the corporation showing the names of the parties to
the transaction, the date of the transfer, the number
of the certificate or certificates, and the number of
shares transferred.
No shares of stock against which the corporation
holds any unpaid claim shall be transferable in the
books of the corporation. (Sec. 62, RCC)
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 Corporation Law

b. ALLOWABLE RESTRICTIONS ON THE SALE OF c. REQUISITES OF A VALID TRANSFER

SHARES
See discussion under: c. NEGOTIABILITY;
Right of Corporation to Regulate Transfers of REQUISITES FOR VALID TRANSFER OF STOCKS –
Stock page 217.

Corporation can provide regulations to the d. INVOLUNTARY DEALINGS

sale/transfer of the shares of stockholders, but the
authority granted to a corporation to regulate the
It refers to such writ, order or process issued by a
transfer of its stock does not empower it to restrict
court of record affecting shares of stocks which by
the right of a stockholder to transfer his shares, but
law should be registered to be effective, and also to
merely authorizes the adoption of regulations as to
such instruments which are not the willful acts of
the formalities and procedure to be followed in
the registered owner, and which may have been
effecting transfer. (Thomson v. CA, G.R. No. 116631,
executed even without his knowledge or against his
28 Oct. 1998)
consent.

Requisites for Validity of Restriction

Examples of Involuntary Dealings

The corporation may impose restrictions on the

1. Attachment;
transfer of shares but subject to the following
2. Sale on execution of judgment or sales for taxes;
requisites:
3. Adverse claims; or
4. Foreclosure of mortgage of stocks.
1. Restrictions on the right to transfer shares must
appear in the AOI, in the bylaws, as well as in the
Involuntary Dealings Must be Registered
certificate of stock; otherwise, the same shall
not be binding on any purchaser in good faith.
It is the act of registration which creates a
constructive notice to the whole world of such
2. Restrictions shall not be more onerous than
instrument or court writ or process and is the
granting the existing stockholders or the
operative act that conveys ownership. (Aquino,
corporation the option to purchase the shares
2007)
of the transferring stockholder with such
reasonable terms, conditions or period stated.

3. Upon the expiration of the said period, the

existing stockholders or the corporation fails to
exercise the option to purchase, the
transferring stockholder may sell their shares
to any third person. (Sec. 97, RCC)

While these restrictions appear in the chapter on

close corporations, there is no reason not to apply
the same to open or regular corporation. (Divina,
2020)

223 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

the parties, and the questions involved pertain to

G. DISSOLUTION AND LIQUIDATION
Dissolution
It is the extinguishment or cancellation of the
corporate franchise and the termination of its
corporate existence for business purposes. (Divina,
2020)
Effects of Dissolution of Corporation
their rights and obligations under the Corporation
Code and matters relating to the regulation of the
corporation. The Court further holds that the nature
of the case as an intra-corporate dispute was not
affected by the subsequent dissolution of the
corporation. Sec. 145 (now Sec. 184 of the RCC)
preserves a corporate actor’s cause of action and
remedy against another corporate actor. In so doing,
the said section also preserves the nature of the
controversy between the parties as an intra-
corporate dispute.

The dissolution of the corporation simply prohibits

1. Corporation ceases as a body corporate to
it from continuing its business. However, despite
continue the business for which it was
such dissolution, the parties involved in the
established.
litigation are still corporate actors. The dissolution
does not automatically convert the parties into total
2. The Corporation continues as a body corporate
strangers or change their intra-corporate
for 3 years only for the purpose of prosecuting
relationships. Neither does it change or terminate
and defending suits by or against it and
existing causes of action, which arose because of the
enabling it to settle and close its affairs, dispose
corporate ties between the parties. Thus, a cause of
of, and convey its property, and distribute its
action involving an intra-corporate controversy
assets (winding up or liquidation). (Sec. 139,
remains and must be filed as an intra-corporate
RCC)
dispute despite the subsequent dissolution of the
corporation. (Aguirre v. FQB+7 Inc., G.R. No. 170770,
Q: Vitaliano Aguirre, II, one of the original
09 Jan. 2013)
subscribers of FQB+7, filed a complaint for
intra-corporate dispute against Nathaniel, et al.
Q: Alabang Development Corporation (ADC),
upon learning that they have filed, as corporate
developer of Alabang Hills Village, filed with the
officers of FQB+7, a GIS which showed a different
RTC a complaint for injunction against Alabang
set of Directors and Subscribers from that of the
Hills Village Association, Inc. (AHVAI) and its
AOI. In response, Nathaniel, et al. filed a petition
president, Rafael Tinio, alleging that AHVAI
for certiorari with the CA for the annulment of
started the construction of a multi-purpose hall
the proceedings in the RTC claiming that the SEC
and a swimming pool on one of the parcels of
had already revoked FQB+7’s certificate of
land still owned by ADC, without the latter’s
registration almost a year before Aguirre filed
consent and approval.
his complaint with the RTC.

AHVAI claimed that ADC had no legal capacity to

The CA dismissed the complaint because the
sue since its existence as a registered corporate
corporation has lost its juridical personality. As
entity was revoked by the SEC on 26 May 2003.
such the trial court does not have jurisdiction to
Does the ADC have the capacity to file the
entertain an intra-corporate dispute when the
complaint?
corporation is already dissolved. Is the case an
intra-corporate dispute and is thus under the
A: NO. In the instant case, there is no dispute that
jurisdiction of the RTC?
ADC's corporate registration was revoked on 26
May 2003. Based on Sec. 122 (no Sec. 139, RCC), it
A: YES. The Court finds and so holds that the case is
had three years, or until May 26. 2006, to prosecute
essentially an intra-corporate dispute. It obviously
or defend any suit by or against it. The subject
arose from the intra-corporate relations between

UNIVERSITY OF SANTO TOMAS 224

2022 GOLDEN NOTES
 Corporation Law

complaint, however, was filed only on Oct. 19, 2006, corporation:

more than three years after such revocation.
i. Was created for the purpose of
In the present case, ADC filed its complaint not only committing, concealing or aiding the
after its corporate existence was terminated but commission of securities violations,
also beyond the three-year period allowed by [now] smuggling, tax evasion, money
Sec. 139 of the RCC. Thus, it is clear that at the time laundering, or graft and corrupt
of the filing of the subject complaint ADC lacks the practices;
capacity to sue as a corporation. To allow ADC to ii. Committed or aided in the
initiate the subject complaint and pursue it until commission of securities violations,
final judgment, on the ground that such complaint smuggling, tax evasion, money
was filed for the sole purpose of liquidating its laundering, or graft and corrupt
assets, would be to circumvent the provisions of Sec. practices, and its stockholders knew
139 of the RCC. (Alabang Development Corp. v. of the same; and
Alabang Hills Village Association and Rafael Tinio, iii. Repeatedly and knowingly tolerated
G.R. No. 187456, 02 June 2014) the commission of graft and corrupt
practices or other fraudulent or illegal
1. MODES OF DISSOLUTION acts by its directors, trustees, officers,
or employees. (Sec. 138, RCC)
a. VOLUNTARY AND INVOLUNTARY
DISSOLUTION VOLUNTARY DISSOLUTION

Dissolution Where No Creditors are Affected

The following are the modes of dissolution of the
corporation:
1. Dissolution is approved by majority vote of the
board of directors or trustees;
1. Voluntary –
a. By a verified request for dissolution filed
2. A meeting of the Stockholders/Members must
with the SEC where no creditors are
be held upon the call of the directors or
affected; (Sec. 134, RCC)
trustees:
b. By a petition for dissolution filed with t
SEC where creditors are affected; (Sec.
Notice of meeting must be given at least twenty
135, RCC)
(20) days prior to the said meeting. to each
c. By amending the AOI to shorten the
stockholder or member either by registered
corporate term; (Sec. 136, RCC)
mail or by personal delivery or by any means
d. Merger or consolidation
authorized under its bylaws whether or not
e. Affidavit of dissolution by a corporation
entitled to vote at the meeting, in the manner
sole
provided in Sec. 50 of the RCC.
2. Involuntary –
a. Notice shall state that the purpose of the
a. Non-use of corporate charter as provided
meeting is to vote on the dissolution of the
under Sec. 21, RCC;
corporation.
b. Continuous inoperation of a corporation
as provided under Sec. 21, RCC;
b. Notice of the time, place, and object of the
c. Upon receipt of a lawful court order
meeting shall be published once prior to the
dissolving the corporation;
date of the meeting in a newspaper
d. Upon finding by final judgment that the
published in the place where the principal
corporation procured its incorporation
office of said corporation is located, or if no
through fraud;
newspaper is published in such place, in a
e. Upon finding by final judgment that the

225 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
newspaper of general circulation in the
Philippines.
3. A resolution must be adopted approving the
dissolution by the affirmative vote of the
stockholders owning at least majority of the
outstanding capital stock or majority of the
members in the meeting called for the said
purpose.
4. A verified request for dissolution shall be filed
with the SEC, stating:
a. The reason for the dissolution
b. The form, manner, and time when the
notices were given;
c. Names of the stockholders and directors
or members and trustees who approved
the dissolution;
d. The date, place, and time of the meeting in
which the vote was made; and
e. The details of publication.
5. The Corporation shall submit the following to
the SEC:
a. A copy of the resolution authorizing the
dissolution, certified by the majority of the
BOD/BOT, and countersigned by the
secretary of the corporation;
b. Proof of publication; and
c. Favorable recommendation from the
appropriate regulatory agency, when
necessary.
No application for dissolution of banks,
banking, and quasi-banking institutions,
preneed, insurance and trust companies,
NSSLAs, pawnshops, and other financial
intermediaries shall be approved by the
SEC unless accompanied by a favorable
recommendation of the appropriate
government agency.
6. Within fifteen (15) days from receipt of the
verified request for dissolution, and in the
absence of any withdrawal within said period,
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
the SEC shall approve the request and issue the
certificate of dissolution.
NOTE: The dissolution shall take effect only upon
the issuance by the SEC of a certificate of
dissolution. (Sec. 134, RCC)
Dissolution Where Creditors are Affected
(A-PSIVECSO–CPUPOO-J)
1. Approval of the stockholders representing at
least 2/3 of the OCS or by at least two-thirds
(2/3) of the members at a meeting of its
stockholders or members called for that
purpose;
2. Filing of Petition for dissolution with SEC. The
petition must be: (SiVeCS)
a. Signed by a majority of its board of
directors or trustees;
b. Verified by its president or secretary or one
of its directors or trustees;
c. Set forth all Claims and demands against it;
d. State that dissolution was resolved upon by
the affirmative vote of the Stockholders
representing at least two-thirds (2/3) of
the OCS or at least two-thirds (2/3) of the
members at a meeting of its stockholders or
members called for that purpose ;
e. State: (a) the reason for the dissolution; (b)
the form, manner, and time when the
notices were given; and (c) the date, place,
and time of the meeting in which the vote
was made
The corporation shall submit to the SEC the
following: (1) a copy of the resolution
authorizing the dissolution, certified by a
majority of the board of directors or trustees
and countersigned by the secretary of the
corporation; and (2) a list of all its creditors.
3. If the petition is sufficient in form and
substance, the SEC shall, by an Order reciting
the purpose of the petition, fix a deadline for
filing objections to the petition which date shall
not be less than thirty (30) days nor more than
sixty (60) days after the entry of the order;
226
 Corporation Law
4. Before such date, Copy of the order shall be:
a. Published at least once a week for three (3)
consecutive weeks in a newspaper of
general circulation published in the
municipality or city where the principal
office of the corporation is situated, or if
there be no such newspaper, then in a
newspaper of general circulation in the
Philippines, and
b. Posted for three (3) consecutive weeks in
three (3) public places in such municipality
or city;
5. After expiration of the time to file objections
and upon prior 5-day notice to hear the
objections, the SEC shall proceed to hear the
petition and try any issue made by the
Objections file; and
6. If no objection is sufficient and the material
allegations of the petition are true, it shall
render Judgment dissolving the corporation
and directing such disposition of its assets as
justice requires and may appoint a receiver to
collect such assets and pay the debts of the
corporation.
NOTE: Dissolution takes effect upon the issuance of
a certificate of dissolution by the SEC. (Sec. 135, RCC)
Procedure for Dissolution by Shortening
Corporate Term (A-S-A-F)
1. Amending the AOI pursuant to Sec. 15:
a. Approved by majority vote of the board of
directors or by vote or written assent of
majority of the trustees
b. Vote or written assent of the stockholders
representing at least two-thirds (2/3) of
the OCS or of the members;
2. The original and amended articles together
shall contain all provisions required by law to
be set out in the AOI. Amendments to the
articles pertaining to the shortened term shall
be indicated by underscoring the change or
227
changes made, and a copy thereof duly certified
under oath by the corporate secretary and a
majority of the directors or trustees, with a
statement that the amendments have been duly
approved by the required vote of the
stockholders or members, shall be submitted to
the SEC;
3. The amendments shall take effect upon their
Approval by the SEC Commission or from the
date of filing with the said Commission if not
acted upon within six (6) months from the date
of filing for a cause not attributable to the
corporation.
NOTE: In the case of expiration of corporate term,
dissolution shall automatically take effect on the day
following the last day of the corporate term stated
in the AOI, without the need for the issuance by the
SEC of a certificate of dissolution.
INVOLUNTARY DISSOLUTION
Involuntary Dissolution
A corporation may be dissolved by the SEC motu
proprio or upon filing of a verified complaint by any
interested party, on the grounds provided under
Sec. 138 of the RCC.
Non-Use of Charter or Continuous Inoperation
To “formally organize” as used in reference to
corporations means:
1. Election of officers,
2. Providing for the subscription and payment of
the capital stock;
3. Adoption of by-laws; and
4. Such other steps as are necessary to endow the
legal entity with the capacity to transact the
legitimate business for which it was created.
(Benguet Consolidated Mining Co. v. Pineda, G.R.
No. L-7231, 28 Mar. 1956)
Effects of Non-Use or Continuous Inoperation
If a corporation does not formally organize and
commence its business within five (5) years from
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
the date of its incorporation, its certificate of
incorporation shall be deemed revoked as of the day
following the end of the five-year period.
If a corporation has commenced its business but
subsequently becomes inoperative for a period of at
least five (5) consecutive years, the Commission
may, after due notice and hearing, place the
corporation under delinquent status.
A delinquent corporation shall have a period of two
(2) years to resume operations and comply with all
requirements that the Commission shall prescribe.
Upon compliance by the corporation, the
Commission shall issue an order lifting the
delinquent status. Failure to comply with the
requirements and resume operations within the
period given by the Commission shall cause the
revocation of the corporation’s certificate of
incorporation. (Sec. 21, RCC)
Forfeiture in Favor of the National Government
If the corporation is ordered dissolved by final
judgment pursuant to the following grounds, , its
assets, after payment of its liabilities, shall, upon
petition of the SEC with the appropriate court, be
forfeited in favor of the national government. Such
forfeiture shall be without prejudice to the rights of
innocent stockholders and employees for services
rendered, and to the application of other penalty or
sanction under the RCC or other laws:
Upon finding by final judgment that the corporation:
(1) Was created for the purpose of committing,
concealing or aiding the commission of
securities violations, smuggling, tax evasion,
money laundering, or graft and corrupt
practices;
(2) Committed or aided in the commission of
securities violations, smuggling, tax evasion,
money laundering, or graft and corrupt
practices, and its stockholders knew; and
(3) Repeatedly and knowingly tolerated the
commission of graft and corrupt practices or
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
other fraudulent or illegal acts by its directors,
trustees, officers, or employees.
NOTE: The SEC shall give reasonable notice to, and
coordinate with, the appropriate regulatory agency
prior to the involuntary dissolution of companies
under their special regulatory jurisdiction. (Sec. 138,
RCC)
DISSOLUTION OF CORPORATION SOLE
Procedure for Dissolution of Corporation Sole
In case of a corporation sole, by submitting to the
SEC for approval, a verified declaration of
dissolution which will set forth the following:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the
corporation by the particular religious
denomination, sect or church; and
4. The names and addresses of the persons who
are to supervise the winding up of the affairs of
the corporation.
Upon approval of such declaration of dissolution by
the Securities and Exchange Commission, the
corporation shall cease to carry on its operations
except for the purpose of winding up its affairs. (Sec.
113, RCC)
DISSOLUTION BY MERGER OR CONSOLIDATION
Dissolution by Merger or Consolidation
Upon issuance by the SEC of a Certificate of Merger
or Consolidation, the corporate existence of the
absorbed corporation and the constituent
corporations in case of consolidation shall
automatically cease. No liquidation proceedings will
thereafter be conducted. (Sec. 79, RCC)
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 Corporation Law
2. METHODS OF LIQUIDATION
Liquidation
Liquidation is the process of settling the affairs of
the corporation after its dissolution. This consists
of: (1) collection of all that is due the corporation,
(2) the settlement and adjustment of claims against
it, and (3) the payment of its debts and (4) the
distribution of the remaining assets, if any among
the stockholders thereof in accordance with their
contracts, or if there be no special contract, on the
basis of their respective interests. The manner of
liquidation or winding up may be provided for in the
corporate bylaws and this would prevail unless it is
inconsistent with law. (Divina, 2020)
Methods of Liquidation
1. By the corporation itself; (Sec. 139, RCC)
2. By the trustee appointed by the corporation;
(Sec. 139, RCC)
3. By the Receiver appointed by SEC; (Sec. 135,
RCC)
4. By liquidation after three years. (Sec. 25, FRIA)
Approval of the SEC is NOT Required for
Liquidation and Distribution
The liquidation and distribution of the assets of a
dissolved corporation is a matter of internal
concern of the corporation and falls within the
power of the directors and stockholders or duly
appointed liquidation trustee. (SEC Opinion, July 23,
1996)
Suits Brought Against Corporation Within the
Three-Year Period But Remain Pending
Pending actions against the corporation are not
extinguished. They may still be prosecuted against
the corporation even beyond said period.
The creditors of the corporation who were not paid
within the 3-year period may follow the property of
the corporation that may have passed to its
stockholders unless barred by prescription or
laches or disposition of said property in favor of a
purchaser in good faith.
229
Right to Appeal Not Extinguished
Although the cancellation of a corporation's
certificate of registration puts an end to its juridical
personality, Sec. 122 of the Corporation Code (now
Sec. 139, RCC), however provides that a corporation
whose corporate existence is terminated in any
manner continues to be a body corporate for three
(3) years after its dissolution for purposes of
prosecuting and defending suits by and against it
and to enable it to settle and close its affairs.
Moreover, the rights of a corporation, which is
dissolved pending litigation, are accorded
protection by law pursuant to Sec. 145 of the
Corporation Code (now Sec. 184, RCC) (Paramount
Insurance Corp. v. A.C. Ordonez Corp., G.R. No.
175109, 06 Aug. 2008)
Liquidation NOT Necessary in Dissolution by
Merger or Consolidation
In case of merger or consolidation, the surviving or
the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent
corporations; and all property, real or personal, and
all receivables due on whatever account, including
subscriptions to shares and other choses in action,
and all and every other interest of, or belonging to,
or due to each constituent corporation, shall be
deemed transferred to and vested in such surviving
or consolidated corporation without further act or
deed.
The separate existence of the constituent
corporations shall cease, except that of the surviving
or the consolidated corporation. (Sec. 79, RCC)
Distribution of Assets Prior to Dissolution
GR: No corporation shall distribute any of its assets
or property except upon lawful dissolution and after
payment of all its debts and liabilities. (Sec. 139,
RCC)
XPNs:
1. Decrease of capital stock; (Sec. 37, RCC)
2. Redemption of redeemable shares; (Sec. 8,
RCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
3. Acquisition of own shares, provided that the
corporation has unrestricted retained
earnings; (Sec. 41, RCC)
4. Declaration of dividends out of the
unrestricted retained earnings; (Sec. 42, RCC)
5. Purchase of shares of any stockholder upon
order of the SEC in case of deadlocks in a close
corporation; (Sec. 103, RCC) and
6. Withdrawal of a stockholder in a close
corporation. (Sec. 104, RCC)
Order of Distribution of Assets in Case of
Liquidation
The assets of the corporation shall be used to pay off
the claims of various creditors based on the law on
concurrence and preference of credit. The residual
assets shall then be distributed to the holders of the
preferred shares of stock, if any, then to the holders
of common shares based on their agreement, if any,
otherwise, in proportion to their respective
shareholdings in the corporation.
NOTE: SEC approval is not required in the approval
of the distribution or liquidation of the assets of the
dissolved corporation. This falls within the
authority of the directors and stockholders or the
duly appointed trustee or receiver.
Any asset distributable to the creditor or
stockholder or member who is unknown or cannot
be found shall be escheated in favor of the national
government. (Divina, 2020)
Liquidation by the Corporation Itself
Every corporation whose charter expires pursuant
to its AOI, is annulled by forfeiture, or whose
corporate existence is terminated in any other
manner, shall nevertheless remain as a body
corporate for three (3) years after the effective date
of dissolution, for the purpose of prosecuting and
defending suits by or against it and enabling it to
settle and close its affairs, dispose of and convey its
property, and distribute its assets, but not for the
purpose of continuing the business for which it
was established. The period of liquidation is three
(3) years. (Sec. 139, RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
NOTE: A corporation’s board of directors is not
rendered functus officio by its dissolution. Since Sec.
122 (now Sec. 139, RCC) allows a corporation to
continue its existence for a limited purpose,
necessarily there must be a board that will continue
acting for and on behalf of the dissolved corporation
for that purpose. In fact, Sec. 122 (now Sec. 139,
RCC) authorizes the dissolved corporation’s board
of directors to conduct its liquidation within three
years from its dissolution. Jurisprudence has even
recognized the board’s authority to act as trustee for
persons in interest beyond the said three-year
period. Thus, the determination of which group is
the bona fide or rightful board of the dissolved
corporation will still provide practical relief to the
parties involved. (Aguirre v. FQB+7 Inc., G.R. No.
170770, 09 Jan. 2013)
Liquidation by Conveyance to a Trustee Within a
Three-Year Period
At any time during the three-year period for
liquidation, said corporation is authorized and
empowered to convey all of its property to trustees
for the benefit of its stockholders, members,
creditors and other persons in interest.
From and after any such conveyance by the
corporation of its property in trust for the benefit of
its stockholders, members, creditors and others in
interest, all interest which the corporation had in
the property terminates, the legal interest vests in
the trustees, and the beneficial interest in the
stockholders, members, creditors, or other persons
in interest. (Sec. 139(2), RCC)
Meaning of Trustee
The word “trustee” as used in the law must be
understood in its general concept which could
include the counsel to whom the prosecution of the
suit filed by the corporation was entrusted. The
purpose in the transfer of the assets of the
corporation to a trustee upon its dissolution is more
for the protection of its creditors and stockholders.
The appointment of said counsel can be considered
a substantial compliance. (Gelano v. CA, G.R. No. L-
39050, 24 Feb. 1981)
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 Corporation Law
Suits Brought By Corporation Within the Three-
Year Period But Remain Pending After Period
A corporation may, during the three-year term,
appoint a trustee or a receiver who may act beyond
that period. The termination of the life of a juridical
entity does not by itself cause the extinction or
diminution of the rights and liabilities of such entity
nor those of its owners and creditors. If the three-
year extended life has expired without a trustee or
receiver. having been expressly designated by the
corporation within that period, the board of
directors (or trustees) itself, following the rationale
of the Supreme Court's decision in Gelano vs. CA may
be permitted to so continue as "trustees" by legal
implication to complete the corporate liquidation.
Still in the absence of a board of directors or
trustees, those having any pecuniary interest in the
assets, including not only the shareholders but
likewise the creditors of the corporation, acting for
and in its behalf, might make proper
representations with the Securities and Exchange
commission, which has primary and sufficiently
broad jurisdiction in matters of this nature, for
working out a final settlement of the corporate
concerns. (Clemente v. CA, G.R. No. 82407, 27 March
1995)
Suits Brought By Corporation Beyond Three-
Year Period Not Barred
The trustee (of a dissolved corporation) may
commence a suit which can proceed to final
judgment even beyond the three-year period (of
liquidation) x x x, no reason can be conceived
why a suit already commenced by the
corporation itself during its existence, not by a
mere trustee who, by fiction, merely continues the
legal personality of the dissolved corporation,
should not be accorded similar treatment – to
proceed to final judgment and execution
thereof.
Indeed, the rights of a corporation (dissolved
pending litigation) are accorded protection by law.
This is clear from Sec. 145 of the Corporation Code
(now Sec. 184, RCC). The dissolution of UCC itself, or
the expiration of its three-year liquidation period,
should not be a bar to the enforcement of its rights
231
as a corporation. One of these rights, to be sure,
includes the UCC’s right to seek from the court the
execution of a valid and final judgment in Civil Case
No. 9165 – through its trustee/liquidator
Encarnacion Gonzales Wong – for the benefit of its
stockholders, creditors and any other person who
may have legal claims against it. To hold otherwise
would be to allow petitioners to unjustly enrich
themselves at the expense of UCC. (Knecht v. United
Cigarette Corp., G.R. No. 139370, 04 July 2002)
Q: The corporation, once dissolved, thereafter
continues to be a body corporate for three years
for purposes of prosecuting and defending suits
by and against it and of enabling it to settle and
close its affairs, culminating in the final
disposition and distribution of its remaining
assets. If the 3-year extended life expires
without a trustee or receiver being designated
by the corporation within that period and by
that time (expiry of the 3-year extended term),
the corporate liquidation is not yet over, how, if
at all, can a final settlement of the corporate
affairs be made? (1997 BAR)
A: The liquidation can continue with the winding up.
The members of the BOD can continue with the
winding of the corporate affairs until final
liquidation. They can act as trustees or receivers for
this purpose.
Where no receiver or trustee has been designated
after dissolution:
1. The board of directors or trustees itself may be
permitted to so continue as “trustees” by legal
implication;
2. In the absence of the BoD or BoT, those having
a pecuniary interest in the corporate assets,
stockholders, or creditors, may make a proper
representations with SEC for working out a final
settlement of the corporate concerns; (Clemente
v. CA, G.R. No. 82407, 27 Mar. 1995)
3. The only surviving stockholder or director;
(SEC Opinion No. 10-96, 29 Jan. 2010) or
4. The counsel who prosecuted and defended the
interest of the corporation. (Reburiano v. CA,
G.R. No. 102965, 21 Jan. 1999)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Liquidation by a Management Committee or
Rehabilitation Receiver
In the case of a dissolution order where creditors
are affected, the SEC may appoint a receiver to take
charge of the liquidation of the corporation. (Sec.
135, RCC)
Appointment of Receiver for Going Corporation
The appointment of a receiver for a going
corporation is a last resort remedy and should not
be employed when another remedy is
available. Relief by receivership is an extraordinary
remedy and is never exercised if there is an
adequate remedy at law or if the harm can be
prevented by an injunction or a restraining
order. Bad judgment by directors, or even
unauthorized use and misapplication of the
company’s funds, will not justify the appointment of
a receiver for the corporation if appropriate relief
can otherwise be had. (Rev. Ao-As v. CA, G.R. No.
128464, 20 June 2006)
Under Sec. 135 of the RCC, the SEC shall proceed to
hear the petition (filed by a corporation where
creditors are affected) and try any issue raised in
the objections filed; and if no such objection is
sufficient, and the material allegations of the
petition are true, it shall render judgment dissolving
the corporation and directing such disposition of its
assets as justice requires and may appoint a receiver
to collect such assets and pay the debts of the
corporation.
The receiver represents the SEC, as well as the
stockholders and creditors. The receiver is not
bound by the three-year liquidation period.
The appointment of a receiver operates to suspend
the authority of a corporation and its directors and
officers over its property and effects, such authority
being reposed in the receiver. Thus, a corporate
officer had no authority to condone a debt.
In BPI v. Eduardo Hong (G.R. No. 161771, 15 Feb.
2012), the Supreme Court held, however, that while
the SEC has jurisdiction to order the dissolution of a
corporation, jurisdiction over the liquidation of the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
corporation now pertains to the appropriate
regional trial courts. This is the correct procedure
because the liquidation of a corporation requires
the settlement of claims for and against the
corporation, which clearly falls under the
jurisdiction of the regular courts. The trial court is
in the best position to convene all the creditors of
the corporation, ascertain their claims, and
determine their preferences.
It should be noted that the power of the SEC to
appoint a receiver existed even under the OCC and
retained under the RCC despite the ruling in BPI v.
Eduardo Hong. It is submitted that the receiver may
carry out the liquidation of the corporation if the
creditors and the corporation are able to agree
among themselves on how the creditors’ claims
shall be satisfied. Otherwise, the RTC should carry
out the liquidation process. (Divina, 2020)
Prohibition Against Condonation
The corporation, through its president cannot
condone penalties and charges after it had been
placed under receivership. The appointment of a
receiver operates to suspend the authority of a
corporation and of its directors and officers over its
property and effects, such authority being reposed
in the receiver. (Yam v. CA, G.R. No. 104726, 11 Feb.
1999)
Q: ASB Realty, being the owner of the property
by virtue of a Deed of Assignment, entered a
Contract of Lease with Leonardo Umale. Upon
expiration of the contract, Umale continued
occupying the premises. ASB Realty served
Umale a Notice of Termination of Lease and
Demand to Vacate. Umale failed to comply with
the demand of vacating the premises and paying
his arrears. Thus, ASB Realty filed an unlawful
detainer case againt Umale.
Umale admitted occupying the property but
challenged the personality of ASB Realty to sue
and recover the property. He claimed that ASB
Realty being placed under receivership, it is the
rehabilitation receiver that has the power to
take possession, control, and custody of the
assets under the Interim Rules of Procedure on
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 Corporation Law
Corporate Rehabilitation. Can ASB Realty, a
corporation under rehabilitation, sue in its own
name and recover property unlawfully
withheld?
A: YES. Being placed under corporate rehabilitation
and having a receiver appointed to carry out the
rehabilitation plan do not ipso facto deprive a
corporation and its corporate officers of the power
to recover its unlawfully detained property.
Rehabilitation is for effecting a feasible and viable
rehabilitation by preserving a floundering business
as a going concern. This concept of preserving the
corporation’s business as a going concern while it is
undergoing rehabilitation is called debtor-in-
possession or debtor-in-place wherein the debtor
corporation remains in control of its business and
properties, subject only to the monitoring of the
appointed rehabilitation receiver. The receiver
does not take over the control and management of
the debtor corporation being tasked only to monitor
the successful implementation of the rehabilitation
plan. (Umale v. ASB Realty Corporation, G.R. No.
181126, 15 June 2011)
233
H. OTHER CORPORATIONS
1. CLOSE CORPORATION
Characteristics of a Close Corporation
The principal characteristics of close corporations
are the following:
1. The business of the corporation may be
managed by the stockholders of the corporation
rather than by a board of directors.
2. If the corporation is classified as a close
corporation, a board resolution authorizing the
sale or mortgage of the corporate property is
not necessary to bind the corporation for the
action of its president.
3. Quorum may be greater than a mere majority.
4. Transfers of stocks to others which would
increase the number of stockholders to more
than the maximum are invalid.
5. Corporate actions may be binding even without
a formal board meeting, if the director had
knowledge or ratified the informal action of the
others, unless after having knowledge thereof,
the director promptly files his written objection
with the secretary of the corporation.
6. Pre-emptive right extends to all stocks issued,
including re-issuance of treasury shares,
whether for money or for property or personal
services, or in payment of corporate debts,
unless the AOI provide otherwise.
7. Deadlocks in the board may be settled by the
SEC, on written petition by any stockholder.
8. A stockholder may withdraw for any reason and
avail himself of his right of appraisal when the
corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital
stock. (Divina, 2020)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Validity of Restrictions on Transfer of Shares
Restrictions on the right to transfer shares must:
1. Appear in:
a. The articles of incorporation;
b. In the by-laws; and
c. In the certificate of stock;
NOTE: Otherwise, the same shall not be binding
on any purchaser in good faith.
2. Said restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares
of the transferring stockholder with such
reasonable terms, conditions or period stated. If
upon the expiration of said period, the existing
stockholders or the corporation fails to exercise
the option to purchase, the transferring
stockholder may sell their shares to any third
person. (Sec. 97, RCC)
NOTE: The above describes a Right of First Refusal.
Effects of Issuance or Transfer of Stock in Breach
of Qualifying Conditions
1. If a stock of a close corporation is issued or
transferred to any person who is not eligible
thereof under any provision of the AOI, and if
the certificate for such stock conspicuously
shows the qualifications of the persons entitled
to be holders of record thereof, such person is
conclusively presumed to have notice of the fact
of the ineligibility to be a stockholder.
2. If the AOI of a close corporation states the
number of persons, not exceeding twenty (20),
who are entitled to be stockholders of record,
and if the certificate for such stock
conspicuously states such number, and the
issuance or transfer of stock to any person
would cause the stock to be held by more than
such number of persons, the person to whom
such stock is issued or transferred is
conclusively presumed to have notice of this
fact.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
3. If a stock certificate of a close corporation
conspicuously shows a restriction on transfer of
the corporation’s stock and the transferee
acquires the stock in violation of such
restriction, the transferee is conclusively
presumed to have notice of the fact that the
stock was acquired in violation of the
restriction.
4. Whenever a person to whom stock of a close
corporation has been issued or transferred has,
or is conclusively presumed under this section
to have notice of: (1) the person’s ineligibility to
be a stockholder of the corporation, or (2) that
the transfer of stock would cause the stock of
the corporation to be held by more than the
number of persons permitted under its AOI; or
(3) that the transfer violates a restriction on
transfer of stock, and the corporation may, at its
option, refuse to register the transfer in the
name of the transferee.
NOTE: The provisions under par. 4 shall not be
applicable if the transfer of stock, though contrary
to par. 1-3, has been consented to by all the
stockholders of the close corporation, or if the close
corporation has amended its AOI.
NOTE: “Transfer” is not limited to a transfer for
value.
The provisions of Sec. 98 shall not impair any right
which the transferee may have to either rescind the
transfer or recover the stock under any express or
implied warranty. (Sec. 98, RCC)
Effects When Board Meeting is Unnecessary or
Improperly Held
Unless the by-laws provide otherwise, any action
taken by the directors of a close corporation without
a meeting called properly and with due notice shall
nevertheless be deemed valid if:
1. Before or after such action is taken, written
consent thereto is signed by all the directors;
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection in writing;
234
 Corporation Law
3. The directors are accustomed to take informal
action with the express or implied acquiescence
of all the stockholders; or
4. All the directors have express or implied
knowledge of the action in question and none of
them makes a prompt objection in writing. (Sec.
100, RCC)
NOTE: An action within the corporate powers taken
at a meeting held without proper call or notice, is
deemed ratified by a director who failed to attend,
unless after having knowledge thereof, the director
promptly files his written objection with the
secretary of the corporation. (Ibid.)
Pre-Emptive Right in Close Corporations
The preemptive right of stockholders in close
corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for
money, property, or personal services, or in
payment of corporate debts, unless the AOI provide
otherwise. (Sec. 101, RCC)
Amendment of AOI
Any amendment to the AOI which seeks to delete or
remove any provision required by this Title or to
reduce a quorum or voting requirement stated in
said AOI shall require the affirmative vote of at least
two-thirds (2/3) of the OCS, whether with or
without voting rights, or of such greater proportion
of shares as may be specifically provided in the AOI
for amending, deleting or removing any of the
aforesaid provisions, at a meeting duly called for the
purpose. (Sec. 102, RCC)
Power to Arbitrate in case of a Deadlock
Notwithstanding any contrary provision in the close
corporation’s AOI, bylaws, or stockholders’
agreement, if the directors or stockholders are so
divided on the management of the corporation’s
business and affairs that the votes required for a
corporate action cannot be obtained, with the
consequence that the business and affairs of the
corporation can no longer be conducted to the
advantage of the stockholders generally, the SEC,
upon written petition by any stockholder, shall have
235
the power to arbitrate the dispute. (Sec. 103, RCC)
Appropriate Orders of the SEC in case of
Deadlocks
In the exercise of its power to arbitrate in case of
deadlock, the SEC shall have authority to make
appropriate orders, such as:
1. Cancelling or altering any provision contained
in the AOI, bylaws, or any stockholder’s
agreement;
2. Cancelling, altering, or enjoining a resolution
or act of the corporation or its board of
directors, stockholders, or officers;
3. Directing or prohibiting any act of the
corporation or its board of directors,
stockholders, officers, or other persons party
to the action;
4. Requiring the purchase at their fair value of
shares of any stockholder, either by the
corporation regardless of the availability of
unrestricted retained earnings in its books, or
by the other stockholders;
5. Appointing a provisional director;
6. Dissolving the corporation; or
7. Granting such other relief as the circumstances
may warrant. (Ibid.)
Provisional Director
A provisional director shall be an impartial person
who is neither a stockholder nor a creditor of the
corporation or any of its subsidiaries or affiliates,
and whose further qualifications, if any, may be
determined by the Commission. (Ibid.)
A provisional director is not a receiver of the
corporation and does not have the title and powers
of a custodian or receiver. (Ibid.)
A provisional director shall have all the rights and
powers of a duly elected director, including the right
to be notified of and to vote at meetings of directors
until removed by order of the Commission or by all
the stockholders. (Ibid.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Compensation of Provisional Director
The compensation of the provisional director shall
be determined by agreement between such director
and the corporation, subject to approval of the
Commission, which may fix the compensation
absent an agreement or in the event of
disagreement between the provisional director and
the corporation. (Ibid.)
2. NON-STOCK CORPORATION
Non-Stock Corporation
One where no part of its income is distributable as
dividends to its members, trustees, or officers. Any
profit which it may obtain as an incident to its
operations shall whenever necessary or proper, be
used in furtherance of the purpose or purposes for
which it was organized. (Sec. 86, RCC)
Nonstock corporations may be formed or organized
for charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social, civic
service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination
thereof, subject to the special provisions of Title XI
of the RCC governing particular classes of nonstock
corporations. (Sec. 87, RCC)
Characteristics of Non-Stock Corporation
1. It does not have capital stock divided into
shares;
2. No part of its income during its existence is
distributable as dividends to its members,
trustees, or officers;
3. Any profit which it obtains incidental to its
operations shall, whenever necessary or
proper, be used for the furtherance of the
purpose or purposes for which it was
organized, subject to the provisions of Title XII
of the RCC; (Sec. 86, RCC)
4. Membership in a nonstock corporation and all
rights arising therefrom are personal and non-
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
transferable, unless the AOI or the bylaws
otherwise provide. (Sec. 89, RCC)
5. The right of the members of any class or classes
to vote may be limited, broadened, or denied to
the extent specified in the AOI or the bylaws.
Unless so limited, broadened, or denied, each
member, regardless of class, shall be entitled to
one; (Sec. 88, RCC)
6. The provisions of specific provisions of the RCC
to the contrary notwithstanding, nonstock, or
special corporations may, through their AOI or
their bylaws, designate their governing boards
by any name other than as board of trustees;
(Sec. 174, RCC)
7. The bylaws may provide that the members of a
nonstock corporation may hold their regular or
special meetings at any place even outside the
place where the principal office of the
corporation is located: Provided, That proper
notice is sent to all members indicating the date,
time and place of the meeting: Provided,
further, That the place of meeting shall be
within Philippine territory; (Sec. 92, RCC)
Q: Adventist University of the Philippines (AUP)
is a non-stock, non-profit educational
institution. Petonillo Barayuga was appointed
by the AUP’s Board of Trustees as its President
in 2001. AUP subsequently amended its By-Laws
to state that members of the Board of Trustees
were to serve a term of office of only two years;
and the officers, who included the President,
were to be elected from among the members of
the Board of Trustees during their
organizational meeting, which was held during
the election of the Board of Trustees every two
years.
In 2003, the Board voted to remove Barayuga as
president. This prompted Barayuga to file a
petition for injunction with damages against
AUP, contending among others, that the Board
relieved him of the presidency without valid
grounds despite his five-year term. The RTC
ruled in favor of Barayuga. The CA, on the other
hand, ruled in favor of AUP.
236
 Corporation Law

Can an officer-elect of a non-stock educational

corporation occupying a hold-over capacity be
removed without cause upon the appointment
of his or her successor?

A: YES. For institutions organized as stock

corporations, the number and term of directors
shall be governed by the provisions on stock
corporations.

The second paragraph of Sec. 108 (now Sec. 106,

RCC), although setting the term of the members of
the Board of Trustees at five years, contains a
proviso expressly subjecting the duration to what is
otherwise provided in the AOI or by-laws of the
educational corporation. That contrary provision
controls on the term of office.

In AUP's case, its amended By-Laws provided the

term of the members of the Board of Trustees, and
the period within which to elect the officers. In light
of foregoing, the members of the Board of Trustees
were to serve a term of office of only two years; and
the officers, who included the President, were to be
elected from among the members of the Board of
Trustees during their organizational meeting, which
was held during the election of the Board of
Trustees every two years. Naturally, the officers,
including the President, were to exercise the powers
vested by Section 2 of the amended By-Laws for a
term of only two years, not five years.

Ineluctably, the petitioner, could serve for only two

years. By the time of his removal for cause as
President, he was already occupying the office in a
hold-over capacity, and could be removed at any
time, without cause, upon the election or
appointment of his successor. His insistence on
holding on to the office was untenable, therefore,
and with more reason when one considers that his
removal was due to the loss of confidence on the
part of the Board of Trustees. (Barayuga v. Adventist
University of the Philippines, G.R. No. 168008, 17 Aug.
2011)

237 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

Stock Corporation vs. Non-stock Corporation

STOCK CORPORATION NON-STOCK CORPORATION

Existence of Capital Stock

No capital stock.

Has capital stock divided into shares. (Sec. 3, RCC)

Non-stock corporations only have contributions or
donations.

Purpose

Organized for profit. Not organized for profit.

Distribution of Profit

Profits are not distributed to members. Any profit

Profits are distributed to the stockholders through earned by the non-stock corporation is used for the
dividends. (Sec. 3, RCC) furtherance of the purpose or purposes for which it
was organized. (Sec. 86, RCC)

Number of Directors or Trustees

May or may not be more than fifteen (15) (Sec. 91,

RCC)

One (1) in the case of OPC, two to fifteen (2-15) in the
case of Ordinary Stock Corporations. (Sec. 121, 13,
RCC)
XPN: Banks (in case of merger or consolidation)
which can have a maximum of 21 directors.
XPNs:
Non-stock educational institutions – not be less than
five (5) nor more than fifteen (15): Provided, That the
number of trustees shall be in multiples of five (5).
(Sec. 106, RCC)

Religious Societies – not less than five (5) nor more

than fifteen (15) (Sec. 114, RCC)

Term of Office of the Board of Directors / Trustees

Term of one year until their successors are elected Shall hold office for not more than three (3) years
and qualified, subject to the provisions of AOI and By- until their successors are elected and qualified. (Sec.
laws. (Sec. 22, RCC) 22 and 91, RCC)

Election of Officers

Unless otherwise provided in the AOI or the bylaws,

Officers are elected by the BOD . the members may directly elect officers of a nonstock
corporation. (Sec. 91, RCC)

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2022 GOLDEN NOTES
 Corporation Law

Place of Meeting

The bylaws may provide that the members of a

Stockholders’ or members’ meetings, whether
regular or special, shall be held in the principal office
of the corporation as set forth in the AOI, or, if not
practicable, in the city or municipality where the
principal office of the corporation is located. (Sec. 50,
RCC)
nonstock corporation may hold their regular or
special meetings at any place even outside the place
where the principal office of the corporation is
located: Provided, That proper notice is sent to all
members indicating the date, time and place of the
meeting: Provided, further, That the place of meeting
shall be within Philippine territory. (Sec. 92, RCC)

Right to Vote

Unless otherwise provided in the AOI or in the bylaws,

members of nonstock corporations may cast as many
votes as there are trustees to be elected but may not
Stockholders can resort to cumulative voting. (Sec. 23, cast more than one (1) vote for one (1) candidate.
RCC) (Sec. 23, RCC)

Only preferred and redeemable shares can be denied
the right to vote, but will still be entitled to vote in the
8 instances provided in in Sec. 6.
The right of the members of any class or classes to
vote may be limited, broadened, or denied to the
extent specified in the AOI or the bylaws. Unless so
limited, broadened, or denied, each member,
regardless of class, shall be entitled to one (1) vote.
(Sec. 88, RCC)

Transferability of Shares/ Membership

Shares of stock so issued are personal property and

may be transferred by delivery of the certificate or
certificates indorsed by the owner, his attorney in-
fact, or any other person legally authorized to make
the transfer. No transfer, however, shall be valid,
Membership in a nonstock corporation and all rights
except as between the parties, until the transfer is
arising therefrom are personal and non-transferable,
recorded in the books of the corporation showing the
unless the AOI or the bylaws otherwise provide. (Sec.
names of the parties to the transaction, the date of the
89, RCC)
transfer, the number of the certificate or certificates,
and the number of shares transferred. No shares of
stock against which the corporation holds any unpaid
claim shall be transferable in the books of the
corporation. (Sec. 62, RCC)

239 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

Right to Expel Members

Membership shall be terminated in the manner and

Stockholders may be expelled only for grounds
provided by law.
for the causes provided in the AOI or the bylaws.
Termination of membership shall extinguish all rights
of a member in the corporation or in its property,
unless otherwise provided in the AOI or the bylaws.
(Sec. 90, RCC)

Distribution of Assets in case of Dissolution

The assets of a nonstock corporation undergoing the

Assets of stock corporation shall be distributed in the
following order:
1. Payment of claims of creditors who are not
stockholders (based on preference of credit);
2. Payment of claims of stockholders as creditors;
3. Residual balance is distributed proportionately
to preferred shares, if any, then to common
stock.
process of dissolution for reasons other than those set
forth in Sec. 139 of the RCC, shall be applied and
distributed as follows: (a) All liabilities and
obligations of the corporation shall be paid, satisfied
and discharged, or adequate provision shall be made
therefor; (b) Assets held by the corporation upon a
condition requiring return, transfer or conveyance,
and which condition occurs by reason of the
dissolution, shall be returned, transferred or
conveyed in accordance with such requirements; (c)
Assets received and held by the corporation subject
to limitations permitting their use only for charitable,
religious, benevolent, educational or similar
purposes, but not held upon a condition requiring
return, transfer or conveyance by reason of the
dissolution, shall be transferred or conveyed to one
(1) or more corporations, societies or organizations
engaged in activities in the Philippines substantially
similar to those of the dissolving corporation
according to a plan of distribution adopted pursuant
to the Chapter II, Title XI of the RCC,; (d) Assets other
than those mentioned in the preceding paragraphs, if
any, shall be distributed in accordance with the
provisions of the AOI or the bylaws, to the extent that
the AOI or the bylaws determine the distributive
rights of members, or any class or classes of members,
or provide for distribution; and (e) In any other case,
assets may be distributed to such persons, societies,
organizations or corporations, whether or not
organized for profit, as may be specified in a plan of
distribution adopted pursuant to Chapter II, Title XI
of the RCC. (Sec. 93, RCC)

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2022 GOLDEN NOTES
 Corporation Law

Termination of Membership Political Purpose Not Allowed

1. Membership shall be terminated in the manner
and for the causes provided in the AOI or the
bylaws. Termination of membership shall
extinguish all rights of a member in the
corporation or in its property, unless otherwise
provided in the AOI or the bylaws. (Sec. 90, RCC)
Political purpose is not included on the purposes for
which a non-stock corporation may be established.
SEC may reject the AOI if the purpose of the
corporation is to engage in election campaign or
partisan political activity. (SEC Opinion, 10 Apr.
1985)

Example: Membership in a golf club where the
purchase of the share is a sine qua non. (Valley
Golf & Country Club Inc. v. Caram, G.R. No.
158805, 16 Apr. 2009)
2. Non-payment of dues may be a ground for
termination or suspension of membership. The
AOI or the by-laws of a non-stock corporation
may provide that unpaid dues shall constitute a
lien on the member’s share. (Calatagan Golf
Club, Inc. v. Clemente, Jr., G.R. No. 165443, 16 Apr.
2009);
NOTE: The procedure in Sec. 68 of the
Corporation Code (now Sec. 67, RCC) does not
apply if the membership shares are sold under
the provisions that provide for the constitution
of lien, as said section refers to delinquency sale
arising from unpaid subscription.
For the termination of membership to be valid,
there should be reasonable notice to the
member concerned and he must be given a fair
opportunity to be heard in his defense;
Rule on Offsetting Unused Contributions Against
Balance of Receivables
The unused contributions of members cannot be
offset against the balance of receivables because
this would amount to distribution of the capital of
the corporation. Members of non-stock
corporations are not entitled to distribution of
capital. They are only entitled to distribution of
capital upon dissolution when it is provided for in
the AOI or by-laws. (SEC Opinion, Nov. 27, 1985)
3. FOREIGN CORPORATIONS
A foreign corporation is:
1. One formed, organized or existing under any
laws other than those of the Philippines; and
2. Whose laws allow Filipino citizens and
corporations to do business in its own country
or State. (Sec. 140, RCC)
NOTE: The second requirement refers to Principle
of Reciprocity

3. Membership in and all rights arising from a Jurisdiction over Foreign Corporation
non-stock corporation are personal and non-
transferable, unless the AOI or the by-laws of IF THE FOREIGN IF THE FOREIGN
the corporation provide otherwise. Deceased CORPORATION IS CORPORATION IS
members who are dropped from the THE PLAINTIFF THE DEFENDANT
membership roster in the manner and for the 1. Voluntary 1. GR: Voluntary
cause provided for in the by-laws are not to be appearance before appearance of the
counted in determining the requisite vote in the local courts by corporation by
corporate matters or the requisite quorum for the filing of an interposing a
the annual member’s meeting. (Tan v. Sycip, G.R. action by a licensed defense.
No. 153468, 17 Aug. 2006) corporation.
XPN: A special
2. If the foreign appearance to file a
corporation is a co- motion to dismiss
plaintiff with a based on lack of

241 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

domestic jurisdiction. RCC and a certificate of authority from the

corporation and appropriate government agency. (Sec. 140, RCC)
latter later filed a 2. Service of summons
suit here in the to a foreign a. WHAT CONSTITUTES “DOING BUSINESS”
Philippines. corporation which
has transacted Q: When is a foreign corporation deemed to be
business in the “doing business in the Philippines?” (1998, 2016
Philippines whether BAR)
licensed or
registered. A: Under the Foreign Investment Act of 1991 (R.A.
No. 7402),the phrase “doing business” shall include
3. Service of summons soliciting orders, service contracts, opening offices,
to its resident agent whether called “liaison” offices or branches;
in an isolated appointing representatives or distributors
transaction. domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods
Bases of Jurisdiction totaling one hundred eighty (180) days or more;
participating in the management, supervision or
The following are the two bases of authority control of any domestic business, firm, entity or
(jurisdiction) over foreign corporations: corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings
1. A corporation may give actual consent to or arrangements, and contemplate to that extent the
judicial jurisdiction manifested normally by performance of acts or works, or the exercise of
compliance with the State’s foreign corporation some of the functions normally incident to, and in
qualification requirements (licensing progressive prosecution of, commercial gain or of
requirements and other requisites to lawfully the purpose and object of the business organization
transact business in the Philippines); and
Provided, however, That the phrase “doing business”
2. A corporation, even though not qualified (not shall not be deemed to include mere investment as
licensed), by engaging in sufficient activity a shareholder by a foreign entity in domestic
(doing business) within the State, established corporations duly registered to do business, and/or
judicial jurisdiction over the foreign the exercise of rights as such investor; nor having a
corporation. (Foreign Corporations: The nominee director or officer to represent its interests
Interrelation of Jurisdiction and Qualification, in such corporation; nor appointing a
Indiana Law Journal, Art. 4, Vol. 33, Issue 3, representative or distributor domiciled in the
retrieved on 29 Apr. 2013) Philippines which transacts business in its own
name and for its own account.
Consent
Q: When is a foreign corporation deemed doing
Through compliance with the Philippines’ legal business in the Philippines?
requirements to lawfully engage in business within
the country’s territory, the foreign corporation A: The term “doing business” is not specifically
gives its actual consent to be subjected to the defined by the OCC and the RCC. There are certain
jurisdiction of the Philippines. (Ibid.) activities, however, which are deemed as doing
business under R.A. No. 7042, otherwise known as
Foreign Corporations shall have the right to transact the Foreign Investments Act of 1991 (“FIA”). Under
business in the Philippines after obtaining a the FIA, doing business shall include:
license for that purpose in accordance with the

UNIVERSITY OF SANTO TOMAS 242

2022 GOLDEN NOTES
 Corporation Law
a. Soliciting orders;
b. Service contracts;
c. Opening offices, whether called “liaison” offices
or branches;
d. Appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a period or
periods totaling 180 days or more;
e. Participating in the management, supervision
or control of any domestic business, firm, entity,
or corporation in the Philippines; and
f. Any other act or acts that imply a continuity of
commercial dealings or arrangements and
contemplate to that extent the performance of
acts or works, or the exercise of some of the
functions normally incident to, and in
progressive prosecution of, commercial gain or
of the purpose and object of the business
organization.
Twin Characterization Test
Under this test, a foreign corporation is considered
to be “doing business” in the Philippines when:
a. The foreign corporation is maintaining or
continuing in the Philippines the body or
substance of the business or enterprise for
which it was organized or whether it has
substantially retired from it and turned it over
to another.
b. The foreign corporation is engaged in activities
which necessarily imply “continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of
acts or works or the exercise of some of the
functions normally incident to, and in
progressive prosecution of, the purpose and
object of its organization.” (Divina, 2020, citing
Mentholatum Co. Inc. v. Mangaliman, G.R. No. L-
47701, 27 June 1941)
Sliding Scale Test
Currently, most courts in the United States apply a
Sliding Scale Test tailored to internet activities to
determine the level or types of activities that will
243
constitute “minimum contacts” for jurisdictional
purposes.
The Sliding Scale Test is based on the premise that
“the likelihood that ‘personal jurisdiction’ can be
constitutionally exercised is directly proportionate
to the nature and quantity of commercial activity
that an entity conducts over the internet.”
At one end of the scale are “passive” websites, which
alone generally do not generate sufficient contacts
with a foreign state to establish personal
jurisdiction since they are only used to post
information therein.
At the other end of the scale are “active” websites,
which generate sufficient business over the internet
to establish personal jurisdiction.
“Interactive” websites fall in the center of the scale
since they are hybrid sites that contain elements of
both passive and active websites, and courts
determine whether to exercise personal jurisdiction
over the interactive website owner on a case-by-
case basis. (Divina, 2020)
Q: What is the legal test for determining if an
unlicensed foreign corporation is doing
business in the Philippines? (2002 BAR)
A: The test is whether or not the unlicensed foreign
corporation has performed an act or acts that imply
a continuity of commercial dealings or
arrangements and contemplate to that extent the
performance of acts or works, or the exercise of
some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of
the purpose and object of the business corporation.
Q: Steelcase is a foreign corporation existing
under the laws of Michigan, USA, and engaged in
the manufacture of office furniture with dealers
worldwide. DISI is a corporation existing under
Philippine Laws and engaged in the furniture
business, including the distribution of furniture.
Steelcase and DISI orally entered into a
dealership agreement whereby Steelcase
granted DISI the right to market, sell, distribute,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
install, and service its products to end-user
customers within the Philippines. The business
relationship continued smoothly until it was
terminated after the agreement was breached
with neither party admitting any fault. Steelcase
filed a complaint for sum of money against DISI
alleging, among others, that DISI had an unpaid
account of US$600,000.00.
DISI alleged that the complaint failed to state a
cause of action and to contain the required
allegations on Steelcase’s capacity to sue in
the Philippines despite the fact that Steelcase
was doing business in the Philippines without
the required license to do so. Consequently, it
posited that the complaint should be dismissed
because of Steelcase’s lack of legal capacity to
sue in Philippine courts. Is Steelcase doing
business in the Philippines without the required
license?
A: NO. The appointment of a distributor in
the Philippines is not sufficient to constitute “doing
business” unless it is under the full control of the
foreign corporation. If the distributor is an
independent entity which buys and distributes
products, other than those of the foreign
corporation, for its own name and its own account,
the latter cannot be considered to be doing business
in the Philippines. It should be kept in mind that the
determination of whether a foreign corporation is
doing business in the Philippines must be judged in
light of the attendant circumstances.
It is undisputed that DISI was founded in 1979 and
is independently owned and managed by the
spouses Leandro and Josephine Bantug. In addition
to Steelcase products, DISI also distributed products
of other companies including carpet tiles,
relocatable walls, and theater settings. The
dealership agreement between Steelcase and DISI
had been described by the owner himself as a buy-
and-sell arrangement. This clearly belies DISI’s
assertion that it was a mere conduit through which
Steelcase conducted its business in the
country. From the preceding facts, the only
reasonable conclusion that can be reached is that
DISI was an independent contractor, distributing
various products of Steelcase and of other
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
companies, acting in its own name and for its own
account. (Steel Case v. Design International
Selections, Inc., G.R. No. 171995, 18 Apr. 2012)
b. NECESSITY OF A LICENSE TO DO BUSINESS
It was never the intent of the legislature to bar court
access to a foreign corporation or entity which
happens to obtain an isolated order for business in
the Philippines. Neither, did it intend to shield
debtors from their legitimate liabilities or
obligations. But it cannot allow foreign corporations
or entities which conduct regular business any
access to courts without the fulfillment by such
corporations of the necessary requisites to be
subjected to our government’s regulation and
authority. By securing a license, the foreign entity
would be giving assurance that it will abide by the
decisions of our courts, even if adverse to it. By
securing a license, which is a legal requirement to
lawfully engage in business in the Philippines, the
foreign entity would be giving assurance that it will
abide by the decisions of our courts, even if adverse
to it. (Eriks PTE, Ltd. v. CA, GR 118843, 06 Feb. 1997)
Corporation Engaged in Exporting Goods to the
Philippines NOT Required to Obtain License
To be doing or "transacting business in the
Philippines" for purposes of Sec. 133 of the
Corporation Code (now, Sec. 150, RCC), the foreign
corporation must actually transact business in the
Philippines, that is, perform specific business
transactions within the Philippine territory on a
continuing basis in its own name and for its own
account. Actual transaction of business within the
Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign
corporation and thus require the foreign
corporation to secure a Philippine business license.
If a foreign corporation does not transact such kind
of business in the Philippines, even if it exports its
products to the Philippines, the Philippines has no
jurisdiction to require such foreign corporation to
secure a Philippine business license. (B. Van Zuiden
Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R.
No. 147905, 28 May 2007)
244
 Corporation Law
Q: Cargill is a corporation organized and existing
under the laws of the State of Delaware, United
States of America. Cargill and Northern
Mindanao Corporation (NMC) executed a
contract whereby NMC agreed to sell to Cargill
molasses provided that Cargill would open a
Letter of Credit with the BPI. The amended
contract required NMC to put up a performance
bond which represents the value of 10,500
metric tons of molasses. The performance bond
was intended to guarantee NMC’s performance
to deliver the molasses during the prescribed
shipment periods according to the terms of the
amended contract.
In compliance with the terms of the third
amendment of the contract, respondent Intra
Strata Assurance Corporation (Intra Strata)
issued a performance bond to
guarantee NMC’s delivery of the 10,500 tons of
molasses, and a surety bond. NMC was only able
to deliver 219.551 metric tons of molasses out of
the agreed 10,500 metric tons. Thus, Cargill sent
demand letters to NMC claiming payment under
the performance and surety bonds. When NMC
refused to pay, Cargill filed a complaint for sum
of money against NMC and Intra Strata. Does
Cargill, an unlicensed foreign corporation, have
legal capacity to sue before Philippine courts?
A: YES. It has the capacity to sue. In this case, Cargill
and NMC amended their contract three times to give
a chance to NMC to deliver to Cargill the molasses,
considering that NMC already received the
minimum price of the contract. There is no showing
that the transactions between Cargill and NMC
signify the intent of Cargill to establish a continuous
business or extend its operations in the Philippines.
An exporter in one country may export its products
to many foreign importing countries without
performing in the importing countries specific
commercial acts that would constitute doing
business in the importing countries. The mere act of
exporting from one’s own country, without doing
any specific commercial act within the territory of
the importing country, cannot be deemed as doing
business in the importing country. The importing
country does not require jurisdiction over the
foreign exporter who has not yet performed any
245
specific commercial act within the territory of the
importing country. Without jurisdiction over the
foreign exporter, the importing country cannot
compel the foreign exporter to secure a license to do
business in the importing country.
In this case, the contract between Cargill and NMC
involved the purchase of molasses by petitioner
from NMC. It was NMC, the domestic corporation,
which derived income from the transaction and not
Cargill. To constitute "doing business," the activity
undertaken in the Philippines should involve profit-
making. Besides, under Sec. 3(d) of RA 7042,
"soliciting purchases" has been deleted from the
enumeration of acts or activities which constitute
"doing business."
Other factors which support the finding that
petitioner is not doing business in the Philippines
are: (1) Cargill does not have an office in the
Philippines; (2) Cargill imports products from the
Philippines through its non-exclusive local broker,
whose authority to act on behalf of petitioner is
limited to soliciting purchases of products from
suppliers engaged in the sugar trade in the
Philippines; and (3) the local broker is an
independent contractor and not an agent of
petitioner.
In the present case, Cargill is a foreign company
merely importing molasses from a Philippine
exporter. A foreign company that merely imports
goods from a Philippine exporter, without opening
an office or appointing an agent in the Philippines, is
not doing business in the Philippines. (Cargill,
Inc., vs. Intra Strata Assurance Corp., G.R. No. 168266,
15 Mar. 2010)
c. REQUISITES FOR ISSUANCE OF LICENSE
The foreign corporation must submit to SEC the
following:
1. Copy of its AOI and by-laws, certified in
accordance with law and their translation to an
official language of the Philippines, if necessary
(Sec. 142, RCC);
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
2. The application, which shall be under oath, and,
unless already stated in its AOI, shall specifically
set forth the following: (a) The date and term of
incorporation; (b) The address, including the
street number, of the principal office of the
corporation in the country or State of
incorporation; (c) The name and address of its
resident agent authorized to accept summons
and process in all legal proceedings and all
notices affecting the corporation, pending the
establishment of a local office; (d) The place in
the Philippines where the corporation intends
to operate; (e) The specific purpose or purposes
which the corporation intends to pursue in the
transaction of its business in the Philippines:
Provided, That said purpose or purposes are
those specifically stated in the certificate of
authority issued by the appropriate
government agency; (f) The names and
addresses of the present directors and officers
of the corporation; (g) A statement of its
authorized capital stock and the aggregate
number of shares which the corporation has
authority to issue, itemized by class, par value
of shares, shares without par value, and series,
if any; (h) A statement of its outstanding capital
stock and the aggregate number of shares
which the corporation has issued, itemized by
class, par value of shares, shares without par
value, and series, if any; (i) A statement of the
amount actually paid in; and (j) Such additional
information as may be necessary or appropriate
in order to enable the Commission to determine
whether such corporation is entitled to a license
to transact business in the Philippines, and to
determine and assess the fees payable. (Ibid.);
3. Attached to the application for a license shall be
a duly executed certificate under oath by the
authorized official or officials of the jurisdiction
of its incorporation, attesting to the fact that:
a. The laws of the country or state of the
applicant allow Filipino citizens and
corporations to do business therein.
b. The applicant is an existing corporation in
good standing.
c. If such certificate is in a foreign language, a
translation thereof in English under oath of
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
the translator shall be attached thereto;
4. Statement under oath by the President or other
person authorized by the Corporation showing
to the satisfaction of the SEC and other
governmental agency in the proper cases that
the:
a. Applicant is solvent and in sound financial
condition
b. The assets and liabilities of the corporation
as of the date not exceeding one (1) year
immediately prior to the filing of the
application;
5. A written power of attorney designating a
person who must be a resident of the
Philippines, on whom summons, and other legal
processes may be served in all actions or other
legal proceedings against such corporation, and
consenting that service upon such resident
agent shall be admitted and held as valid as if
served upon the duly authorized officers of the
foreign corporation at its home office (Sec. 145,
RCC); and
6. An agreement or stipulation, executed by the
proper authorities of said corporation, in form
and substance as follows: “The (name of foreign
corporation) hereby stipulates and agrees, in
consideration of being granted a license to
transact business in the Philippines, that if the
corporation shall cease to transact business in
the Philippines, or shall be without any resident
agent in the Philippines on whom any summons
or other legal processes may be served, then
service of any summons or other legal process
may be made upon the Commission in any
action or proceeding arising out of any business
or transaction which occurred in the
Philippines and such service shall have the
same force and effect as if made upon the duly
authorized officers of the corporation at its
home office.”
NOTE: Foreign banking, financial and insurance
corporations shall, in addition to the above
requirements, comply with the provisions of
existing laws applicable to them. In the case of all
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 Corporation Law
other foreign corporations, no application for
license to transact business in the Philippines shall
be accepted by the Commission without previous
authority from the appropriate government agency,
whenever required by law. (Sec. 142, RCC)
Effectivity of License
Upon issuance of the license, such foreign
corporation may commence to transact business in
the Philippines and continue to do so for as long as
it retains its authority to act as a corporation under
the laws of the country or State of its incorporation,
unless such license is sooner surrendered, revoked,
suspended, or annulled in accordance with this
Code or other special laws. (Sec. 143, RCC)
NOTE: Within sixty (60) days after the issuance of
the license to transact business in the Philippines,
the licensee, except foreign banking or insurance
corporations, shall deposit with the SEC for the
benefit of present and future creditors of the
licensee in the Philippines, securities satisfactory to
the SEC, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines,
its political subdivisions and instrumentalities, or of
GOCCs and entities, shares of stock or debt
securities that are registered under R.A. No. 8799,
otherwise known as “The Securities Regulation
Code”, shares of stock in domestic corporations
listed in the stock exchange, shares of stock in
domestic insurance companies and banks, any
financial instrument determined suitable by the
SEC, or any combination thereof with an actual
market value of at least Five hundred thousand
pesos (P500,000.00) or such other amount that may
be set by the Commission:
Provided, however, That within six (6) months after
each fiscal year of the licensee, the SEC shall require
the licensee to deposit additional securities or
financial instruments equivalent in actual market
value to two percent (2%) of the amount by which
the licensee’s gross income for that fiscal year
exceeds Ten million pesos (P10,000,000.00). The
SEC shall also require the deposit of additional
securities or financial instruments if the actual
market value of the deposited securities or financial
instruments has decreased by at least ten percent
247
(10%) of their actual market value at the time they
were deposited. The SEC may, at its discretion,
release part of the additional deposit if the gross
income of the licensee has decreased, or if the actual
market value of the total deposit has increased, by
more than ten percent (10%) of their actual market
value at the time they were deposited. The SEC may,
from time to time, allow the licensee to make
substitute deposits for those already on deposit as
long as the licensee is solvent. Such licensee shall be
entitled to collect the interest or dividends on such
deposits. In the event the licensee ceases to do
business in the Philippines, its deposits shall be
returned, upon the licensee’s application and upon
proof to the satisfaction of the Commission that the
licensee has no liability to Philippine residents,
including the Government of the Republic of the
Philippines. For purposes of computing the
securities deposit, the composition of gross income
and allowable deductions therefrom shall be in
accordance with the rules of the SEC. Deposit
securities for the benefit of present and future
creditors, within 60 days after the issuance of
license. (Ibid.)
Since the SEC will grant a license only when the
foreign corporation has complied with all the
requirements of law, it follows that when it decides
to issue such a license, it is satisfied that the
applicant's by-laws, among the other documents,
meet the legal requirements. This, in effect, is an
approval of the foreign corporation’s by-laws. It
may not have been made in express terms, still it is
clearly an approval. Therefore, petitioner bank's by-
laws, though originating from a foreign jurisdiction,
are valid and effective in the Philippines. (Citibank
vs. Chua, G.R. No. 102300, 17 Mar. 1993)
d. RESIDENT AGENT
A resident agent may be either an individual
residing in the Philippines or a domestic
corporation lawfully transacting business in the
Philippines:
1. An individual resident agent must be of
good moral character and of sound
financial standing;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
2. In case of a domestic corporation who will
act as a resident agent, it must likewise be
of sound financial standing and must show
proof that it is in good standing as certified
by the Commission. (Sec 144, RCC)
Purpose of Appointing Resident Agent
The appointment of a resident agent is required for
the purpose of accepting and receiving, on behalf of
the foreign corporation:
1. Notice affecting the corporation pending the
establishment of its local office; and
2. Summons and other legal processes in all
proceedings for or against the corporation.
Effect of Service of Summons and Notices to the
Resident Agent
Service upon such resident agent shall be admitted
and held as valid as if served upon the duly
authorized officers of the foreign corporation at its
home office. (Sec. 145, RCC)
Resident Agent Cannot Sign the Certificate of
Non-Forum Shopping
While a resident agent may be aware of actions filed
against his principal (a foreign corporation doing
business in the Philippines), such resident may not
be aware of actions initiated by its principal,
whether in the Philippines against a domestic
corporation or private individual, or in the country
where such corporation was organized and
registered, against a Philippine registered
corporation or a Filipino citizen. (Expert Travel &
Tours Inc. vs. CA, G.R. No. 152392, 26 May 2005)
Requirements for Replacement of Resident
Agent
SEC requires the submission of:
1. A duly authenticated copy of board resolution
or a certification from the authorized officer of
the company formally revoking his
appointment as a resident agent of the
corporation; and
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
2. Accompanied by a duly authenticated written
power of attorney designating the substitute or
the new resident agent.
NOTE: The appointment of a resident agent of a
foreign corporation is revocable at any time at the
instance of the corporation. (SEC Opinion, 4 Sept.
1990)
Duty of Resident Agent in Case of Change of
Address
It shall be his or its duty to immediately notify in
writing the SEC of the new address. (Sec. 145, RCC)
Instances When Service of Summons Or Other
Legal Processes are Made Upon the SEC Instead
of a Resident Agent
1. If a foreign corporation, previously granted a
license, ceases to transact business in the
Philippines.
2. A foreign corporation shall be without any
resident agent in the Philippines on whom any
summons or other legal processes may be
served. (Sec. 145, RCC)
Effect of Service Made Upon SEC
Such service made upon the SEC shall have the same
force and effect as if made upon the duly authorized
officers of the corporation at its home office. (Sec.
145, RCC)
Whenever such service shall be made upon the SEC,
the SEC must, within 10 days thereafter, transmit by
mail a copy of such summons or other legal process
to the corporation at its home or principal office.
The sending of such copy by the SEC shall be a
necessary part of and shall complete such service.
All expenses incurred by the Commission for such
service shall be paid in advance by the party at
whose instance the service is made. (Ibid.)
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 Corporation Law
e. PERSONALITY TO SUE AND SUABILITY
Personality to Sue
No foreign corporation transacting business in the
Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such
corporation may be sued or proceeded against
before Philippine courts or administrative tribunals
on any valid cause of action recognized under
Philippine laws. (Sec. 150, RCC)
XPN: Under the rule on estoppel, a party is estopped
to challenge the personality of a foreign corporation
to sue, even if it has no license, after having
acknowledged the same by entering to a contract
with it.
One who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny its
corporate existence. (Steel Case v. Design
International Selections, Inc., G.R. No. 171995, 18 Apr.
2012)
Q: Is a foreign corporation which not licensed to
do business in the Philippines absolutely
incapacitated from filing a suit in local courts?
A: NO. Only when that foreign corporation is
“transacting” or “doing business” in the country will
a license be necessary before it can institute suits. It
may, however, bring suits on isolated business
transactions, which is not prohibited under
Philippine law.
Thus, a foreign insurance company may sue in
Philippine courts upon the marine insurance
policies issued by it abroad to cover international-
bound cargoes shipped by a Philippine carrier, even
if it has no license to do business in this country. It
is the act of engaging in business without the
prescribed license and not the lack of license per se
which bars a foreign corporation from access to our
courts. (Aboitiz Shipping Corp. v. Insurance Co. of NA,
G.R. No. 168402, 6 Aug. 2008)
249
The obtainment of a license prescribed by the
Corporation Code is not a condition precedent to the
maintenance of any kind of action in Philippine
courts by a foreign corporation. However, no
foreign corporation shall be permitted to transact
business in the Philippines, as this phrase is
understood under the Corporation Code, unless it
shall have the license required by law, and until it
complies with the law in transacting business here,
it shall not be permitted to maintain any suit in local
courts. As thus interpreted, any foreign corporation
not doing business in the Philippines may maintain
an action in our courts upon any cause of action,
provided that the subject matter and the defendant
are within the jurisdiction of the court. It is not the
absence of the prescribed license but "doing
business" in the Philippines without such license
which debars the foreign corporation from access to
our courts. In other words, although a foreign
corporation is without license to transact business
in the Philippines, it does not follow that it has no
capacity to bring an action. Such license is not
necessary if it is not engaged in business in the
Philippines. (Columbia Pictures v. CA, G.R. No.
110318, 28 Aug. 1996)
Without doubt, the Corporation Code is the general
law providing for the formation, organization, and
regulation of private corporations. On the other
hand, RA 6657 is the special law on agrarian reform.
As between a general and special law, the latter shall
prevail — generalia specialibus non derogant.
Following the same principle, the Alternative
Dispute Resolution Act of 2004 shall apply in this
case as the Act, as its title – An Act to Institutionalize
the Use of an Alternative Dispute Resolution System
in the Philippines and to Establish the Office for
Alternative Dispute Resolution, and for Other
Purposes – would suggest, is a law especially
enacted “to actively promote party autonomy in the
resolution of disputes or the freedom of the party to
make their own arrangements to resolve their
disputes.” It specifically provides exclusive grounds
available to the party opposing an application for
recognition and enforcement of the arbitral award.
Now, does a foreign corporation not licensed to do
business in the Philippines have legal capacity to sue
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
under the provisions of the Alternative Dispute
Resolution Act of 2004? We answer in the
affirmative. Indeed, it is in the best interest of
justice that in the enforcement of a foreign arbitral
award, we deny availment by the losing party of
the rule that bars foreign corporations not licensed
to do business in the Philippines from maintaining
a suit in our courts.
When a party enters into a contract containing a
foreign arbitration clause and, as in this case, in
fact submits itself to arbitration, it becomes bound
by the contract, by the arbitration and by the result
of arbitration, conceding thereby the capacity of
the other party to enter into the contract,
participate in the arbitration and cause the
implementation of the result. A foreign corporation,
although not licensed to do business in the
Philippines, may seek recognition and enforcement
of the foreign arbitral award in accordance with the
provisions of the Alternative Dispute Resolution Act
of 2004. (Tuna Processing Inc., v. Philippine Kingford
Inc., G.R. No. 185582, 29 Feb. 2012)
Foreign Corporation Not Doing Business in the
Philippines Must Disclose Such Fact to Sue in
Philippine Courts
A foreign corporation that is not doing business in
the Philippines must disclose such fact if it desires
to sue in Philippine courts under the "isolated
transaction rule" because without such disclosure,
the court may choose to deny it the right to sue.
While the law (presently the RCC or its predecessor,
the Corporation Code) grants to foreign
corporations with Philippine license the right to sue
in the Philippines, the Court, however, in a long line
of cases under the regime of the Corporation Code
has held that a foreign corporation not engaged in
business in the Philippines may not be denied the
right to file an action in the Philippine courts for an
isolated transaction. The issue on whether a foreign
corporation which does not have license to engage
in business in the Philippines can seek redress in
Philippine courts depends on whether it is doing
business or it merely entered into an isolated
transaction. A foreign corporation that is not doing
business in the Philippines must disclose such fact if
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
it desires to sue in Philippine courts under the
"isolated transaction rule" because without such
disclosure, the court may choose to deny it the right
to sue.
The right and capacity to sue, being, to a great
extent, matters of pleading and procedure, depend
upon the sufficiency of the allegations in the
complaint. Thus, as to a foreign corporation, the
qualifying circumstance that if it is doing business in
the Philippines, it is duly licensed or if it is not, it is
suing upon a singular and isolated transaction, is an
essential part of the element of the plaintiffs
capacity to sue and must be affirmatively pleaded.
In either case, compliance with the requirement of
license, or the fact that the suing corporation is
exempt therefrom, as the case may be, cannot be
inferred from the mere fact that the party suing is a
foreign corporation. The qualifying circumstance
being an essential part of the plaintiff’s capacity to
sue must be affirmatively pleaded. Hence, the
ultimate fact that a foreign corporation is not
doing business in the Philippines must first be
disclosed for it to be allowed to sue in Philippine
courts under the isolated transaction rule.
Failing in his requirement, the complaint filed by
plaintiff with the trial court, it must be said, fails to
show its legal capacity to sue. (Llorente v. Star City
Pty. Ltd., G.R. No. 212050, 15 Jan. 2020, J. Caguioa)
Suability of Foreign Corporations
A foreign corporation lawfully doing business in the
Philippines shall be bound by all laws, rules, and
regulations applicable to domestic corporations of
the same class, except those which provide for the
creation, formation, organization or dissolution of
corporations or those which fix the relations,
liabilities, responsibilities, or duties of stockholders,
members, or officers of corporations to each other
or to the corporation.(Sec. 146, RCC)
A Foreign Corporation Doing Business in the
Philippines Without License may be Sued in the
Country
At this juncture it must be emphasized that a foreign
corporation doing business in the Philippines with
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 Corporation Law
or without license is subject to process and
jurisdiction of the local courts. If such corporation is
properly licensed, well and good. But it shall not be
allowed, under any circumstances, to invoke its lack
of license to impugn the jurisdiction of our courts.
(Marubeni Nedeland BV v. Tensuan, G.R. No. 61950,
28 Sept. 1990)
Isolated Transaction
The execution of the policy is a single act, an isolated
transaction. This Court has not construed the term
“isolated transaction” to literally mean “one” or a
mere single act. In Eriks Pte. Ltd. vs. CA, this Court
held that:
. . . What is determinative of "doing business" is not
really the number or the quantity of the
transactions, but more importantly, the intention of
an entity to continue the body of its business in the
country. The number and quantity are merely
evidence of such intention. The phrase "isolated
transaction" has a definite and fixed meaning, i.e. a
transaction or series of transactions set apart from
the common business of a foreign enterprise in the
sense that there is no intention to engage in a
progressive pursuit of the purpose and object of the
business organization. Whether a foreign
corporation is "doing business" does not necessarily
depend upon the frequency of its transactions, but
more upon the nature and character of the
transactions.
In the case of Gonzales v. Raquiza, et al., three
contracts, hence three transactions were challenged
as void on the ground that the three American
corporations which are parties to the contracts are
not licensed to do business in the Philippines. This
Court held that “one single or isolated business
transaction does not constitute doing business
within the meaning of the law. Transactions which
are occasional, incidental, and casual — not of a
character to indicate a purpose to engage in
business — do not constitute the doing or engaging
in business as contemplated by law. Where the
three transactions indicate no intent by the foreign
corporation to engage in a continuity of
transactions, they do not constitute doing business
in the Philippines.” (Lorenzo Shipping Corp., v. Chubb
251
and Sons, G.R. No. 147724, 08 June 2004)
Q: Star City PTY Limited (SCPL) is an Australian
corporation which operates the Star City Casino
in Sydney, New South Wales, Australia. Claiming
that it is not doing business in the Philippines
and is suing for an isolated transaction, it filed a
complaint for collection of sum of money with
prayer for preliminary attachment against
Quintin Artacho Llorente (Llorente), who was a
patron of its Star City casino and Equitable PCI
Bank (EPCIB).
Llorente is one of the numerous patrons of its
casino in Sydney, Australia. As such, he
maintained therein a Patron Account. Llorente
negotiated two EPCIB drafts in order to play in
the Premium Programme of the casino. SCPL
deposited the subject drafts, but it received an
advice of Bank of New York about the "Stop
Payment Order" prompting it to make several
demands upon Llorente to make good his
obligation. However, the latter refused to pay. It
likewise asked EPCIB for a settlement which the
latter denied on the ground that it was Llorente
who requested the Stop Payment Order and no
notice of dishonor was given. Does SCPL have the
legal personality to sue?
A: YES. In the case at bar, SCPL alleged in its
complaint that "it is a foreign corporation which
operates its business at the Star City Casino in
Sydney, New South Wales, Australia; that it is not
doing business in the Philippines; and that it is suing
upon a singular and isolated transaction". (Llorente
v. Star City PTY Ltd., supra, J. Caguioa)
Q: May a foreign corporation not engaged in
business in the Philippines and a national of a
country which is a party to any convention,
treaty, or agreement relating to intellectual
property rights or the repression of unfair
competition, to which the Philippines is also a
party or extend reciprocal rights sue in
trademark or service mark enforcement action?
A: YES. The foreign corporation mentioned above
may sue in trademark or service mark enforcement
action. This is in accordance with Section 160, in
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
relation to Section 3 of R.A. No. 8393, The
Intellectual Property Code. (Sehwani Inc. v. In-n-Out
Burger, G.R. No. 171053, 15 Oct. 2007)
Q: Surecomp, a foreign corporation duly
organized and existing under the laws of the
Netherlands, entered into a software license
agreement with ABC, a domestic corporation, for
the use of its IMEX Software System (System) in
the bank’s computer system for a period of
twenty (20) years. ABC merged with Global
Business Holdings, Inc. (Global), with Global as
the surviving corporation.
When Global took over the operations of ABC, it
found the System unworkable for its operations
and informed Surecomp of its decision to
discontinue the agreement and to stop further
payments thereon. Consequently, for failure of
Global to pay its obligations under the
agreement despite demands, Surecomp filed a
complaint for breach of contract with damages
before the RTC.
In its complaint, Surecomp alleged that it is a
foreign corporation not doing business in
the Philippines and is suing on an isolated
transaction. Pursuant to the agreement, it
installed the System in ABC’s computers for a
consideration of US$298,000.00 as license fee.
Global filed a motion to dismiss on the ground
that Surecomp had no capacity to sue because it
was doing business in the Philippines without a
license. Is Global estopped from questioning
Surecomp’s capacity to sue?
A: YES, Global is estopped. A corporation has a legal
status only within the state or territory in which it
was organized. For this reason, a corporation
organized in another country has no personality to
file suits in the Philippines. In order to subject a
foreign corporation doing business in the country to
the jurisdiction of our courts, it must acquire a
license from the Securities and Exchange
Commission and appoint an agent for service of
process. Without such license, it cannot institute a
suit in the Philippines.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The exception to this rule is the doctrine of estoppel.
Global is estopped from challenging Surecomp's
capacity to sue.
A foreign corporation doing business in the
Philippines without license may sue in Philippine
courts a Filipino citizen or a Philippine entity that
had contracted with and benefited from it. A party is
estopped from challenging the personality of a
corporation after having acknowledged the same by
entering into a contract with it. The principle is
applied to prevent a person contracting with a
foreign corporation from later taking advantage of
its noncompliance with the statutes, chiefly in cases
where such person has received the benefits of the
contract. (Global Business Holdings, Inc., v. Surecomp
Software, B.V., G.R. No. 173463, 13 Oct. 2010)
Grounds for Revocation of License
Without prejudice to other grounds provided by
special laws, the license of a foreign corporation to
transact business in the Philippines may be revoked
or suspended by the SEC upon any of the following
grounds:
1. Failure to file its annual report or pay any fees
as required by the Code;
2. Failure to appoint and maintain a resident
agent in the Philippines;
3. Failure, after change of its resident agent or of
his address, to submit to the Securities and
Exchange Commission a statement of such
change;
4. Failure to submit to the SEC an authenticated
copy of any amendment to its AOI or by-laws or
of any articles of merger or consolidation within
the time prescribed by the Corporation Code;
5. A misrepresentation of any material matter in
any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments, or penalties, if any, lawfully due to
the Philippine Government or any of its
agencies or political subdivisions;
7. Transacting business in the Philippines outside
of the purpose or purposes for which such
corporation is authorized under its license;
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 Corporation Law
8. Transacting business in the Philippines as agent
of or acting for and on behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines. (Sec. 151,
RCC)
Upon the revocation of the license to transact
business in the Philippines, a certificate of
revocation shall be issued by the SEC. A copy thereof
shall be furnished to the appropriate government
agency in the proper cases. The SEC shall also mail
to the corporation at its registered office in the
Philippines a notice of such revocation accompanied
by a copy of the certificate of revocation. (Sec. 152,
RCC)
Withdrawal of License
Subject to existing laws and regulations, a foreign
corporation licensed to transact business in the
Philippines may be allowed to withdraw from the
Philippines by filing a petition for withdrawal of
license. No certificate of withdrawal shall be issued
by the Commission unless all the following
requirements are met:
1. All claims which have accrued in the Philippines
have been paid, compromised, or settled;
2. All taxes, imposts, assessments, and penalties, if
any, lawfully due to the Philippine Government
or any of its agencies or political subdivisions
have been paid; and
3. The petition for withdrawal of license has been
published once a week for three (3) consecutive
weeks in a newspaper of general circulation in
the Philippines. (Sec. 152, RCC)
4. ONE-PERSON CORPORATIONS
A corporation with a single stockholder: Provided,
that only a natural person, trust, or an estate may
form a One Person Corporation. (Sec. 116, RCC)
Banks and quasi-banks, pre-need, trust, insurance,
public and publicly listed companies, and non-
chartered GOCCs may not incorporate as One
Person Corporations: Provided, further, That a
253
natural person who is licensed to exercise a
profession may not organize as a One Person
Corporation for the purpose of exercising such
profession except as otherwise provided under
special laws. (Ibid.)
Q: A single parent started a plant-based/vegan
meal delivery service during the COVID-19
pandemic using only the resources available in
the kitchen and in a nearby market. After just six
months, the single parent needed to expand by
hiring cooks, kitchen staff, and finance and
administrative personnel. A bank told the single
parent that it was ready to fund the small
business but the parent needed to be registered
with the proper government regulatory
agencies.
Friends advised the single parent that
registering as a single proprietorship would
make their personal assets vulnerable in case
the business takes a downturn. The single
parent now comes to you for legal advice,
wanting to have the limited liability of a
corporation but is unwilling to take in partners
in the business that would stiffly their culinary
creativity.
Under the Revised Corporation Code, is it legally
possible for the single parent to register as a
corporation with only the single parent as
stockholder? Explain briefly. (2020-21 BAR)
A: The Revised Corporation Code eliminated the
minimum number of incorporators for corporations
(Sec. 10, RCC). It also allows natural persons, trust
and estate to organize a corporation with a single
stockholder (Sec. 116, RCC). The law makes no
distinction as to the civil status of natural persons
who can organize a one person corporation. Thus, a
single parent may register as a corporation with
only himself/herself as stockholder.
Minimum Capital Stock NOT Required
A One Person Corporation shall not be required to
have a minimum authorized capital stock except as
otherwise provided by special law. (Sec. 117, RCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Contents of the AOI
A One Person Corporation shall file AOI in
accordance with the requirements under Sec. 14 of
the RCC. It shall likewise substantially contain the
following:
1. If the single stockholder is a trust or an estate,
the name, nationality, and residence of the
trustee, administrator, executor, guardian,
conservator, custodian, or other person
exercising fiduciary duties together with the
proof of such authority to act on behalf of the
trust or estate; and
2. Name, nationality, residence of the nominee
and alternate nominee, and the extent,
coverage, and limitation of the authority. (Sec.
118, RCC)
By-Laws
The One Person Corporation is not required to
submit and file corporate bylaws. (Sec. 119, RCC)
Display of Corporate Name
A One Person Corporation shall indicate the letters
“OPC” either below or at the end of its corporate
name. (Sec. 120, RCC)
Single Stockholder as Director, President
The single stockholder shall be the sole director and
president of the One Person Corporation. (Sec. 121,
RCC)
Treasurer, Corporate Secretary, and Other
Officers
Within fifteen (15) days from the issuance of its
certificate of incorporation, the One Person
Corporation shall appoint a treasurer, corporate
secretary, and other officers as it may deem
necessary, and notify the Commission thereof
within five (5) days from appointment. (Sec. 122,
RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The single stockholder may not be appointed as
corporate secretary. A single stockholder who is
likewise the self-appointed treasurer of the
corporation shall give a bond to the Commission in
such a sum as may be required. The bond shall be
renewed every two (2) years or as often as may be
required.
Provided, That, the said stockholder/treasurer shall
undertake in writing to faithfully administer the
One Person Corporation’s funds to be received as
treasurer, and to disburse and invest the same
according to the AOI as approved by the
Commission. (Ibid.)
Special Functions of the Corporate Secretary
In addition to the functions designated by the One
Person Corporation, the corporate secretary shall:
1. Be responsible for maintaining the minutes
book and/or records of the corporation;
2. Notify the nominee or alternate nominee of the
death or incapacity of the single stockholder,
which notice shall be given no later than five (5)
days from such occurrence;
3. Notify the Commission of the death of the single
stockholder within five (5) days from such
occurrence and stating in such notice the
names, residence addresses, and contact details
of all known legal heirs; and
4. Call the nominee or alternate nominee and the
known legal heirs to a meeting and advise the
legal heirs with regard to, among others, the
election of a new director, amendment of the
AOI, and other ancillary and/or consequential
matters. (Sec. 123, RCC)
Nominee and Alternate Nominee
The single stockholder shall designate a nominee
and an alternate nominee who shall, in the event of
the single stockholder’s death or incapacity, take the
place of the single stockholder as director and shall
manage the corporation’s affairs.
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 Corporation Law
The AOI shall state the names, residence addresses
and contact details of the nominee and alternate
nominee, as well as the extent and limitations of
their authority in managing the affairs of the One
Person Corporation.
The written consent of the nominee and alternate
nominee shall be attached to the application for
incorporation. Such consent may be withdrawn in
writing any time before the death or incapacity of
the single stockholder. (Sec. 124, RCC)
Term of Nominee and Alternate Nominee
1. When the incapacity of the single stockholder
is temporary – the nominee shall sit as director
and manage the affairs of the One Person
Corporation until the stockholder, by self-
determination, regains the capacity to assume
such duties.
2. In case of death or permanent incapacity of
the single stockholder – the nominee shall sit
as director and manage the affairs of the One
Person Corporation until the legal heirs of the
single stockholder have been lawfully
determined, and the heirs have designated one
of them or have agreed that the estate shall be
the single stockholder of the One Person
Corporation.
The alternate nominee shall sit as director and
manage the One Person Corporation in case of the
nominee’s inability, incapacity, death, or refusal to
discharge the functions as director and manager of
the corporation, and only for the same term and
under the same conditions applicable to the
nominee. (Sec. 125, RCC)
Change of Nominee or Alternate Nominee
The single stockholder may, at any time, change its
nominee and alternate nominee by submitting to
the Commission the names of the new nominees and
their corresponding written consent. For this
purpose, the AOI need not be amended. (Sec. 126,
RCC)
255
Minutes Book
A One Person Corporation shall maintain a minutes
book which shall contain all actions, decisions, and
resolutions taken by the One Person Corporation.
(Sec. 127, RCC)
Records in Lieu of Meetings
When action is needed on any matter, it shall be
sufficient to prepare a written resolution, signed
and dated by the single stockholder, and recorded in
the minutes book of the One Person Corporation.
The date of recording in the minutes book shall be
deemed to be the date of the meeting for all
purposes under this Code. (Sec. 128, RCC)
Reportorial Requirements
The One Person Corporation shall submit the
following within such period as the Commission
may prescribe:
1. Annual financial statements audited by an
independent certified public accountant:
Provided, That if the total assets or total
liabilities of the corporation are less than Six
Hundred Thousand Pesos (P600,000.00), the
financial statements shall be certified under
oath by the corporation’s treasurer and
president.
2. A report containing explanations or comments
by the president on every qualification,
reservation, or adverse remark or disclaimer
made by the auditor in the latter’s report;
3. A disclosure of all self-dealings and related
party transactions entered into between One
Person Corporation and the single stockholder;
and
4. Other reports as the Commission may require.
(Sec. 129, RCC)
For purposes of this provision, the fiscal year of a
One Person Corporation shall be that set forth in its
AOI or, in the absence thereof, the calendar year.
The Commission may place the corporation under
delinquent status should the corporation fail to
submit the reportorial requirements three (3)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

times, consecutively or intermittently, within a
period of five (5) years. (Ibid.)
Liability of Single Shareholder
A sole shareholder claiming limited liability has the
burden of affirmatively showing that the
corporation was adequately financed.
Where the single stockholder cannot prove that the
property of the One Person Corporation is
independent of the stockholder’s personal property,
the stockholder shall be jointly and severally liable
for the debts and other liabilities of the One Person
Corporation.
The principle of piercing the corporate veil applies
with equal force to One Person Corporations as with
other corporations. (Sec. 130, RCC)
the conversion into an ordinary stock corporation.
If all requirements have been complied with, the
Commission shall issue an amended certificate of
incorporation reflecting the conversion. (Sec. 132,
RCC)
In case of death of the single stockholder, the
nominee or alternate nominee shall transfer the
shares to the duly designated legal heir or estate
within seven (7) days from receipt of either an
affidavit of heirship or self-adjudication executed by
a sole heir, or any other legal document declaring
the legal heirs of the single stockholder and notify
the Commission of the transfer. Within sixty (60)
days from the transfer of the shares, the legal heirs
shall notify the Commission of their decision to
either wind up and dissolve the One Person
Corporation or convert it into an ordinary stock
corporation. (Ibid.)

Conversion from an Ordinary Corporation to a The ordinary stock corporation converted from a
One Person Corporation One Person Corporation shall succeed the latter and
be legally responsible for all the latter’s outstanding
When a single stockholder acquires all the stocks of liabilities as of the date of conversion. (Ibid.)
an ordinary stock corporation, the latter may apply
for conversion into a One Person Corporation,
subject to the submission of such documents as the
Commission may require. If the application for
conversion is approved, the Commission shall issue
a certificate of filing of amended AOI reflecting the
conversion.

The One Person Corporation converted from an

ordinary stock corporation shall succeed the latter
and be legally responsible for all the latter’s
outstanding liabilities as of the date of conversion.
(Sec. 131, RCC)

Conversion from a One Person Corporation to an

Ordinary Stock Corporation

A One Person Corporation may be converted into an

ordinary stock corporation after due notice to the
Commission of such fact and of the circumstances
leading to the conversion, and after compliance with
all other requirements for stock corporations under
this Code and applicable rules. Such notice shall be
filed with the Commission within sixty (60) days
from the occurrence of the circumstances leading to

UNIVERSITY OF SANTO TOMAS 256

2022 GOLDEN NOTES
 Corporation Law

Merger vs. De Facto Merger

I. MERGERS AND CONSOLIDATIONS
DE FACTO MERGER
MERGER
(2016 BAR)
Merger is a re-
1. CONCEPT
organization of two or
more corporations that
Common Forms of Corporate Combinations Can be pursued by
results in their
one corporation
consolidating into a
1. Sale of Assets – One corporation sells all or acquiring all or
single corporation, which
substantially all of its assets to another. Such substantially all of
is one of the constituent
sale, usually, though not necessarily made in the the properties of
corporations, one
course of the dissolution of the vendor another corporation
disappearing or
corporation. in exchange of
dissolving and the other
shares of stock of the
surviving. To put it
2. Lease of Assets – A corporation, without being acquiring
another way, merger is
dissolved, leases its property to another corporation. The
the absorption of one or
corporation for which the lessor merely acquiring
more corporations by
receives rental paid by the lessee. This is similar corporation would
another existing
to the sale of assets, except that under a lease, end up with the
corporation, which
nothing passes, except the right to use the business enterprise
retains its identity and
property leased. of the target
takes over the rights,
corporation;
privileges, franchises,
3. Sale of Stock – The purpose of a holding whereas, the target
properties, claims,
corporation is to acquire a sufficient amount of corporation would
liabilities and obligations
the stock of another corporation for the end up with
of the absorbed
purpose of acquiring control. The acquiring basically its only
corporation(s). The
corporation is called the parent/ holding remaining assets
absorbing corporation
company. The corporation whose stocks were being the shares of
continues its existence
acquired is the subsidiary. stock of the
while the life or lives of
acquiring
the other corporation(s)
4. Merger – Two (2) or more corporations may corporation.
is or are terminated.
merge into a single corporation which shall be (Ibid.)
(Bank of Commerce v.
one of the constituent corporations (Sec. 75, Radio Philippines
RCC)
Network, Inc., et al., G.R.
No. 195615, 21 Apr. 2014)
5. Consolidation – Two (2) or more corporations
may consolidate into a new single corporation
Asset Sale vs. Stock Sale
which shall be the consolidated corporation.
ASSET SALE STOCK SALE
The individual or
The corporate entity corporate
sells all or substantially shareholders sell a
all of its assets to controlling block of
another entity. stock to new or
existing shareholders.
The seller in good faith Notwithstanding the
is authorized to stock sale, the
dismiss the affected corporation continues

257 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

employees but is liable to be the employer of Was there a transfer of business such that
for the payment of its people and Samson, being an innocent transferee, has no
separation pay under continues to be liable obligation to retain the employment of Gaspar,
the law. The buyer in for the payment of et al.?
good faith, on the other their just claims.
hand, is not obliged to Furthermore, the A: NO. There was no transfer of the business
absorb the employees corporation or its new establishment to speak of, but merely a change in
affected by the sale, nor majority shareholders the new majority shareholders of the corporation.
is it liable for the are not entitled to
payment of their lawfully dismiss There are two types of corporate acquisitions: asset
claims. The most that it corporate employees sales and stock sales. In contrast with asset sales,
may do, for reasons of absent a just or in which the assets of the selling corporation are
public policy and social authorized cause. transferred to another entity, the transaction in
justice, is to give (Ibid.) stock sales takes place at the shareholder level.
preference to the Because the corporation possesses a personality
qualified separated separate and distinct from that of its shareholders,
personnel of the selling a shift in the composition of its shareholders will not
firm. (SME Bank, Inc., et affect its existence and continuity. Thus,
al., v. Gaspar, et al., G.R. notwithstanding the stock sale, the corporation
Nos. 184517 & 186641, continues to be the employer of its people and
8 Oct. 2013) continues to be liable for the payment of their just
claims. Furthermore, the corporation or its new
Q: One of the stipulations in the sale of SME Bank majority shareholders are not entitled to lawfully
to Abelardo Samson was that Agustin and De dismiss corporate employees absent a just or
Guzman, the majority stockholders, and authorized cause.
corporate directors of SME, shall
terminate/retire its employees. At the behest of In the case at bar, the Letter Agreements show that
Samson’s wife, SME’s general manager urged its their main object is the acquisition by the Samson
employees, respondents Gaspar, et al., to tender Group of 86.365% of the shares of stock of SME
their resignations on the promise that they will Bank. Hence, this case involves a stock sale,
be rehired. The majority shares of SME were whereby the transferee acquires the controlling
then sold to the Sps. Samson, and SME did not shares of stock of the corporation. Thus, following
rehire De Guzman, et al. the rule in stock sales, respondent employees may
not be dismissed except for just or authorized
Gaspar, et al. filed a complaint for illegal causes under the Labor Code.
dismissal against SME, Samson, Agustin and De
Guzman. The LA ruled that the labor buyer of an The transfer only involved a change in the equity
enterprise is not bound to absorb its employees, composition of the corporation. To reiterate, the
unless there is an express stipulation to the employees are not transferred to a new employer,
contrary. The NLRC found that there was only a but remain with the original corporate employer,
mere transfer of shares – and therefore, a mere notwithstanding an equity shift in its majority
change of management – from Agustin and De shareholders. This being so, the employment status
Guzman to the Samson Group. As the change of of the employees should not have been affected by
management was not a valid ground to the stock sale. A change in the equity composition of
terminate respondent bank employees, the the corporate shareholders should not result in the
NLRC ruled that they had indeed been illegally automatic termination of the employment of the
dismissed. corporation’s employees. Neither should it give the
new majority shareholders the right to legally

UNIVERSITY OF SANTO TOMAS 258

2022 GOLDEN NOTES
 Corporation Law
dismiss the corporation’s employees, absent a just
or authorized cause.
It is thus erroneous on the part of the corporation to
consider the employees as terminated from their
employment when the sole reason for so doing is a
change of management by reason of the stock sale.
The conformity of the employees to the
corporation’s act of considering them as terminated
and their subsequent acceptance of separation pay
does not remove the taint of illegal dismissal.
Acceptance of separation pay does not bar the
employees from subsequently contesting the
legality of their dismissal, nor does it estop them
from challenging the legality of their separation
from the service. (SME Bank, Inc., et al., v. Gaspar, et
al., supra)
Q: Petitioner Bank of Commerce (BOC) and
Traders Royal Bank (TRB) executed a Purchase
and Assumption agreement, where the former
acquired the latter’s specified assets and
liabilities, excluding liabilities arising from
judicial actions which were covered by a BSP-
mandated escrow fund of P50 million. Shortly
after, the Supreme Court, in TRB v. RPN, ordered
TRB to pay respondents Radio Philippines
Network, Intercontinental Broadcasting
Corporation, and Banahaw Broadcasting
Corporation (RPN, et al.) actual damages with
legal interest. RPN, et al. filed a motion for
execution against TRB before the RTC. But
rather than pursue a levy in execution of the
corresponding amounts on escrow, RPN, et al.
filed a Supplemental Motion for Execution
where they described TRB as “now BOC” based
on the assumption that TRB had been merged
into BOC.
BOC opposed RPN, et al.’s motion and denied
that there was a merger between itself and TRB.
The RTC granted the writ of execution to cover
all assets of TRB, including those subject of the P
& A agreement. The RTC held that the P & A
agreement was a mere tool to effectuate merger.
BOC appealed to the CA, which affirmed with
modification the RTC decision, by declaring that
no merger existed between BOC and TRB and
259
deleting the phrase that the P & A agreement
was a farce or a mere tool to effectuate a merger
or consolidation between TRB and BOC. The CA
limited the execution to TRB’s properties found
in BOC’s possession.
The RTC issued an alias writ of execution against
BOC, and BOC sought reconsideration of the
same considering that the CA declared that no
merger existed between BOC and TRB. The RTC
denied BOC’s motion.
a. Was there a merger between BOC and TRB?
b. Should BOC be considered as RPN, et al.’s
judgment debtor?
A:
a. NO. What happened is that TRB sold, and BOC
purchased identified recorded assets of TRB in
consideration of BOC’s assumption of identified
recorded liabilities of TRB including booked
contingent accounts. There is no law that
prohibits this kind of transaction especially
when it is done openly and with appropriate
government approval. In a strict sense, no
merger or consolidation took place as the
records do not show any plan or articles of
merger or consolidation.
No de facto merger took place in the present
case simply because the TRB owners did not get
an equivalent value in BOC shares of stock in
exchange for the bank’s assets and liabilities.
BOC and TRB agreed with BSP’s approval to
exclude from the sale the TRB’s contingent
judicial liabilities, including those owing to RPN,
et al.
The Bureau of Internal Revenue (BIR) treated
the transaction between the two banks purely
as a sale of specified assets and liabilities when
it rendered its opinion on the tax consequences
of the transaction given that there is a
difference in tax treatment between a sale and
a merger or consolidation.
b. NO. First, BOC agreed to assume those liabilities
of TRB that are specified in their P & A
Agreement. That agreement specifically
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

excluded TRB’s contingent liabilities that the Merger vs. Consolidation

latter might have arising from pending
litigations in court, including the claims of RPN, MERGER CONSOLIDATION
et al. Definition
One where a
Second, as already pointed out above, the sale
corporation absorbs One where a new
did not amount to merger or de facto merger of
another corporation corporation is created
Bancommerce and TRB since the elements
and remains in and consolidating
required of both were not present.
existence while others corporations are
are dissolved. (Sec. 75, extinguished. (Ibid.)
Third, the evidence in this case fails to show that
RCC)
BOC was a mere continuation of TRB. TRB
retained its separate and distinct identity after Consequent Dissolution of a
the purchase. Although it subsequently changed Corporation or Corporations
its name to Traders Royal Holding’s, Inc. such
change did not result in its dissolution. All of the constituent All consolidated
corporations involved corporations are
Fourth, to protect contingent claims, the BSP are dissolved except dissolved without
directed BOC and TRB to put up P50 million in one. exception.
escrow with another bank. It was the BSP, not Consequent Creation of a New Corporation
BOC that fixed the amount of the escrow.
Consequently, it cannot be said that the latter No new corporation is A new corporation
bank acted in bad faith with respect to the created. emerges.
excluded liabilities. They did not enter into the
P & A Agreement to enable TRB to escape from Acquisition of Assets, Liabilities,
its liability to creditors with pending court Capital Stock
cases. The surviving All assets, liabilities,
corporation acquires and capital stock of all
Since there had been no merger, BOC cannot be all the assets, consolidated
considered as TRB’s successor-in-interest and liabilities, and capital corporations are
against which the Court’s Decision in TRB v. RPN stock of all constituent transferred to the new
may be enforced. BOC did not hold the former corporations. corporation.
TRBs assets in trust for it as to subject them to
garnishment for the satisfaction of the latter’s
Q: Where one corporation sells or otherwise
liabilities to RPN, et al. BOC bought and
transfers all of its assets to another corporation,
acquired those assets and thus, became their
is the latter liable for the debts and liabilities of
absolute owner.
the transferor?

The enforcement, therefore, of the decision in

A: GR: NO.
the main case should not include the assets and
properties that BOC acquired from TRB. These
XPNs:
have ceased to be assets and properties of TRB
1. Where the purchaser expressly or impliedly
under the terms of the BSP-approved P & A
agrees to assume such debts;
Agreement between them. They are not TRB
2. Where the transaction amounts to a
assets and properties in the possession of BOC.
consolidation or merger of the corporations;
(Bank of Commerce v. Radio Philippines
3. Where the purchasing corporation is merely a
Network, Inc., et al., supra)
continuation of the selling corporation; and
4. Where the transaction is entered into
fraudulently to escape liability for such debts.

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2022 GOLDEN NOTES
 Corporation Law
(Nell Co. vs. Pacific Farms, Inc., G.R. No. L-20850,
29 Nov. 1965)
NOTE: The Nell Doctrine states the general rule
that the transfer of all the assets of a corporation to
another shall not render the latter liable to the
liabilities of the transferor. If any of the above-cited
exceptions are present, then the transferee
corporation shall assume the liabilities of the
transferor. (2017 BAR)
See also discussion on the Nell Doctrine – page 132.
Business-Enterprise Transfer
The transferee corporation’s interest goes beyond
the assets of the transferor’s assets and its desires
to acquire the latter’s business enterprise, including
its goodwill.
Sec. 40 (now Sec. 39, RCC) suitably reflects the
business-enterprise transfer under the exception of
the Nell Doctrine because the purchasing or
transferee corporation necessarily continued the
business of the selling or transferor corporation.
Given that the transferee corporation acquired not
only the assets but also the business of the
transferor corporation, then the liabilities of the
latter are inevitably assigned to the former. Sec. 39
refers to the sale, lease, exchange or disposition of
all or substantially all of the corporation's assets,
including its goodwill. The sale under this provision
does not contemplate an ordinary sale of all
corporate assets; the transfer must be of such
degree that the transferor corporation is rendered
incapable of continuing its business or its corporate
purpose.
The purpose of the business-enterprise transfer is
to protect the creditors of the business by allowing
them a remedy against the new owner of the assets
and business enterprise. Otherwise, creditors
would be left “holding the bag,” because they may
not be able to recover from the transferor who has
“disappeared with the loot,” or against the
transferee who can claim that he is a purchaser in
good faith and for value. Based on the foregoing, as
the exception of the Nell doctrine relates to the
protection of the creditors of the transferor
261
corporation and does not depend on any deceit
committed by the transferee corporation, then
fraud is certainly not an element of the business
enterprise doctrine. Indeed, the transferee
corporation may inherit the liabilities of the
transferor despite the lack of fraud due to the
continuity of the latter’s business. (Y-I Leisure
Philippines, Inc. v. Yu, G.R. No. 207161, 08 Sept. 2015)
Q: E Co. sold its assets to M Inc. after complying
with the requirements of the Bulk Sales Law.
Subsequently, one of the creditors of E Co. tried
to collect the amount due it but found out that E
Co. has no more assets left. The creditors sued M
Inc. on the theory that M Inc. is a mere alter ego
of E Co. Will the suit prosper? (1996 BAR)
A: NO. The suit will not prosper. The sale by E Co. of
its assets to M Inc. did not result in the transfer of
liabilities of the latter to, nor in the assumption
therefore by, the former. The facts given do not
indicate that such transfer or assumption took place
or was stipulated upon by the parties in their
agreement. Furthermore, the sale by E Co. of its
assets is a sale of its property. It does not involve the
sale of the shares of stock of the corporation
belonging to its stockholders. There is therefore no
merger or consolidation that took place. E Co.
continues to exist and remains liable to the creditor.
Contents of a Plan of Merger or Consolidation
The BOD/BOT of each corporation party to the
merger or consolidation shall approve a plan of
merger or consolidation which set forth the
following:
1. The names of the corporations proposing to
merge or consolidate, hereinafter referred to as
the constituent corporations;
2. The terms of the merger or consolidation and
the mode of carrying the same into effect;
3. A statement of the changes, if any, in the AOI of
the surviving corporation in case of a merger;
and, with respect to the consolidated
corporation in case of consolidation, all the
statements required to be set forth in the AOI
for corporations organized under the RCC; and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
4. Such other provisions with respect to the
proposed merger or consolidation as are
deemed necessary or desirable. (Sec. 75, RCC)
Approval of the Plan of Merger or Consolidation
The plan of merger or consolidation must be
approved by:
1. Majority vote of each of the BOD/ BOT of the
constituent corporations; and
2. Submitted for approval by the stockholders or
members of each of such corporations at
separate corporate meetings duly called for the
purpose.
3. Notice of such meetings shall be given to all
stockholders or members of the respective
corporations in the same manner as giving
notice of regular or special meetings under
Section 49 of the RCC The notice shall state the
purpose of the meeting and include a copy or a
summary of the plan of merger or
consolidation.
4. The affirmative vote of the stockholders
representing at least 2/3 of the OCS of each
corporation in the case of stock corporations or
at least 2/3 of the members in the case of non-
stock corporations, shall be necessary for the
approval of such plan. (Sec. 76, RCC)
Amendment of a Plan of Merger or Consolidation
Any amendment may be made, provided such
amendment is approved by majority vote of the
respective BOD/BOT of all the constituent
corporations and ratified by the affirmative vote of
stockholders representing at least 2/3 of the OCS or
2/3 of the members of each of the constituent
corporations. (Sec. 76, RCC)
NOTE: Such plan, together with any amendment,
shall be considered as the agreement of merger or
consolidation.
Appraisal Right is Available to a Dissenting
Stockholder to a Plan of Merger or Consolidation
Any dissenting stockholder in stock corporations
may exercise his appraisal right in accordance with
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
this Code: Provided, that if after the approval by the
stockholders of such plan, the BOD should decide to
abandon the plan, the appraisal right shall be
extinguished. (Sec. 76, RCC)
Articles of Merger or Consolidation
After the approval by the stockholders or members
as required by Sec. 76, articles of merger or articles
of consolidation shall be executed by each of the
constituent corporations, to be signed by the
president or vice president and certified by the
secretary or assistant secretary of each corporation
setting forth:
a. The plan of the merger or the plan of
consolidation;
b. As to stock corporations, the number of shares
outstanding, or in the case of nonstock
corporations, the number of members;
c. As to each corporation, the number of shares or
members voting for or against such plan,
respectively;
d. The carrying amounts and fair values of the
assets and liabilities of the respective
companies as of the agreed cut-off date;
e. The method to be used in the merger or
consolidation of accounts of the companies;
f. The provisional or pro-forma values, as merged
or consolidated, using the accounting method;
and
g. Such other information as may be prescribed by
the Commission. (Sec. 77, RCC)
The articles of merger or of consolidation, signed
and certified as required by the RCC, shall be
submitted to the SEC for its approval. (Sec. 78, RCC)
NOTE: In the case of merger or consolidation of
banks or banking institutions, loan associations,
trust companies, insurance companies, public
utilities, educational institutions, and other special
corporations governed by special laws, the
favorable recommendation of the appropriate
government agency shall first be obtained (Ibid.)
262
 Corporation Law
When Hearing is Set
If, upon investigation, the SEC has reason to believe
that the proposed merger or consolidation is
contrary to or inconsistent with the provisions of
the RCC or existing laws, it shall set a hearing to give
the corporations concerned the opportunity to be
heard. Written notice of the date, time, and place of
hearing shall be given to each constituent
corporation at least two (2) weeks before said
hearing. The SEC shall thereafter proceed as
provided in the RCC. (Ibid.)
Effectivity
If the SEC is satisfied that the merger or
consolidation of the corporations concerned is
consistent with the provisions of the RCC and
existing laws, it shall issue a certificate approving
the articles and plan of merger or of consolidation,
at which time the merger or consolidation shall be
effective. (Ibid.)
Q: FISLAI and DSLAI entered into a merger, with
DSLAI as the surviving corporation. The articles
of merger were not registered with the SEC due
to incomplete documentation. DSLAI changed its
corporate name to MSLAI. The business of
MSLAI, however, failed. Prior to the closure of
MSLAI, Remedios Uy filed an action for
collection of sum of money against FISLAI. The
RTC ruled in favor of Uy and hence, six (6)
parcels of land owned by FISLAI were sold to
Willkom, the highest bidder.
MSLAI filed a complaint for annulment of
sheriff’s sale. Willkom, et al., averred that MSLAI
had no cause of action against them or the right
to recover the subject properties because MSLAI
is a separate and distinct entity from FISLAI.
They further contended that the “unofficial
merger” between FISLAI and DSLAI (now MSLAI)
did not take effect considering that the merging
companies did not comply with the formalities
and procedure for merger or consolidation as
prescribed by the Corporation Code of
the Philippines. Was the merger between FISLAI
and DSLAI (now MSLAI) valid and effective?
263
A: NO. The merger was not valid. Merger does not
become effective upon the mere agreement of the
constituent corporations. Since a merger or
consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders
and creditors, there must be an express provision of
law authorizing them.
The merger shall only be effective upon the issuance
of a certificate of merger by the SEC, subject to its
prior determination that the merger is not
inconsistent with the Corporation Code or existing
laws.
In this case, it is undisputed that the articles of
merger between FISLAI and DSLAI were not
registered with the SEC due to incomplete
documentation. Consequently, the SEC did not issue
the required certificate of merger. Even if it is true
that the Monetary Board of the Central Bank of
the Philippines recognized such merger, the fact
remains that no certificate was issued by the SEC.
Such merger is still incomplete without
the certification.
The issuance of the certificate of merger is crucial
because not only does it bear out SEC’s approval but
it also marks the moment when the consequences of
a merger take place. By operation of law, upon the
effectivity of the merger, the absorbed corporation
ceases to exist but its rights and properties, as well
as liabilities, shall be taken and deemed transferred
to and vested in the surviving corporation.
(Mindanao Savings and Loan Association, Inc., et al.,
v. Willkom, et al., G.R. No. 178618, 11 Oct. 2010)
2. EFFECTS AND LIMITATIONS
1. The constituent corporations shall become a
single corporation which:
a. In case of merger, shall be the surviving
corporation designated in the plan of
merger.
b. In case of consolidation, shall be the
consolidated corporation designated in the
plan of consolidation;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
2. The separate existence of the constituent
corporations shall cease, except that of the
surviving or the consolidated corporation;
3. The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities, and powers and shall be subject to
all the duties and liabilities of a corporation
organized under the RCC;
4. The surviving or the consolidated corporation
shall thereupon and thereafter possess:
a. All the rights, privileges, immunities, and
franchises of each of the constituent
corporations;
b. All property, real or personal, and all
receivables due on whatever account,
including subscriptions to shares and other
choses in action,
c. Every other interest of, belonging to, or due
to each constituent corporation, shall be
deemed transferred to and vested in such
surviving or consolidated corporation
without further act or deed; and
5. The surviving or consolidated corporation
shall:
a. Be responsible and liable for all the
liabilities and obligations of each of the
constituent corporations in the same
manner as if such surviving or consolidated
corporation had itself incurred such
liabilities or obligations;
b. Any pending claim, action or proceeding
brought by or against any of such
constituent corporations may be
prosecuted by or against the surviving or
consolidated corporation;
c. The rights of creditors or liens upon the
property of any of such constituent
corporations shall not be impaired by such
merger or consolidation. (Sec. 79, RCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Garnishment Upon the Surviving Corporation
for the Liabilities of the Absorbed Corporation
Citytrust was dissolved, no winding up of its affairs
or liquidation of assets, privileges, powers, and
liabilities took place. As the surviving corporation,
BPI simply continued the combined businesses of
the two banks and absorbed all the rights,
privileges, assets, liabilities, and obligations of City
Trust, including the latter’s obligation over the
garnished deposits of the defendants.
Through the service of the writ of garnishment, the
garnishee becomes a “virtual party” to, or a “forced
intervenor” in the case and the trial court thereby
acquires jurisdiction to bind him to compliance with
all orders and processes of the trial court with a
view to the complete satisfaction of the judgment of
the court.
Citytrust, therefore, upon service of the notice of
garnishment and its acknowledgment that it was in
possession of defendants’ deposit accounts became
a “virtual party” to or “forced intervenor” in the civil
case. As such, it became bound by the orders and
processes issued by the trial court despite not
having been properly impleaded therein.
Consequently, by virtue of its merger with BPI, the
latter, as the surviving corporation, effectively
became the garnishee, thus the “virtual party” to the
civil case. (BPI v. Lee, G.R. No. 190144, 01 Aug. 2012)
Transfer of Employees
Taking a second look on this point, we have come to
agree with Justice Brion's view that it is more in
keeping with the dictates of social justice and the
State policy of according full protection to labor to
deem employment contracts as automatically
assumed by the surviving corporation in a merger,
even in the absence of an express stipulation in the
articles of merger or the merger plan. In his
dissenting opinion, Justice Brion reasoned that:
To my mind, due consideration of Sec. 80 of the
Corporation Code (now Sec. 79, RCC), the
constitutionally declared policies on work, labor
and employment, and the specific FEBTC-BPI
situation -- i.e., a merger with complete "body and
264
 Corporation Law
soul" transfer of all that FEBTC embodied and
possessed and where both participating banks were
willing (albeit by deed, not by their written
agreement) to provide for the affected human
resources by recognizing continuity of employment
-- should point this Court to a declaration that in a
complete merger situation where there is total
takeover by one corporation over another and there
is silence in the merger agreement on what the fate
of the human resource complement shall be, the
latter should not be left in legal limbo and should be
properly provided for, by compelling the surviving
entity to absorb these employees. This is what Sec.
80 of the Corporation Code (now, Sec. 79, RCC)
commands, as the surviving corporation has the
legal obligation to assume all the obligations and
liabilities of the merged constituent corporation.
Not to be forgotten is that the affected employees
managed, operated, and worked on the transferred
assets and properties as their means of livelihood;
they constituted a basic component of their
corporation during its existence. In a merger and
consolidation situation, they cannot be treated
without consideration of the applicable
constitutional declarations and directives, or,
worse, be simply disregarded. If they are so treated,
it is up to this Court to read and interpret the law so
that they are treated in accordance with the legal
requirements of mergers and consolidation, read in
light of the social justice, economic and social
provisions of our Constitution. Hence, there is a
need for the surviving corporation to take
responsibility for the affected employees and to
absorb them into its workforce where no
appropriate provision for the merged corporation's
human resources component is made in the Merger
Plan.
By upholding the automatic assumption of the non-
surviving corporation's existing employment
contracts by the surviving corporation in a merger,
the Court strengthens judicial protection of the right
to security of tenure of employees affected by a
merger and avoids confusion regarding the status of
their various benefits which were among the chief
objections of our dissenting colleagues. However,
nothing in this Resolution shall impair the right of
an employer to terminate the employment of the
265
absorbed employees for a lawful or authorized
cause or the right of such an employee to resign,
retire or otherwise sever his employment, whether
before or after the merger, subject to existing
contractual obligations. In this manner, Justice
Brion's theory of automatic assumption may be
reconciled with the majority's concerns with the
successor employer's prerogative to choose its
employees and the prohibition against involuntary
servitude. (BPI v. BPI Employees Union – Davao
Chapter, G.R. No. 164301, 19 Oct. 2011)
Q: Associated Banking Corporation and Citizens
Bank and Trust Company (CBTC) merged to
form just one banking corporation known as
Associated Citizens Bank, the surviving
bank. The Associated Citizens Bank changed its
corporate name to Associated Bank by virtue of
the Amended Articles of Incorporation.
Lorenzo Sarmiento executed in favor of CBTC a
promissory note. Upon maturity and despite
repeated demands Sarmiento failed to pay the
amount due. Associated Bank filed a collection
suit against Sarmiento. Sarmiento contends that
Associated Bank is not the proper party in
interest because the promissory note was
executed in favor of Associated Citizens Bank.
The trial court ordered Sarmiento to pay. The
CA, however, held that the Associated Bank had
no cause of action against Lorenzo Sarmiento Jr.,
since the said bank was not privy to the
promissory note executed by Sarmiento in favor
of Citizens Bank and Trust Company
(CBTC). The court ruled that the earlier merger
between the two banks could not have vested
Associated Bank with any interest arising from
the promissory note executed in favor of
CBTC after such merger.
May Associated Bank, the surviving corporation,
enforce the promissory note made by Sarmiento
in favor of CBTC, the absorbed company, after
the merger agreement had been signed?
A: YES. Associated Bank may enforce the
promissory note. Ordinarily, in the merger of two or
more existing corporations, one of the combining
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

corporations survives and continues the combined

business, while the rest are dissolved and all their
rights, properties and liabilities are acquired by the
surviving corporation. Although there is a
dissolution of the absorbed corporations, there is no
winding up of their affairs or liquidation of their
assets, because the surviving corporation
automatically acquires all their rights, privileges,
and powers, as well as their liabilities. All contracts
of the absorbed corporations, regardless of the date
of execution shall pertain to the surviving
corporation. (Associated Bank v. CA, G.R. No. 123793,
29 June 1998)

UNIVERSITY OF SANTO TOMAS 266

2022 GOLDEN NOTES
 Intellectual Property Code

Intellectual Property Rights

IV. INTELLECTUAL PROPERTY CODE
(R.A. NO. 8293; EXCLUDING IMPLEMENTING The term “intellectual property rights” consists of:
RULES AND REGULATIONS)
a. Copyright and Related Rights;
b. Trademarks and Service Marks;
c. Geographic Indications;
Rationale behind the Intellectual Property
d. Industrial Designs;
Code
e. Patents;
f. Layout-Designs (Topographies) of Integrated
The Intellectual Property Code (IPC) gives life to
Circuits; and
Sec. 13, Art. XIV of the 1987 Constitution which
g. Protection of Undisclosed Information. (Sec.
mandates that the State shall protect and secure
4.1., IPC)
the exclusive rights of scientists, inventors, artists
and other gifted citizens to their intellectual
Intellectual Property as Property
property and creations, particularly when
beneficial to the people, for such period as may be
Ownership is acquired by occupation and by
provided by law.
intellectual creation.

The State recognizes that an effective intellectual

Ownership and other real rights over property are
and industrial property system is vital to the
acquired and transmitted by law, by donation, by
development of domestic and creative activity,
testate and intestate succession, and in
facilitates transfer of technology, attracts foreign
consequence of certain contracts, by tradition.
investments and ensures market access for our
products. It shall protect and secure the exclusive
They may also be acquired by means of
rights of scientists, inventors, artists and other
prescription. (Art. 712, New Civil Code (NCC))
gifted citizens to their intellectual property and
creations, particularly when beneficial to the
Ownership may be exercised over things or rights.
people, for such periods as provided in R.A. No.
(Art. 427, NCC)
8293, as amended, or the IPC. (Sec. 2, IPC)

Basic Principles
Intellectual Property

National Treatment – A Member country shall

Intellectual Property shall include the rights
accord to the nationals of other Member countries
relating to:
treatment no less favorable than it accords to its
own national with regard to the protection of
1. Literary, artistic, and scientific works;
intellectual property. (Art. 3, The Agreement on
2. Performances of performing artists,
Trade-Related Aspects of Intellectual Property
phonograms, and broadcasts;
Rights [TRIPS Agreement])
3. Scientific discoveries;
4. Industrial designs;
Most Favored Nation – With regard to the
5. Trademarks, service marks, and commercial
protection of intellectual property, any advantage,
names and designations;
favor, privilege, or immunity granted by a Member
6. Protection against unfair competition; and
to the nationals of any other country shall be
7. All other rights resulting from intellectual
accorded immediately and unconditionally to the
activity in the industrial, scientific, literary or
nationals of all other Members. (Art. 4, TRIPS
artistic fields. (Art. 2 (viii), World Intellectual
Agreement)
Property Organization)

267 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
Technology Transfer Arrangements
Contracts or agreements involving the transfer of
systematic knowledge for the manufacture of a
product, the application of the process, or
rendering of a service including management
contracts; and the transfer, assignment or
licensing of all forms of intellectual property
rights, including licensing of computer software
except computer software developed for mass
market. (Sec. 4.2, IPC)
Nature of Technology Transfer Arrangement
Technology transfer is a licensing contract. It is a
contract between an intellectual property right
owner, as the licensor, and a second party, as the
licensee who was granted the authority to
commercially exploit the same intellectual
property right under specified terms and
conditions. (Salao, 2019)
Undisclosed Information
1. Secret in the sense that it is not, as a body or in
precise configuration and assembly of
components, generally known among, or
readily accessible to persons within the circles
that normally deal with the kind of
information in question;
2. Has commercial value because it is a secret; or
3. Has been subjected to reasonable steps under
the circumstances, by the person lawfully in
control of the information, to keep it a secret.
(Art. 39, TRIPS Agreement)
Nature of Undisclosed Information or Trade
Secret
Those trade secrets are of a privileged nature. The
protection of industrial property encourages
investments in new ideas and inventions and
stimulates creative efforts for the satisfaction of
human needs. It speeds up transfer of technology
and industrialization, and thereby bring about
social and economic progress.
Verily, the protection of industrial secrets is
inextricably linked to the advancement of our
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
economy and fosters healthy competition in trade.
(Air Philippines Corp. v. Pennswell, Inc., G.R. No.
172835, 13 Dec. 2007)
INTELLECTUAL PROPERTY RIGHTS
Copyright and Related Rights
Exists over original and derivative intellectual
creations in the literary and artistic domain
protected from the moment of their creation.
(Sec. 172.1, IPC)
Trademarks and Service Marks
Any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of
an enterprise and shall include a stamped or
marked container of goods. (Sec. 121.1, IPC)
Geographic Indications
Indications which identify a good as originating
in the territory of a Member of the Agreement,
or a region or locality in that territory, where a
given quality, reputation or other characteristic
of the good is essentially attributable to its
geographical origin. (Art. 22, TRIPS Agreement)
Industrial Designs
Any composition of lines or colors or any three-
dimensional form, whether or not associated
with lines or colors, provided that such
composition or form gives a special appearance
to and can serve as pattern for an industrial
product or handicraft. It must be new or
ornamental. (Secs. 112 & 113, IPC)
Patents
Any technical solution of a problem in any field
of human activity which is new, involves an
inventive step and is industrially applicable. It
may be, or may relate to, a product, or process,
or an improvement of any of the foregoing. (Sec.
21, IPC)
Layout Designs
Synonymous with ‘Topography' and means the
three-dimensional disposition, however
expressed, of the elements, at least one of which
is an active element, and of some or all of the
interconnections of an integrated circuit, or
such a three-dimensional disposition prepared
268
 Intellectual Property Code

for an integrated circuit intended for Trade Secrets

manufacture. (Sec. 112(3), IPC)
Protection of Undisclosed Information
Protection of information lawfully held from
being disclosed to, acquired by, or used by
others without their consent in a manner
contrary to honest commercial practices so long
as such information: (a) is secret in the sense
that it is not, as a body or in the precise
configuration and assembly of its components,
generally known among or readily accessible to
persons within the circles that normally deal
with the kind of information in question; (b) has
commercial value because it is secret; and (c)
has been subject to reasonable steps under the
circumstances, by the person lawfully in control
of the information, to keep it secret. (Art. 39,
TRIPS Agreement)
A plan or process, tool, mechanism or
compound known only to its owner and those of
his employees to whom it is necessary to
confide it. The definition also extends to: (a) a
secret formula or process not patented, but
known only to certain individuals using it in
compounding some article of trade having a
commercial value; or (b) any formula, pattern,
device, or compilation of information that: (1) is
used in one's business; and (2) gives the
employer an opportunity to obtain an
advantage over competitors who do not possess
the information. (Air Philippines Corporation v.
Pennswell, Inc., G.R. No. 172835, 13 Dec. 2007)

Differences between Copyrights, Trademarks, and Patents (2015 BAR)

PATENT TRADEMARK COPYRIGHT

Any technical solution of a
problem in any field of human
activity which is new, involves an
inventive step and is industrially
applicable shall be patentable. It
may be, or may relate to, a product,
or process, or an improvement of
any of the foregoing. (Sec. 21, IPC)
Definition
Any visible sign capable of
Exists over original and derivative
distinguishing the goods
intellectual creations in the
(trademark) or services (service
literary and artistic domain
mark) of an enterprise and shall
protected from the moment of
include a stamped or marked
their creation. (Sec. 172.1, IPC)
container of goods. (Sec. 121.1, IPC)
Term of Protection

1. For literary and artistic works,

Twenty (20) years from filing date
of application. (Sec. 54, IPC)
It shall remain in force for ten (10)
years. (Sec. 145, IPC)
It may be renewed for periods of
ten (10) years at its expiration
upon payment of prescribed fee
and upon filing of a request. (Sec.
146, IPC)
and derivative works, it shall
be protected during the life of
the author and for 50 years
after his death; (Sec. 213.1,
IPC)
2. In joint authorship, during the
life of the last surviving author
and for 50 years after his
death; (Sec. 213.2, IPC)

3. In anonymous or pseudonym
works, 50 years from the date
on which the work was first

269 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

published. In case the author’s

identity is revealed, during his
lifetime and 50 years after his
death; (Sec. 213.3, IPC)

4. In works of applied art, 25

years from the date of making;
(Sec. 213.4, IPC) and

5. In case of photographic works,

50 years from publication of
the work, and if unpublished,
50 years from the making.
(Sec. 213.5, IPC)

6. In case of audiovisual work, 50

years from the date of
publications, and if
unpublished, from the date of
making. (Sec. 213.6, IPC)

NOTE: The term of protection

subsequent to the death of the
author shall run from the date of
his death or of publication, but
such terms shall always be deemed
to begin on the first day of January
of the year following. (Sec. 214,
IPC)
Limitations to the Use of Right
A person may NOT: 1. Recitation or performance of a
1. In general
work, once it has been lawfully
1. Use a name if the word is made accessible to the public, if
a. GR: If put on the market in the
generic; (Lyceum of the done privately and free of
Philippines by the owner of
Philippines v. CA, G.R. No. 101897, charge or for a charitable or
the product, or with his
05 Mar. 1993) religious institution or society;
express consent.
(Sec. 184, IPC)
2. Use any name indicating a
XPN: Drugs and medicines -
geographical location; (Ang Si 2. The making of quotations from
introduced in the Philippines
Heng v. Wellington Department a published work if they are
or anywhere else in the world
Store, G.R. No. L-4531, 10 Jan. compatible with fair use and
by the patent owner, or by any
1953) only to the extent justified for
party authorized to use the
the purpose; (Ibid.)
invention. (Sec. 72.1, as
3. Use any name or designation
amended by R.A. No. 9502)
contrary to public order or 3. Communication to the public
morals; by mass media of articles on
b. Where the act is done
current political, social,
privately and on a non-
4. Use a name if it is liable to economic, scientific or
commercial scale or for a non-
deceive trade circles or the religious topic, lectures,

UNIVERSITY OF SANTO TOMAS 270

2022 GOLDEN NOTES
 Intellectual Property Code
commercial purpose; (Sec.
72.2, IPC)
c. Exclusively for experimental
use of the invention for
scientific purposes or
educational purposes
(experimental use provision);
(Sec. 72.3, IPC)
d. Bolar Provision - In the case of
drugs and medicines, where
the act includes testing, using,
making or selling the
invention including any data
related thereto, solely for
purposes reasonably related
to the development and
submission of information and
issuance of approvals by
government regulatory
agencies required under any
law of the Philippines or of
another country that regulates
the manufacture,
construction, use or sale of
any product; (Sec. 72.4, IPC)
e. Where the act consists of the
preparation for individual
cases, in a pharmacy or by a
medical professional, of a
medicine in accordance with a
medical prescription; (Sec.
72.5, IPC) and
f. Where the invention is used in
any ship, vessel, aircraft, or
land vehicle of any other
country entering the territory
of the Philippines temporarily
or accidentally. (Sec. 72.6, IPC)
2. Prior user – Person other than
the applicant, who in good faith,
started using the invention in the
Philippines, or undertaken serious
preparations to use the same,
before the filing date or priority
public as to the nature of the
enterprise identified by that
name; (Sec. 165.1, IPC)
5. Subsequently use a trade name
likely to mislead the public as a
third party; (Sec. 165.2(b), IPC).
6. Copy or simulate the name of
any domestic product (for
imported products);
7. Copy or simulate a mark
registered in accordance with
the provisions of IPC (for
imported products); and
8. Use mark or trade name
calculated to induce the public to
believe that the article is
manufactured in the Philippines,
or that it is manufactured in any
foreign country or locality other
than the country or locality
where it is in fact manufactured.
NOTE: Items 4, 5 and 6 only apply
to imported products and those
imported articles shall not be
admitted to entry at any
customhouse of the Philippines.
(Sec. 166, IPC)
271 UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
addresses and other works of
the same nature; (Ibid.)
4. As part of reports of current
events (e.g. music played or
tunes on the occasion of a
sporting event and such tunes
were picked up during a new
coverage of the event); (Ibid.)
5. For teaching purposes,
provided that the source and
the name of the author, if
appearing in the work, are
mentioned; (Ibid.)
6. Recording made in educational
institutions of a work included
in a broadcast for the use of
such educational institutions,
provided that such recording
must be deleted within a
reasonable period after they
were first broadcast; (Ibid.)
7. The making of ephemeral
recordings by a broadcasting
organization by means of its
own facilities and for use in its
own broadcast; (Ibid.)
8. The use made of a work by or
under the direction or control
of the government, by the
National Library or by
educational, scientific or
professional institutions
where such use is in the public
interest and is compatible with
fair use; (Ibid.)
9. The public performance of a
work, in a place where no
admission fee is charged;
(Ibid.)
10. Public display of the original
or a copy of the work not
made by means of a film,
slide, television image or
 Commercial Law

date of the application, shall have otherwise on screen or by

the right to continue the use means of any other device or
thereof, but this right shall only be process (e.g. Public display
transferred or assigned further using posters mounted on
with his enterprise or business. walls and display
(Sec. 73, IPC) boards;(Ibid.) and

3. Use by Government – A 11. Any use made of a work for

government agency or third the purpose of any Judicial
person authorized by the proceedings or for the giving
government may exploit invention of professional advice by a
even without agreement of a legal practitioner; (Ibid.) and
patent owner where:
12. The reproduction or
a. Public interest, as determined distribution of published
by the appropriate agency of articles or materials in a
the government, so requires; specialised format
or exclusively for the use of the
b. A judicial or administrative blind, visually- and reading-
body has determined that the impaired perons. Provided
manner of exploitation by that such copies and
owner of patent is anti- distribution shall be made on
competitive. (Sec. 74, IPC) a non-profit basis, and shall
indicate the copyright owner
4. Reverse reciprocity of foreign and the date of the original
law – Any condition, restriction, publication. (Ibid.)
limitation, diminution,
requirement, penalty or any
similar burden imposed by the law
of a foreign country on a Philippine
national seeking protection of
intellectual property rights in that
country, shall reciprocally be
enforceable upon nationals of said
country, within Philippine
jurisdiction. (Sec. 231, IPC)
Prescriptive Period for Filing an Action for Damages due to Infringement
No damages can be recovered for
acts of infringement committed Four (4) years from the time the Four (4) years from the time the
more than 4 years before the cause of action arose. (Sec. 226, cause of action arose. (Sec. 226,
institution of the action for IPC) IPC)
infringement. (Sec. 79, IPC)
Tests or Elements which will Establish the Presence of Infringement
1. Literal Infringement Test – A person infringes a right
1. That it is duly registered in the
Resort must be had, in the first protected under this Act when one:
Intellectual Property Office;
instance, to words of the claim. If
the accused matter clearly falls a. Directly commits an
2. The validity of the mark;
within the claim, infringement is infringement;
committed.

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2022 GOLDEN NOTES
 Intellectual Property Code
Minor modifications are
sufficient to put the item beyond
literal infringement. (Godines v.
CA, G.R. No. L-97343, 13 Sept.
1993)
2. Doctrine of Equivalents – There
is infringement where a device
appropriates a prior invention
by incorporating its innovative
concept and, although with
some modification and change,
performs substantially the same
function in substantially the
same way to achieve
substantially the same result.
(Godines v. CA, G.R. No. L-97343,
13 Sept. 1993)
1. Civil action; (Sec. 76.3, IPC)
2. Criminal action;
3. Administrative remedy;
4. Disposal or destruction of
infringing material; (Sec. 76.5,
IPC) or
5. Provisional measures. (Sec.
76.2, IPC)
3. The plaintiff’s ownership of
the mark;
4. The use of the mark or its
colorable imitation by the
alleged infringer results in
“likelihood of confusion”;
(McDonald’s Corp v. L.C. Big
Mak Burger, Inc., G.R. No.
143993, 18 Aug. 2004) and
5. Used without the consent of
the owner. (Prosource
International Inc. v. Horphag
Research Management SA, G.R.
No. 180073, 25 Nov. 2009)
Remedies Against Infringement
1. Civil – i.e. preliminary
injunction with damages;
2. Criminal – remedies available
shall also include the seizure,
forfeiture and destruction of
the infringing goods and of any
materials and implements the
predominant use of which has
been in the commission of the
offense; or
3. Administrative
273 UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
b. Benefits from the infringing
activity of another person who
commits an infringement if the
person benefiting has been
given notice of the infringing
activity and has the right and
ability to control the activities
of the other person; and
c. With knowledge of infringing
activity, induces, causes or
materially contributes to the
infringing conduct of another
(Sec. 216, IPC, as amended by
R.A. No. 10372)
1. Injunction;
2. Damages, including legal costs
and other expenses, as he may
have incurred due to the
infringement as well as the
profits the infringer may have
made due to such
infringement;
3. Impounding during the
pendency of the action sales
invoices and other documents
evidencing sales;
4. Destruction without any
compensation of all infringing
copies; and
5. Moral and exemplary damages
(Sec. 216.1, IPC); or
6. Seizure and impounding of
any article, which may serve
as evidence in the court
proceedings. (Sec. 216.2, IPC)
 Commercial Law

How Acquired
The rights in a mark shall be
acquired through registration
made validly in accordance with
Patent is acquired through Copyright is acquired from the
the provisions of this law. (Sec.
registration with the IPO. moment of creation.
122, IPC; Zuneca v. Natrapharm,
G.R. No. 211850, 08 Sept. 2020, J.
Caguioa)

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2022 GOLDEN NOTES
 Intellectual Property Code

3. Industrial Design – any composition of lines

A. PATENTS or colors or any three-dimensional form,
whether or not associated with lines or colors,
provided that such composition or form gives
a special appearance to and can serve as
General Principles
pattern for an industrial product or handicraft
and must be new or ornamental. (Secs. 112 and
The right granted to an inventor by a State, or by
113, IPC)
a regional office acting for several States, which
allows the inventor to exclude anyone else from
Generally, an industrial design is the
commercially exploiting his invention for a
ornamental or aesthetic aspect of a useful
limited period. (Understanding Industrial
article. (Amador, 2007)
Property, WIPO, p.5)

An industrial design is not considered new if it

The primary purpose of the patent system is not
differs from prior designs only in minor
the reward of the individual but the
respects that can be mistaken as such prior
advancement of the arts and sciences. The
designs by an ordinary observe. (World
function of a patent is to add to the sum of useful
Intellectual Property Organization, 2004)
knowledge and one of the purposes of the patent
system is to encourage dissemination of
Term or Duration of a Patentable Invention
information concerning discoveries and
(Sec. 54, IPC)
inventions. (Manzano v. Court of Appeals, G.R. No.
113388, 05 Sept. 1997)
It shall be twenty (20) years from the filing date of
the application.
Three-fold Purpose of Patent Law:

Right to a Patent (Sec. 28, IPC)

1. To foster and reward invention;
2. To promote disclosures of inventions to
The right to a patent belongs to the inventor, his
stimulate further innovation and to permit
heirs, or assigns. When two (2) or more persons
the public to practice the invention once the
have jointly made an invention, the right to a
patent expires; and
patent shall belong to them jointly.

3. To ensure that ideas in the public domain

Assignment of Patent Rights
remain there for the free use of the public.
(Pearl & Dean Inc. v. Shoemart, Inc., G.R. No.
Inventions and any right, title, or interest in and to
148222, 15 Aug. 2003)
patents and inventions covered thereby, may be
assigned or transmitted by inheritance or bequest
Coverage of Patents
or may be the subject of a license contract. (Sec.
103.2, IPC)
1. Invention – any technical solution of a
problem in any field of human activity
The assignment must be: (W-A-C)
which is new, involves an inventive step and
is industrially applicable. It may be, or may
1. In Writing;
relate to, a product or process, or an
2. Acknowledged before a notary public or other
improvement of any of the foregoing. (Sec.
officer authorized to administer oath or
21, IPC)
perform notarial acts; and
3. Certified under the hand and official seal of the
2. Utility Model – an invention qualifies for
notary or such other officer. (Sec. 105, IPC)
registration as a utility model if it is new and
industrially applicable. (Sec. 109, IPC)

275 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
1. PATENTABLE VS. NON-PATENTABLE
INVENTIONS
PATENTABLE INVENTIONS
Any technical solution of a problem in any field
of human activity which is: (N-I-I)
1. New;
2. Involves an Inventive step; and
3. Is Industrially applicable.
NOTE: It may be, or may relate to, a product or
process or an improvement of any of the
foregoing. (Sec. 21, IPC)
Improvement
An enhancement or modification of any of the
foregoing subject to patentability criteria.
For example, an improvement in the tile-making
process is indeed inventive and goes beyond the
exercise of mechanical skill. The applicant has
introduced a new kind of tile for a new purpose.
He has improved the old method of making tiles
and pre-cast articles which were not satisfactory
because of an intolerable number of breakages,
especially if deep engravings are made on the
tile. He has overcome the problem of producing
decorative tiles with deep engraving, but with
sufficient durability. (Aguas v. De Leon, G.R. No.
L-32160, 30 Jan. 1982)
Three Elements for Patentability
1. Novelty;
2. Inventive Step; and
3. Industrially Applicable.
NOVELTY
An invention shall not be considered new if it
forms part of a prior art. (Sec. 23, IPC)
NOTE: The burden of proving want of novelty of
an invention is on the person who avers it and
the burden is a heavy one which is met only by
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
clear and satisfactory proof which overcomes
every reasonable doubt. (Manzano v. CA, G.R. No.
113388, 05 Sept. 1997)
Prior Art (Sec. 24, IPC)
1. Everything which has been made available to
the public anywhere in the world, before the
filing date or the priority date of the
application claiming the invention; and
2. The whole contents of an earlier published
Philippine application or application with
earlier priority date of a different inventor.
Public Disclosure
The ultimate goal of a patent system is to bring
new designs and technologies into the public
through disclosure; hence ideas, once disclosed to
the public without protection of a valid patent, are
subject to appropriation without significant
restraint. (Pearl & Dean v. Shoemart Inc., G.R. No.
148222, 15 Aug. 2003)
The application shall disclose the invention in a
manner sufficiently clear and complete for it to be
carried out by a person skilled in the art. Where the
application concerns a microbiological process or
the product thereof and involves the use of a
micro-organism which cannot be sufficiently
disclosed in the application in such a way as to
enable the invention to be carried out by a person
skilled in the art, and such material is not available
to the public, the application shall be
supplemented by a deposit of such material with
an international depository institution. (Sec. 35.1,
IPC)
Doctrine of Prejudicial Disclosure
The right to patent arises from application date. If
the inventor voluntarily discloses his creation,
such as by offering it for sale, the world is free to
copy and use it with impunity. Ideas, once
disclosed to the public without the protection of a
valid patent, are subject to appropriation without
significant restraint. (Pearl & Dean, Inc. v.
Shoemart, Inc., G.R. No. 148222, 15 Aug. 2003)
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 Intellectual Property Code
GR: When a work has already been made
available to the public, it shall be non-patentable
for absence of novelty.
XPN: Doctrine of Non-Prejudicial Disclosure
The disclosure of information contained in the
application during the twelve (12) months
preceding the filing date or the priority date of
the application shall not prejudice the applicant
on the ground of lack of novelty if such
disclosure was made by:
a. The inventor;
b. A patent officer and the information was
contained (a) in another publication filed by
the inventor and should not have been
disclosed by the office, or (b) in an
application filed, without the knowledge or
consent of the inventor, by a third party who
obtained the information directly or
indirectly from the inventor; or
c. A third party who obtained the information
directly or indirectly from the inventor.
(Sec. 25, IPC)
If the disclosure was made by the designer in the
case of industrial design, the period is six (6)
months. In other words, the application must be
filed within six (6) months after disclosure for it
to be non-prejudicial.
INVENTIVE STEP
GR: An invention involves an inventive step if,
having regard to prior art, it is not obvious to a
person skilled in the art at the time of the filing
date or priority date of the application claiming
the invention. (Sec. 26, IPC)
XPN: In the case of drugs and medicine, there is
no inventive step if the invention results from
the mere discovery of:
a. A new form or new property of a known
substance which does not result in the
enhancement of the known efficacy of
that substance; or
277
b. The mere discovery of any new property
or new use for a known substance; or
c. The mere use of a known process unless
such known process results in a new
product that employs at least one new
reactant. (Sec. 26.2, IPC, as amended by R.A.
No. 9502)
Test of Non-Obviousness
A patent may not be obtained though the invention
is not identically disclosed or described, if the
differences between the subject matter sought to
be patented and the prior art are such that the
subject matter as a whole would have been
obvious at the time the invention was made to a
person having ordinary skill in the art to which
said subject matter pertains. Patentability shall not
be negatived by the manner in which the invention
was made. (Graham v. John Deere Co., 383 U.S. 1, 21
Feb. 1966)
Person Skilled in the Art
A person skilled in the art is a person with ordinary
skills in a certain art or field, who is aware of what
is a common general knowledge in the field at the
time of the application. He is presumed to have
knowledge of all references that are sufficiently
related to one another and to the pertinent art and
to have knowledge of all arts reasonably pertinent
to the particular problems with which the inventor
was involved. He is presumed also to have had at
his disposal the normal means and capacity for
routine work and experimentation. (Rule 207,
Revised IRR for R.A. No. 8293)
The use of the qualifying phrase “ordinary skill”
excludes the “best” expert available. This means
that the criteria is only limited to a person with an
average level of skill in the concerned field. (WIPO,
Intellectual Property Handbook, 2004 edition, p.
20.)
INDUSTRIAL APPLICABILITY
An invention that can be produced and used in any
industry meets the industrial application
requirement of patent registrability. This means
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

an invention is not merely theoretical, but also
has a practical purpose. If the invention is a
product, it should be able to produce a product
and if the invention is a process, it should be able
to lay out a process. (WIPO, IP Handbook 2nd
Edition, Chapter 2: “Fields of Intellectual Property
Protection” Publication No. 489 (E))
protection provided in the law for a utility model
is generally much shorter than the maximum term
of protection provided in the law for an invention
for which a patent for invention is available. (WIPO
Handbook, Chapter 2, “Fields of Intellectual
Property Protection”, WIPO Publication No. 489, 2nd
Edition)

Utility Model Requisites for an Invention to be considered as

A name given to inventions in the mechanical
field.
Utility models differ from inventions for which
patents for invention are available mainly in two
respects. First, the technological progress
required is smaller than the technological
progress (“inventive step”) required in the case
of an invention for which a patent for invention
is available. Second, the maximum term of
a Utility Model
It must be new and industrially applicable. A model
of implement or tools of any industrial product
even if not possessed of the quality of invention but
which is of practical utility. (Sec. 109.1, IPC)
Term of a Utility Model
Seven (7) years from date of filing of the
application. (Sec. 109.3, IPC)

Invention vs. Utility Model vs. Industrial Design

INVENTION UTILITY MODEL INDUSTRIAL DESIGN

-New
-Inventive Step
-Industrial Applicability
Twenty (20) years from the date of
filing with payment of annuities.
No renewal. (Sec. 54, IPC)
1. Invention is not new or
patentable;
2. Patent does not disclose the
invention in a manner
sufficiently clear and complete
for it to be carried out by any
person skilled in the art;
3. The patent is contrary to
public order or morality (Sec.
61.1, IPC);
4. The patent is found invalid in
an action for infringement
(Sec. 82, IPC); or
5. The patent includes matters
outside the scope of the
Elements
-New
-New or Ornamental
-Industrial Applicability
Term of Protection
Five (5) years from the date of filing
Seven (7) years from the date of
with 2 five-year term renewals
filing without renewal. (Sec. 109.3,
upon payment of fees. (Sec. 118.2,
IPC)
IPC)
Grounds for Cancellation
1. The invention does not qualify
for registration as a utility
model; 1. The subject matter of the
2. The description and the claims industrial design is not
do not comply with the registrable;
prescribed requirements; 2. The subject matter is not new;
3. Any drawing which is or
necessary for the 3. The subject matter of the
understanding of the industrial design extends
invention has not been beyond the content of the
furnished; or application as originally filed.
4. The owner of the utility model (Sec. 120, IPC)
registration is not the inventor
or his successor in title. (Sec.
109.4, IPC)

UNIVERSITY OF SANTO TOMAS 278

2022 GOLDEN NOTES
 Intellectual Property Code
disclosure contained in the
application. (Sec. 1, Rule 3,
Regulations on Inter Partes
Proceeding)
NON-PATENTABLE INVENTIONS
An invention may not be patentable because it
does not comply with the elements of
patentability, or it falls under non-patentable
inventions enumerated under Sec. 23 of the IPC.
(Salao, 2018)
The Following are Non-Patentable Inventions:
(Tr-A-P-S-A-D2)
1. Methods for Treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the human or
animal body. This provision shall not apply to
products and composition for use in any of
these methods;
2. Aesthetic creations;
3. Plant varieties or animal breeds or essentially
biological process for the production of plants
or animals. This provision shall not apply to
micro-organisms and non-biological and
microbiological processes;
4. Schemes, rules and methods of performing
mental acts, playing games or doing business,
and programs for computers;
5. Anything which is contrary to public order or
morality;
6. In the case of Drugs and medicines, mere
discovery of a new form or new property of a
known substance which does not result in the
enhancement of the efficacy of that substance
or the new use for a known substance, or the
mere use of a known process unless such
known process results in a new product that
employs at least one new reactant; and
279
7. Discoveries, scientific theories and
mathematical methods. (Sec. 22, IPC as
amended by R.A. 9502)
Q: Dr. Nobel discovered a new method of
treating Alzheimer’s involving a special
method of diagnosing the disease, treating it
with a new medicine that has been discovered
after long experimentation and field testing,
and novel mental isometric exercises. He
comes to you for advice on how he can have his
discoveries protected. Can he legally protect
his new method of diagnosis, the new medicine,
and the new method of treatment? If no, why?
If yes, how? (2010 BAR)
A: Dr. Nobel can be protected by a patent for the
new medicine as it falls within the scope of Sec. 21
of the Intellectual Property Code. (R.A. No. 8293, as
amended). However, no protection can be legally
extended to him for the method of diagnosis and
method of treatment which are expressly non-
patentable. (Sec. 22, IPC)
Patentability of Computer Programs
GR: Computer programs are not patentable but are
copyrightable.
XPN: They can be patentable if they are part of a
process. (e.g., business process with a step
involving the use of a computer program)
Q: Supposing Albert Einstein were alive today
and he filed with the Intellectual Property
Office (IPO) an application for patent for his
theory of relativity expressed in the formula
E=mc2. The IPO disapproved Einstein’s
application on the ground that his theory of
relativity is not patentable. Is the IPO’s action
correct? (2006 BAR)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
A: YES. The IPO is correct because under the
Intellectual Property Code, discoveries, scientific
theories, and mathematical methods are classified
to be as “non-patentable inventions”. Einstein’s
theory of relativity falls within the category of
being a non-patentable “scientific theory”.
Q: X invented a bogus coin detector which can
be used exclusively on self-operating gambling
devices otherwise known as one-armed
bandits. Can X apply for a patent?
A: NO. The law provides that any invention that is
contrary to public order or morality may not be
extended patent protection. The bogus coin
detector appears to be a device used to cheat in
gambling. Therefore, it may not be patented.
Q: Can an article of commerce serve as
trademark and at the same time enjoy patent
and copyright protection? Explain and give an
example. (2010 BAR)
A: A stamped or marked container of goods can be
registered as trademark (Sec. 113, IPC). An original
ornamental design or model for articles of
manufacturer can be copyrighted (Sec. 172.1, IPC).
An ornamental design cannot be patented, because
aesthetic creations cannot be patented (Sec. 22,
IPC). However, it can be registered as an industrial
design (Sec. 113.1, 172.1, IPC). Thus, a container of
goods which has an original ornamental design can
be registered as trademark, can be copyrighted,
and can be registered as an industrial design.
Other Kinds of Intellectual Property Rights
1. Integrated Circuit – A product, in its final
form, or an intermediate form, in which the
elements, at least one of which is an active
element and some or all of the
interconnections are integrally formed in and
or on a piece of material, and in which is
intended to perform an electronic function.
2. Layout Design/Topography – The three-
dimensional disposition, however expressed,
of the elements, at least one of which is an
active element, and of some or all of the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
interconnections of an integrated circuit, or
such a three-dimensional disposition
prepared for an integrated circuit intended for
manufacture. (Sec. 112 (3), IPC)
Registration is valid for 10 years without
renewal counted from date of commencement
of protection. (Sec. 118.5, IPC)
2. OWNERSHIP OF A PATENT
Persons Entitled to a Patent
1. Inventor, his heirs, or assigns; (Sec. 28, IPC)
2. Joint invention – jointly by the inventors; (Sec.
28, IPC)
3. Two or more persons invented separately and
independently of each other – to the person
who filed an application; (Sec. 29, IPC)
4. Two or more applications are filed – the
applicant who has the earliest filing date or,
the earliest priority date. [First-to-file Rule]
(Sec. 29, IPC)
First-to-File Rule (Sec. 29, IPC)
1. If two (2) or more persons have made the
invention separately and independently of
each other, the right to the patent shall belong
to the person who filed an application for such
invention; or
2. Where two or more applications are filed for
the same invention, to the applicant which has
the earliest filing date.
Inventions Pursuant to a Commission (Sec.
30.1, IPC)
The person who commissions the work shall own
the patent, unless otherwise provided in the
contract.
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 Intellectual Property Code

Inventions Pursuant to Employment (Sec. 30.2, 2. Classification, search and first publication;
IPC) and
3. Examination as to substance or substantive
In case the employee made the invention in the examination.
course of his employment contract, the patent shall
belong to: Steps in the Registration of a Patent
(F-A-Fo-Cla-P-S-G-P-I)
1. The employee, if the inventive activity is not a
part of his regular duties even if the employee The procedure for the grant of patent may be
uses the time, facilities, and materials of the summarized as follows:
employer;
1. Filing of the application;
2. The employer, if the inventive activity is the 2. Accordance of the filing date;
result of the performance of his regularly 3. Formality examination;
assigned duties, unless there is an agreement, 4. Classification and Search;
express or implied, to the contrary. 5. Publication of application;
6. Substantive examination;
Priority Date 7. Grant of Patent;
8. Publication upon grant;
An application for patent filed by any person who 9. Issuance of certificate. (Salao, 2019)
has previously applied for the same invention in
another country which by treaty, convention, or Manner of Making Disclosure (Sec. 35, IPC)
law affords similar privileges to Filipino citizens,
shall be considered as filed as of the date of filing The application shall disclose the invention in a
the foreign application. (Sec. 31, IPC) manner sufficiently clear and complete for it to be
carried out by a person skilled in the art.
Filing date is accorded only when all the
requirements provided under Section 40 are Claims (Sec. 36.1)
present. Priority Date comes into play when there
is an application for patent for the same invention The application for patent shall contain one (1) or
that was filed in another country. (Salao, 2012) more claims which shall define the matter for
which protection is sought. Each claim shall be
Conditions in Availing of Priority Date clear and concise and shall be supported by the
description.
1. The local application expressly claims
priority; Abstract (Sec. 37, IPC)
2. It is filed within 12 months from the date the
earliest foreign application was filed; and A concise summary of the disclosure of the
3. A certified copy of the foreign application invention as contained in the description, claims,
together with an English translation is filed and merely serves as technical information.
within 6 months from the date of filing in the
Philippines. (Sec. 31, IPC) The purpose of requiring a definite and accurate
description of the process is to apprise the public
Three (3) Main Areas of Activity in the Grant of of what the patentee claims as his invention, to
Invention Patent inform the Courts as to what they are called upon
to construe, and to convey to competing
1. Examination as to form or formality manufacturers and dealers information of exactly
examination; what they are bound to avoid. (Boothe v. Director
of Patents, G.R. No. L-24919, 28 Jan. 1980)

281 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
Unity of Invention
The application shall relate to one invention only
or to a group of inventions forming a single general
inventive concept. (Sec. 38.1, IPC)
If several independent inventions which do not
form a single general inventive concept are
claimed in one application, the application must be
restricted to a single invention. (Sec. 38.2, IPC)
Divisional Applications
Divisional applications come into play when two or
more inventions are claimed in a single application
but are of such a nature that a single patent may
not be issued for them. The applicant is thus
required to “divide”, that is, to limit the claims to
whichever invention he may elect, whereas those
inventions not elected may be made the subject of
separate applications which are called “divisional
applications.” (Smith-Kline Beckman Corp. v. CA,
G.R. No. 126627, 14 Aug. 2003)
Q: Leonard and Marvin applied for Letters
Patent claiming the right of priority granted to
foreign applicants. Receipt of petitioners’
application was acknowledged by respondent
Director on March 6, 1954. Their Application
for Letters Patent in the US for the same
invention indicated that the application in the
US was filed on March 16, 1953. They were
advised that the "specification" they had
submitted was "incomplete" and that
responsive action should be filed with them
four months from date of mailing, which was
August 5, 1959. On July 3, 1962, petitioners
submitted two complete copies of the
Specification. The Director of Patents held that
petitioners' application may not be treated as
filed. Is the director correct?
A: YES. It is imperative that the application be
complete in order that it may be accepted. It is
essential to the validity of Letters Patent that the
specifications be full, definite, and specific. To be
entitled to the filing date of the patent application,
an invention disclosed in a previously filed
application must be described within the instant
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
application in such a manner as to enable one
skilled in the art to use the same for a legally
adequate utility. (Boothe v. Director of Patents, G.R.
No. L-24919, 28 Jan. 1980)
Rights Conferred by a Patent Application After
Publication (Sec. 46, IPC)
The applicant shall have all the rights of a patentee
against any person who, without his authorization,
exercised any of the rights conferred under Section
71 in relation to the invention claimed in the
published patent application, as if a patent had
been granted for that invention, provided that the
said person had:
1. Actual knowledge that the invention that he
was using was the subject matter of a
published application; or
2. Received written notice that the invention was
the subject matter of a published application
being identified in the said notice by its serial
number.
The action may not be filed until after the grant of
a patent on the published application and within
four (4) years from the commission of the acts
complained of.
Effectivity of a Patent (Sec. 50.3, IPC)
A patent shall take effect on the date of the
publication of the grant of the patent in the IPO
Gazette.
3. GROUNDS FOR CANCELLATION OF A
PATENT
Grounds for Cancellation (Sec. 61, IPC)
Any interested party may petition to cancel any
patent or any claim or parts of a claim any of the
following grounds:
1. Invention is not new or patentable;
2. Patent does not disclose the invention in a
manner sufficiently clear and complete for it to
be carried out by any person skilled in the art;
282
 Intellectual Property Code
3. The patent is contrary to public order or
morality; (Sec. 61.1, IPC)
4. The patent is found invalid in an action for
infringement; (Sec. 82, IPC) or
5. The patent includes matters outside the scope
of the disclosure contained in the application.
(Sec. 1, Rule 3, Regulations on Inter Partes
Proceeding)
NOTE: If the ground for cancellation relates to
some of the claims or parts of the claim only,
cancellation may be effected to such extent only.
(Sec. 61.2, IPC)
Grounds for Cancellation of Layout-Design of
Integrated Circuits
1. The layout-design is not protectable;
2. The right holder is not entitled to protection;
or
3. The application for registration of the layout-
design, was not filed within two (2) years from
its first commercial exploitation anywhere in
the world.
NOTE: Where the grounds for cancellation are
established with respect only to a part of the
layout-design, only the corresponding part of the
registration shall be cancelled. (Sec. 120.3, IPC as
amended by Sec. 1, R.A. No. 9150)
Remedies of Persons with a Right to a Patent
(Sec. 67.1, IPC)
If a person other than the applicant is declared by
final court order or decision as having the right to
a patent, he may within 3 months after such
decision has become final:
1. Prosecute the application as his own;
2. File a new patent application;
3. Request the application to be refused; or
4. Seek cancellation of the patent.
Remedies of the True and Actual Inventor
(1993, 2005 BAR)
If a person, who was deprived of the patent
without his consent or through fraud is declared
283
by final court order or decision to be the true and
actual inventor, the court shall order for his
substitution as patentee, or at the option of the
true inventor, cancel the patent, and award actual
damages in his favor if warranted by the
circumstances. (Sec. 68, IPC)
In the two circumstances aforementioned, the
court shall furnish the Office a copy of the order or
decision which shall be published in the IPO
Gazette within three (3) months from the date
such order or decision became final and executor
and shall be recorded in the register of the Office.
(Sec. 69, IPC)
Time to File Action in Court (Sec. 70, IPC)
The actions indicated in Sections 67 and 68 shall
be filed within one (1) year from the date of
publication made in accordance with Sections 44
and 51, respectively.
Q: Cezar works in a car manufacturing
company owned by Joab. Cezar is quite
innovative and loves to tinker with things. With
the materials and parts of the car, he was able
to invent a gas-saving device that will enable
cars to consume less gas. Francis, a co-worker,
saw how Cezar created the device and likewise,
came up with a similar gadget, also using scrap
materials and spare parts of the company.
Thereafter, Francis filed an application for
registration of his device with the Bureau of
Patents. Eighteen months later, Cezar filed his
application for the registration of his device
with the Bureau of Patents.
a. Is the gas-saving device patentable?
Explain.
b. Assuming that it is patentable, who is
entitled to the patent? What, if any, is the
remedy of the losing party? (2005 BAR)
A:
a. YES. For the gas saving device to be patentable
invention it must be new; must involve an
inventive step; and must be industrially
applicable. In the given case, it shows that the
gas saving device is new and with the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
innovativeness of Cezar using certain
materials of the car, it provides a useful
application to save on the consumption of gas.
b. Cezar is entitled to the patent because he is
the true and actual inventor. While it is true
that Francis was the first to file the application
for registration of patent, the same will not
work in his favor because he was in bad faith.
However, considering that under the IPC, it
adopts the first to file rule, Cezar will have to
take action against Francis within one (1) year
from the date of publication. If he is declared
by final court order or decision as having the
right to a patent, he may within 3 months after
such decision has become final: a) prosecute
the application as his own application in place
of the applicant; b) file a new patent
application in respect of the same invention; c)
request the application to be refused; or d)
seek cancellation of the patent, if one has
already been issued.
Q: E.I. Dupont Nemours is an American
corporation organized under the laws of the
State of Delaware. It is the assignee of several
inventors who were all citizens of the United
States of America (U.S.). In 1987, it filed a
patent application before the Bureau for
losartan, an invention related to the treatment
of hypertension and congestive heart failure.
The application was handled by Atty. Nicanor
Mapili. In 2000, E.I. Dupont Nemours’ counsel
requested for an office action to be issued on
the said patent application. The application,
however, was already deemed abandoned for
E.I. Dupont Nemours’ failure to respond to an
Office Action mailed on 1988. Arguing that Atty.
Mapili failed to inform them about it, a Petition
for Revival of the patent application was filed
in 2002. When the case reached the Court of
Appeals (CA), Therapharma intervened. It
argued that a decision granting the
application’s revival directly affects its vested
rights. It was able to prove its case, and so the
CA denied the Petition for Revival.
a. Was the CA correct in denying the revival of
the patent application?
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
b. Was Therapharma even rightfully allowed
to intervene on appeal?
c. Will E.I. Dupont Nemours’ prior application
in the U.S. remove the invention from being
part of the public domain in the
Philippines?
A:
a. YES, the CA was correct in denying the revival of
the patent application. Section 113 of the 1962
Revised Rules of Practices, which provides for a 4-
month period within which an application may be
revived from the date of abandonment, has since
been superseded Rule 930 of the Rules and
Regulations on Inventions, and Rule 929 of the
Revised Implementing Rules and Regulations for
Patents, Utility Models and Industrial Design. The
period of four (4) months from the date of
abandonment, however, remains unchanged.
Section 133.4 of the Intellectual Property Code
even provides for a shorter period of three (3)
months within which to file for revival. Under
Section 113, E.I. Dupont Nemours had until
January 1989 to file for a revival of the patent
application. Its Petition for Revival, however, was
filed on May 2002, 13 years after the date of
abandonment. The petition should thus be denied
since these regulations only provide a four (4)
month period within which to file for the revival of
the application. The rules do not provide any
exception that could extend this four (4)-month
period to 13 years.
b. YES, Therapharma was rightfully allowed to
intervene on appeal. The Intellectual Property
Code (IPC) is the applicable law with regard to the
revival of E.I. Dupont Nemours' patent application.
Section 7 (7.1)(a) of the Intellectual Property Code
states that the decisions of the Director General in
the exercise of his appellate jurisdiction in respect
of the decisions of the Director of Patents, and the
Director of Trademarks shall be appealable to the
Court of Appeals in accordance with the Rules of
Court. Furthermore, Rule 19 of the Rules of Court
provides that a court has the discretion to
determine whether to give due course to an
intervention. If an administrative agency's
procedural rules expressly prohibit an
intervention by third parties, the prohibition is
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limited only to the proceedings before the
administrative agency. Once the matter is brought
before the Court of Appeals in a petition for review,
any prior prohibition on intervention does not
apply since the only question to be determined is
whether the intervenor has established a right to
intervene under the Rules of Court.
c. NO, a prior application in the U.S. did not remove
the invention from the Philippines’ public domain.
A right of priority has no bearing in a case for
revival of an abandoned patent application. A
patent applicant with the right of priority is given
preference in the grant of a patent when there are
two or more applicants for the same invention.
Since both the United States and the Philippines
are signatories to the Paris Convention for the
Protection of Industrial Property, an applicant who
has filed a patent application in the United States
may have a right of priority over the same
invention in a patent application in the Philippines.
However, this right of priority does not
immediately entitle a patent applicant the grant of
a patent. A right of priority is not equivalent to a
patent. Otherwise, a patent holder of any member-
state of the Paris Convention need not apply for
patents in other countries where it wishes to
exercise its patent. It was, therefore, inaccurate for
E.I. Dupont Nemours to argue that its prior patent
application in the United States removed the
invention from the public domain in the
Philippines. This argument is only relevant if
respondent Therapharma, Inc. had a conflicting
patent application with the Intellectual Property
Office, but in a case for revival of an abandoned
patent application. (E.I. Dupont De Nemours and Co.
v. Director Francisco, G.R. No. 174379, 31 Aug. 2016)
Rights Conferred by a Patent
1. In case of a Product – Right to restrain,
prohibit and prevent any unauthorized
person or entity from making, using, offering
for sale, selling, or importing the product.
2. In case of Process – Right to restrain prohibit
and prevent any unauthorized person or
entity from manufacturing, dealing in, using,
offering for sale, selling, or importing any
285
product obtained directly or indirectly from
such process. (Sec. 71, IPC)
3. Right to assign the patent, to transfer by
succession, and to conclude licensing
contracts. (Sec. 71.2, IPC)
NOTE: The rights conferred by a patent
application take effect after publication in the IPO
Gazette. (Sec. 46, IPC)
Limitations of Patent Rights (Sec. 72, IPC as
amended by R.A. No. 9502)
The owner of a patent has no right to prevent third
parties from making, using, offering for sale,
selling, or importing a patented product in the
following circumstances:
a. Using a patented product after it has been put
on the market in the Philippines by the owner
of the product, or with his express consent.
In case of drugs or medicines, the said
limitation applies after a drug or medicine has
been introduced in the Philippines or
anywhere else in the world by the patent
owner, or by any party authorized to use the
invention. This allows parallel importation
for drugs and medicines.
The right to import the drugs and medicines
shall be available to any government agency or
any private third party; (Sec. 72.1, IPC)
b. Where the act is done privately and on a non-
commercial scale or for a non-commercial
purpose: Provided that it does not
significantly prejudice the economic interest
of the owner of the patent.; (Sec. 72.2, IPC)
c. Exclusively for experimental use of the
invention for scientific purposes or
educational purposes; (Sec. 72.3, IPC)
d. In the case of drugs and medicines, where the
act includes testing, using, making, or selling
the invention including any data related
thereto, solely for purposes reasonably
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
related to the development and submission of
information and issuance of approvals by
government regulatory agencies required
under any law of the Philippines or of another
country that regulates the manufacture,
construction, use or sale of any product.
The data submitted by the original patent
holder may be protected from unfair
commercial use provided in Article 39.3 of the
TRIPS Agreement; (Sec. 72.4, IPC)
e. Where the act consists of the preparation for
individual cases, in a pharmacy or by a medical
professional, of a medicine in accordance with
a medical prescription; and (Sec. 72.5, IPC)
f. Where the invention is used in any ship, vessel,
aircraft, or land vehicle of any other country
entering the territory of the Philippines
temporarily or accidentally. Provided, that
such invention is used exclusively for the
needs of the ship, vessel, aircraft, or land
vehicle and not used for the manufacturing of
anything to be sold within the Philippines.
(Sec. 72.6, IPC)
Prior User
Any prior user, who, in good faith was using the
invention or has undertaken serious preparations
to use the invention in his enterprise or business,
before the filing date or priority date of the
application in which a patent is granted, shall have
the right to continue the use thereof as envisaged
in such preparations within the territory where
the patent produces its effects. (Sec. 73.1, IPC)
To protect the patent owner, however, the prior
user may only transfer or assign the right if it is
transferred or assigned together with his
enterprise or business, or with that part of his
enterprise or business in which is the use or
preparation for use have been made. (Sec. 73.2,
IPC)
In other words, the prior user cannot assign the
right to use the patented product or process
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2022 GOLDEN NOTES
without giving up entirely his enterprise. (Salao,
2019)
Prior use in good faith is generally considered as a
defense against patent infringement. This defense
permits a person to continue their use of an
invention even if that invention is subsequently
patented by another. (Gepty, 2019)
Q: X invented a device which, through the use
of noise, can recharge a cellphone battery. He
applied for and was granted a patent on his
device, effective within the Philippines. As it
turns out, a year before the grant of X's patent,
Y, also an inventor, invented a similar device
which he used in his cellphone business in
Manila. But X files an injunctive suit against Y
to stop him from using the device on the
ground of patent infringement. Will the suit
prosper? (2011 BAR)
A: NO, since Y is a prior user in good faith.
Use by the Government
A Government agency or third person authorized
by the Government may exploit the invention even
without agreement of the patent owner where:
(PI-JA-Na-No-D)
a. The Public Interest, in particular, national
security, nutrition, health, or the development
of other sectors, as determined by the
appropriate agency of the government, so
requires;
b. A Judicial or Administrative body has
determined that the manner of exploitation,
by the owner of the patent or his licensee, is
anti- competitive;
c. In the case of drugs and medicines, there is a
National emergency or other circumstance of
extreme urgency requiring the use of the
invention;
d. In the case of drugs and medicines, there is a
public Non-commercial use of the patent by
the patentee, without satisfactory reason; or
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 Intellectual Property Code
e. In the case of drugs and medicines, the
Demand for the patented article in the
Philippines is not being met to an adequate
extent and on reasonable terms, as
determined by the Secretary of the
Department of Health. (Sec. 74, IPC as amended
by R.A. No. 9502)
Unless otherwise provided herein, the use by the
Government, or third person authorized by the
Government shall be subject, where applicable, to
the following provisions:
1. In situations of national emergency or other
circumstances of extreme urgency, the right
holder shall be notified as soon as reasonably
practicable;
2. In the case of public non-commercial use of the
patent by the patentee, without satisfactory
reason, the right holder shall be informed
promptly;
Provided, that, the Government or third
person authorized by the Government,
without making a patent search, knows or has
demonstrable ground to know that a valid
patent is or will be used by or for the
Government.
3. If the demand for the patented article in the
Philippines is not being met to an adequate
extent and on reasonable terms as determined
by the Secretary of Health, the right holder
shall be informed promptly;
4. The scope and duration of such use shall be
limited to the purpose for which it was
authorized;
5. Such use shall be non-exclusive;
6. The right holder shall be paid adequate
remuneration in the circumstances of each
case, taking into account the economic value of
the authorization; and
7. The existence of national emergency or other
circumstances of extreme urgency, in the case
287
of drugs and medicines shall be subject to the
determination of the President of the
Philippines for the purpose of determining the
need for such use or other exploitation, which
shall be immediately executory. (Sec. 74.2, IPC,
as amended by R.A. No. 9502)
Reverse Reciprocity of Foreign Law
Any condition, restriction, limitation, diminution,
requirement, penalty, or any similar burden
imposed by the law of a foreign country on a
Philippine national seeking protection of
intellectual property rights in that country, shall
reciprocally be enforceable upon nationals of said
country, within Philippine jurisdiction. (Sec. 231,
IPC)
Doctrine of Exhaustion
Also known as the doctrine of first sale, it provides
that the patent holder has control of the first sale
of his invention. He has the opportunity to receive
the full consideration for his invention from his
sale. Hence, he exhausts his rights in the future
control of his invention.
It espouses that the patentee who has already sold
his invention and has received all the royalty and
consideration for the same will be deemed to have
released the invention from his monopoly. The
invention thus becomes open to the use of the
purchaser without further restriction. (Adams v.
Burke, 84 U.S. 17, 1873)
GR: Patent rights are exhausted by first sale in the
Philippines (Domestic exhaustion).
XPN: On drugs and medicines: first sale in any
jurisdiction exhausts the rights of the owner
thereof (International exhaustion). (R.A. No. 9502)
4. PATENT INFRINGEMENT
Civil Infringement
GR: The making, using, offering for sale, selling, or
importing a patented product or a product
obtained directly or indirectly from a patented
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
process, or the use of a patented process without
the authorization of the patentee constitutes
patent infringement. (Sec. 76.1, IPC)
XPNs:
a. Using a patented product which has been put
on the market in the Philippines by the owner
of the product, or with his express consent,
insofar as such use is performed after that
product has been so put on the said market.
(Sec. 72.1, IPC, as amended by R.A. No. 9502)
b. In the case of drugs and medicines, where the
act includes testing, using, making or selling
the invention including any data related
thereto, solely for purposes reasonably
related to the development and submission of
information and issuance of approvals by
government regulatory agencies required
under any law of the Philippines or of another
country that regulates the manufacture,
construction, use or sale of any product; (Ibid.)
c. Compulsory licensing; (Sec. 76.1, IPC, as
amended by R.A. No. 9502)
d. Use of Invention by Government; (Ibid.) and
e. Procedures on Issuance of a Special
Compulsory License under the TRIPS
Agreement for patented drugs and medicines.
(Ibid.)
Contributory Infringement
Anyone who actively induces the infringement of a
patent or provides the infringer with a component
of a patented product or of a product produced
because of a patented process knowing it to be
especially adopted for infringing the patented
invention and not suitable for substantial non-
infringing use shall be liable as a contributory
infringer and shall be jointly and severally liable
with the infringer. (Sec. 76.6, IPC)
To succeed on a claim of inducement, patentee
must show, first, that there has been direct
infringement, and second, that the alleged
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
infringer knowingly induced infringement and
possessed of specific intent to encourage another’s
infringement. (Amador, 2007)
In patent infringement, one who induced someone
to make, use, offer for sale, sell, or import a
patented product or a product obtained directly or
indirectly from a patented process, or facilitated
the use of a patented process without the
authorization of the patentee will also be held
liable for patent infringement. (Gepty, 2019)
Criminal Infringement
If infringement is repeated by the infringer or by
anyone in connivance with him after finality of the
judgment of the court against the infringer, the
offenders shall, without prejudice to the institution
of a civil action for damages, be criminally liable.
(Sec. 84, IPC)
Two Tests in Determining Patent Infringement
1. Literal Infringement
The extent of protection conferred by the patent
shall be determined by the claims, which are to be
interpreted in the light of description and
drawings. (Sec. 75, IPC)
There is infringement of patent under this test if
one makes, uses or sells an item that contains all
elements of the patent claim. The test is satisfied
in either of the following:
a. Exactness rule: the item being sold, made,
or used conforms exactly to the patent
claim of another; or
b. Additional rule: One makes, uses, or sells
an item that has all the elements of the
patent claim of another plus other
elements. (Aquino, 2019)
In using literal infringement, resort must be had, in
the first instance, to the words of the claim. If
accused matter clearly falls within the claim,
infringement is made out and that is the end of it.
To determine whether the particular item falls
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 Intellectual Property Code
within the literal meaning of the patent claims, the
Court must juxtapose the claims of the patent and
the accused product within the overall context of
the claims and specifications, to determine
whether there is exactly identity of all material
elements. (Godines v. CA, G.R. No. 97343, 13 Sept.
1993)
A patent may be infringed where the essential or
substantial features of the patented invention are
taken or appropriated, or the device, machine or
other subject matter to infringe is substantially
identical with the patented invention. In order to
infringe a patent, a machine or device must
perform the same function, or accomplish the
same result by identical or substantially identical
means and the principle or mode of operation
must be substantially the same. (Del Rosario v.
Court of Appeals, G.R. No. 115106, 15 Mar. 1996)
2. Doctrine of Equivalents (2015 BAR)
Account shall be taken of elements which are
equivalent to the elements expressed in the claims,
so that a claim shall be considered to cover not
only all the elements expressed therein, but also
equivalents. (Sec. 75, IPC)
According to the doctrine of equivalents, an
infringement also occurs when a device
appropriates a prior invention by incorporating its
innovative concept and, despite some modification
and change, performs substantially the same
function in substantially the same way to achieve
substantially the same result. (Godines v. CA, G.R.
No. 97343, 13 Sept. 1993)
The doctrine of equivalents thus requires
satisfaction of the function-means-and-result test,
the patentee having the burden to show that all
three components of such equivalency test are
met. (Smithkline Beckman Corporation v. CA, G.R.
No. 126627, 14 Aug. 2003)
Meaning of “Equivalent Device”
An equivalent device is such as a mechanic of
ordinary skill in construction of similar machinery,
having the forms, specifications, and machine
289
before him, could substitute in the place of the
mechanism described without the exercise of the
inventive faculty. (Gsell v. Yap-Jue, G.R. No. L-4720,
19 Jan. 1909, citing Burden v. Corning)
Steps in Determining the Presence of
Infringement:
1. Determine if there is literal infringement. If
there is, defendant is liable; and
2. If there is no literal infringement, then the
doctrine of equivalents should be applied.
(Funa, 2017)
Process Patent Infringement
If the subject matter of a patent is a process for
obtaining a product, any identical product shall be
presumed to have been obtained through the use
of the patented process if the product is new or
there is substantial likelihood that the identical
product was made by the process and the owner of
the patent has been unable despite reasonable
efforts, to determine the process actually used.
(Sec. 78, IPC)
To establish an infringement, it is not essential to
show that the defendant adopted the device or
process in every particular; Proof of an adoption of
the substance of the thing will be sufficient
(Godines v. CA, G.R. No. L-97343, 13 Sept. 1993)
Q: Does the use of a patented process by a third
person constitute an infringement when the
alleged infringer has substituted, in lieu of
some unessential part of the patented process,
a well-known mechanical equivalent?
A: YES. Under the doctrine of mechanical
equivalents, the patentee is protected from
colorable invasions of his patent under the guise of
substitution of some part of his invention by some
well-known mechanical equivalent. It is an
infringement of the patent if the substitute
performs the same function and was well known at
the date of the patent as a proper substitute for the
omitted ingredient. (Gsell v. Yap-Jue, G.R. No. L-
4720, 19 Jan. 1909)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Doctrine of File Wrapper Estoppel
Prosecution History Estoppel
Prosecution history estoppel applies when an
applicant during a patent prosecution narrows a
claim to avoid the prior art, or otherwise to
address specific concern that arguably would have
rendered the claimed subject matter unpatentable.
In these instances, estoppel bars the applicant
from later invoking the doctrine of equivalents.
(Funa, 2012)
The doctrine precludes a patentee from obtaining
under the doctrine of equivalents coverage of
subject matter that has been relinquished during
the process of its patent application. (Pharmacia &
Upjohn Co. v. Mylan Pharm., Inc., 170 F. 3d1373,
1376, 31 Mar. 1998)
Remedies of a Patent Owner
1. Civil action for infringement – The owner
may bring a civil action with the appropriate
Regional Trial Court to recover from infringer
the damages sustained by the former, plus
attorney’s fees and other litigation expenses,
and to secure an injunction for the protection
of his rights. (Sec 76.2, IPC)
Limitations:
a. No damages can be recovered for acts of
infringement committed more than four
(4) years before the filing of the action for
infringement. (Sec. 79, IPC)
b. Damages cannot be recovered for acts of
infringement committed before the
infringer had known or had reasonable
grounds to know of the patent. (Sec. 80,
IPC)
c. If the damages are inadequate or cannot
be reasonably ascertained with
reasonable certainty, the court may award
by way of damages a sum equivalent to
reasonable royalty. (Sec 76.3, IPC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
or d. The court may, according to the
circumstances of the case, award damages
in a sum above the amount found as actual
damages sustained: Provided, That the
award does not exceed three (3) times the
amount of such actual damages. (Sec. 76.4,
IPC)
If the infringement is a continuing activity, the
aggrieved patent holder retains his cause of action
for damages and injunction but may not claim
damages beyond 4 years counted back from the
institution of the action. (Amador, 2007)
A civil action for infringement of a patent may be
filed despite the pendency of a petition in the IPO
fir cancellation of the patent. (Luchan v. Honrado,
CA-G.R. No. 04706-SP, 06 July 1976)
2. Criminal action for infringement – If the
infringement is repeated by the infringer or
by anyone in connivance with him after
finality of the judgment of the court against the
infringer, the infringer offender shall be
criminally liable and upon conviction, shall
suffer imprisonment of not less than six (6)
months but not more than three (3) years
and/or a fine not less than P100,000.00 but
not more than P300,000.00. (Sec. 84, IPC)
Limitation: The criminal action prescribes
three (3) years from the commission of the
crime. (Ibid.)
NOTE: Infringement entails only civil liability in
the first instance, but it becomes a criminal offense
when it is repeated by the infringer after finality of
the judgment of the court against the infringer.
(Amador, 2007)
3. Administrative remedy – Where the number
of damages claimed is not less than
P200,000.00, the patentee may choose to file
an administrative action against the infringer
with the Bureau of Legal Affairs (BLA). The
BLA can issue injunctions and order direct
infringer to pay patentee damages. However,
unlike regular courts, the BLA may not issue
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 Intellectual Property Code
search and seizure warrants or warrants of
arrest. (Sec. 10.2(a), IPC)
4. Disposal or Destruction of Infringing
material – The court may, in its discretion,
order that the infringing goods, materials and
implements predominantly used in the
infringement be disposed of outside the
channels of commerce of destroyed, without
compensation. (Sec.76.5, IPC)
5. Provisional measures - Any patentee, or
anyone possessing any right, title, or interest
in and to the patented invention, whose rights
have been infringed, may bring a civil action
before a court of competent jurisdiction, to
recover from the infringer such damages
sustained thereby, plus attorney’s fees and
other expenses of litigation, and to secure an
injunction for the protection of his rights. (Sec.
76.2, IPC)
Exclusive right to monopolize the subject
matter of the patent exists only within the
term of the patent. Upon the expiration of the
term, there is no more basis for the issuance of
a restraining order or injunction. (Phil.
Pharmawealth, Inc. v. Pfizer Inc., G.R. No.
167715, 17 Nov. 2010)
Jurisdiction
An action for infringement of patent falls within
the jurisdiction of the regular courts rather than
the Intellectual Property Office. (Amancor, Inc. v.
Salas, CA-G.R. No. 06049-SP, 10 Oct. 1985)
Persons who can File an Action for
Infringement
1. The patentee or his successors-in-interest
may file an action for infringement. (Creser
Precision Systems, Inc. v. CA, G.R. No. 118708, 02
Feb. 1998)
A person or entity who has not been granted
letters patent over an invention and has not
acquired any light or title thereto either as
assignee or as licensee, has no cause of action
291
for infringement because the right to maintain
an infringement suit depends on the existence
of the patent. (Ibid.)
GR: A licensee may NOT maintain a suit for
infringement. Only the patentees, his heirs,
assignee, grantee, or personal representatives
may bring an action for infringement.
XPN: If the licensing agreement provides that
the licensee may bring an action for
infringement or if he was authorized to do so
by the patentee through a special power of
attorney.
2. Any foreign national or juridical entity who
meets the requirements of Sec. 3 and not
engaged in business in the Philippines, to
which a patent has been granted or assigned,
whether or not it is licensed to do business in
the Philippines. (Sec. 77, IPC)
A patent holder cannot enforce his rights if he has
committed inequitable conduct in the prosecution
of his patent application. (Amador, 2007)
Defenses in Action for Infringement
1. Invalidity of the patent; (Sec. 81, IPC);
2. Any of the grounds for cancellation of patents:
a. That what is claimed as the invention is
not new or patentable;
b. That the patent does not disclose the
invention in a manner sufficiently clear
and complete for it to be carried out by
any person skilled in the art; or
c. That the patent is contrary to public order
or morality; (Sec. 61, IPC) and
3. Prescription. (Sec. 84, IPC)
Burden of Proof
The burden of proof to substantiate a charge of
infringement is with the plaintiff. But where the
plaintiff introduces the patent in evidence, and the
same is in due form, there is created a prima facie
presumption of its correctness and validity. The
decision of the Director of Patent in granting the
patent is presumed to be correct. The burden of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
evidence then shifts to the defendant to overcome
by competent evidence this legal presumption.
(Maguan v. CA, G.R. No. L-45101, 28 Nov. 1986)
Effect of Invalid Patent
In an action for infringement, if the court shall find
the patent or any claim to be invalid, it shall cancel
the same, and the Director of Legal Affairs upon
receipt of the final judgement of cancellation by the
court, shall record that fact in the registrar of the
Office and shall publish a notice to that effect in the
IPO Gazette. (Sec. 82, IPC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
B. TRADEMARKS
1. MARKS vs. COLLECTIVE MARKS vs. TRADE
NAMES
Mark
Any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of an
enterprise and shall include a stamped or marked
container of goods. (Sec. 121.1, IPC)
Trademark
It is any distinctive word, name, symbol, emblem,
sign or device or any combination thereof, adopted
and used by a manufacturer or merchant on his
goods to identify and distinguish them from those
manufactured, sold or dealt by others. (Dermaline,
Inc. v. Myra Pharmaceuticals, Inc., G.R. No. 190065,
26 Aug. 2010)
Purpose of Trademark
1. To indicate origin or ownership of the articles
to which they are attached;
2. To guarantee that those articles come up to a
certain standard of quality; and
3. To advertise the articles they symbolized.
(Mirpuri v. CA, G.R. No. 114508, 19 Nov. 1999)
Functions of Trademark
1. Economic Function - serve as essential means
of distinguishing the products of one
manufacturer or dealers from those of others;
2. Source-Indicating Function - indicate the
source or origin of the goods on which it is
used. Its immediate object is to distinguish the
goods of one manufacturer from those of his
competitors through the association of goods
thus marked with a particular producer;
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 Intellectual Property Code
3. Guarantee Function - guarantee that the
product to which it is affixed comes up to a
certain standard of quality;
4. Advertisement Function – the more widely
advertised the product is, the more readily
may courts concede that it has become
distinctive of its proprietor’s goods. (Amador,
2017)
Marks which may be Registered
Any word, name, symbol, emblem, device, figure,
sign, phrase, or any combination thereof except
those enumerated under Section 123 of the IPC.
Obligations Under the Paris Convention
In view of the obligations under the Paris
Convention, the Philippines is obligated to assure
nationals of the signatory-countries that they are
afforded an effective protection against violation
of their intellectual property rights in the
Philippines in the same way that their own
countries are obligated to accord similar
protection to Philippine nationals. "Thus, under
Philippine law, a trade name of a national of a State
that is a party to the Paris Convention, whether or
not the trade name forms part of a trademark, is
protected "without the obligation of filing or
registration. Thus, the applicant for registration of
trademark is not the lawful owner thereof and is
not entitled to registration if the trademark has
been in prior use by a national of a country which
is a signatory to the Paris Convention. (Divina,
2021; Ecole De Cuisine Manille, Inc. v. Renaud
Cointreau & Cie and Le Condron Bleu Int’l B.V., G.R.
No. 185830, 05 June 2013)
Under Section 2 of R.A. No. 166, in order to register
a trademark, one must be the owner thereof and
must have actually used the mark in commerce in
the Philippines for 2 months prior to the
application for registration. Under the same law, it
is clear that actual use in commerce is also the test
of ownership, but the provision went further by
saying that the mark must not have been so
appropriated by another. Thus, one may be an
owner of a mark due to its actual use but may not
293
yet have the right to register such ownership here
due to the owner’s failure to use the same in the
Philippines for 2 months prior to registration.
In any case, the present law on trademarks,
Republic Act No. 8293, otherwise known as the
Intellectual Property Code of the Philippines, as
amended, has already dispensed with the
requirement of prior actual use at the time of
registration. Thus, there is more reason to allow
the registration of the subject mark under the
name of Cointreau as its true and lawful owner.
(Ibid.)
Collective Mark
Any visible sign designated as such in the
application for registration and capable of
distinguishing the origin or any other common
characteristic, including the quality of goods or
services of different enterprises which use the sign
under the control of the registered owner of the
collective mark. (Sec. 121.2, IPC)
A "collective mark" or “collective trade-name" is a
mark or tradename used by the members of a
cooperative, an association or other collective
group or organization. (Sec. 40, RA. No. 166)
Contents of an Application for Registration of a
Collective Mark
1. The application shall designate the mark as a
collective mark;
2. Accompanied by a copy of the agreement, if
any, governing the use of the collective mark.
(Sec. 167.2, IPC)
Grounds for the Cancellation of Collective
Marks
The Court shall cancel the registration of a
collective mark if the person requesting the
cancellation proves that:
1. Only the registered owner uses the mark;
2. He uses or permits its use in contravention of
the agreements referred to in Subsection
166.2; and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
3. He uses or permits its use in a manner liable to
deceive trade circles or the public as to the
origin or any other common characteristics of
the goods or services concerned. (Sec. 167.3,
IPC)
The registration of a collective mark, or an
application therefore shall not be the subject of a
license contract.
Transliteration vs. Translation of Mark
TRANSLATION OF
TRANSLITERATION
MARK
Definition
An act, process, or
instances of An act, process, or
representing or instance of
spelling of words, translating as
letters, or characters of rendering from one
one language in the language or
letters and characters representational
of another language or system into another.
alphabet.
Trade Name
Name or designation identifying or distinguishing
an enterprise. (Sec. 121.3, IPC)
Any individual name or surname, firm name,
device nor word used by manufacturers,
industrialists, merchants, and others to identify
their businesses, vocations, or occupants.
(Converse Rubber Corp. vs. Universal Rubber
Products, G.R. No. L-27425, L-30505, 28 Apr. 1980)
A trade name need not be registered with the IPO
before an infringement suit may be filed by its
owner against the owner of an infringing
trademark. All that is required is that the trade
name is previously used in trade or commerce in
the Philippines. (Coffee Partners v. San Francisco
Coffee and Roastery, Inc., G.R. No. 169504, 03 Mar.
2010)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Limitations on Use of Trade Name or Business
Name
A person may NOT:
1. Use a name if the word is generic; (Lyceum of
the Philippines v. CA, G.R. No. 101897, 5 Mar.
1993)
2. Use any name indicating geographical
locations; (Ang Si Heng v. Wellington
Department Store, Inc., G.R. No. L-4531, 10 Jan.
1953)
3. Use any name or designation contrary to
public order or morals;
4. Use a name if it is liable to deceive trade circles
or the public as to the nature of the enterprise
identified by that name; (Sec. 165.1, IPC)
5. Subsequently use a trade name likely to
mislead the public as a third party; (Sec.
165.2(b), IPC)
6. Copy or simulate the name of any domestic
product (for imported products);
7. Copy or simulate a mark registered in
accordance with the provisions of IPC (for
imported products); and
8. Use mark or trade name calculated to induce
the public to believe that the article is
manufactured in the Philippines, or that it is
manufactured in any foreign country or
locality other than the country or locality
where it is in fact manufactured.
NOTE: Items 4, 5 and 6 only apply to imported
products and those imported articles shall not be
admitted to entry at any customhouse of the
Philippines. (Sec. 166, IPC)
Change in the ownership of a trade name is made
with the transfer of the enterprise or part thereof
identified by that name. (Sec. 165.4, IPC)
294
 Intellectual Property Code

Trademark vs. Trade name trademark application based on the fact that it
is the registered owner of the KOLIN mark and
TRADEMARK TRADE NAME the registration of KPII’s kolin mark will cause
Function confusion among consumers. KPII asserted
Identifies or Identifies or that KECI’s ownership over the mark is limited
distinguishes the distinguishes the only in connection with the goods specified in
goods or services business or enterprise KECI’s certificate of registration and those
Requirement of Registration related thereto. KPII insisted that the
Registration is Registration is not “Television sets and DVD players” are not
required required related to the goods covered by KECI’s
registered mark. Should KPII’s trademark
2. ACQUISITION OF OWNERSHIP application be granted?

A: NO. KECI was already declared owner of the

The right to register a trademark should be based
KOLIN mark under the Trademark Law. Section
on ownership. When the applicant is not the owner
236 of the Intellectual Property Code states that
of the trademark being applied for, he has no right
nothing in the IP Code – which includes
to apply for the registration of the same. Under the
registrations made pursuant thereto – shall
Trademark Law, only the owner of the trademark,
adversely affect the rights of the enforcement of
trade name or service mark used to distinguish his
marks acquired in good faith prior to the effective
goods, business or service from the goods,
date of said law. Furthermore, Section 122 of the
business or service of others is entitled to register
same code provides that the rights in a mark shall
the same. An exclusive distributor does not acquire
be acquired through registration made validly in
any proprietary interest in the principal's
accordance with the provisions of the IP Code.
trademark and cannot register it in his own name
unless it has been validly assigned to him.
By granting KPII’s trademark application, KPII
(Superior Commercial Enterprises, Inc. v. Kunnan
would acquire exclusive rights over the stylized
Enterprises, G.R. No. 169974, 20 Apr. 2010)
version of KOLIN (“kolin”) for a range of
good/services falling within the normal potential
Trademark is acquired solely through registration.
expansion of its business. This will effectively
For marks that are first used and/or registered
amount to a curtailment of KECI’s right to freely
after the effectivity of the IP Code, ownership is no
use and enforce the KOLIN word mark, or any
longer dependent on the fact of prior use in light of
stylized version thereof, for its own range of
the adoption of the first-to-file rule and the rule
goods/services, especially against KPII, regardless
that ownership is acquired through registration.
of the existence of actual confusion. Based on
(Zuneca Pharmaceutical v. Natrapharm, Inc., G.R.
Section 122 vis-à-vis Section 236 of the Intellectual
No. 211850, 08 Sept. 2020, J. Caguioa)
Property Code, KPII’s trademark application for
kolin cannot be given due course. (Kolin
Rights Over a Trademark Conferred by
Electronics Co, Inc. v. Kolin Philippines
Registration
International, Inc, G.R. No. 228165, 9 Feb. 2021, J.
Caguioa)
The rights in a mark shall be acquired through
registration made validly in accordance with the
Prior Use of Mark as a Requirement
provisions of the IP Code. (Sec. 122, IPC) The filing
date of application is the operative act to acquire
Actual prior use in commerce in the Philippines
trademark rights.
has been abolished as a condition for the
registration of trademark.
Q: KPII filed a trademark application for kolin
mark under class 9 covering “Television sets
and DVD players.” KECI opposed KPII’s

295 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
Q: S Development Corporation sued Shangrila
Corporation for using the “S” logo and the trade
name “Shangrila.” The former claims that it
was the first to register the logo and the trade
name in the Philippines and that it had been
using the same in its restaurant business.
Shangrila Corporation counters that it is an
affiliate of an international organization which
has been using such logo and trade name
“Shangrila” for over 20 years.
However, Shangrila Corporation registered the
trade name and logo in the Philippines only
after the suit was filed.
a. Which of the two corporations has a better
right to use the logo and the trade name?
Explain.
b. How does the international affiliation of
Shangrila Corporation affect the outcome
of the dispute? Explain. (2005 BAR)
A:
a. S Corporation. Sec. 122 of the Intellectual
Property Code provides that the rights in a
trademark are acquired through valid
registration. Actual prior use in commerce in
the Philippines has been abolished as a
condition for the registration of a trademark.
(Record of the Senate, Vol. II, No. 29, 8 Oct. 1996;
Journal of the House of Representatives, No. 35.
12 Nov. 1996, 34)
b. Shangrila’s international affiliation shall result
in a decision favorable to it. The Paris
Convention mandates that protection should be
afforded to internationally known marks as
signatory to the Paris Convention, without regard
as to whether the foreign corporation is registered,
licensed, or doing business in the Philippines.
Shangrila’s separate personalities from their
mother corporation cannot be an obstacle in the
enforcement of their rights as part of the Kuok
Group of Companies and as official repository,
manager and operator of the subject mark and
logo. Besides, R.A. No. 166 did not require the party
seeking relief to be the owner of the mark but "any
person who believes that he is or will be damaged
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
by the registration of a mark or trade name".
(Shangri-la International Hotel Management, LTD.,
et.al v. Developers Group of Companies, Inc. G.R. No.
159938, 31 March 2006)
Q: Natrapharm Corp. is selling citicoline under
the trademark ZYNAPSE that is used for
treating stroke and registered it with the IPO.
In 2007, It filed a complaint against Zuneca for
injunction and trademark infringement.
Zuneca is selling a drug called carbamezipine
under the brand name ZYNAPS that is used to
control seizure disorders. Natrapharm claimed
that the term ZYNAPSE was registered in IPO
upon researching that there is no product
using the same. On the other hand, Zuneca
alleged that it has been using the term ZYNAPS
since 2004 and already secured a certificate of
product listing from BFAD. Also, it claimed that
it was impossible for Natrapharm not to have
known the existence of ZYNAPS before
registration of ZYNAPSE since Natrapharm
promoted its products in the same publication
where ZYNAPS was advertised. RTC ruled in
favor of Natrapharm stating that it is the first
filer in good faith thus, it may prevent others. Is
the court correct?
A: YES. Under the IP Code, ownership of a mark is
acquired through registration. Subparagraph (d)
of the provision of the Trademark Law was
amended in the IP Code to, among others, remove
the phrase ''previously used in the Philippines by
another and not abandoned." Under the
Trademark Law, as amended, the first user of the
mark had the right to file a cancellation case
against an identical or confusingly mark registered
in good faith by another person. However, with
the omission in the IP Code provision of the
phrase "previously used in the Philippines by
another and not abandoned," said right of the
first user is no longer available. In effect, based
on the language of the provisions of the IP Code,
even if the mark was previously used and not
abandoned by another person, a good faith
applicant may still register the same and thus
become the owner thereof, and the prior user
cannot ask for the cancellation of the latter's
registration. If the lawmakers had wanted to retain
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 Intellectual Property Code
the regime of acquiring ownership through use,
this phrase should have been retained in order to
avoid conflicts in ownership. The removal of such
a right unequivocally shows the intent of the
lawmakers to abandon the regime of ownership
under the Trademark Law, as amended. (Zuneca
Pharmaceutical v. Natrapharm Inc, G.R. No. 211850,
8 Sept. 2020, J. Caguioa)
Rights Conferred to the Owner of a Registered
Mark
The owner of a registered mark shall have the
exclusive right to:
1. Use the mark for one’s own goods or services;
and
2. Prevent third parties from using, without his
consent, signs or containers which are
identical or similar to the registered
trademark where such use would result in a
likelihood of confusion.
In case of the use of an identical sign for identical
goods or services, a likelihood of confusion shall
be presumed. (Secs. 147 and 147.1, IPC)
Trademark owner enjoys protection in product
and market areas that are the normal potential
expansion of his business. (Dermaline Inc. vs. Myra
Pharmaceuticals, Inc., GR No. 190065, August 16,
2010)
Doctrine of Secondary Meaning
"Secondary meaning" means that a word or phrase
originally incapable of exclusive appropriation
with reference to an article in the market (because
it is geographically or otherwise descriptive)
might nevertheless have been used for so long and
so exclusively by one producer with reference to
his article that, in the trade and to that branch of
the purchasing public, the word or phrase has
come to mean that the article was his property.
(Pearl & Dean, Inc. v. Shoemart, Inc., G.R. No.
148222, 15 Aug. 2003)
297
a. CONCEPT OF ACTUAL USE
The actual use of the mark representing the goods
or services introduced and transacted in
commerce over a period of time creates that
goodwill which the law seeks to protect.
The use of a registered mark representing the
owner's goods or services by means of an
interactive website may constitute proof of actual
use that is sufficient to maintain the registration of
the same (W Land Holdings, Inc., v. Starwood Hotels
and Resorts Worldwide, Inc., G.R. No. 222366, 04
Dec. 2017)
It must be emphasized, however, that the mere
exhibition of goods or services over the internet,
without more, is not enough to constitute actual
use. To reiterate, the "use" contemplated by law is
genuine use – that is, a bona fide kind of use
tending towards a commercial transaction in the
ordinary course of trade. Since the internet creates
a borderless marketplace, it must be shown that
the owner has actually transacted, or at the very
least, intentionally targeted customers of a
particular jurisdiction in order to be considered as
having used the trademark in the ordinary course
of his trade in that country. A showing of an actual
commercial link to the country is therefore
imperative. (W Land Holdings, Inc., v. Starwood
Hotels and Resorts Worldwide, Inc., supra.)
Proof of Actual Use
The following shall be accepted as proof of actual
use of the mark:
1. Labels of the mark as these are used;
2. Downloaded pages from the website of the
applicant or registrant clearly showing that
the goods are being sold or the services are
being rendered in the Philippines;
3. Photographs (including digital photographs
printed on ordinary paper) of goods bearing
the marks as these are actually used or of the
stamped or marked container of goods and of
the establishment/s where the services are
being rendered;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
4. Brochures or advertising materials showing
the actual use of the mark on the goods being
sold or services being rendered in the
Philippines;
5. For online sale, receipts of sale of the goods or
services rendered or other similar evidence of
use, showing that the goods are placed on the
market, or the services are available in the
Philippines or that the transaction took place
in the Philippines;
6. Copies of contracts for services showing the
use of the mark. Computer printouts of the
drawing or reproduction of marks will not be
accepted as evidence of use. (Rule 205(c),
Trademark Regulations, as amended by Office
Order No. 056-13; W Land Holdings, Inc., v.
Starwood Hotels and Resorts Worldwide, Inc.,
supra.)
Admission of non-compliance with the
requirement of filing a Declaration of Actual Use is
tantamount to a judicial admission of
abandonment of trademark. (Mattel, Inc. v.
Francisco, G.R. No. 166886, 30 July 2008)
NOTE: Failure to file a Declaration of Actual Use
(DAU) within the required period results in the
automatic cancellation of registration of a
trademark. In turn, such failure is tantamount to
the abandonment or withdrawal of any right or
interest the registrant has over his trademark.
(Birkenstock Orthopaedie GMBH and Co. KG v.
Philippine Shoe Expo Marketing Corporation, G.R.
No. 194307, 20 Nov. 2013)
Periods for the Submission of Declaration of
Actual Use and Proof of Use:
1. Three (3) years from the filing date of the
application; and
2. One (1) year from the 5th anniversary of
the date of registration of the mark.
Instances when Non-Use of a Mark is Excused
1. If caused by circumstances arising
independently of the will of the owner; (Sec.
152.1, IPC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
NOTE: Lack of funds shall not excuse non-use of
a mark. (Sec. 152.1, IPC)
2. A use which does not alter its distinctive
character though the use is different from the
form in which it is registered; (Sec. 152.2, IPC)
3. Use of mark in connection with one or more of
the goods/services belonging to the class in
which the mark is registered; (Sec. 152.3, IPC)
4. Use of a mark by a company related to the
applicant/registrant; (Sec. 152.4, IPC)
5. Use of a mark by a person controlled by the
registrant. (Sec. 152.4, IPC)
Duration or Effectivity of Trademark
Registration
The trademark registration remains in force for
ten (10) years, subject to indefinite renewals of ten
(10) years each.
The registrant is required to file a declaration of
actual use and evidence to that effect, or show valid
reasons based on the existence of obstacles to such
use, within one (1) year from the fifth anniversary
of the date of the registration of the mark.
Otherwise, the mark shall be removed from the
Register by the IPO. (Secs. 145 and 146, IPC)
Application for Registration of a Mark by a
Foreign National
An application for registration of a mark filed in
the Philippines by a foreign national of a country
with whom the Philippines extends reciprocity
rights, and who previously duly filed an
application for registration of the same mark in
one of those countries, shall be considered as filed
as of the day the application was first filed in the
foreign country. (Sec. 131.1, IPC)
However, the owner of a well-known mark in the
Philippines that is identical with, or confusingly
similar to, or constitutes a translation of a mark,
although not registered, may oppose the
application of a mark of foreign origin, or petition
the cancellation of its registration or sue for unfair
competition. (Sec. 131.3, IPC)
298
 Intellectual Property Code
Q: Birkenstock, applied for various trademark
registrations before the IPO. However,
registration proceedings of the subject
applications were suspended in view of an
existing registration of the mark
"BIRKENSTOCK AND DEVICE" in the name of
STIIC, predecessor-in-interest of PSEMC.
Birkenstock filed a cancellation case on the
ground that it is the lawful and rightful owner
of the Birkenstock marks. However,
STIIC/PSEMC’s registration expired, thereby
resulting in the cancellation of such mark.
Accordingly, the cancellation case was
dismissed for being moot and academic.
The aforesaid cancellation paved the way for
the publication of the subject applications in
the IPO e-Gazette. In response, respondent
filed three (3) separate Inter Partes Cases. The
BLA-IPO sustained STIIC/PSEMC’s opposition.
IPO Director General reversed and set aside
the ruling of the BLA. The CA reversed and set
aside the ruling of the IPO Director General and
reinstated that of the BLA. Did Birkenstock
acquire ownership over the said marks by
mere application or registration?
A: NO. It is not the application or registration of a
trademark that vests ownership thereof, but it is
the ownership of a trademark that confers the
right to register the same. A trademark is an
industrial property over which its owner is
entitled to property rights which cannot be
appropriated by unscrupulous entities that, in one
way or another, happen to register such trademark
ahead of its true and lawful owner. The
presumption of ownership accorded to a
registrant must then necessarily yield to superior
evidence of actual and real ownership of a
trademark. (Divina, 2014; Birkenstock Orthopaedie
GMBH and Co. KG v. Philippine Shoe Expo Marketing
Corporation G.R. No. 194307, 20 Nov. 2013)
NOTE: The rights in a mark shall be acquired
through registration made validly in accordance
with the provisions of the IP Code. (Sec. 122, IPC;
Zuneca Pharmaceutical v. Natrapharm, Inc., G.R. No.
211850, 08 Sept. 2020, J. Caguioa)
299
Q: E.Y. Industrial is a domestic corporation
engaged in the production, distribution and
sale of air compressors and other industrial
tools and equipment. Shen Dar is a Taiwan-
based foreign corporation engaged in the
manufacture of air compressors. Both
companies claimed to have the right to register
the trademark "VESPA" for air compressors.
On June 9, 1997, Shen Dar filed Trademark
Application with the IPO for the mark "VESPA,
Chinese Characters and Device" for use on air
compressors and welding machines. On July
28, 1999, EYIS filed Trademark Application
also for the mark "VESPA," for use on air
compressors.
On June 21, 2004, Shen Dar filed a Petition for
Cancellation of EYIS’ COR. Shen Dar primarily
argued that the issuance of the COR in favor of
EYIS violated Section 123.1 paragraphs (d), (e)
and (f) of Republic Act No. (RA) 8293,
otherwise known as the Intellectual Property
Code (IP Code), having first filed an application
for the mark.
Who is the true owner of the mark?
A: E.Y. Industrial is the true owner of the mark.
Under the Intellectual Property Code, the
registration of a mark is prevented with the filing
of an earlier application for registration. This must
not, however, be interpreted to mean that
ownership should be based upon an earlier filing
date. Notably, the Court has ruled that the prior
and continuous use of a mark may even overcome
the presumptive ownership of the registrant and
be held as the owner of the mark. Registration,
without more, does not confer upon the registrant
an absolute right to the registered mark. The
certificate of registration is merely a prima facie
proof that the registrant is the owner of the
registered mark or trade name. Evidence of prior
and continuous use of the mark or trade name by
another can overcome the presumptive ownership
of the registrant and may very well entitle the
former to be declared owner in an appropriate
case.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
E.Y. Industrial’s prior adoption and continuous use
of the mark "VESPA" on air compressors is
bolstered by numerous documentary evidence.
The use by E.Y. Industrial in the concept of owner
is shown by commercial documents, sales invoices
unambiguously describing the goods as "VESPA"
air compressors. E.Y. Industrial have sold the air
compressors bearing the "VESPA" to various
locations in the Philippines, as far as Mindanao and
the Visayas since the early 1990s.
As such, E.Y. Industrial must be considered as the
prior and continuous user of the mark "VESPA"
and its true owner and is entitled to the
registration of the mark in its name. (E.Y. Industrial
Sales v. Shen Dar Electricity and Machinery Co., Ltd.,
G.R. No. 184850, 20 Oct. 2010)
Q: Is there an infringement of trademark when
two similar goods use the same words, ‘PALE
PILSEN’?
A: NONE, because “pale pilsen” are generic words
descriptive of the color (pale) and of a type of beer
(pilsen), which is a light bohemian beer with
strong hops flavor that originated in the City of
Pilsen in Czechoslovakia. Pilsen is a primarily
geographically descriptive word, hence, non-
registrable and not appropriable by any beer
manufacturer. (Asia Brewery, Inc. v. CA, G.R. No.
103543, 5 July 1993)
Who May File Opposition to Trademark
Registration; Grounds
Any person who believes that he would be
damaged by the registration of a mark may, upon
payment of the required fee and within thirty (30)
days after the publication referred to in Subsection
133.2, file with the Office an opposition to the
application. (Sec. 134, IPC)
Acquisition of Trade Names
A name or designation may not be used as a trade
name if by its nature or the use to which such name
or designation may be put, it is contrary to public
order or morals and if, in particular, it is liable to
deceive trade circles or the public as to the nature
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
of the enterprise identified by that name. (Sec.
165.1, IPC)
In particular, any subsequent use of the trade
name by a third party, whether as a trade name or
a mark or collective mark, or any such use of a
similar trade name or mark, likely to mislead the
public, shall be deemed unlawful. (Sec. 165.2(b),
IPC)
Ownership of a xxx trade name may be acquired
not necessarily by registration but by adoption and
use in trade or commerce. As between actual use of
a mark without registration, and registration of the
mark without actual use thereof, the former
prevails over the latter. For a rule widely accepted
and firmly entrenched is that actual use in
commerce or business is a prerequisite to the
acquisition of the right of ownership. (Shangri- La
International Hotel Management, Ltd. v. Developers
Group of Companies, Inc., G.R. No. 159938, 31 Mar.
2006)
The two concepts of corporate name or business
name and trademark or service mark are not
mutually exclusive. It is common, indeed likely,
that the name of a corporation or business is also a
trade name, trademark, or service mark. (Shangri-
La International Hotel Management, Ltd. v.
Developers Group of Companies, Inc., supra)
A trade name of a national of a State that is a party
to the Paris Convention, whether or not the trade
name forms part of a trademark, is protected
“without the obligation of prior filing or
registration.” (Fredco Manufacturing Corporation
v. President and Fellows of Harvard College
(Harvard University), G.R. No. 185917, 01 June
2011)
A trade name need not be registered with the IPO
before an infringement suit may be filed by its
owner against the owner of an infringing
trademark. All that is required is that the trade
name is previously used in trade or commerce in
the Philippines. A corporation has the exclusive
right to use its name. The right proceeds from the
theory that it is a fraud on the corporation which
has acquired a right to that name and perhaps
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 Intellectual Property Code
carried on its business thereunder, that another
should attempt to use the same name, or the same
name with a slight variation in such a way as to
induce persons to deal with it in the belief that they
are dealing with the corporation which has given a
reputation to the name. (Coffee Partners, Inc. v. San
Francisco Coffee & Roastery, Inc., G.R. No. 169504,
03 Mar. 2010)
b. EFFECT OF REGISTRATION
The rights in a mark shall be acquired through
registration made validly in accordance with the
provisions of the IPC. (Sec. 122, IPC)
Certificate of Registration
A certificate of registration of a mark shall be
prima facie evidence of the validity of the
registration, the registrant's ownership of the
mark, and of the registrant's exclusive right to use
the same in connection with the goods or services
and those that are related thereto specified in the
certificate. (Sec. 138, IPC)
Non-Registrable Marks (Im-F-L-E-W-Re-Mi-G-
Cu-De-S-Co-Con)
1. Consists of Immoral, deceptive, or scandalous
matter or falsely suggest a connection with
persons, institutions, beliefs, or national
symbols;
2. Consists of the Flag or coat of arms or other
insignia of the Philippines or any of its
political subdivisions, or of any foreign
nation;
3. Consists of a name, portrait or signature
identifying a particular Living individual
except by his written consent, or the name,
signature, or portrait of a deceased President
of the Philippines, during the life of his widow
except by written consent of the widow;
4. Identical with a registered mark belonging to
a different proprietor or a mark with an
Earlier filing or priority date, in respect of:
a. The same goods or services;
301
b. Closely related goods or services; or
c. If it nearly resembles such a mark as to
be likely to deceive or cause confusion;
5. Is identical with an internationally well-
known mark, Whether or not it is registered
here, used for identical or similar goods or
services Provided, that in determining
whether a mark is well-known, account shall
be taken of;
6. Is identical with an internationally well-
known mark which is Registered in the
Philippines with respect to non-similar goods
or services. Provided, that the interests of the
owner of the registered mark are likely to be
damaged by such use;
7. Is likely to Mislead the public as to the nature,
quality, characteristics or geographical origin
of the goods or services;
8. Consists exclusively of signs that are Generic
for the goods or services that they seek to
identify;
9. Consists exclusively of signs or of indications
that have become Customary or usual to
designate the goods or services in everyday
language or in bona fide and established trade
practice.
10. Consists exclusively of signs or indications
that may serve in trade to Designate the kind,
quality, quantity, intended purpose, value,
geographical origin, time or production of the
goods or rendering of the services, or other
characteristics of the goods or services;
11. Consists of Shapes that may be necessitated
by technical factors or by the nature of the
goods themselves or factors that affect their
intrinsic value;
12. Consists of Color alone, unless defined by a
given form; or
13. Is Contrary to public order or morality (Sec.
123, IPC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Q: Laberge, Inc., manufactures and markets
after-shave lotion, shaving cream, and
deodorants using the trademark “PRUT”,
which is registered with the Intellectual
Property Office. Laberge does not manufacture
briefs and underwear and these items are not
specified in the certificate of registration. JG
who manufactures briefs and underwear,
wants to know whether, under our laws, he can
use and register the trademark “PRUTE” for his
merchandise. Can JG register the trademark?
A: YES. The trademark registered in the name of
Laberge, Inc. covers only after-shave lotion,
shaving cream, deodorant, talcum powder and
toilet soap. It does not cover briefs and underwear.
The limit of the trademark is stated in the
certificate issued to Laberge Inc. It does not
include briefs and underwear which are different
products protected by Laberge’s trademark. JG can
register the trademark “PRUTE” to cover its briefs
and underwear. (Faberge Inc. v. IAC, G.R. No. 71189,
04 Nov. 1992)
Q: CPI was registered with the SEC in January
2001. It has a franchise agreement with Coffee
Partners Ltd. (CPL) for a non-exclusive right to
operate coffee shops in the Philippines using
trademarks designed by CPL such as SAN
FRANCISCO COFFEE.
SFCRI was registered with the SEC in May 1995.
It registered the business name SAN
FRANCISCO COFFEE & ROASTERY, INC. with the
DTI in June 1995.
In June 2001, SFCRI discovered that CPI was
about to open a coffee shop under the name
SAN FRANCISCO COFFEE in Libis, Quezon City.
SFCRI sent a letter to CPI demanding that the
latter stop using the name SAN FRANCISCO
COFFEE. Does CPI ‘s use of the trademark SAN
FRANCISCO COFFEE constitutes infringement
of SFCRI ‘s trade name SAN FRANCISCO COFFEE
& ROASTERY, INC., even if the trade name is not
registered with the Intellectual Property Office
(IPO)?
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
A: YES. Petitioner’s argument that “San Francisco”
is just a proper name referring to the famous city
in California and that “coffee” is simply a generic
term, is untenable. Respondent has acquired an
exclusive right to the use of the trade name “SAN
FRANCISCO COFFEE & ROASTERY, INC.” since the
registration of the business name with the DTI in
1995. Thus, respondent’s use of its trade name
from then on must be free from any infringement
by similarity. Of course, this does not mean that
respondent has exclusive use of the geographic
word “San Francisco” or the generic word “coffee.”
Geographic or generic words are not, per se,
subject to exclusive appropriation. It is only the
combination of the words “SAN FRANCISCO
COFFEE,” which is respondent’s trade name in its
coffee business, that is protected against
infringement on matters related to the coffee
business to avoid confusing or deceiving the
public. (Divina, 2014; Coffee Partners, Inc. v. San
Francisco Coffee and Roastery, Inc., G.R. No. 169504,
03 Mar. 2010)
NOTE: It is hornbook doctrine that emphasis
should be on the similarity of the products
involved and not on the arbitrary classification or
general description of their properties or
characteristics. The mere fact that one person has
adopted and used a trademark on his goods would
not, without more, prevent the adoption and use of
the same trademark by others on unrelated
articles of a different kind. (Taiwan Kolin
Corporation, Ltd. v. Kolin Electronics Co., Inc., G.R.
No. 209843, 25 Mar. 2015)
In Taiwan Kolin Corporation, while both competing
marks refer to the word “KOLIN” written in upper
case letters and in bold font, the Court noted that
one is italicized and colored black while the other
is white in pantone red color background.
According to the Court, the differing features
between the two, though they may appear
minimal, are sufficient to distinguish one brand
from the other.
Q: Natrapharm is a domestic corporation
engaged in the business of manufacturing,
marketing, and distribution of pharmaceutical
products for human relief. One of the products
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 Intellectual Property Code
being manufactured and sold by Natrapharm is
citicoline under the trademark "ZYNAPSE",
which is indicated for the treatment of
cerebrovascular disease or stroke. The
trademark "ZYNAPSE" was registered with the
Intellectual Property Office of the Philippines
(IPO) on September 24, 2007 and is covered by
Certificate of Trademark Registration No. 4-
2007-005596. Natrapharm filed with the RTC
a Complaint against Zuneca for Injunction,
Trademark Infringement, Damages and
Destruction with Prayer for TRO and/or
Preliminary Injunction, alleging that Zuneca's
"ZYNAPS" is confusingly similar to its
registered trademark "ZYNAPSE" and the
resulting likelihood of confusion is dangerous
because the marks cover medical drugs
intended for different types of illnesses.
Zuneca, contends that, as the first user, it had
already owned the "ZYNAPS" mark prior to
Natrapharm's registration. Does Natrapharm
have the right to prevent Zuneca from
using/registering the trademark "ZYNAPS" or
marks similar or identical thereto?
A: YES. Section 122 of the IP Code provides that the
rights in a mark shall be acquired by means of its
valid registration with the IPO. A certificate of
registration of a mark, once issued, constitutes
prima facie evidence of the validity of the
registration, of the registrant's ownership of the
mark, and of the registrant's exclusive right to use
the same in connection with the goods or services
and those that are related thereto specified in the
certificate. Nevertheless, the first-to-file rule
prioritizes the first filer of the trademark
application and operates to prevent any
subsequent applicants from registering marks
described under Section 123.1(d) of the IP Code. In
other words, the prima facie presumption brought
about by the registration of a mark may be
challenged and overcome, in an appropriate
action, by proof of the nullity of the registration or
of non-use of the mark, except when excused.
Moreover, the presumption may likewise be
defeated by evidence of prior use by another
person, i.e., it will controvert a claim of legal
appropriation or of ownership based on
registration by a subsequent user. This is because
303
a trademark is a creation of use and belongs to one
who first used it in trade or commerce. (Zuneca
Pharmaceutical v. Natrapharm, Inc., G.R. No.
211850, 08 Sept. 2020, J. Caguioa)
Similarity between Marks
The likelihood of confusion is a relative concept; to
be determined only according to the particular and
sometimes peculiar circumstances of each case. In
trademark cases, even more than in any other
litigation, precedent must be studied in light of the
facts of the particular case. The wisdom of the
likelihood of confusion test lies in its recognition
that each trademark infringement case presents its
own unique set of facts. (Societe Des Produits
Nestle, S.A. and Nestle Philippines, Inc. v. CA and CFC
Corporation, G.R. No. 112012, 04 Apr. 2001)
Two (2) Types of Confusion
1. Confusion of goods (product confusion) –
where the ordinarily prudent purchaser
would be induced to purchase one product in
the belief that he was purchasing the other;
and
2. Confusion of business (source or origin
confusion) – where, although the goods of the
parties are different, the product, the mark of
which registration is applied for by one party,
is such as might reasonably be assumed to
originate with the registrant of an earlier
product, and the public would then be
deceived either into that belief or into the
belief that there is some connection between
the two parties, though inexistent. (Mang
Inasal Philippines, Inc. v. IFP Manufacturing
Corporation, G.R. No. 221717, 19 June 2017)
Q: Kolin Philippine International (KPII), an
affiliate of TKC, filed Trademark Application
No. 4-2006-010021 for the mark under Class 9
covering “television and DVD players. Kolin
Electronics Co., Inc (KECI) filed an opposition
against KPII’s trademark Application for the
reason that it is the registered owner of the
mark and that the registration of KPII will
cause confusion among customers. KPII
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
argued that the promulgation of KECI
ownership cannot apply to KPII case because
it was not a party to the said case and the
ownership case is not res judicata to the KPII
case. The IPO – BLA rejected KPII claim
because it will cause confusion to the products
offered by KECI and KPII. Whether or not Kolin
Philippines International Inc., should be
allowed to register its mark?
A: NO. To summarize the above discussion: (1)
there is resemblance between KECI's and KPII's
marks; (2) the goods covered by KECI's are
related to the goods covered by KPII's ; (3) there
is evidence of actual confusion between the two
marks; (4) the goods covered by KPII's fall within
the normal potential expansion of business of
KECI; (5) sophistication of buyers is not enough to
eliminate confusion; (6) KPII's adoption of KECI's
coined and fanciful mark would greatly contribute
to likelihood of confusion; and (7) KPII applied for
in bad faith. Thus, KPII's application for should be
denied because it would cause likelihood of
confusion and KECI's rights would be damaged.
Further, KECI was already declared as the owner
of the mark under Trademark Law. The existence
of likelihood of confusion is already considered as
damage that would be sufficient to sustain the
opposition and rejection of KPII's trademark
application. The Court is likewise cognizant that,
by granting this registration, KPII would acquire
exclusive rights over the stylized version of
KOLIN for a range of goods/services, 172 i.e.,
covered goods, related goods/services,
goods/services falling within the normal
potential expansion of KPII's business. Owing to
the peculiar circumstances of this case, this will
effectively amount to a curtailment of KECI's right
to freely use and enforce the KOLIN word mark,
or any stylized version thereof, for its own range
of goods/services, especially against KPII,
regardless of the existence of actual confusion.
(Kolin Electronics v. Kolin Philippines, G.R. No.
228165, 09 Feb. 2021, J. Caguioa)
NOTE: The use of the Holistic Test in determining
the resemblance of marks has been abandoned.
(Ibid.)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Holistic Test, Abandoned
Q: Petitioner Levi Strauss & Co. is a foreign
corporation and owner of the word mark
"LEVI'S". It filed before the IPO a petition for
cancellation of the trademark “LIVE’S” on the
ground that it is confusingly similar with
petitioner's "LEVI'S" mark. Both marks cover
the same goods under Class 25 of the Nice
Classification. Respondent Guevarra alleged
that its mark is not confusingly similar with
petitioner's "LEVI'S" mark, claiming that the
probability of confusion arising from the
alleged similarity of the marks is negligible
due to the attention given by the purchasers to
the goods they are purchasing; and that there
are sufficient differences in the price, hand
tags, and other markings of the products.
Should the Petition for Cancellation be
granted?
A: YES. The Holistic Test in determining
trademark resemblance has been abandoned. The
Dominancy Test must be used in determining the
existence of confusing similarity between the
"LEVI'S" and “LIVE’S” marks. This test relies not
only on the visual but also on the aural and
connotative comparisons and overall impressions
between the two trademarks. The dominant
feature of petitioner's "LEVI'S" marks is the word
"LEVI'S" composed of five (5) letters, namely "L",
"E", "V", "I", and "S" with an apostrophe
separating the fourth and fifth letters. Notably, for
petitioner's stylized marks, the letter "E" is in
lowercase format with the rest in uppercase
format. On the other hand, the dominant feature
of respondents' “LIVE’S” stylized mark is the word
"LIVE'S" also composed of the same five (5)
letters; and its only difference with petitioner's
marks is that the positioning of the letters "E" and
"I" are interchanged. Furthermore, respondents'
mark also depicts the letter "E" in lowercase
format with the rest in uppercase format.
From the foregoing, it is thus readily apparent
that although petitioner's and respondents'
marks are neither spelled identically nor
pronounced in the same way, nor possess the
same meaning, they both begin with the same
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 Intellectual Property Code
letter and are in the possessive form as denoted
by the apostrophe before the letter "S" at the end,
with only the second and fourth letters re-
arranged. Simply put, respondents' “LIVE’S” mark
is but a mere anagram of petitioner's "LEVI'S"
marks. It would not be farfetched to imagine that
a buyer, when confronted with such striking
similarity would be led to confuse one over the
other. Thus, by simply applying the Dominancy
Test, it can already be concluded that there is a
likelihood of confusion between petitioner's
"LEVI'S" marks and respondents' “LIVE’S” mark.
(Levi Strauss & Co. v. Sevilla, G.R. No. 219744, 01
Mar. 2021)
3. WELL-KNOWN MARKS
Well-known Marks
A well-known mark is a mark which is considered
by the competent authority of the Philippines to be
well-known internationally and in the Philippines,
whether or not it is registered here, as being
already the mark of a person other than the
applicant for registration. (Divina, 2021; Sec.
123.1(e), IPC)
Test to Determine Confusing Well-Known
Marks
This is used in determining whether an
international mark is well-known for the rule on
non-registrable marks under Sec. 123(e) to
operate. (Gepty, 2018)
The scope of protection initially afforded by the
Paris Convention has been expanded via a
nonbinding recommendation that a well-known
mark should be protected in a country even if the
mark is neither registered nor used in that country.
(Sehwani, Incorporated v. In-N-Out Burger, Inc., G.
R. No. 171053, 15 Oct. 2007)
A junior user of a well-known mark on goods or
services which are not similar to the goods or
services, and are therefore unrelated, to those
specified in the certificate of registration of the
well-known mark is precluded from using the
305
same on the entirely unrelated goods or services,
subject to the following requisites, to wit:
1. The mark is well-known internationally and in
the Philippines;
2. The use of the well-known mark on the
entirely unrelated goods or services would
result to the likelihood of confusion of origin
or business or some business connection or
relationship between the registrant and the
user of the mark; and
3. The interests of the owner of the well-known
mark are likely to be damaged. (246
Corporation, doing business under the name
and style of Rolex Music Lounge v. Hon.
Reynaldo B. Daway, in his capacity as Presiding
Judge of RTC Br. 90, Quezon City, G.R. No.
157216, 20 Nov. 2003)
Internationally Well-known Mark
1. Considered by the competent authority of the
Philippines to be “well-known” internationally
and in the Philippines as the mark of a person
other than the applicant or registrant;
2. Need not be used or registered in the
Philippines; and
3. Need not be known by the public at large but
only by relevant sector of the public. (Sec.
123(e), IPC)
Rules regarding Internationally Well-Known
Marks
A mark cannot be registered if it is identical with,
or confusingly similar to, or constitutes a
translation of a mark which is considered by the
competent authority of the Philippines to be well-
known internationally and in the Philippines,
whether or not it is registered here, as being
already the mark of a person other than the
applicant for registration and used for identical or
similar goods or services. Provided. that in
determining whether a mark is well-known,
account shall be taken of the knowledge of the
relevant sector of the public, rather than of the
public at large, including knowledge in the
Philippines which has been obtained as a result of
the promotion of the mark.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
A mark cannot be registered if it is identical with,
or confusingly similar to, or constitutes a
translation of a mark considered well-known in
accordance with the preceding paragraph, which is
registered in the Philippines with respect to goods
or services which are NOT similar to those with
respect to which registration is applied for:
Provided, That use of the mark in relation to those
goods or services would indicate a connection
between those goods or services, and the owner of
the registered mark: Provided further, That the
interests of the owner of the registered mark are
likely to be damaged by such use. (Sec. 123, IPC)
Factors to be Considered in Determining Well-
Known Marks
1. Duration, extent, and geographical area of any
use of the mark; in particular, the duration,
extent and geographical area of any promotion
of the mark, including advertising or publicity
and the presentation, at fairs or exhibitions, of
the goods and/or services to which the mark
applies;
2. Market share, in the Philippines and in other
countries, of the goods and/or services to
which the mark applies;
3. Degree of the inherent or acquired distinction
of the mark;
4. Quality image or reputation acquired by the
mark;
5. Extent to which the mark has been registered
in the world;
6. Exclusivity of registration attained by the
mark in the world;
7. Extent to which the mark has been used in the
world;
8. Exclusivity of use attained by the mark in the
world;
9. Commercial value attributed to the mark in
the world;
10. Record of successful protection of the rights in
the mark;
11. Outcome of litigations dealing with the issue of
whether the mark is a well-known mark; and
12. Presence or absence of identical or similar
marks validly registered for or used on
identical or similar goods or services and
owned by persons other than the person
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
claiming that his mark is a well-known mark.
Provided, further, that the mark is well-known both
internationally and in the Philippines. (Sec. 3, Rule
18, A.M. No. 10-3-10-SC, as amended, 06 Oct. 2020)
NOTE: Account shall be taken of the knowledge of
the relevant sector of the public, rather than of the
public at large, including knowledge in the
Philippines which has been obtained as a result of
the promotion of the mark. The following criteria
or any combination thereof may be taken into
account in determining whether a mark is well-
known.
In Fredco Manufacturing Corp. vs. President and
Fellows of Harvard College, (G.R. No. 185917, 01
June 2011) Fredco Manufacturing Corp. (Fredco)
filed before the IPO a Petition for Cancellation of
Registration issued to Harvard University for the
mark “Harvard Veritas Shield Symbol”. Fredco
claims that as early as 1982 the mark was already
used in the Philippines by its predecessor-in-
interest. Harvard University, on the other hand,
claimed that the name and mark “Harvard” was
adopted in 1639 as the name of Harvard College of
Cambridge, Massachusetts, USA. The mark had
been used in commerce since 1872 and was
registered in more than 50 countries.
The Supreme Court ruled that "Harvard" is the
trade name of the world-famous Harvard
University, and it is also a trademark of Harvard
University. Under Article 8 of the Paris Convention,
as well as Section 37 of R.A. No. 166, Harvard
University is entitled to protection in the
Philippines of its trade name "Harvard" even
without registration of such trade name in the
Philippines. This means that no educational entity
in the Philippines can use the trade name
"Harvard" without the consent of Harvard
University. Likewise, no entity in the Philippines
can claim, expressly or impliedly through the use
of the name and mark "Harvard," that its products
or services are authorized, approved, or licensed
by, or sourced from, Harvard University without
the latter's consent.
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 Intellectual Property Code
To be protected under the two directives of the
Ministry of Trade, an internationally well-known
mark need not be registered or used in the
Philippines. All that is required is that the mark is
well-known internationally and in the Philippines
for identical or similar goods, whether or not the
mark is registered or used in the Philippines.
Section 123.1(e) of R.A. No. 8293 now categorically
states that "a mark which is considered by the
competent authority of the Philippines to be well-
known internationally and in the Philippines,
whether or not it is registered here," cannot be
registered by another in the Philippines. Section
123.1(e) does not require that the well-known
mark be used in commerce in the Philippines but
only that it be well-known in the Philippines.
Division of Application
Any application referring to several goods or
services, hereafter referred to as the "initial
application," may be divided by the applicant into
two (2) or more applications, hereafter referred to
as the "divisional applications," by distributing
among the latter the goods or services referred to
in the initial application. The divisional
applications shall preserve the filing date of the
initial application or the benefit of the right of
priority. (Sec. 129, IPC)
Priority Right
An application for registration of a mark filed in
the Philippines by a person referred to in Section 3
of the IPC, and who previously duly filed an
application for registration of the same mark in
one of those countries, shall be considered as filed
as of the day the application was first filed in the
foreign country. No registration of a mark shall be
granted until such mark has been registered in the
country of origin of the applicant. (Sec. 131, IPC)
The owner of a mark seeking priority right is not
entitled to sue for acts committed prior to the date
on which his mark was registered in the
Philippines: except in the case of an owner of a
well-known mark where he can oppose its
registration or petition the cancellation of its
registration or sue for unfair competition, without
307
prejudice to availing himself of other remedies
provided for under the law. (Ibid.)
4. RIGHTS CONFERRED BY REGISTRATION
Rights Conferred to the Owner of a Registered
Mark
The owner of a registered mark shall have the
exclusive right to:
1. Use the mark for one’s own goods or services;
2. Prevent third parties from using, without his
consent, signs or containers which are
identical or similar to the registered
trademark where such use would result in a
likelihood of confusion.
In case of the use of an identical sign for identical
goods or services, a likelihood of confusion shall
be presumed. (Secs. 147 and 147.1, IPC)
Trademark owners enjoy protection in product
and market areas that are the normal potential
expansion of his business. (Dermaline Inc. vs. Myra
Pharmaceuticals, Inc.., GR No. 190065, 16 Aug.
2010)
Limitations
Except in cases of importation of drugs and
medicines allowed under Section 72.1 of the IP
Code and of off- patent drugs and medicines, the
owner of a registered mark shall have the exclusive
right to prevent all third parties not having the
owner’s consent from using in the course of trade
identical or similar signs or containers for goods or
services which are identical or similar to those in
respect of which the trademark is registered
where such use would result in a likelihood of
confusion. In case of the use of an identical sign for
identical goods or services, a likelihood of
confusion shall be presumed.
There shall be no infringement of trademarks or
trade names of imported or sold patented drugs
and medicines allowed under Section 72.1 of the IP
Code, as well as imported or sold off-patent drugs
and medicines; Provided, That said drugs and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
medicines bear the registered marks that have not
been tampered, unlawfully modified, or infringed
upon, under Section 155 of the IP Code. (Sec. 147,
IPC, as amended by R.A. No. 9502)
When the Rights Terminate
The rights conferred by trademark registration
end upon cancellation of the certificate of
registration by the IPO in the cases allowed by law.
(Divina, 2021)
Certificate of Registration Prima Facie
Evidence of Validity
A certificate of registration of a mark shall be
prima facie evidence of the validity of the
registration, the registrant’s ownership of the
mark, and of the registrant’s exclusive right to use
the same in connection with the goods or services
and those that are related thereto specified in the
certificate. (Sec. 138, IPC)
Issuance and Publication of Certificate of
Registration
The certificate of registration shall be issued when
the period for filing the opposition has expired, or
when the Director of Legal Affairs shall have
denied the opposition, and upon payment of the
required fee. (Sec. 136, IPC)
The registered mark shall be published, in the form
and within the period fixed by the Regulations.
Marks registered at the Office may be inspected
free of charge and any person may obtain copies
thereof at his own expense. This provision shall
also be applicable to transactions recorded in
respect of any registered mark. (Sec. 138, IPC)
Duration of a Certificate of Trademark
Registration
A certificate of registration shall remain in force
for ten (10) years, provided that the registrant
shall file a declaration of actual use and evidence
to that effect or shall show valid reasons based on
the existence of obstacles to such use, as
prescribed by the Regulations, within one (1) year
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
from the fifth anniversary of the date of the
registration of the mark. Otherwise, the mark shall
be removed from the Register by the Office. (Sec.
145, IPC)
Effect of Failure to file Declaration of Actual Use
The applicant or the registrant shall file a
declaration of actual use (DAU) of the mark with
evidence to that effect, as prescribed by the
Regulations within three (3) years from the filing
date of the application. Otherwise, the application
shall be refused, or the mark shall be removed
from the Register by the Director. (Sec. 124.2, IPC)
A fifth anniversary use is also required. This is
done by filing a declaration of actual use and
evidence to that effect within one year from the
fifth anniversary of the registration. The form and
evidence of use required are similar to the third
year DAU. Failure to submit the fifth anniversary
use and evidence to that effect shall merit the
cancellation of the mark. (Sec. 145, IPC)
Renewal of Registration
A certificate of registration may be renewed for
periods of ten (10) years at its expiration. Each
request for renewal of registration must be made
within 6 months before the expiration of the
registration or within 6 months after such
expiration on payment of the additional fee
prescribed. (Sec. 146, IPC)
5. CANCELLATION OF REGISTRATION
A trademark registration may be cancelled by any
person who believes that he will be damaged by
the registration of the mark:
1. Within five (5) years from the date of the
registration of the mark; or
2. At any time;
a. If the registered mark becomes the generic
name for the goods or services, or a portion
thereof, for which it is registered;
b. If the mark has been abandoned;
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 Intellectual Property Code
c. If its registration was obtained
fraudulently or contrary to the provisions
of the IPC;
d. If the registered mark is being used by, or
with the permission of, the registrant so as
to misrepresent the source of the goods or
services on or in connection with which the
mark is used; or
e. Non-use of the mark within the Philippines,
without legitimate reason, for an
uninterrupted period of 3 years. (Sec. 151,
IPC)
NOTE: If in a petition for cancellation of a
trademark, it was established that the petitioner
was not its owner, prior registration can be
cancelled without need of filing a separate petition.
(E.Y. Industrial Sales, Inc. v. Shen Dar Electricity and
Machinery Co. Ltd., G.R. No. 184850, 20 Oct. 2010)
Q: ABC Appliances Corporation (ABC) is a
domestic corporation engaged in the
production and sale of televisions and other
appliances. YYY Engineers, a Taiwanese
company, is the manufacturer of televisions
and other appliances from whom ABC actually
purchases appliances. From 2000, when ABC
started doing business with YYY, it has been
using the mark "TTubes" in the Philippines for
the television units that were bought from YYY.
In 2015, YYY filed a trademark application for
"TTubes." Later, ABC also filed its application.
Both claim the right over the trademark
"TTubes" for television products. YYY relies on
the principle of "first to file" while ABC involves
the "doctrine of prior use.
a. Does the fact that YYY filed its application
ahead of ABC mean that YYY has the prior right
over the trademark? Explain briefly.
b. Does the prior registration also mean a
conclusive assumption that YYY Engineers is in
fact the owner of the trademark “TTubes?”
Briefly explain your answer. (2016 BAR)
309
A:
a. NO. Since YYY is not the owner of the trademark,
it has no right to apply for registration.
Registration of trademark, by itself, is not a mode
of acquiring ownership. It is the ownership of a
trademark that confers the right to register the
same. (Birkenstock Orthopedia GMBH and Co. v.
Philippines Shoe Expo Marketing Corp., G.R. No.
194307, 20 Nov. 2013)
b. NO. Registration merely creates a prima facie
presumption of validity of the registration of the
registrant’s ownership of the trademark and the
exclusive right to the use thereof. The presumption
of ownership accorded to a registrant is rebuttable
and must yield to evidence to the contrary.
(Zuneca Pharmaceutical v. Natrapharm, Inc., G.R.
No. 211850, 08 Sept. 2020, J. Caguioa)
Q: Alice Corp had been using the trademark
“Mr. Gulaman” for gulaman powder jelly mix. It
registered the same on 2006, but it found out
that there was a pending registration for the
same trademark filed on 2005 by Q Corp. Alice
Corp. opposed Q’s registration on the ground
that it had been using the logo since 2000 and
the logo it had been using was a registered
copyright from the artist that it had
commissioned to create such logo. The artist
then assigned such copyrighted logo to its
favor. Despite such opposition, the Certificate
of Registration was issued in favor of Q Corp.
Alice Corp then decides to file a petition for
cancellation of the certificate of registration.
This was granted by the BLA-IPO on the ground
of that was substantial evidence to prove Alice
Corp’s prior use of mark due to its actual use in
commerce since 1996 and that the competing
logos are identical and the same in all aspects.
Is the BLA-IPO correct in cancelling the
Certificate of Registration issued in favor of Q
Corp?
A: YES. Pursuant to the case of Zuneca v.
Natrapharm, trademark can be acquired only
through registration and not through prior use.
However, when a certificate of registration is
already issued in favor of a person, it is only
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
considered as prima facie evidence of the
ownership of such trademark. The same can be
rebutted. While registration vests ownership over
a mark, bad faith may still be a ground for the
cancellation of trademark registrations. In
cancelling petitioner's certificate of registration,
the BLA-IPO concluded that petitioner copied
respondent's mark. It compared the two and found
that petitioner's mark is identical with
respondent's. It noted that the word "Mr.
Gulaman" in both of their marks are "exactly the
same in all aspects" This conclusion was bolstered
by its finding that in petitioner's Declaration of
Actual Use, she submitted photographs of a
packaging showing respondent's "Mr. Gulaman"
and its logo design. (Medina v. Global Quest
Ventures, G.R. No. 213815, 08 Feb. 2021)
Use of Indications by Third Parties for
Purposes Other than those for which the Mark
is Used
Registration of the mark shall not confer on the
registered owner the right to preclude third
parties from using bona fide their names,
addresses, pseudonyms, geographical name, or
exact indications concerning the kind, quality,
quantity, destination, value, place of origin, or time
of production or of supply, of their goods or
services: Provided, That such use is confined to the
purposes of mere identification or information and
cannot mislead the public as to the source of the
goods or services. (Sec. 148, IPC)
NOTE: The IPC deems unlawful any subsequent
use of the trade name by a third party, whether as
a trade name or mark or collective mark, or any
such use of a similar trade name or mark, likely to
mislead the public. (Sec. 165.2(b), IPC)
6. TRADEMARK INFRINGEMENT
Infringement is the use without consent of the
trademark owner of any "reproduction,
counterfeit, copy or colorable limitation of any
registered mark or tradename in connection with
the sale, offering for sale, or advertising of any
goods, business or services on or in connection
with which such use is likely to cause confusion or
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
mistake or to deceive purchasers or others as to
the source or origin of such goods or services, or
Identity of such business; or reproduce,
counterfeit, copy or colorably imitate any such
mark or tradename and apply such reproduction,
counterfeit, copy or colorable limitation to labels,
signs, prints, packages, wrappers, receptacles or
advertisements intended to be used upon or in
connection with such goods, business or services."
(Esso Standard Eastern, Inc. v. CA, G.R. No. L-29971,
31 Aug. 1982)
A crucial issue in any trademark infringement case
is the likelihood of confusion, mistake, or deceit as
to the identity, source or origin of the goods or
identity of the business as a consequence of using
a certain mark. Likelihood of confusion is
admittedly a relative term, to be determined
rigidly according to the particular (and some-
times peculiar) circumstances of each case. Thus,
in trademark cases, more than in other kinds of
litigation, precedents must be studied in the light
of each particular case. (Mighty Corporation v. E. J.
Gallo Winery, G.R. No. 154342, 14 July 2004)
Less Stringent Standard of Likelihood of
Confusion
Failure to present proof of actual confusion does
not negate their claim of trademark infringement.
Trademark infringement requires the less
stringent standard of “likelihood of confusion”
only. While proof of actual confusion is the best
evidence of infringement, its absence is
inconsequential. (McDonalds Corporation v. L. C.
Big Mak Burger, Inc., G.R. No. 143993, 18 Aug. 2004)
Elements of Trademark Infringement (Re-Re-
Use-Co-Co)
1. The trademark being infringed is Registered
in the Intellectual Property Office;
2. The trademark is Reproduced, counterfeited,
copied, or colorably imitated by the infringer;
3. The infringing mark is Used in connection
with the sale, offering for sale, or advertising
of any goods, business, or services; or the
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 Intellectual Property Code
infringing mark is applied to labels, signs,
prints, packages, wrappers, receptacles or
advertisements intended to be used upon or in
connection with such goods, business or
services;
4. The use or application of the infringing mark
is likely to cause Confusion or mistake or to
deceive purchasers or others as to the goods
or services themselves or as to the source or
origin of such goods or services or the identity
of such business; and
5. The use or application of the infringing mark
is without the Consent of the trademark
owner or the assignee thereof. (Divina, 2021;
Diaz v. People, G.R. No. 180677, 18 Feb. 2013)
Q: ELARS Lechon was established and
marketed in 1970 by spouses Lontoc. In 1989,
the spouses Lontoc incorporated their food
business. Elarfoods was granted a Certificate of
Registration by the Securities and Exchange
Commission. Since then, the spouses Lontoc
actively managed and used Elarfoods as its
business name and marketed its roasted pig
products as “ELARS LECHON ON A BAMBOO
TRAY,” popularly known by the public as
“Elar’s Lechon.” However, without Elarfoods’
knowledge and permission, Emzee sold and
distributed roasted pigs using the marks
“ELARZ LECHON” “ELAR LECHON” “PIG DEVICE”
and “ON A BAMBOO TRAY” making it appear
that Emzee was a branch or franchisee of
Elarfoods. Emzee’s officers and incorporators
were former Elarfoods employees. Is Emzee
guilty of trademark infringement and unfair
competition?
A: YES. Applying the dominancy test to the case at
bar, it is very obvious that the Emzee's marks
"ELARZ LECHON” and "ELAR LECHON” bear an
indubitable likeness with Elarfoods' "ELARS
LECHON." As can easily be seen, both marks use
the essential and dominant word "ELAR". The only
difference between the Emzee's mark from that of
Elarfoods' are the last letters Z and S, respectively.
However, the letters Z and S sound similar when
pronounced. Thus, both marks are not only
311
visually similar, but are phonetically and aurally
similar as well. To top it all off, both marks are used
in selling lechon products. Verily, there exists a
high likelihood that the consumers may conclude
an association or relation between the products.
Likewise, the uncanny resemblance between the
marks may even lead purchasers to believe that
Emzee and Elarfoods are the same entity. In fine,
Emzee's use of marks similar to those of the
Elarfoods' constitutes a violation of the latter's
intellectual property rights. (Emzee Foods, Inc. v.
Elarfoods, Inc., G.R. No. 220558, 17 Feb. 2021)
Counterfeit Goods vs. Colorable Imitation
COUNTERFEIT COLORABLE
GOODS IMITATION
Definition
Any goods, including Such a close or
packaging, bearing ingenious imitation as
without authorization to be calculated to
a trademark which is deceive ordinary
identical to the purchasers, or such
trademark validly resemblance of the
registered in respect infringing mark to the
of such goods, or original as to deceive
which cannot be an ordinary purchaser
distinguished in its giving such attention
essential aspects from as a purchaser usually
such a trademark, and gives, and to cause
which thereby him to purchase the
infringes the rights of one supposing it to be
the owner of the the other. (Emerald v.
trademark in question CA, G.R. No. 100098, 29
under the law of the Dec. 1995)
country of
importation. (Art. 51,
footnote 14(a), TRIPS
Agreement)
Unauthorized Use of Container Bearing a
Registered Trademark
The mere unauthorized use of a container bearing
a registered trademark in connection with the sale,
distribution or advertising of goods or services
which is likely to cause confusion, mistake or
deception among the buyers or consumers can be
considered as trademark infringement. (Republic
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Gas Corporation v. Petron Corporation, G.R. No.
194062, 17 June 2013)
Remedies of the Owner of the Trademark
Against Infringers
1. Civil – filed with the Regional Trial Courts. The
owner of the registered mark may ask the
court to issue a preliminary injunction to
quickly prevent infringer from causing
damage to his business. Furthermore, the
court will require infringer to pay damages to
the owner of the mark provided defendant is
shown to have had notice of the registration of
the mark (which is presumed if a letter R
within a circle is appended) and stop him
permanently from using the mark.
2. Criminal – the owner of the trademark may
ask the court to issue a search warrant and in
appropriate cases, remedies available shall
also include the seizure, forfeiture, and
destruction of the infringing goods and of any
materials and implements the predominant
use of which has been in the commission of the
offense.
3. Administrative – same as in patent
infringement cases. If the amount of damages
claimed is not less than P200,000.00, the
registrant may choose to seek redress against
the infringer by filing an administrative action
against the infringer with the Bureau of Legal
Affairs.
Ascertainment of the Amount of Damages in a
Civil Action for Infringement
The owner of a trademark which has been
infringed is entitled to actual damages:
1. The reasonable profit which the complaining
party would have made, had the defendant not
infringed his said rights; or
2. The profit which the defendant actually made
out of infringement; or
3. The court may award as damages a reasonable
percentage based upon the amount of gross
sales of the defendant or the value of the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
services in connection with which the mark or
trade name was issued.
In cases where actual intent to mislead the public
or to defraud the complainant is shown, in the
discretion of the court, the damages may be
doubled. (Sec, 156.3, IPC)
Jurisdiction Over Violations of Intellectual
Property Rights
It is properly lodged with the Regional Trial Court
even if the penalty therefore is imprisonment of
less than six years, or from 2 to 5 years and a fine
ranging from P50,000 to P200,000.
R.A. No. 8293 and R.A. No. 166 are special laws
conferring jurisdiction over violations of
intellectual property rights to the Regional Trial
Court. They should therefore prevail over R.A. No.
7691, which is a general law. (Samson v. Daway,
G.R. No. 160054-55, 21 July 2004)
Q: K-9 Corporation, a foreign corporation
alleging itself to be the registered owner of
trademark “K-9” and logo “K”, filed an Inter
Partes case with the Intellectual Property
Office against Kanin Corporation for the
cancellation of the latter’s mark “K-9” and logo
“K.” During the pendency of the case before the
IPO, Kanin Corporation brought suit against K-
9 Corporation before the RTC for infringement
and damages. Could the action before the RTC
prosper? Why? (2003 BAR)
A: YES. The action before the RTC can prosper.
According to Section 151.2 of the IPO, the filing of
a suit to enforce the registered mark with the
proper court or agency shall exclude any other
court or agency from assuming jurisdiction over a
subsequently filed petition to cancel the same
mark. On the other hand, the earlier filing of
petition to cancel the mark with the Bureau of
Legal Affairs shall not constitute a prejudicial
question that must be resolved before an action to
enforce the rights to same registered mark may be
decided. The issues raised before the different the
IPO and the RTC are different. The issue raised
before the IPO is whether or not the cancellation of
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 Intellectual Property Code
the subsequent trademark is proper because of the
prior ownership of the disputed mark by K-9.
While the issue raised before the RTC pertains to
infringement. Furthermore, an action for
infringement or unfair competition, as well as the
remedy of injunction and relief for damages, is
explicitly and unquestionably within the
competence and jurisdiction of ordinary courts.
(Shangri-la International Hotel Management, Ltd.,
v. Makati Shangri-la Hotel and Resort Inc., G.R. No.
111580, 21 June 2001)
Venue in Filing Actions for Infringement
A.M. 02-1-06-SC (The Rule on Search and Seizure in
Civil Actions for Infringement of Intellectual
Property Rights) governs the issuance of a writ of
search and seizure in a civil action for infringement
filed by an intellectual property right owner
against the supposed infringer of his trademark or
name. Under this rule, the claim for damages
should be filed with the same court that issued the
writ of search and seizure.
However, Philip Morris, the manufacturer of
Marlboro cigarettes did not go by this route. Philip
Morris did not file a civil action for infringement of
its trademark against the Del Rosarios before the
RTC of Angeles City. Instead, Philip Morris sought
assistance from the NBI for the apprehension and
criminal prosecution of those reportedly
appropriating its trademark and selling fake
Marlboro cigarettes. In turn, the NBI instituted a
police action that included applying for a search
and seizure warrant under Sections 3, 4, 5 and 6 of
Rule 126 of the Rules of Criminal Procedure (not
under the provisions of A.M. 02-1-06-SC) against
the Del Rosarios upon the belief that they were
storing and selling fake Marlboro cigarettes in
violation of the penal provisions of the intellectual
property law.
The proceeding under Rule 126, a limited criminal
one, does not provide for the filing of
counterclaims for damages against those who may
have improperly sought the issuance of the search
warrant. Consequently, the Del Rosarios had the
right to seek damages, if the circumstances
warranted, by separate civil action for the wrong
313
inflicted on them by an improperly obtained or
enforced search warrant. (Divina, 2014; Del
Rosario, et al. v. Donato, Jr. et al., G.R. No. 180595, 04
Mar. 2010)
Limitations on the Actions for Infringement
1. Right of prior user – a registered mark shall
be without effect against any person who, in
good faith, before filing or priority date, was
using the mark for purposes of his business;
(Sec. 159.1, IPC)
2. Relief against publisher – injunction is
limited to the future printing against an
innocent infringer who is engaged solely in the
business of printing the mark; (Sec. 159.2, IPC)
and
3. Relief against newspaper – injunction
against the presentation of advertising matter
in future issues of the newspaper, magazine or
in electronic communications in case the
infringement complained of is contained in or
is part of paid advertisement in such materials.
(Sec. 159.3, IPC)
Requirement of Notice
The owner of the registered mark shall not be
entitled to recover profits or damages unless the
acts have been committed with knowledge that
such imitation is likely to cause confusion, or to
cause mistake, or to deceive.
Knowledge is presumed in the following instances:
1. The registrant gives notice that his mark is
registered by displaying with the mark the
words “Registered Mark” or the letter R within
a circle; or
2. The defendant had otherwise actual notice of
the registration. (Sec. 158, IPC)
7. UNFAIR COMPETITION
Employing deception or any other means contrary
to good faith by which a person passes off his
goods or business or services for those of one who
has already established goodwill thereto. (Sec.
168.2, IPC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

It is the passing off (or palming off) or attempting
to pass off upon the public of the goods or business
of one person as the goods or business of another
with the end and probable effect of deceiving the
public. Passing off (or palming off) takes place
where the defendant, by imitative devices on the
general appearance of the goods, misleads
prospective purchasers into buying his
merchandise under the impression that they are
buying that of his competitors. Thus, the defendant
gives his goods the general appearance of the
goods of his competitor with the intention of
deceiving the public that the goods are those of his
competitor. (Republic Gas Corporation v. Petron
Corporation, G. R. No. 194062, 17 June 2013)
their products or services due to its similarity in
appearance or packaging.
Unfair competition violates property rights
A person who has identified in the mind of the
public the goods he manufactures or deals in, his
business or services from those of others, whether
or not a registered mark is employed, has a property
right in the goodwill of the said goods, business or
services so identified, which will be protected in
the same manner as other property rights. (Sec.
168.1, IPC)
Persons Guilty of Unfair Competition

Infringement of Trademark vs. Unfair 1. Any person, who is selling his goods and gives
Competition (2015 BAR) them the general appearance of goods of
another manufacturer or dealer, either as to
INFRINGEMENT OF UNFAIR the goods themselves or in the wrapping of the
TRADEMARK COMPETITION packages in which they are contained, or the
Definition devices or words thereon, or in any other
The passing off of feature of their appearance, which would be
Unauthorized use of a likely to influence purchasers to believe that
one’s goods as those of
trademark.
another. the goods offered are those of a manufacturer
Requirement of Fraudulent Intent or dealer, other than the actual manufacturer
Fraudulent intent is Fraudulent intent is or dealer, or who otherwise clothes the goods
unnecessary. essential. with such appearance as shall deceive the
Requirement of Prior Registration public and defraud another of his legitimate
GR: Prior registration trade, or any subsequent vendor of such goods
of the trademark is a or any agent of any vendor engaged in selling
Registration is not such goods with a like purpose;
prerequisite to the
necessary. (Del Monte
action.
Corp. v. CA, G.R. No. 2. Any person who by any artifice, or device, or
78325, 23 Jan. 1990) who employs any other means calculated to
XPN: Well-known
marks induce the false belief that such person is
offering the services of another who has
NOTE: There can be unfair competition and identified such services in the mind of the
infringement at the same time. public;

Q: In what way is an infringement of a
trademark similar to that which pertains to
unfair competition? (2003 BAR)
A: The similarity lies in both their ability to disrupt
fair competition amongst business enterprises and
other businesses. They can also create confusion,
mistake, and deception as to the minds of the
consumers with regard to the source or identity of
3. Any person who shall make any false
statement in the course of trade or who shall
commit any other act contrary to good faith of
a nature calculated to discredit the goods,
business or services of another. (Sec. 168.3,
IPC)
Trademark infringement is more limited, but it
recognizes a more exclusive right derived from the

UNIVERSITY OF SANTO TOMAS 314

2022 GOLDEN NOTES
 Intellectual Property Code
trademark adoption and registration by the person
whose goods or business is first associated with it.
Hence, even if one fails to establish his exclusive
property right to a trademark, he may still obtain
relief on the ground of his competitor’s unfairness
or fraud. Conduct constitutes unfair competition if
the effect is to pass off on the public the goods of
one man as the goods of another. (Mighty
Corporation v. E. & J. Gallo Winery, G.R. No. 154342,
14 July 2004)
An action for unfair competition is based on the
proposition that no dealer in merchandise should
be allowed to dress his goods in simulation of the
goods of another dealer, so that purchasers
desiring to buy the goods of the latter would be
induced to buy the goods of the former. The most
usual devices employed in committing this crime
are the simulation of labels and the reproduction
of form, color and general appearance of the
package used by the pioneer manufacturer or
dealer. (Caterpillar, Inc. v. Samson, G.R. No. 164605,
27 Oct. 2006)
Jurisprudence also formulated the following “true
test” of unfair competition: whether the acts of the
defendant have the intent of deceiving or are
calculated to deceive the ordinary buyer making
his purchases under the ordinary conditions of the
particular trade to which the controversy relates.
One of the essential requisites in an action to
restrain unfair competition is proof of fraud; the
intent to deceive, actual or probable must be
shown before the right to recover can exist.
(Superior Enterprises, Inc. v. Kunnan Enterprises
Ltd., G.R. No. 169974, 20 Apr. 2010)
Essential Elements of an Action for Unfair
Competition
1. Confusing similarity in the general appearance
of the goods; and
2. Intent to deceive the public and defraud a
competitor.
The confusing similarity may or may not result
from similarity in the marks but may result from
other external factors in the packaging or
presentation of the goods. The intent to deceive
315
and defraud may be inferred from the similarity of
the appearance of the goods as offered for sale to
the public. (McDonalds Corporation v. L. C. Big Mak
Burger, Inc., G.R. No. 143993, 18 Aug. 2004)
The Element of Passing-off
In order to prove a case of unfair competition, it is
sufficient to show that such deception will be the
natural and probable effect of defendant’s acts.
(Superior Enterprises, Inc. v. Kunnan Enterprises
Ltd., supra.)
Q: The NBI found that SG Inc. is engaged in the
reproduction and distribution of counterfeit
"playstation games" and thus applied with the
Manila RTC warrants to search respondent's
premises in Cavite. RTC granted such warrants
and thus, the NBI served the search warrants
on the subject premises. SG Inc. questioned the
validity of the warrants due to wrong venue
since the RTC of Manila had no jurisdiction to
issue a search warrant enforceable in Cavite. Is
the contention of SG Inc., correct?
A: NO. Unfair competition is a transitory or
continuing offense under Sec. 168 of the IPC. As
such, petitioner may apply for a search warrant in
any court where any element of the alleged offense
was committed, including any of the courts within
Metro Manila and may be validly enforced in
Cavite. (Sony Computer Entertainment Inc. v.
Supergreen Inc. G.R. No. 161823, 22 Mar. 2007)
NOTE: Section 2, Rule 10 of the Rules of Procedure
on IP Cases (A.M. No. 10-3-10 SC, as amended
October 6, 2020) provides that Special Commercial
Courts in Quezon City, Manila, Makati, Pasig,
Baguio City, Iloilo City, Cebu City, Cagayan de Oro
City, and Davao City shall have authority to act on
applications for the issuance of search warrants
involving violations of the Intellectual Property
Code, which search warrants shall be enforceable
nationwide. Within their respective territorial
jurisdictions, the Special Commercial Courts in the
judicial regions where the violation of intellectual
property rights occurred shall have concurrent
jurisdiction to issue search warrants.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
The "true test" of unfair competition has thus been
"whether the acts of the defendant have the intent
of deceiving or are calculated to deceive the
ordinary buyer making his purchases under the
ordinary conditions of the particular trade to
which the controversy relates." It is therefore
essential to prove the existence of fraud, or the
intent to deceive, actual or probable, determined
through a judicious scrutiny of the factual
circumstances attendant to a particular case.
(Shang Properties Realty Corporation (formerly The
Shang Grand Tower Corporation) and Shang
Properties, Inc. (formerly EDSA Properties Holdings,
Inc.) v. St. Francis Development Corporation, G.R.
No. 190706, 21 July 2014)
A distinction should be made between suits for
trademark infringement and unfair competition:
(a) the former is the unauthorized use of a
trademark, whereas the latter is the passing off of
one’s goods as those of another; (b) fraudulent
intent is unnecessary in the former, while it is
essential in the latter; and (c) in the former, prior
registration of the trademark is a pre-requisite to
the action, while it is not necessary in the latter.
(Roberto Co v. Keng Huan Jerry Yeung and Emma
Yeung, G.R. No. 212705, 10 Sept. 2014)
Q: San Miguel started selling its FIESTA ham in
1980. In 2006, it filed for trademark
infringement and unfair competition against
Foodsphere for selling its PISTA ham. San
Miguel alleged that there is confusing
similarity in the general appearance of the
goods and that Foodsphere intended to deceive
the public. According to San Miguel, both
products have a picture of a partly sliced ham
served on a plate of fruits and both FIESTA and
PISTA were printed in white bold stylized font.
Further, the packaging for both consists of box-
typed paper bags made of cardboard materials
with cut-out holes on the middle top portion
for use as handles and predominantly red in
color with a background design of Christmas
balls, stars, snowflakes, and ornate scrolls. On
the other hand, Foodsphere claimed that the
marks were not confusingly similar and
visually and aurally distinct from each other.
This is because PISTA is always in conjunction
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
with its house mark “CDO” and FIESTA bears
house mark “PUREFOODS” rendering
confusion impossible. Further, Foodsphere
claimed that San Miguel does not have the
monopoly to the term FIESTA since there are
other products in the supermarket using the
same term. Was there unfair competition?
A: YES. The Court has held that unfair competition
consists of the passing off (or palming off) or
attempting to pass off upon the public of the goods
or business of one person as the goods or business
of another with the end and probable effect of
deceiving the public. Passing off (or palming off)
takes place where the defendant, by imitative
devices on the general appearance of the goods,
misleads prospective purchasers into buying his
merchandise under the impression that they are
buying that of his competitors. In other words, the
defendant gives his goods the general appearance
of the goods of his competitor with the intention of
deceiving the public that the goods are those of his
competitor. The "true test," therefore, of unfair
competition has thus been "whether the acts of the
defendant have the intent of deceiving or are
calculated to deceive the ordinary buyer making
his purchases under the ordinary conditions of the
particular trade to which the controversy relates."
Thus, the essential elements of an action for unfair
competition are: (1) confusing similarity in the
general appearance of the goods; and (2) intent to
deceive the public and defraud a competitor. The
confusing similarity may or may not result from
similarity in the marks but may result from other
external factors in the packaging or presentation of
the goods. The intent to deceive and defraud may
be inferred from the similarity of the appearance
of the goods as offered for sale to the public. Actual
fraudulent intent need not be shown. (San Miguel
Pure Foods Company, Inc. v. Foodsphere, G.R. No.
217781, 20 June 2018)
Applicability of Rules on the Issuance of the
Search and Seizure Order in Civil Actions for
Infringement
The Rules on the Issuance of the Search and
Seizure in Civil Actions for Infringement of
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 Intellectual Property Code
Intellectual Property Rights are not applicable in
this case as the search warrants were not applied
based thereon, but in anticipation of criminal
actions for violation of intellectual property rights
under RA 8293. It was established that respondent
had asked the NBI for assistance to conduct
investigation and search warrant implementation
for possible apprehension of several drugstore
owners selling imitation or counterfeit TOP GEL
T.G. & DEVICE OF A LEAF papaya whitening soap.
What is applicable is Rule 126 of the Rules of
Criminal Procedure. A core requisite before a
warrant shall validly issue is the existence of
probable cause. The pendency of a similar action
for infringement of trademark and unfair
competition against the very person who applied
for search warrant does not bar the issuance of the
warrant if it is based on probable cause. (Divina,
2014; Century Chinese Medicine Co., et.al. v. People
of the Philippines and Ling Na Lau, G.R. No. 188526,
11 Nov. 2013)
Ordinary Purchaser
An ordinary purchaser is one accustomed to buy,
and therefore to some extent familiar with, the
goods in question. The test of fraudulent
simulation is not found in the deception, or the
possibility of deception, of the person who knows
nothing about the design which has been
counterfeited, and who must be indifferent
between that and the other. The simulation, in
order to be objectionable, must be such as appears
likely to mislead the ordinary intelligent buyer
who has a need to supply and is familiar with the
article that he seeks to purchase. (Emerald
Garment Manufacturing Corporation v. Court of
Appeals, G.R. No. 100098, 29 Dec. 1995)
Q: MS Brewery Corporation (MS) is a
manufacturer and distributor of the popular
beer "MS Lite." It faces stiff competition from
BA Brewery Corporation (BA) whose sales of
its own beer product, "BA Lighter," has soared
to new heights. Meanwhile, sales of the "MS
Lite" decreased considerably. The distribution
and marketing personnel of MS later
discovered that BA has stored thousands of
empty bottles of "MS Lite" manufactured by MS
317
in one of its warehouses. MS filed a suit for
unfair competition against BA before the
Regional Trial Court (RTC). Finding a
connection between the dwindling sales of MS
and the increased sales of BA, the RTC ruled
that BA resorted to acts of unfair competition
to the detriment of MS. Is the RTC correct?
Explain. (2016 BAR)
A: NO. The RTC is not correct. Hoarding, or the act
of accumulating empty bottles to impede
circulation of the bottled product, does not amount
to unfair competition. BA did not fraudulently
“pass off” its product as that of MS Lite. There was
no representation or misrepresentation on the
part of BA that would confuse or tend to confuse its
goods with those of MS Lite. (Coca Cola Bottlers
Philippines v. Gomez, G.R. No. 154491, 14 Nov. 2008)
Actions, and Damages and Injunction for
Infringement
The owner of a registered mark may recover
damages from any person who infringes his rights,
and the measure of the damages suffered shall be
either the reasonable profit which the complaining
party would have made, had the defendant not
infringed his rights, or the profit which the
defendant actually made out of the infringement,
or in the event such measure of damages cannot
be readily ascertained with reasonable certainty,
then the court may award as damages a reasonable
percentage based upon the amount of gross sales
of the defendant or the value of the services in
connection with which the mark or trade name
was used in the infringement of the rights of the
complaining party.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

(Pearl & Dean Inc. v. Shoemart, Inc., G.R. No. 148222,

C. COPYRIGHT 15 Aug. 2003; Joaquin, Jr. v. Drilon, G.R. No. 108946,
28 Jan. 1999; Ching v. Salinas, G.R. No. 161295, 29
June 2005)

A right over literary and artistic works which are

Functional components of useful articles, no matter
original intellectual creations in the literary and
how artistically designed, have generally been
artistic domain protected from the moment of
denied copyright protection unless they are
creation. (Sec. 171.1, IPC)
separable from the useful article A useful article
may be copyrightable only if and only to the extent
Duration of the Author’s Copyright
that such design incorporates pictorial, graphic, and
sculptural features that can be identified separately
Copyright shall last during the lifetime of the author
from and are capable of existing independently of
and 50 years after his death.
the utilitarian aspects of the article. (Ching v. Salinas,
G.R. No. 161295, 29 June 2005)
Copyright protection is not absolute. (ABS-CBN
Corporation v. Gozon, G.R. No. 195956, 11 Mar. 2015)
Elements of Originality
There is no absolute protection unlike the
protection in tangible properties where one can do
1. Independently created by the author; and
anything so long as you will not violate the rights of
2. Possesses some minimal degree of creativity
others. In the case of copyright, there is a limitation
on the term of protection.
Time when Copyright Vests

Basic Principles
Principle of Automatic Protection – Works are
protected from the moment of their creation,
Elements of copyrightability
irrespective of their mode or form of expression, as
well as of their content, quality, and purpose (Sec.
1. Originality – Must have been created by the
172.2, IPC).
author’s own skill, labor, and judgment without
directly copying or evasively imitating the work
P.D. 49, as amended, does not require registration
of another. (Ching Kian Chuan v. CA, G.R. No.
and deposit for a creator to be able to file an action
130360, 15 Aug. 2001)
for infringement of his rights. These conditions are
merely pre-requisites to an action for damages. So,
NOTE: Minimal degree of creativity suffices.
as long as the proscribed acts are shown to exist, an
action for infringement may be initiated. (Columbia
2. Expression – Must be embodied in a medium
Pictures, Inc. v. CA, G.R. No. 110318, 28 Aug. 1996)
sufficiently permanent or stable to permit it to
be perceived, reproduced or communicated for
The certificates of registration and deposit issued by
a period more than a transitory duration.
the National Library and the Supreme Court Library
serve merely as a notice of recording and
Copyright, in the strict sense of the term, is purely a
registration of the work but do not confer any right
statutory right. Being a mere statutory grant, the
or title upon the registered copyright owner or
rights are limited to what the statute confers. It may
automatically put his work under the protective
be obtained and enjoyed only with respect to the
mantle of the copyright law. It is not a conclusive
subjects and by the persons, and on terms and
proof of copyright ownership. As it is, non-
conditions specified in the statute. Accordingly, it
registration and deposit of the work within the
can only cover the works falling within the statutory
prescribed period only makes the copyright owner
enumeration or description. Only the expression of
liable to pay a fine. (Manly Sportswear
an idea is protected by copyright, not the idea itself.

UNIVERSITY OF SANTO TOMAS 318

2022 GOLDEN NOTES
 Intellectual Property Code
Manufacturing Inc. v. Dadodette Enterprises and/or
Hermes Sports Center, G.R. No. 165306, 20 Sept. 2005)
Copyright as Distinct from Material Object
GR: The copyright is distinct from the property in
the material object subject to it. Consequently, the
transfer or assignment of the copyright shall not
itself constitute a transfer of the material object. Nor
shall a transfer or assignment of the sole copy or of
one or several copies of the work imply transfer or
assignment of the copyright.
XPN: Work of Architecture - Copyright in a work of
architecture shall include the right to control the
erection of any building which reproduces the
whole or a substantial part of the work either in its
original form or in any form recognizably derived
from the original: Provided, That the copyright in
any such work shall not include the right to control
the reconstruction or rehabilitation in the same
style as the original of a building to which that
copyright relates. (Sec. 186, IPC)
1. COPYRIGHTABLE WORKS
Original Works Include in Particular the
Following (Literary and Artistic Works):
(Bo-L2-D-M-Wa-P-G-A-S-P-A-P-C-O)
1. Books, pamphlets, articles, and other writings
2. Lectures, sermons, addresses, dissertations
prepared for oral delivery, whether or not
reduced in writing or other material form
3. Letters
4. Dramatic, choreographic works
5. Musical compositions
6. Works of Art
7. Periodicals and Newspapers
8. Works relative to Geography, topography,
architecture, or science
9. Works of Applied art
10. Works of a Scientific or technical character
11. Photographic works
12. Audiovisual works and cinematographic works
13. Pictorial illustrations and advertisements
14. Computer programs; and
15. Other literary, scholarly, scientific, and artistic
works. (Sec. 172.1, IPC)
319
Derivative Works
1. Dramatizations, translations, adaptations,
abridgements, arrangements, and other
alterations of literary or artistic works;
2. Collections of literary, scholarly, or artistic
works and compilations of data and other
materials which are original by reason of the
selection or coordination or arrangement of
their contents. (Sec. 173, IPC)
NOTE: Derivative works shall be protected as new
works, provided that such new work shall not affect
the force of any subsisting copyright upon the
original works employed or any part thereof or be
construed to imply any right to such use of the
original works, or to secure or extend copyright in
such original works. (Sec. 173.2, IPC)
Q: P&D was granted a copyright on the technical
drawings of light boxes as "advertising display
units". SMI, however, manufactured similar or
identical to the light box illustrated in the
technical drawings copyrighted by P&D for
leasing out to different advertisers. Was this an
infringement of P&D’s copyright over the
technical drawings?
A: NO. P&D’s copyright protection extended only to
the technical drawings and not to the light box itself.
The light box was not a literary or artistic piece
which could be copyrighted under the copyright
law. If SMI reprinted P&D’s technical drawings for
sale to the public without license from P&D, then no
doubt they would have been guilty of copyright
infringement. Only the expression of an idea is
protected by copyright, not the idea itself. If what
P&D sought was exclusivity over the light boxes, it
should have instead procured a patent over the light
boxes itself. (Pearl and Dean Inc. v. Shoemart Inc., GR
No. 148222, 15 Aug. 2003)
Q: Juan Xavier wrote and published a story
similar to an unpublished copyrighted story of
Manoling Santiago. It was, however,
conclusively proven that Juan Xavier was not
aware that the story of Manoling Santiago was
protected by copyright. Manoling Santiago sued
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Juan Xavier for infringement of copyright. Is
Juan Xavier liable? (1998 BAR)
A: YES. Juan Xavier is liable for infringement of
copyright. It is not necessary that Juan Xavier is
aware that the story of Manoling Santiago was
protected by copyright. The work of Manoling
Santiago is protected from the time of its creation.
There will still be originality sufficient to warrant
copyright protection if “the author, through his skill
and effort, has contributed a distinguishable
variation from the older works.” In such a case, of
course, only those parts which are new are
protected by the new copyright. Hence, in such a
case, there is no case of infringement. Juan Xavier is
no less an “author” because others have preceded
him. (Habana v. Robles, G.R. No. 131522, 19 July
1999)
2. NON-COPYRIGHTABLE WORKS
Non-copyrightable Works (I-N-O-P-De-G-TV-S2)
1. Idea, procedure, system, method or operation,
concept, principle, discovery, or mere data as
such;
2. News of the day and other items of press
information;
3. Any Official text of a legislative, administrative,
or legal nature, as well as any official translation
thereof;
4. Pleadings;
5. Decisions of courts and tribunals – this refers to
original decisions and not to annotated
decisions such as the SCRA or SCAD as these
already fall under the classification of
derivative works, hence copyrightable;
6. Any work of the Government of the Philippines;
GR: Conditions imposed prior the approval of
the government agency or office wherein the
work is created shall be necessary for
exploitation of such work for profit. Such
agency or office, may, among other things,
impose as condition the payment of royalties.
XPN: No prior approval or conditions shall be
required for the use of any purpose of statutes,
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
rules and regulations, and speeches, lectures,
sermons, addresses, and dissertations,
pronounced, read, or rendered in courts of
justice, before administration agencies, in
deliberative assemblies and in meetings of
public character. (Sec. 176, IPC)
7. TV programs, format of TV programs; (Joaquin
v. Drilon, G.R. No. 108946, 28 Jan. 1999)
8. Systems of bookkeeping; and
9. Statutes.
Q: X, an amateur astronomer, stumbled upon
what appeared to be a massive volcanic
eruption in Jupiter while peering at the planet
through his telescope. The following week, X,
without notes, presented a lecture on his
findings before the Association of Astronomers
of the Philippines. To his dismay, he later read
an article in a science journal written by Y, a
professional astronomer, repeating exactly
what X discovered without any attribution to
him. Has Y infringed on X's copyright, if any?
(2011 BAR)
A: NO, because no protection extends to any
discovery, even if expressed, explained, illustrated,
or embodied in a work.
Q: Rural is a certified public utility providing
telephone service to several communities in
Manila. It obtains data for the directory from
subscribers, who must provide their names and
addresses to obtain telephone service. Feist
Publications, Inc., is a publishing company that
specializes in area-wide telephone directories
covering a much larger geographic range than
directories such as Rural's. Feist extracted the
listings it needed from Rurals’s directory
without its consent. Are directories
copyrightable?
A: NO. Directories are not copyrightable and
therefore the use of them does not constitute
infringement. The IPC mandates originality as a
prerequisite for copyright protection. This
requirement necessitates independent creation
plus a modicum of creativity. Since facts do not owe
their origin to an act of authorship, they are not
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 Intellectual Property Code
original, and thus are not copyrightable. A
compilation is not copyrightable per se, but is
copyrightable only if its facts have been "selected,
coordinated, or arranged in such a way that the
resulting work as a whole constitutes an original
work of authorship." Nonetheless, a compilation
that is copyrightable receives only limited
protection, for the copyright does not extend to facts
contained in the compilation. (Feist Publications, Inc.
v. Rural Telephone Service Co., 499 U.S. 340, 27 Mar.
1991)
Q: ABS-CBN conducted a live audio-video
coverage of and broadcasted the arrival of
Angelo dela Cruz at the Ninoy Aquino
International Airport (NAIA) and the
subsequent press conference. ABS-CBN allowed
Reuters Television Service (Reuters) to air the
footages it had taken earlier under a special
embargo agreement. It received a live video feed
of the coverage of Angelo dela Cruz’s arrival
from Reuters. GMA-7 immediately carried the
live news feed in its program "Flash Report,"
together with its live broadcast. ABS-CBN filed
the Complaint for copyright infringement. Are
news footages considered copyrightable under
the law?
A: YES. The arrival of Angelo dela Cruz is not
copyrightable because that is the newsworthy
event. However, any footage created from the event
itself, in this case the arrival of Angelo dela Cruz, are
intellectual creations which are copyrightable. The
Intellectual Property Code does not state that
expression of the news of the day, particularly when
it underwent a creative process, is not entitled to
protection. News coverage in television involves
framing shots, using images, graphics, and sound
effects. It involves creative process and originality.
Television news footage is an expression of the
news. Thus, being an expression, it is considered
copyrightable under the law. (ABS-CBN Corp. v.
Gozon, G.R. No. 195956, 15 Mar. 2015)
Q: Estrella Domingo is the Chief Archivist of the
Archives Preservation Division of the National
Archives of the Philippines (NAP). She
personally received an invitation to serve as a
resource speaker for the City of Bacoor's Basic
321
Records Management Seminar. She filed a leave
of absence to attend the seminar. During the
said seminar, NAP’s handouts were presented
and disseminated. The Executive Director
learned about Domingo’s activity and issued a
show cause memorandum relative to the
conduct of the unapproved seminar and
unauthorized use and dissemination of the NAP
handouts. Rule on Domingo’s liability for the
dissemination of NAP’s handouts during the
seminar.
A: Domingo is not liable. She did not violate any
rule of conduct when the NAP's materials were
disseminated during the seminar. There is no
finding of fact that Domingo was the operating and
controlling mind of the dissemination. Further,
under Section 176.1 of the Intellectual Property
Code, the Government holds no copyright to its
materials. However, prior approval of the
government agency or office wherein the work is
created shall be necessary for exploitation of such
work for profit. Such agency or office may, among
other things, impose as a condition the payment of
royalties. No prior approval or conditions shall be
required for the use for any purpose of statutes,
rules and regulations, and speeches, lectures,
sermons, addresses, and dissertations, pronounced,
read, or rendered in courts of justice, before
administrative agencies, in deliberative assemblies
and in meetings of public character.
Under the law, the NAP materials were free to be
disseminated to the City of Bacoor stakeholders.
Presenting the NAP materials to the City of Bacoor
is not an exploitation of the NAP materials for profit,
but for the noble and laudable cause of improving
the basic records management of this local
government unit. There is no finding that Domingo
personally materially benefitted from her
attendance at the seminar and the dissemination of
the NAP materials. (Estrella Domingo v. Civil Service
Commission and Victorino Manalo, G.R. No. 236050,
17 June 2020)
An Object of Utility is Not Copyrightable
A copyrightable work refers to literary and artistic
works defined as original intellectual creations in
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
the literary and artistic domain. A hatch door, by its
nature is an object of utility. It is defined as a small
door, small gate or an opening that resembles a
window equipped with an escape for use in case of
fire or emergency. It is thus by nature, functional
and utilitarian serving as egress access during
emergency. It is not primarily an artistic creation
but rather an object of utility designed to have
aesthetic appeal. It is intrinsically a useful article,
which, as a whole, is not eligible for copyright.
The only instance when a useful article may be the
subject of copyright protection is when it
incorporates a design element that is physically or
conceptually separable from the underlying
product. This means that the utilitarian article can
function without the design element. In such an
instance, the design element is eligible for copyright
protection. (Sison Olano, et al. v. Lim Eng Co, G.R. No.
195835, 14 Mar. 2016)
3. RIGHTS CONFERRED BY COPYRIGHT
Rights of Copyright Owners (1995 BAR)
1. Economic rights – The right to carry out,
authorize or prevent the following acts:
(Re-Ca- F-Re-P2-O)
a. Reproduction of the work or substantial
portion thereof;
b. Carry-out derivative work (dramatization,
translation, adaptation, abridgement,
arrangement, or other transformation of
the work) ;
c. First distribution of the original and each
copy of the work by sale or other forms of
transfer of ownership;
d. Rental right;
e. Public display;
f. Public performance;
g. Other communications to the public.
NOTE: Assignment of rights must be in writing
to be valid.
2. Moral rights – For reasons of professionalism
and propriety, the author has the right:
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
a. To require that the authorship of the works
be attributed to him (attribution right);
b. To make any alterations of his work prior
to, or to withhold it from publication;
c. To preserve integrity of work, object to any
distortion, mutilation or other modification
which would be prejudicial to his honor or
reputation; and
d. To restrain the use of his name with respect
to any work not of his own creation or in a
distorted version of his work. (Sec. 193, IPC)
3. Droit de suite or “art proceeds right” is the
artist’s resale right, which requires that a
percentage of the resale price of an artistic work
is paid to the author. The right is exercisable
even after the author’s death, provided the
work is still in copyright. (David Bainbridge,
Intellectual Property, 3rd Ed., p. 220 1996, also
cited in Copyright Law of the Philippines by D.
Funa)
In every sale or lease of an original work of
painting or sculpture or of the original
manuscript of a writer or composer,
subsequent to the first disposition thereof by
the author, the author or his heirs shall have an
inalienable right to participate in the gross
proceeds of the sale or lease to the extent of five
percent (5%). (Sec. 200, IPC)
Rights Which are Not Covered Under a Droit de
suite
1. Prints
2. Etchings
3. Engravings
4. Works of applied art
5. Similar works wherein the author primarily
derives gain from the proceeds of
reproductions. (Sec. 201, IPC)
Q: ABC is the owner of certain musical
compositions among which are the songs
entitled: "Dahil Sa Iyo", "Sapagkat Ikaw Ay Akin,"
"Sapagkat Kami Ay Tao Lamang" and "The
Nearness Of You.” Soda Fountain Restaurant
hired a combo with professional singers to play
and sing musical compositions to entertain and
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 Intellectual Property Code
amuse customers. They performed the above-
mentioned compositions without any license or
permission from ABC to play or sing the same.
Accordingly, ABC demanded from Soda Fountain
payment of the necessary license fee for the
playing and singing of aforesaid compositions,
but the demand was ignored. ABC filed an
infringement case against Soda Fountain. Does
the playing and singing of musical compositions
inside an establishment constitute public
performance for profit?
A: YES. The patrons of the Soda Fountain pay only
for the food and drinks and apparently not for
listening to the music, but the music provided is for
the purpose of entertaining and amusing the
customers in order to make the establishment more
attractive and desirable. For the playing and singing
the musical compositions involved, the combo was
paid as independent contractors by Soda Fountain.
It is therefore obvious that the expenses entailed
thereby are added to the overhead of the restaurant
which are either eventually charged in the price of
the food and drinks or to the overall total of
additional income produced by the bigger volume of
business which the entertainment was programmed
to attract. Consequently, it is beyond question that
the playing and singing of the combo in Soda
Fountain Restaurant constituted performance for
profit. (FILSCAP v. Tan, G.R., No. L-36402, 16 Mar.
1987)
Performance of a Contract
An author cannot be compelled to perform his
contract to create a work or for the publication of
his work already in existence. However, he may be
held liable for damages for breach of such contract.
(Sec. 195, IPC)
MORAL RIGHTS
Nature of Moral Rights
These are personal rights independent from the
economic rights. Being a personal right, it can only
be given to a natural person. Hence, even if he has
licensed or assigned his economic rights, he
323
continues to enjoy the above-mentioned moral
rights. (Amador, 2007)
Term of Moral Rights
The rights of an author shall last during the lifetime
of the author and for fifty (50) years after his death
while the rights under sections 193.2, 193.3 and
193.4 shall be coterminous with the economic
rights, the moral rights shall not be assignable or
subject to license. The person or persons to be
charged with the posthumous enforcement of these
rights shall be named in a written instrument which
shall be filed with the National Library. In default of
such person or persons, such enforcement shall
devolve upon either the author’s heirs, and in
default of the heirs, the Director of the National
Library. (Sec. 198, IPC)
Exceptions to Moral Rights
1. Absent any special contract at the time creator
licenses/permits another to use his work, the
following are deemed not to contravene
creator’s moral rights, provided they are done
in accordance with reasonable customary
standards or requisites of the medium:
a. Editing
b. Arranging
c. Adaptation
d. Dramatization
e. Mechanical and electric reproduction
2. Complete destruction of work unconditionally
transferred by creators. (Sec. 197, IPC)
Waiver of Moral Rights
GR: Moral rights can be waived in writing, expressly
so stating such waiver.
XPN: Even in writing, no such waiver shall be valid
where its effects is to permit another to:
1. Use the name of the author, title of his work, or
his reputation with respect to any
version/adaptation of his work, which because
of alterations, substantially tend to injure
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
literary/artistic reputation of another author;
or
2. Use the name of the author in a work that he did
not create. (Sec. 195, IPC)
NEIGHBORING RIGHTS
1. Performer’s Rights
2. Producers of Sound Recordings
3. Broadcasting Organizations
1. PERFORMER’S RIGHTS
Performers shall enjoy the following exclusive
rights:
1. As regards their performances, the right of
authorizing the:
a. Broadcasting and other communication to
the public of their performance; and
b. Fixation of their unfixed performance.
2. Right of authorizing the direct or indirect
reproduction of their performances fixed in
sound recordings or audiovisual works or
fixations in any manner or form;
3. Right of authorizing the first public distribution
of the original and copies of their performance
fixed in sound recordings or audiovisual works
or fixations through sale or rental of other
forms of transfer of ownership;
4. Right of authorizing the commercial rental to
the public of the original and copies of their
performances fixed in sound recordings or
audiovisual works or fixations, even after
distribution of them by, or pursuant to the
authorization by the performer; and
5. Right of authorizing the making available to the
public of their performances fixed in sound
recordings or audiovisual works or fixations, by
wire or wireless means, in such a way that
members of the public may access them from a
place and time individually chosen by them.
(Sec. 203, IPC, as amended by R.A. No. 10372)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Loss of Performer’s Rights
Once the performer has authorized the
broadcasting or fixation of his performance, his
performer’s rights provided for in Section 203 shall
have no further application.
Fair use and limitations to copyrights shall apply
mutatis mutandis to performers. (Sec. 205, IPC)
Moral Rights of Performers
The performer, shall, as regards his live aural
performances or performances fixed in sound
recordings, have the right to claim to be identified
as the performer of his performances, except where
the omission is dictated by the manner of the use of
the performance, and to object to any distortion,
mutilation or other modification of his
performances that would be prejudicial to his
reputation. (Sec. 204, IPC)
Additional Remuneration for Subsequent
Communications or Broadcasts
The performer shall be entitled to an additional
remuneration equivalent to at least five percent
(5%) of the original compensation he received for
the first communication or broadcast in every
communication to the public or broadcast of a
performance subsequent to the first communication
or broadcast, unless otherwise provided in the
contract. (Sec. 206, IPC)
2. PRODUCERS OF SOUND RECORDINGS
Producers of sound recordings shall have exclusive
right to authorize the:
1. Direct or indirect reproduction of their sound
recordings, in any manner or form; the placing
of these reproductions in the market and the
right of rental or lending;
2. First public distribution of the original and
copies of their sound recordings through sale or
rental or other forms of transferring ownership;
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 Intellectual Property Code
3. Commercial rental to the public of the original
and copies of their sound recordings, even after
distribution by them by or pursuant to
authorization by the producer; and
4. Making available to the public of their sound
recordings in such a way that members of the
public may access the sound recording from a
place and at a time individually chosen or
selected by them, as well as other
transmissions of a sound recording with like
effect. (Sec. 208, IPC, as amended by R.A. No.
10372)
3. BROADCASTING ORGANIZATION’S RIGHTS
Broadcasting organizations shall enjoy the exclusive
right to carry out, authorize or prevent any of the
following acts:
1. Rebroadcasting of their broadcasts;
2. Recording in any manner, including the making
of films or the use of video tape, of their
broadcasts for the purpose of communication to
the public of television broadcasts of the same;
and
3. Use of such records for fresh transmissions or
for fresh recording. (Sec. 211, IPC)
Broadcasting
It is the transmission by wireless means for the
public reception of sounds or of images or of
representations thereof; such transmission by
satellite is also broadcasting where the means for
decrypting are provided to the public by the
broadcasting organization or with its consent. (ABS-
CBN Broadcasting Corp. v. Philippine Multimedia
System, Inc., G.R. Nos. 175769-70, 19 Jan. 2009)
Rebroadcasting
It is the simultaneous broadcasting by one
broadcasting organization of the broadcast of
another broadcasting organization. While the Rome
Convention gives broadcasting organizations the
right to authorize or prohibit the rebroadcasting of
its broadcast, however, this protection does not
extend to cable retransmission. (Ibid.)
325
Must Carry Rule
It is limitation on copyright which obligates
operators to carry the signals of local channels
within their respective systems. This is to give the
people wider access to more sources of news,
information, education, sports event and
entertainment programs other than those provided
for by mass media and afforded television programs
to attain a well-informed, well-versed and culturally
refined citizenry and enhance their socio-economic
growth. (ABS-CBN Broadcasting Corp. v. Philippine
Multimedia System, G.R. No. 175769-70, 19 Jan. 2009)
This rule mandates that the local television (TV)
broadcast signals of an authorized TV broadcast
station, such as the GMA Network, Inc., should be
carried in full by the cable antenna television
(CATV) operator, without alteration or deletion. In
this case, the Central CATV, Inc. was found not to
have violated the must-carry rule when it solicited
and showed advertisements in its cable television
(CATV) system. Such solicitation and showing of
advertisements did not constitute an infringement
of the “television and broadcast markets” under
Section 2 of E.O. No. 205. (GMA Network, Inc. v.
Central CATV, Inc., G.R No. 176694, 18 July 2014)
NOTE: The provisions of IPC shall also apply to
works, performers, producers of sound recordings
and broadcasting organizations that are to be
protected by virtue of and in accordance with any
international convention or other international
agreement to which the Philippines is a party. (Sec.
221.2 and 224.2, IPC)
Applicability of Rights
The provisions of Chapter VIII shall apply mutatis
mutandis to the rights of performers, producers of
sound recordings and broadcasting organizations,
as an exception to infringement and allowing the
following:
1. Exclusive use of a natural person for own
personal purposes;
2. Short excerpts for reporting current events;
3. Sole use for the purpose of teaching or for
scientific research;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
4. Fair use of the broadcast. (Sec. 212, IPC, as
amended by R.A. No. 10372)
Term of Protection
1. For performances not incorporated in
recordings, fifty (50) years from the end of the
year in which the performance took place
2. For sound or image and sound recordings and
for performances incorporated therein, fifty
(50) years from the end of the year in which the
recording took place
3. In case of broadcasts, the term shall be twenty
(20) years from the date the broadcast took
place. The extended term shall be applied only
to old works with subsisting protection under
the prior law. (Sec. 215, IPC)
Persons To Whom the Rights are Granted
(Copyrightable Works Applicable)
1. For works
a. Works of authors who are nationals of, or
have their habitual residence in, the
Philippines;
b. Audio-visual works the producer of which
has his headquarters or habitual residence
in the Philippines;
c. Works of architecture erected in the
Philippines or other artistic works
incorporated in a building or other
structure located in the Philippines;
d. Works first published in the Philippines;
and
e. Works first published in another country
but also published in the Philippines within
thirty days, irrespective of the nationality
or residence of the authors. (Sec. 221, IPC)
2. For performers
a. Performers who are nationals of the
Philippines;
b. Performers who are not nationals of the
Philippines but whose performances:
i. Take place in the Philippines;
ii. Are incorporated in sound
recordings that are protected under
IPC; or
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
iii. Which has not been fixed in sound
recording but are carried by
broadcast qualifying for protection
under the IPC. (Sec. 222, IPC)
3. Of sound recordings
a. Sound recordings the producers of which
are nationals of the Philippines
b. Sound recordings that were first published
in the Philippines. (Sec. 223, IPC)
4. For broadcasts
a. Broadcasts of broadcasting organizations
the headquarters of which are situated in
the Philippines; and
b. Broadcasts transmitted from transmitters
situated in the Philippines. (Sec. 224, IPC)
4. OWNERSHIP OF A COPYRIGHT
Presumption of Authorship
The natural person whose name is indicated on a
work in the usual manner as the author shall, in the
absence of proof to the contrary, presumed to be the
author of the work. This is applicable even if the
name is a pseudonym, where the pseudonym leaves
no doubt as to identity of the author. (Sec. 219.1, IPC)
The person or body corporate, whose name appears
on the audio-visual work in the usual manner shall,
in the absence of proof to the contrary, be presumed
to be the maker of said work. (Sec. 219.2, IPC)
Rules on Ownership of Copyright
OWNER OF COPYRIGHT
Original literary and artistic works
Author of the work. (Sec. 178.1, IPC)
Joint authorship
Co-authors – in case of works of joint authorship;
in the absence of agreement, their rights shall be
governed by the rules on co-ownership.
NOTE: If work of joint authorship consists of
parts that can be used separately, then the author
of each part shall be the original owner of the
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 Intellectual Property Code

copyright in the part that he has created. (Sec.

178.2, IPC) Letters and other private communications in
Audiovisual work writing are owned by the person to whom they
GR: Producer, the author of the scenario, the are addressed and delivered, but they cannot be
composer of the music, the film director, and the published or disseminated without the consent of
author of the work so adapted. the writer or his heirs. However, the court may
authorize their publication or dissemination if
XPN: Unless otherwise provided in an the public good or the interest of justice so
agreement, the producers shall exercise the requires. (Art. 723, NCC)
copyright to an extent required for the exhibition
of the work in any manner, except for the right to Collective work vs. Joint work
collect performing license fees for the
performance of musical compositions, with or COLLECTIVE WORK JOINT WORK
without words, which are incorporated into the Integration of Elements
work. (Sec. 178.5, IPC) Elements remain Separate elements
Anonymous and pseudonymous works unintegrated and merge into a unified
The publishers shall be deemed to represent the disparate. whole.
authors of articles and other writings published Intention of the Authors
without the names of the authors or under Work created by two or
pseudonyms, unless the contrary appears, or the more persons at the
Work prepared by two
pseudonyms or adopted name leaves no doubt as initiative and under the
or more authors with
to the author's identity, or if the author of the direction of another
the intention that
anonymous works discloses his identity. (Sec. with the understanding
their contributions be
179, IPC) that it will be disclosed
merged into
Commissioned work by the latter under his
inseparable or
The person who commissioned the work shall own name and that of
independent parts of
own the work but the copyright thereto shall the contributions of
the unitary whole.
remain with the creator, unless there is a written natural persons will not
stipulation to the contrary. (Sec. 178.4, IPC) be identified
Collective works Right of the Authors
When an author contributes to a collective work, Each author shall enjoy Joint authors shall be
his right to have his contribution attributed to copyright to his own co-owners. Co-
him is deemed waived unless he expressly contribution ownership shall apply.
reserves it. (Sec. 196, IPC) Persons to whom the Work will be Attributed
In the course of employment The work will be
The employee, if not a part of his regular duties attributed to the person
Joint authors shall be
even if the employee uses the time, facilities and under whose initiative
both entitled to the
materials of the employer. and direction it was
acknowledgment as
created unless the
authors of the work.
The employer, if the work is the result of the contributor expressly
performance of his regularly-assigned duties, reserves his right.
unless there is an agreement, express or implied,
to the contrary. (Sec. 178.3, IPC) Q: T, an associate attorney in XYZ Law Office,
Letters wrote a newspaper publisher a letter disputing
In respect of letters, the copyright shall belong to a columnist’s claim about an incident in the
the writer subject to the provisions of Article 723 attorney’s family. T used the law firm’s
of the Civil Code. (Sec. 178.6, IPC) letterhead and its computer in preparing the
letter. T also requested the firm’s messenger to

327 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
deliver the letter to the publisher. Who owns the
copyright to the letter? (2011 BAR)
A: T, since he is the original creator of the contents
of the letter.
Q: Solid Investment House commissioned Mon
Blanco and his son Steve, both noted artists, to
paint a mural for the Main Lobby of the new
building of Solid for a contract price of P2M.
a. Who owns the mural? Explain.
b. Who owns the copyright of the mural?
Explain. (1995 BAR)
A:
a. The mural is owned by Solid. It commissioned
the work and paid Mon and Steve Blanco P2M
for the mural.
b. Even though Solid owns the mural, the
copyright of the mural is jointly owned by Mon
and Steve, unless there is a written stipulation
to the contrary. (Sec. 178.4, IPC)
Q: Rudy is a fine arts student in a university. He
stays in a boarding house with Bernie as his
roommate. During his free time, Rudy would
paint and leave his finished works lying around
the boarding house. One day, Rudy saw one of
his works—an abstract painting entitled Manila
Traffic Jam—on display at the university
cafeteria. The cafeteria operator said he
purchased the painting from Bernie who
represented himself as its painter and owner.
Rudy and the cafeteria operator immediately
confronted Bernie. While admitting that he did
not do the painting, Bernie claimed ownership
of its copyright since he had already registered
it in his name with the National Library as
provided in the Intellectual Property Code.
Who owns the copyright to the painting?
Explain. (2013 BAR)
A: Rudy owns the copyright to the painting because
he was one who actually created it. His rights
existed from the moment of its creation. The
registration of the painting by Bernie with the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
National Library did not confer copyright upon him.
The registration is merely for the purpose of
completing the records of the National Library.
Q: BR and CT are noted artists whose paintings
are highly prized by collectors. Dr. DL
commissioned them to paint a mural at the main
lobby of his new hospital for children. Both
agreed to collaborate on the project for a total
fee of 2 million pesos to be equally divided
between them. It was also agreed that Dr. DL had
to provide all the materials for the painting and
pay for the wages of technicians and laborers
needed for the work on the project.
Assume that the project is completed and both
BR and CT are fully paid the amount of P2M as
artists' fee by DL. Under the law on intellectual
property, who will own the mural? Who will own
the copyright in the mural? Why? Explain. (2004
BAR)
A: DL owns the mural, while both BR and CT jointly
own the copyright thereto. This is so because the
mural was commissioned by DL and a consideration
was paid to BR and CT in exchange thereof.
According to Section 178.4 of the IPC, when the
work is commissioned by a person other than an
employer of the author, the owner of the work shall
be the one who commissioned the work, but the
copyright of the work shall be owned by the person
who is responsible for its creation, unless there is a
written stipulation to the contrary.
Q: Eloise, an accomplished writer, was hired by
Petong to write a bimonthly newspaper column
for Diario de Manila, a newly established
newspaper of which Petong was the Editor-in-
chief. Eloise was to be paid P1,000.00 for each
column that was published. In the course of two
months, Eloise submitted three columns which,
after some slight editing, were printed in the
newspaper. However, Diario de Manila proved
unprofitable and closed only after two months.
Due to the minimal amounts involved, Eloise
chose not to pursue any claim for payment from
the newspaper, which was owned by New Media
Enterprises.
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 Intellectual Property Code
Three years later, Eloise was planning to publish
an anthology of her works and wanted to include
the three columns that appeared in the Diario de
Manila in her anthology. She asks for your legal
advice:
a. Does Eloise have to secure authorization
from New Media Enterprises to be able to
publish Diario de Manila columns in her own
anthology. Explain fully.
b. Assume that New Media Enterprises plans to
publish Eloise’s columns in its own
anthology entitled, “The best of Diario de
Manila.” Eloise wants to prevent the
publication of her columns in that anthology
since she was never paid by the newspaper.
Name one irrefutable legal argument Eloise
could cite to enjoin New Media Enterprises
from including her columns in its anthology.
(2008 BAR)
A:
a. NO. In the case of a work commissioned by a
person other than an employer of the author
and who pays for it and the work is made in
pursuance of the commission, the person who
so commissioned the work shall have
ownership of work, but the copyright thereto
shall remain with the creator, unless there is a
written statement to the contrary. Thus, though
Diario de Manila commissioned the work, it
cannot be considered as its owner because it did
not pay Eloise. Ownership and copyright still
belong to Eloise. Authorization is no longer
needed to publish Diario de Manila in her
anthology because Eloise has moral and
economic rights over her works.
b. The fact that Eloise was not paid, ownership
over her work, published in the newspaper, did
not vest upon the latter. She retains full moral
and economic rights over it.
329
5. LIMITATIONS ON COPYRIGHT
General Limitations on Copyright
The following acts shall not constitute infringement
of copyright:
1. Recitation or performance of a work, once it has
been lawfully made accessible to the public, if
done privately and free of charge or if made
strictly for a charitable or religious institution
or society;
2. Making of quotations from a published work if
they are compatible with fair use and only to the
extent justified for the purpose, including
quotations from newspaper articles and
periodicals in the form of press summaries:
Provided, That the source and the name of the
author, if appearing on the work, are
mentioned;
3. Communication to the public by mass media of
articles on current political, social, economic,
scientific, or religious topic, lectures, addresses
and other works of the same nature, which are
delivered in public if such use is for information
purposes and has not been expressly reserved:
Provided, That the source is clearly indicated;
4. Reproduction and communication to the public
of literary, scientific, or artistic works as Part of
reports of current events (e.g. music played or
tunes on the occasion of a sporting event and
such tunes were picked up during a new
coverage of the event) by means of
photography, cinematography or broadcasting
to the extent necessary for the purpose;
5. Inclusion of a work in a publication, broadcast,
or other communication to the public, sound
recording or film, if such inclusion is made by
way of illustration for teaching purposes and is
compatible with fair use: Provided, That the
source and of the name of the author, if
appearing in the work, are mentioned;
6. Recording made in educational institutions of a
work included in a broadcast for the use of such
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
educational institutions, provided that such
recording must be deleted within a reasonable
period after they were first broadcast;
7. Making of ephemeral recordings by a
broadcasting organization by means of its own
facilities and for use in its own broadcast;
8. Use made of a work by or under the direction or
control of the government, by the National
Library or by educational, scientific, or
professional institutions where such use is in
the public interest and is compatible with fair
use;
9. Public performance or the communication to
the public of a work, in a place where no
admission fee is charged in respect of such
public performance or communication, by a
club or institution for charitable or educational
purpose only, whose aim is not profit making,
subject to such other limitations as may be
provided in the Regulations;
10. Public display of the original or a copy of the
work not made by means of a film, slide,
television image or otherwise on screen or by
means of any other device or process (e.g.
Public display using posters mounted on walls
and display boards), Provided, That either the
work has been published, or, that original or the
copy displayed has been sold, given away or
otherwise transferred to another person by the
author or his successor in title;
11. Any use made of a work for the purpose of any
judicial proceedings or for the giving of
professional advice by a legal practitioner;
12. Reproduction or distribution of published
articles or materials in a specialized format
exclusively for the use of the blind, visually- and
reading-impaired persons: Provided, that such
copies and distribution shall be made on a
nonprofit basis and shall indicate the copyright
owner and the date of the original publication.
(Sec. 184, IPC, as amended by R.A. No. 10372)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Other Limitations on Copyright
1. Copyright in a work of architecture shall
include the right to control the erection of any
building which reproduces the whole or a
substantial part of the work either in its original
form or in any form recognizably derived from
the original, provided, that the copyright in any
such work shall not include the right to control
the reconstruction or rehabilitation in the same
style as the original of a building to which that
copyright relates. (Sec. 186, IPC)
2. The private reproduction of a published work in
a single copy, where the reproduction is made
by a natural person exclusively for research
and private study, shall be permitted, without
the authorization of the owner of copyright in
the work but shall not extend to the
reproduction of:
a. A work of architecture in the form of
building or other construction;
b. An entire book, or a substantial part
thereof, or of a musical work in graphic
form by reprographic means;
c. A compilation of data and other materials;
d. A computer program except as provided in
Section 189; and
e. Any work in cases where reproduction
would unreasonably conflict with a normal
exploitation of the work or would
otherwise unreasonably prejudice the
legitimate interests of the author. (Sec. 187,
IPC)
3. The reproduction in one back-up copy or
adaptation of a computer program shall be
permitted, without the authorization of the
author of, or other owner of copyright in, a
computer program, by the lawful owner of that
computer program, provided, the copy or
adaptation is necessary for:
a. The use of the computer program in
conjunction with a computer for the
purpose, and to the extent, for which the
computer program has been obtained; and
330
 Intellectual Property Code
b. Archival purposes, and, for the replacement
of the lawfully owned copy of the computer
program in the event that the lawfully
obtained copy of the computer program is
lost, destroyed, or rendered unusable. (Sec.
187, IPC)
Q: In a written legal opinion for a client on the
difference between apprenticeship and
learnership, Liza quoted without permission a
labor law expert’s comment appearing in his
book entitled “Annotations on the Labor Code.”
Can the labor law expert hold Liza liable for
infringement of copyright for quoting a portion
of his book without his permission?
A: NO. Liza cannot be held liable for infringement of
copyright. Any use made of a work for the purpose
of judicial proceedings or for giving of professional
advice by a legal proceedings or for giving of
professional advice by a legal practitioner shall not
constitute infringement of copyright. (Sec. 184(k),
IPC)
Q: May a person have photocopies of some pages
of the book of Professor Rosario made without
violating the copyright law?
A: YES. The private reproduction of a published
work in a single copy, where the reproduction is
made by a natural person exclusively for research
and private study, shall be permitted, without the
authorization of the owner of copyright in the work.
This rule contemplates that reproduction of the
book shall not extend to an entire book or a
substantial part thereof. (Secs. 187.1 to 187.2[b], IPC)
Term of protection of copyright
TERM OF PROTECTION
Original and Derivative Works, as well as
Posthumous works
During the life of the author and for fifty (50)
years after his death
Works of joint authorship
Economic rights shall be protected during the life
of the last surviving author and for fifty (50)
years after his death
331
Published Anonymous or Pseudonymous
Works
Fifty (50) years from the date on which the work
was first lawfully published
If the author's identity is revealed or is no longer
in doubt before the 50-year period, the
provisions on original and derivative works, as
well as works of joint authorship, shall apply.
Unpublished Anonymous or Pseudonymous
Works
Fifty (50) years counted from the making of the
work
Work of Applied Art
Twenty-five (25) years from the time of the
making.
Photographic works
Fifty (50) years from publication of the work and,
if unpublished, fifty (50) years from the making
Audio-visual works
Fifty (50) years from date of publication and, if
unpublished, from the date of making
The term of protection subsequent to the death of
the author shall run from the date of his death or of
publication, but such terms shall always be deemed
to begin on the first day of January of the year
following the event which gave rise to them. (Sec.
214, IPC)
6. DOCTRINE OF FAIR USE
The fair use of a copyrighted work for criticism,
comment, news reporting, teaching including
limited number of copies for classroom use,
scholarship, research, and similar purposes is not an
infringement of copyright. (Sec. 185, IPC)
“Fair use” permits a secondary use that “serves the
copyright objective of stimulating productive
thought and public instruction without excessively
diminishing the incentives for creativity.”
Decompilation may be Considered Fair Use
Decompilation, which is the reproduction of the
code and translation of the forms of the computer
program to achieve the inter-operability of an
independently created computer program with
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
other programs, may also constitute fair use under
the criteria established Sec. 185, to the extent that
such decompilation is done for the purpose of
obtaining the information necessary to achieve such
interoperability. (Sec. 185, IPC)
Factors to be considered in determining fair use
(P-A-N-E)
1. Purpose and character of the use, including
whether such use is of a commercial nature or
is for non-profit educational purpose;
2. Amount and substantiality of the portion used
in relation to the copyrighted work as a whole;
3. Nature of the copyrighted work; and
4. Effect of the use upon the potential market for
or value of the copyrighted work.
NOTE: The fact that a work is unpublished shall not
by itself bar a finding of fair use if such finding is
made upon consideration of all the above factors
(Sec. 182.2, IPC). If you copy to the extent that you
reduce the marketability of the book, it is no longer
fair use.
Q: KLM Printers, Inc. operated a small outlet
located at the ground floor of a university
building in Quezon City. It possessed soft copies
of certain textbooks on file and would print
“book-alikes” of these textbooks (or in other
words, reproduced the entire textbooks) upon
order and for a fee. It would even display
samples of such “book-alikes” in its stall for sale
to the public.
Upon learning of KLM Printers, Inc.’s activities,
the authors of the textbooks filed a suit against
it for copyright infringement. In its defense, KLM
Printers, Inc. invoked the doctrine of fair use,
contending that the “book-alikes” are being
used for educational purposes by those who
avail of them.
Is KLM Printers, Inc.’s invocation of the doctrine
of fair use proper in this case? Explain. (2019
BAR)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
A: NO. In determining whether the use made of a
work in any particular case is fair use, the factors to
be considered shall include:
a. The purpose and character of the use,
including whether such use is of a
commercial nature or is for non-profit
educational purposes;
b. The nature of the copyrighted work;
c. The amount and substantiality of the
portion used in relation to the copyrighted
work as a whole; and
d. The effect of the use upon the potential
market for or value of the copyrighted
work. (Sec. 185.1, IPC)
Based on these factors, the invocation of the
doctrine of fair use is not proper. The reproduction
of the copies is commercial in nature, where the
entire book is reproduced thereby violating the
economic right of the author and the offer to the
public of copies of the book has an injurious effect
upon the potential market or value of the
copyrighted work.
Published Works
Works which, with the consent of the authors, are
made available to the public by wire or wireless
means in such a way that members of the public may
access these works from a place and time
individually chosen by them: provided, that
availability of such copies has been such, as to
satisfy the reasonable requirement of the public,
having regard to the nature of the work. (Sec. 171.7,
IPC)
Reprographic Reproduction by Libraries
Any library or archive whose activities are not for
profit may, without the authorization of the author
or copyright owner, make a limited number of
copies of the work, as may be necessary for such
institutions to fulfill their mandate, by reprographic
reproduction:
a. Where the work by reason of its fragile
character or rarity cannot be lent to user in its
original form;
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 Intellectual Property Code

b. Where the works are isolated articles contained Transfer or Assignment of Copyright
in composite works or brief portions of other
published works and the reproduction is The copyright may be assigned or licensed in whole
necessary to supply them, when this is or in part. Within the scope of the assignment or
considered expedient, to persons requesting license, the assignee or licensee is entitled to all the
their loan for purposes of research or study rights and remedies which the assignor or licensor
instead of lending the volumes or booklets had with respect to the copyright. (Sec. 180.1, IPC)
which contain them; and
c. Where the making of such limited copies is in Requisites for a Transfer of Copyright to Take
order to preserve and, if necessary, in the event Effect
that it is lost, destroyed or rendered unusable,
replace a copy, or to replace, in the permanent 1. If inter vivos, there must be a written indication
collection of another similar library or archive, of such intention; and
a copy which has been lost, destroyed or 2. Filed in National Library upon payment of
rendered unusable and copies are not available prescribed fees. (Sec. 182, IPC)
with the publisher.
The filing of the assignment or license of
But it shall not be permissible to produce a volume copyright is NOT a mandatory requirement.
of a work published in several volumes or to
produce missing tomes or pages of magazines or Section 182 uses the permissive word “may” in
similar works, unless the volume, tome or part is out reference to the filing of the deed of assignment or
of stock. (Sec. 188, IPC, as amended by R.A. No. 10372) transfer of copyright, this filing should not be
understood as mandatory for validity and
Public Performance vs. Communication to the enforceability. The filing is entirely optional for the
Public of a Performance parties and may be useful only for evidentiary and
notification purposes. (Amador, 2007)
COMMUNICATION TO
PUBLIC
THE PUBLIC OF A Limitation regarding submission of a literary,
PERFORMANCE
PERFORMANCE photographic, or artistic work to a newspaper,
Definition magazine or periodical for publication
Performance at a
The transmission to the
place or at places Unless a greater right is expressly granted, such
public, by any medium,
where persons submission shall constitute only a license to make a
otherwise than by
outside the normal single publication.
broadcasting, of sounds
circle of a family and
of a performance or the
that family’s closest If two or more persons jointly own a copyright or
representations of
social acquaintances any part thereof, neither of the owners shall be
sounds fixed in a sound
are or can be entitled to grant licenses without the prior written
recording.
present. consent of the other owner or owners. (Sec. 180.3,
Mode of Access IPC)
The communication can
It is performed at a be accessed through Q: In a written legal opinion for a client on the
specific time and wired or wireless means difference between apprenticeship and
place. (e.g. The at a time and place learnership, Liza quoted without permission a
Pacquiao-Clottey convenient to the viewer labor law expert's comment appearing in his
Match in Dallas (e.g. The Pacquiao- book entitled "Annotations on the Labor Code."
Texas Stadium) Clottey Match watched Can the labor law expert hold Liza liable for
via YouTube) infringement of copyright for quoting a portion
of his book without his permission? (2006 BAR)

333 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law
A: NO. One of the limitations on copyright is the
making of quotations from a published work if they
are compatible with fair use, provided that the
source and the name of the author, if appearing on
the work, are mentioned. The legal opinion made by
Liza is consistent with fair use since the quoted part
is merely used to explain a concept of law for the
benefit of the client and not to defeat the rights of
the author over his copyright. (Sec. 184.1(b), IPC)
7. COPYRIGHT INFRINGEMENT
It is the doing by any person, without the consent of
the owner of the copyright, of anything the sole right
to do which is conferred by statute on the owner of
the copyright. The act of lifting from another’s book
substantial portions of discussions and examples
and the failure to acknowledge the same is an
infringement of copyright. (Habana v. Robles, G.R.
No. 131522, 19 July 1999)
Copying alone is not what is prohibited. The copying
must produce an “injurious effect”. A copy of a
piracy is an infringement of the original, and it is no
defense that the pirate, in such cases, did not know
whether or not he was infringing any copyright; he
at least knew that what he was copying was not his,
and he copied at his peril. (Ibid.)
The gravamen of copyright infringement is not
merely the unauthorized "manufacturing" of
intellectual works but rather the unauthorized
performance of any of the rights exclusively granted
to the copyright owner. Hence, any person who
performs any of such acts under without obtaining
the copyright owner’s prior consent renders himself
civilly and criminally liable for copyright
infringement. (NBI-Microsoft Corp. v. Hwang, G.R. No.
147043, 21 June 2005)
Infringement
A person infringes a right protected under this Act
when one:
1. Directly commits an infringement;
2. Benefits from the infringing activity of another
person who commits an infringement if the
person benefiting has been given notice of the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
infringing activity and has the right and ability
to control the activities of the other person;
3. With knowledge of infringing activity, induces,
causes, or materially contributes to the
infringing conduct of another. (Sec. 216, IPC, as
amended by R.A. No. 10372)
Q: Diana and Piolo are famous personalities in
showbusiness who kept their love affair secret.
They use a special instant messaging service
which allows them to see one another’s typing
on their own screen as each letter key is pressed.
When Greg, the controller of the service facility,
found out their identities, he kept a copy of all
the messages Diana and Piolo sent each other
and published them. Is Greg liable for copyright
infringement? Reason briefly. (2007 BAR)
A: YES. The messages which Diana and Pablo sent
each other fall under the category of letters as
provided in Sec. 172.1.d which provides that literary
and artistic works, hereinafter referred to as
“works,” are original intellectual creations in the
literary and artistic domain protected from the
moment of their creation and shall include in
particular, among others, letters. Infringement of
such consist in the doing by any person, without the
consent of the owner of the copyright, of anything
the sole right to do which is conferred by statute on
the owner of the copyright. Reproduction and first
public distribution of the work are economic rights
of the authors of the work. Such cannot be done by
the person not the author of the work. In this
instance, Greg is not the owner of the messages. He
merely copied it without the consent of the authors
thereof and subsequently published the same in
violation of the latter’s economic rights.
Q: The Victoria Hotel chain reproduces
videotapes, distributes the copies thereof to its
hotels and makes them available to hotel guests
for viewing in the hotel guest rooms. It charges a
separate nominal fee for the use of the videotape
player.
a. Can the Victoria Hotel be enjoined for
infringing copyrights and held liable for
damages?
334
 Intellectual Property Code
b. Would it make any difference if Victoria
Hotel does not charge any fee for the use of
the videotape? (1994 BAR)
A:
a. YES. Victoria Hotel may be held liable for
infringing copyrights of the said videotapes
because the reproduction and distribution
thereof are not merely for private viewing.
Instead, it was used as a means to gain extra
profit by making it as an extra amenity for its
hotel services. However, if such performances
contained in the videotapes became available to
the public even prior to its registration, then
there is no copyright infringement because the
videotapes are already considered as public
property.
b. NO. Notwithstanding the non-charging of fee
for the use of the videotapes, Victoria Hotel still
uses the videotapes for business purposes,
serving as an attraction to prospective and
current guests, unless the performances in the
videotapes had been long before available to
the public prior to registration; hence, it is
already public property. (Filipino Society of
Composers, Authors, Publishers, Inc. v. Benjamin
Tan, G.R. No. L-36402, 16 Mar. 1987)
Q: In an action for damages on account of an
infringement of a copyright, the defendant (the
alleged pirate) raised the defense that he was
unaware that what he had copied was a
copyright material. Would this defense be valid?
(1997 BAR)
A: NO. In copyright infringement, intent is
irrelevant. A person may consciously or
unconsciously copy or infringe a copyrighted
material and still be held liable for such act.
Q: KK is from Bangkok, Thailand. She studies
medicine in the Pontifical University of Santo
Tomas (UST). She learned that the same foreign
books prescribed in UST are 40-50% cheaper in
Bangkok. So she ordered 50 copies of each book
for herself and her classmates and sold the
books at 20% less than the price in the
Philippines. XX, the exclusive licensed
335
publisher of the books in the Philippines, sued
KK for copyright infringement. Decide. (2014
BAR)
A: KK did not commit copyright infringement.
Under the “first sale” doctrine, the owner of a
particular copy or phonorecord lawfully made is
entitled, without the authority of the copyright
owner, to sell or otherwise dispose of the
possession of that copy or phonorecord. Hence,
there is no infringement by KK since the said
doctrine permitted importation and resale without
the publisher’s further permission.
Substantial Reproduction
It is not necessarily required that the entire
copyrighted work, or even a large portion of it, be
copied. If so much is taken that the value of the
original work is substantially diminished, there is an
infringement of copyright and to an injurious extent,
the work is appropriated. It is no defense that the
pirate did not know whether or not he was
infringing any copyright; he at least knew that what
he was copying was not his, and he copied at his
peril. In cases of infringement, copying alone is not
what is prohibited. The copying must produce an
“injurious effect”. (Habana v. Robles, G.R. No. 131522,
19 July 1999)
Copying is demonstrated by:
1. Direct evidence; or
2. Circumstantial evidence of access and
substantial inquiry or the most common test.
(Amador, 2007).
Q: May a person have photocopies of some pages
of the book of Professor Rosario made without
violating the copyright law? (1998 BAR)
A: YES, a person may photocopy some of pages of
Professor Rosario’s book for as long as it is not for
public use or distribution, and it does not copy the
substantial text or “heart” of the book. It is
considered as fair use of the copyrighted work.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

Plagiarism as it is not
acknowledged.
Plagiarism means the theft of another person’s Manner of Copying
language, thoughts, or ideas. To plagiarize is to take The copying must be The copying need not
(ideas, writings, etc.) from (another) and pass them substantial. be substantial.
off as one’s own. The passing off of the work of Expression
another as one’s own is thus an indispensable Plagiarism may exist
element of plagiarism. The copying must refer
even if none of the
to an expression of an
same words are used
Plagiarism presupposes intent and a deliberate, idea.
to express an idea.
conscious effort to steal another’s work and pass it
off as one’s own. (In the matter of the charges of Remedies in case of copyright infringement
plagiarism against Associate Justice Mariano C. Del (I2-D2-M-S)
Castillo, A.M. No. 10-7-17-SC, 12 Oct. 2010)
1. Injunction;
Copyright Infringement vs. Plagiarism 2. Impounding during the pendency of the action
sales invoices and other documents evidencing
COPYRIGHT sales;
PLAGIARISM
INFRINGEMENT 3. Damages, including legal costs and other
Definition expenses, as he may have incurred due to the
The unauthorized use infringement as well as the profits the infringer
of copyrighted material may have made due to such infringement;
in a manner that 4. Destruction without any compensation all
violates one of the The use of another’s infringing copies;
copyright owner’s information, language, 5. Moral and Exemplary damages (Sec. 216.1, IPC);
exclusive rights, such or writing, when done or
as the right to without proper 6. Seizure and impounding of any article, which
reproduce or perform acknowledgment of may serve as evidence in the court proceedings.
the copyrighted work, the original source (Sec. 216.2, IPC)
or to make derivative
works that build upon The copyright owner may elect, at any time before
it final judgment is rendered, to recover instead of
Coverage actual damages and profits, an award of statutory
Copyright infringement damages for all infringements involved in an action
is a very broad term in a sum equivalent to the filing fee of the
that describes a variety infringement action but not less than Fifty thousand
of acts, such as the pesos (P50,000.00). (Sec. 216.1, IPC, as amended by
Plagiarism is specific
duplication of a work, R.A. No. 10372)
as it refers only to
rewriting a piece,
using someone else’s
performing a written Factors to be considered by the court in
work without proper
work or doing anything awarding statutory damages
acknowledgment.
that is normally
considered to be the 1. Nature and purpose of the infringing act;
exclusive right of the 2. Flagrancy of the infringement;
copyright holder. 3. Whether the defendant acted in bad faith;
Public Document 4. Need for deterrence;
There is no copyright 5. Any loss that the plaintiff has suffered or is
Public documents can
infringement on public likely to suffer by reason of the infringement;
be plagiarized so long
documents and

UNIVERSITY OF SANTO TOMAS 336

2022 GOLDEN NOTES
 Intellectual Property Code
6. Any benefit shown to have accrued to the
defendant by reason of the infringement. (Sec.
216.1, IPC, as amended by R.A. No. 10372)
Double damages
The amount of damages to be awarded shall be
doubled against any person who:
1. Circumvents effective technological measures;
or
2. Having reasonable grounds to know that it will
induce, enable, facilitate or conceal the
infringement, remove or alter any electronic
rights management information from a copy of
a work, sound recording, or fixation of a
performance, or distribute, import for
distribution, broadcast, or communicate to the
public works or copies of works without
authority, knowing that electronic rights
management information has been removed or
altered without authority. (Sec. 216.1, IPC, as
amended by R.A. No. 10372)
Technological Measure
It is any technology, device, or component that, in
the normal course of its operation, restricts acts in
respect of a work, performance or sound recording,
which are not authorized by the authors,
performers or producers of sound recordings
concerned or permitted by law. (Sec. 171.12, IPC, as
amended by R.A. No. 10372)
Rights Management Information
It is information which identifies the work, sound
recording or performance; the author of the work,
producer of the sound recording or performer of the
performance; the owner of any right in the work,
sound recording or performance; or information
about the terms and conditions of the use of the
work, sound recording or performance; and any
number or code that represent such information,
when any of these items is attached to a copy of the
work, sound recording or fixation of performance or
appears in conjunction with the communication to
the public of a work, sound recording or
337
performance. (Sec. 171.13, IPC, as amended by R.A.
No. 10372)
Criminal Penalties in Case of Copyright
Infringement
1. Imprisonment of one (1) year to three (3) years
plus a fine ranging from Fifty thousand pesos
(P50,000) to One hundred fifty thousand pesos
(P150,000) for the first offense.
2. Imprisonment of three (3) years and one (1)
day to six (6) years plus a fine ranging from One
hundred fifty thousand pesos to Five hundred
thousand (P500,000) for the second offense.
3. Imprisonment of six (6) years and one day to
nine (9) years plus a fine ranging from Five
hundred thousand pesos (P500,000) to
P1,500,000 for the third offense.
4. In all cases, subsidiary imprisonment in cases of
insolvency. (Sec. 217, IPC)
Determination of Penalty
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:
1. Circumvention of effective technological
measures;
2. 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
3. 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, IPC, as
amended by R.A. No. 10372)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
Affidavit Evidence
It is an affidavit made before the notary public in
actions for infringement, reciting the facts required
to be stated under Sec. 216.1 of the IPC.
As a prima facie proof, the affidavit shifts the burden
of proof to the defendant, to prove the ownership of
the copyrighted work.
Q: Due to the amendment of the IP Code under
R.A. No. 10372 APPROVED ON FEBRUARY 28,
2013, deleting the provision entitling
importation in the Philippines of up to three (3)
copies of copyrighted works in a personal
baggage, can one still be allowed to import
books, DVDs, and CDs from abroad?
A: YES. In fact, the amendments to the Intellectual
Property Code have removed the original limitation
of three copies when bringing legitimately acquired
copies of copyrighted material into the country.
Only the importation of pirated or infringed
material is illegal. As long as they were legally
purchased, you can bring as many copies you want,
subject to Customs regulations. (FAQs on the
amendments to the Intellectual Property Code of the
Philippines, officialgazette.gov.ph, 8 Mar 2013)
Reproduction of copyrighted material for
personal purposes is not punishable by R. A. No.
10372
Infringement in this context refers to the economic
rights of the copyright owner. Transferring music
from a lawfully acquired CD into a computer, then
downloading it to a portable device for personal use,
is not infringement. But if, multiple copies of the CD
were reproduced for sale, then infringement occurs.
(Ibid.)
Possession of a music file procured through an
infringing activity is a violation of the law
The possession of a music file procured through an
infringing activity is a violation of the law only if it
can be proven that the person benefitting from the
music file has knowledge of the infringement, and
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
the power and ability to control the person
committing the infringement. (Ibid.)
Liability of mall owners for the infringement
activities of their tenants
Mall owners are not automatically penalized for the
infringing acts of their tenants. When a mall owner
or lessor finds out about an infringement activity, he
or she must give notice to the tenant, then he or she
will be afforded time to act upon this knowledge.
The law requires that one must have both proven
knowledge of the infringement, and the ability to
control the activities of the infringing person, to be
held liable. The mall owner must also have
benefitted from the infringement. (Ibid.)
Other beneficial provisions brought by R.A. No.
10372
1. Grant of enforcement powers to IPOPHL
(Sec. 2)
The law grants visitorial powers to IPOPHL and
allows it to undertake enforcement functions with
the support of concerned agencies such as PNP, NBI,
BOC, OMB and LGUs. IPOPHL itself will not be
conducting raids or seizures but will be
coordinating with the said agencies. However, as IP
rights remain to be private rights, there must be a
complaint from the IP right owner. So, if an author
sees pirated copies of his book in a certain store, he
may notify IPOPHL. IPOPHL can now initiate
together with any of the said agencies to address the
problem.
2. Establishment of the Bureau of Copyright
and other related rights (Secs. 1 and 3)
At present there is no entity performing the more
substantial function of policy formulation,
rulemaking, adjudication, research and education,
which is envisioned to be handled by the Bureau of
Copyright. Although a Copyright Division exists in
the National Library, the function of such office is
merely to accept deposits of copyrighted works. The
Copyright Bureau is dedicated to serving the needs
of the copyright-based industries and stakeholders
could give more focus and rally more resources and
338
 Intellectual Property Code

support for the creative industry, which is very
important for protection of works by Filipinos both
here and abroad.
3. Accreditation of collective management
organizations or CMOs (Sec. 10)
CMOs are organizations that enforce the copyright
of the copyright holders. Through this mandate,
IPOPHL will be able to monitor and promote good
corporate governance among CMOs, benefitting not
only the rights holders themselves but also the users
of copyrighted works. Members of the Philippine
Retailers Association (PRA), mall owners,
restaurants, and other heavy users of music in their
establishments will greatly benefit from this
provision, as they are ensured that only legitimate
collecting agencies can collect royalties from them
on behalf of copyright owners.
4. Clarification of the concept of copyright
infringement, including secondary liability
(Secs. 22 and 23)
works for use by visually impaired persons. Before
this amendment, hundreds of thousands of blind
Filipinos could not buy Braille works at cheap prices
because copyright protection operates. Now with
this amendment, blind and visually impaired
Filipinos can have easier access to copyrighted
works in Braille.
6. Formulation of IP Policies within universities
and colleges (Sec. 27)
This will ensure that the rights of the academic
community (professors, researchers, students) over
their literary, scholarly, and artistic works are
clearly delineated and respected. With an IP Policy
in existence, these sectors within the academe will
have a clear delineation of their respective rights
and benefits, thus, avoiding disputes and costly
litigation within their ranks which would be
detrimental to education, research, and
development.

The provisions on copyright infringement have

been refined to include contributory infringement
(secondary liability), circumvention of
technological measures and rights management
information as aggravating circumstances, and the
option to collect statutory damages instead of actual
damages. However, under Sec. 22 of the
amendments, to be secondarily liable, a landlord or
mall must: (1) benefit from the infringing activity;
(2) must have been given notice of the infringing
activity and a grace period to act on the same; and
(3) has the right and ability to control the activities
of the person who is doing the infringement. The
complainant has the burden of proof to provide
evidence that all 3 elements are present. If a
landlord or mall owner is not aware of the
infringement, he cannot be liable for infringement,
even if he benefits from it (from rental payments) or
has control over the premises.

5. Fair use for the blind, visually- and reading-

impaired (Sec. 11)

This provision would give a special fair use

exemption for the non-commercial reproduction of

339 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Anti-Money Laundering Act
V. THE ANTI-MONEY LAUNDERING ACT OF 2001
(RA. NO. 9160, AS AMENDED)
Policy of the Law (Sec. 2, R.A. No. 9160, as
amended)
1. To protect and preserve the integrity and
confidentiality of bank accounts and to ensure
that the Philippines shall not be used as a
money laundering site for the proceeds of any
unlawful activity;
2. To pursue the State’s foreign policy to extend
cooperation in transnational investigation and
prosecutions of persons involved in money
laundering activities wherever committed as
well as the implementation of targeted financial
sanctions related to the financing of the
proliferation of weapons of mass destruction,
terrorism, and financing of terrorism, pursuant
to the resolutions of the United Nations Security
Council. (as amended by Sec. 1, R.A. No. 11521)
A. COVERED INSTITUTIONS AND THEIR
OBLIGATIONS
Sec. 3(a), R.A. No. 9160, as amended
NOTE: Covered “Institutions” was changed to
Covered “Persons” under R.A. No. 10365.
Covered persons, natural or juridical, refer to:
(M-I-S-S-M-S-B-C-C-R-O-P)
1. Banks, non-banks, quasi-banks, trust entities,
foreign exchange dealers, pawnshops, money
changers, remittance and transfer companies
and other similar entities, and all other persons
and their subsidiaries and affiliates supervised
or regulated by the Bangko Sentral ng Pilipinas
(BSP);
2. Insurance companies, pre-need companies, and
all other persons supervised or regulated by the
Insurance Commission (IC);
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
3. (i) Securities dealers, brokers, salesmen,
investment houses and other similar persons
managing securities or rendering services as
investment agent, advisor, or consultant;
(ii) Mutual funds, close-end investment
companies, common trust funds, and other
similar persons;
(iii) Other entities administering or otherwise
dealing in currency, commodities or financial
derivatives based thereon, valuable objects,
cash substitutes and other similar monetary
instruments or property supervised or
regulated by the Securities and Exchange
Commission (SEC);
4. Jewelry dealers in precious Metals, who, as a
business, trade in precious metals, for
transactions in excess of One million pesos
(P1,000,000.00);
5. Jewelry dealers in precious Stones, who, as a
business, trade in precious stones, for
transactions in excess of One million pesos
(P1,000,000.00);
6. Company service providers which, as a
business, provide any of the following services
to third parties:
(i) Acting as a formation agent of juridical
persons;
(ii) Acting as (or arranging for another
person to act as) a director or corporate
secretary of a company, a partner of a
partnership, or a similar position in
relation to other juridical persons;
(iii) Providing a registered office, business
address or accommodation,
correspondence or administrative
address for a company, a partnership or
any other legal person or arrangement;
and
(iv) Acting as (or arranging for another
person to act as) a nominee shareholder
for another person; and
7. Persons, including lawyers, accountants, and
other professionals, who provide any of the
following services (Sec. 1, Rule 4, 2018
340
 Commercial Law
Implementing Rules and Regulations of R.A. No.
9160, as amended):
(i) Managing of client money, securities, or
other assets;
(ii) Management of bank, savings, or
securities accounts;
(iii) Organization of contributions for the
creation, operation, or management of
companies; and
(iv) Creation, operation or management of
juridical persons or arrangements, and
buying and selling business entities.
8. Casinos, including internet and ship-based
casinos, with respect to their casino cash
transactions related to the gaming operations;
(Sec. 3[a][8], R.A. 9160, as amended by R.A. No.
10927)
9. Real estate developers and brokers; (as
amended by Sec. 2, R.A. No. 11521)
10. Offshore gaming operators, as well as their
service providers, supervised, accredited, or
regulated by the Philippine Amusement and
Gaming Operation or any government agency.
(as amended by Sec. 2, R.A. No. 11521)
Q: Are lawyers and accountants considered as
covered persons?
GR: Yes, lawyers and accountants are
considered as Covered Persons under the definition
under the AMLA except if they act as an
“Independent Legal/Accounting Professional”.
NOTE: “Independent Legal/Accounting
Professional” refers to lawyers/accountants
working in a private firm or as a sole practitioner
who, by way of business or occupation, provides
purely legal or accounting services to their clients.
([tt], Sec. 1, Rule 2, 2018 Implementing Rules and
Regulations of R.A. No. 9160, as amended):
Requisites for Exclusion:
1. They must be acting as independent legal
professionals;
341
2. Authorized to practice in the Philippines; and
3. Continue to be subject to the provisions of their
respective codes of conduct and/or
professional responsibility or any of its
amendments. (Sec. 3[a][7], R.A. 9160, as
amended
For purposes of covered persons under Sec. 3(a)(8),
the following terms are hereby defined as follows:
1. Casino refers to a business authorized by the
appropriate government agency to engage in
gaming operations;
2. Internet-based casinos shall refer to casinos in
which persons participate by the use of remote
communication facilities such as, but not
limited to, internet, telephone, television, radio
or any other kind of electronic or other
technology for facilitating communication; and
3. Ship-based casino shall refer to casinos, the
operation of which is undertaken on board a
vessel, ship, boat, or any other water-based
craft wholly or partly intended for gambling;
4. Casino cash transaction refers to transactions
involving the receipt of cash by a casino paid by
or on behalf of a customer, or transactions
involving the payout of cash by a casino to a
customer or to any person in his/her behalf;
and
5. Gaming operations refer to the activities of the
casino offering games of chance and any
variations thereof approved by the appropriate
government authorities. (as amended by Sec. 3,
R.A. No. 10927)
Obligations of Covered Persons (Sec. 9, R.A. No.
9610, as amended)
a. Customer Identification - Covered persons
shall:
a. Establish and record the true identity
of its clients based on official
documents;
b. Maintain a system of verifying the true
identity of their clients; and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Anti-Money Laundering Act

c. In case of corporate clients, require a

system of verifying their legal existence B. COVERED AND SUSPICIOUS TRANSACTIONS
and organizational structure, as well as
the authority and identification of all
persons purporting to act on their
Covered Transactions (Sec. 3(b), R.A. 9160, as
behalf.
amended)

b. Record Keeping - All records of all transactions

A transaction in cash or other equivalent monetary
of covered persons shall be maintained and
instrument involving a total amount in excess of
safely stored for five (5) years from the date of
five hundred thousand pesos (P500,000.00) within
transactions.
one (1) banking day.

XPN: If a case has been filed in court involving

For casinos, a single casino cash transaction
the account, records must be retained and safely
involving an amount in excess of five million pesos
kept beyond the five (5)-year period, until it is
(P5,000,000.00) or its equivalent in any other
officially confirmed by the AMLC Secretariat
currency.
that the case has been resolved, decided or
terminated with finality. (Sec. 3, Rule 20, 2018
For real estate developers and brokers, a single cash
Implementing Rules and Regulations of R.A. No.
transaction involving an amount in excess of seven
9160, as amended):
million five hundred thousand pesos
(P7,500,000.00) or its equivalent in any other
NOTE: With respect to closed accounts, the
currency. (as amended by Sec. 2, R.A. No. 11521)
records shall be preserved and safely stored for
at least five (5) years from the dates when they
Suspicious Transactions (Sec. 3(b-1), R.A. No.
were closed.
9160, as amended)

c. Reporting of Covered and Suspicious

Transactions with covered persons, regardless of
Transactions.
the amounts involved, where any of the following
circumstances exist: (D-A-R-I-A-N-S)
GR: Covered persons shall report to the AMLC
all covered transactions and suspicious
1. There is No underlying legal or trade obligation,
transactions within five (5) working days from
purpose, or economic justification;
occurrence thereof.
2. The client is not properly Identified;
3. The Amount involved is not commensurate with
XPN: The AMLC prescribes a different period
the business or financial capacity of the client;
not exceeding fifteen (15) working days.
4. Taking into account all known circumstances, it
may be perceived that the client's transaction is
NOTE: Should a transaction be determined to
Structured in order to avoid being the subject of
be both a covered transaction and a suspicious
reporting requirements under the Act;
transaction, the covered person shall be
5. Any circumstances relating to the transaction
required to report the same as a suspicious
which is observed to Deviate from the profile of
transaction. (Sec. 9, R.A. No. 9160, as amended
the client and/or the client's past transactions
by Sec. 7, R.A. No. 10365)
with the covered person;
6. The transaction is in any way Related to an
unlawful activity or offense under this Act that
is about to be, is being or has been committed;
or

UNIVERSITY OF SANTO TOMAS 342

2022 GOLDEN NOTES
 Commercial Law

7. Any transaction that is similar or Analogous to Department of Justice or the Office of the
any of the foregoing. (as amended by Sec. 2, R.A. Ombudsman for anti-money laundering offenses.
No. 11521) The criminal prosecution of such offenses would be
unduly hampered if it were to be prohibited from
Q: Lionair, Inc. sold helicopters as brand new disclosing such information. For the AMLC to refuse
when in fact they were already used. Lionair’s disclosing the information required of it would be to
president alleged that Lionair imported the go against its own functions under the law. (Republic
helicopters from the United States and sold of the Philippines v. Sandiganbayan, G.R. Nos.
them to Arroyo, who, in turn, deposited partial 232724-27, 15 Feb. 2021)
payment to Lionair’s account with the Union
Bank. The Office of the Special Prosecutor (OSP)
presented the Manager of the Union Bank
Branch where the account was maintained to
verify the source of deposits. The manager
suggested that the Bangko Sentral ng Pilipinas
or the AMLC may have reports on the
transaction. Thus, the Sandiganbayan, upon the
OSP’s request, issued a subpoena duces tecum
and ad testificandum directing the Secretariat of
the AMLC, to testify and to produce Lionair’s
bank records. The AMLC moved to quash the
subpoena, arguing that whatever information it
has on Lionair’s bank account is confidential
under R.A. No. 9160. AMLC argues that the
prohibition under R.A. No. 9160 extends to it. It
claims that as a covered institution, it cannot be
forced to disclose such prohibited information.

Is the AMLC’s argument tenable?

A: NO. According to the wording of R.A. No. 9160,

the AMLC “is not one of the covered institutions
prohibited from disclosing information on covered
and suspicious transactions,” and that the rationale
for the prohibition does not extend to the AMLC.
Unlike covered institutions, the AMLC is mandated
to investigate and file a case against violators based
on the information it obtains. Furthermore, the
prohibition and confidentiality cannot apply to the
AMLC; otherwise, it would contravene its direct
mandate under Sec. 7 of R.A. No. 9160.

AMLC is not merely a repository of reports and

information on covered and suspicious
transactions. It is created precisely to investigate
and institute charges against the offenders. Sec. 7
clearly states that it is tasked to institute civil
forfeiture proceedings and other remedial
proceedings, and to file complaints with the

343 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Anti-Money Laundering Act

2. Communicating, directly or indirectly, in any

C. SAFE HARBOR PROVISION manner or by any means, to any person or
entity, the media, the fact that a covered or
suspicious transaction has been reported or is
about to be reported, the contents of the report,
No administrative, criminal, or civil proceedings
or any other information in relation thereto;
shall lie against any person for having made a
and
covered transaction report (CTR) or a suspicious
transaction report (STR) in the regular performance
3. Publishing or airing in any manner or form by
of his duties and in good faith, whether or not such
the mass media, electronic mail, or other similar
reporting results in any criminal prosecution under
devices.
the AMLA or any other Philippine law. (Sec. 6, Rule
22, 2018 Implementing Rules and Regulations of R.A.
In case of violation of these prohibitions, the
No. 9160, as amended)
concerned officer and employee of the covered
person and media shall be held criminally liable. (as
When reporting covered or suspicious transactions
amended by Sec. 9, R.A. No. 10365)
to the Anti-Money Laundering Council (AMLC),
covered persons and their officers and employees
shall not be deemed to have violated: (G-O-L-F)

1. The Law on Secrecy of Bank Deposits or R.A. No.

1405, as amended;
2. Foreign Currency Deposit Act of the Philippines
or R.A. No. 6426, as amended;
3. General Banking Law of 2000 or R.A. No. 8791;
and
4. Other similar laws. (Sec. 9(c), R.A. No. 9160, as
amended by Sec. 6, R.A. No. 9194)

Prohibited Communications

When reporting covered or suspicious transactions

to the AMLC, covered persons and their employees
or officers are prohibited from:

1. Communicating, directly or indirectly, in any

manner or by any means, to any person, the fact
that a covered or suspicious transaction report
was made, the contents thereof, or any other
information in relation thereto;

NOTE: If the reporting is done by any person in

the regular performance of his duties in good
faith, no administrative, criminal, or civil
proceedings shall lie against said person,
whether or not such reporting results in any
criminal prosecution under this Act of any other
law (Safe Harbor Provision).

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2022 GOLDEN NOTES
 Commercial Law

2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16

D. WHEN IS MONEY LAUNDERING COMMITTED of Republic Act No. 9165, otherwise known as
(INCLUDING PREDICATE CRIMES) the Comprehensive Dangerous Drugs Act of
2002;
3. Section 3 paragraphs B, C, E, G, H and I of
Republic Act No. 3019, as amended, otherwise
Money Laundering; How committed (Sec. 4, R.A.
known as the Anti-Graft and Corrupt Practices
No. 9160, as amended by Sec. 4, R.A. No. 10365)
Act;
4. Plunder under Republic Act No. 7080, as
Money laundering is committed by any person
amended;
who, knowing that any monetary instrument or
5. Robbery and extortion under Articles 294, 295,
property represents, involves, or relates to the
296, 299, 300, 301 and 302 of the Revised Penal
proceeds of any unlawful activity: (C-A-P-C-A-T)
Code, as amended;
6. Jueteng and Masiao punished as illegal gambling
a) Transacts said monetary instrument or
under Presidential Decree No. 1602;
property;
7. Piracy on the high seas under the Revised Penal
b) Converts, transfers, disposes of, moves,
Code, as amended and Presidential Decree No.
acquires, possesses, or uses said monetary
532;
instrument or property;
8. Qualified theft under Article 310 of the Revised
c) Conceals or disguises the true nature, source,
Penal Code, as amended;
location, disposition, movement, or ownership
9. Swindling under Article 315 and Other Forms of
of or rights with respect to said monetary
Swindling under Article 316 of the Revised
instrument or property;
Penal Code, as amended;
d) Attempts or conspires to commit money
10. Smuggling under Republic Act Nos. 455 and
laundering offenses referred to in paragraphs
1937;
(a), (b) or (c);
11. Violations of Republic Act No. 8792, otherwise
e) Aids, abets, assists in or counsels the
known as the Electronic Commerce Act of 2000;
commission of the money laundering offenses
12. Hijacking and other violations under Republic
referred to in paragraphs (a), (b) or (c) above;
Act No. 6235; destructive arson and murder, as
and
defined under the Revised Penal Code, as
f) Performs or fails to perform any act as a result
amended;
of which he facilitates the offense of money
13. Terrorism and conspiracy to commit terrorism
laundering referred to in paragraphs (a), (b) or
as defined and penalized under Sections 3 and 4
(c) above.
of Republic Act No. 9372; (as amended by Sec. 2,
R.A. No. 10365)
Money laundering is also committed by any covered
14. Financing of terrorism under Section 4 and
person who, knowing that a covered or suspicious
offenses punishable under Sections 5, 6, 7 and 8
transaction is required under this Act to be reported
of Republic Act No. 10168, otherwise known as
to the AMLC, fails to do so.
the Terrorism Financing Prevention and
Suppression Act of 2012; (Ibid.)
Unlawful Activities or Predicated Crimes (Sec.
15. Bribery under Articles 210, 211 and 211-A of
3(i), R.A. 9160, as amended)
the Revised Penal Code, as amended, and
Corruption of Public Officers under Article 212
Unlawful activity refers to any act or omission or
of the Revised Penal Code, as amended; (Ibid.)
series or combination thereof involving or having
16. Frauds and Illegal Exactions and Transactions
direct relation to the following:
under Articles 213, 214, 215 and 216 of the
Revised Penal Code, as amended; (Ibid.)
1. Kidnapping for ransom under Article 267 of Act
No. 3815, otherwise known as the Revised Penal
Code, as amended;

345 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Anti-Money Laundering Act
17. Malversation of Public Funds and Property
under Articles 217 and 222 of the Revised Penal
Code, as amended; (Ibid.)
18. Forgeries and Counterfeiting under Articles
163, 166, 167, 168, 169 and 176 of the Revised
Penal Code, as amended; (Ibid.)
19. Violations of Sections 4 to 6 of Republic Act No.
9208, otherwise known as the Anti-Trafficking
in Persons Act of 2003; (Ibid.)
20. Violations of Sections 78 to 79 of Chapter IV, of
Presidential Decree No. 705, otherwise known
as the Revised Forestry Code of the Philippines,
as amended; (Ibid.)
21. Violations of Sections 86 to 106 of Chapter VI, of
Republic Act No. 8550, otherwise known as the
Philippine Fisheries Code of 1998; (Ibid.)
22. Violations of Sections 101 to 107, and 110 of
Republic Act No. 7942, otherwise known as the
Philippine Mining Act of 1995; (Ibid.)
23. Violations of Section 27(c), (e), (f), (g) and (i), of
Republic Act No. 9147, otherwise known as the
Wildlife Resources Conservation and Protection
Act; (Ibid.)
24. Violation of Section 7(b) of Republic Act No.
9072, otherwise known as the National Caves
and Cave Resources Management Protection
Act; (Ibid.)
25. Violation of Republic Act No. 6539, otherwise
known as the Anti-Carnapping Act of 2002, as
amended; (Ibid.)
26. Violations of Sections 1, 3 and 5 of Presidential
Decree No. 1866, as amended, otherwise known
as the decree Codifying the Laws on
Illegal/Unlawful Possession, Manufacture,
Dealing In, Acquisition or Disposition of
Firearms, Ammunition or Explosives; (Ibid.)
27. Violation of Presidential Decree No. 1612,
otherwise known as the Anti-Fencing Law;
(Ibid.)
28. Violation of Section 6 of Republic Act No. 8042,
otherwise known as the Migrant Workers and
Overseas Filipinos Act of 1995, as amended by
Republic Act No. 10022; (Ibid.)
29. Violation of Republic Act No. 8293, otherwise
known as the Intellectual Property Code of the
Philippines; (Ibid.)
30. Violation of Section 4 of Republic Act No. 9995,
otherwise known as the Anti-Photo and Video
Voyeurism Act of 2009; (Ibid.)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
31. Violation of Section 4 of Republic Act No. 9775,
otherwise known as the Anti-Child
Pornography Act of 2009; (Ibid.)
32. Violations of Sections 5, 7, 8, 9, 10(c), (d) and
(e), 11, 12 and 14 of Republic Act No. 7610,
otherwise known as the Special Protection of
Children Against Abuse, Exploitation and
Discrimination; (Ibid.)
33. Fraudulent practices and other violations under
Republic Act No. 8799, otherwise known as the
Securities Regulation Code of 2000; (as
amended by Sec. 2, R.A. No. 11521)
34. Violation of Section 19 (a)(3) of Republic Act No.
10697, otherwise known as the ‘Strategic Trade
Management Act’, in relation to the proliferation
of weapons of mass destruction and its
financing pursuant to United Nations Security
Council Resolution Numbers 1718 of 2006 and
2231 of 2015; (Ibid.)
35. Violations of Section 254 of Chapter II, Title X of
the National Internal Revenue Code of 1997, as
amended, where the deficiency basic tax due in
the final assessment is in excess of Twenty-five
million pesos (P25,000,000.00) per taxable
year, for each tax type covered and there has
been finding of probable cause by the
competent authority: Provided, further, that
there must be a finding of fraud, willful
misrepresentation or malicious intent on the
part of the taxpayer: Provided, finally, that in no
case shall the AMLC institute forfeiture
proceedings to recover monetary instruments,
property or proceeds representing, involving or
relating to a tax crime, if the same has already
been recovered or collected by the Bureau of
Internal Revenue (BIR) in a separate
proceeding; and (Ibid.)
36. Felonies or offenses of a similar nature that are
punishable under the penal laws of other
countries. (Ibid.)
346
 Commercial Law

Limitations on Examination
E. AUTHORITY TO INQUIRE INTO BANK
DEPOSITS The authority to inquire into or examine the main
account and the related accounts shall comply with
the requirements of Sec. 2 and 3, Art. III of the 1987
Constitution. (as amended by Sec. 2, R.A. No. 10167)
Authority to Inquire into bank deposits (Sec. 11,
R.A. No. 9160, as amended)
Similarities of a Freeze Order under Sec. 10 and
a Bank Inquiry Order under Sec. 11
The AMLC may inquire into or examine any
particular deposit or investment, including related
The freeze order under Sec. 10 and the bank inquiry
accounts, with any banking institution or non-bank
order under Sec. 11 are similar in that they are
financial institution provided:
extraordinary provisional reliefs which the AMLC
may avail of to effectively combat and prosecute
1. It is upon order of any competent court;
money laundering offenses. (Republic v. Eugenio,
G.R. No. 174629, 15 Feb. 2008)
NOTE: Competent court under Sec. 11 of R.A.
9160, as amended, refers to the Court of
Cases where no court order shall be required in
Appeals (A.M. No. 21-03-05-CA)
order for the AMLC to inquire into deposit,
investment, or related accounts
2. Based on an ex parte application; and
3. In cases of violations of this Act, when it has
No need of court order in cases of activities
been established that there is probable cause
involving (KD-HAM-STF):
that the deposits or investments, including
related accounts involved, are related to an
1. Kidnapping,
unlawful activity as defined in Section 3(i) or a
2. Violation of Dangerous Drugs Act,
money laundering offense under Section 4.
3. Hijacking,
4. Arson,
NOTE: The inquiry conducted by the AMLC is
5. Murder
not violative of The Law on Secrecy of Bank
6. Felonies or offenses of a nature Similar to those
Deposits or R.A. No. 1405, as amended; Foreign
mentioned in Section (i)(1), (2), and (12), which
Currency Deposit Act or R.A. No. 6426, as
are punishable under the penal laws of other
amended; General Banking Law or R.A. No.
countries;
8791; and other similar laws. (As amended by
7. Terrorism and conspiracy to commit terrorism
Sec. 2, R.A. No. 10167)
(as amended by Sec. 2, R.A. No. 10167)
8. Financing of terrorism (Sec. 11, R.A. No. 10168)
The Court of Appeals shall act on the application to
inquire into or examine any deposit or investment
NOTE: In the above mentioned circumstances, the
with any banking institution or non-bank financial
AMLC shall issue an ex parte order authorizing its
institution within twenty-four (24) hours from
Secretariat to inquire into or examine any particular
filing of the application. (Ibid.)
deposit or investment account, including related
accounts, with any banking institution or non-bank
Related Accounts
financial institution and their subsidiaries and
affiliates when it has been established that probable
Refers to accounts, the funds, and sources of which
cause exists that the deposits or investments
originated from and/or are materially linked to the
involved, including related accounts, are in any way
monetary instrument(s) or property(ies) subject of
related to any of the above-mentioned activities.
the freeze order(s). (as amended by Sec. 2, R.A. No.
(Sec. 2, Rule 11, 2018 Implementing Rules and
10167)
Regulations of R.A. No. 9160, as amended):

347 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Anti-Money Laundering Act
Q: The Office of the Ombudsman requested the
AMLC to conduct a financial investigation of the
bank accounts of Senator Estrada and other
individuals allegedly involved in the corruption
over Priority Development Assistance Fund
(PDAF).
Meanwhile, the AMLC, determining that
Estrada's accounts were probably related to the
charge of plunder and the violation of R.A. No.
3019 charged against him and others,
authorized its secretariat to file in the Court of
Appeals (CA) an ex parte application for bank
inquiry pursuant to R.A. No. 9160, as amended.
The results of the AMLC's bank inquiry into
Estrada's accounts were contained in the so-
called Inquiry Report on the Bank Transactions
Related to the Alleged Involvement of Senator
Estrada in the PDAF Scam (Inquiry Report). On
December 19, 2014, the AMLC furnished the
Office of the Ombudsman a copy of the Inquiry
Report. During Estrada's bail hearings in the
Sandiganbayan, the Prosecution presented the
AMLC financial investigator, who testified on the
Inquiry Report.
Estrada filed the motion to suppress the
presentation of Inquiry Report contending that
the bank inquiry violates the constitutionally
mandated right to due process and right to
privacy, and that such Report is a fruit of
poisonous tree. Is the contention of Sen. Estrada
correct?
A: The AMLC, in investigating probable money
laundering activities, does not exercise quasi-
judicial powers, but merely acts as an investigatory
body with the sole power of investigation similar to
the functions of the National Bureau of Investigation
(NBI). Hence, the ex parte application for the bank
inquiry order cannot be said to violate any person's
constitutional right to procedural due process. Also,
the source of the right to privacy respecting bank
deposits is statutory, not constitutional; hence, the
Congress may validly carve out exceptions to the
rule on the secrecy of bank deposits, as illustrated in
Section 11 of R.A. No. 9160.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
With the consistency of the assailed provision of
R.A. No. 9160 with the Constitution, the Estrada’s
argument that the Inquiry Report was the fruit of a
poisonous tree and, therefore, inadmissible in
evidence remains unsubstantiated. (Jinggoy Estrada
v. Sandiganbayan, et al., G.R. No. 217682, July 17,
2018)
Q: From his first term in 2007, Congressman
Abner has been endorsing his pork barrel
allocations to Twin Rivers in exchange for a
commission of 40% of the face value of the
allocation. Twin Rivers is a non-governmental
organization whose supporting papers, after
audit, were found by the Commission on Audit to
be fictitious. Other than to prepare and submit
falsified papers to support the encashment of
the pork barrel checks, Twin Rivers does not
appear to have done anything on the endorsed
projects and Congressman Abner likewise does
not appear to have bothered to monitor the
progress of the projects he endorsed. The
congressman converted most of the
commissions he generated into US dollars and
deposited these in a foreign currency account
with Banco de Plata (BDP). Based on amply
supported tips given by a congressman from
another political party, the Anti-Money
Laundering Council sent BDP an order:
(1) to confirm Cong. Abner's deposits with the
bank and to provide details of these deposits;
and
(2) to hold all withdrawals and other
transactions involving the congressman's bank
accounts.
As counsel for BDP, would you advise the bank
to comply with the order? (2013 BAR)
A: NO. I shall advise Banco de Plata not to comply
with the order of the AMLC. It cannot inquire into
the deposits of Congressman Abner, regardless of
currency, without a bank inquiry order from a
competent court, because crimes involved are not
kidnapping for ransom, violations of the
Comprehensive Dangerous Drugs Act, hijacking and
other violations of R.A. No. 6235, destructive arson,
348
 Commercial Law
murder, and terrorism and conspiracy to commit
terrorism.
The AMLC cannot order Banco de Plata to hold all
withdrawals and other transactions involving the
accounts of Congressman Abner. It is the Court of
Appeals which has the power to issue a freeze order
over the accounts upon petition of the Anti-Money
Laundering Council. (Republic v. Cabrini Green Ross,
G.R. No. 154522, 05 May 2006)
Q: Prosperous Bank is a domestic bank with
head office in Makati. It handles the banking
requirements of thousands of clients. The AMLC
initiated a discreet investigation of the financial
transactions of Lorenzo, a suspected drug
trafficker based in Naga City. The intelligence
group of the AMLC, in coordination with the
counterpart group from the PDEA and the NBI,
gathered ample evidence establishing Lorenzo's
unlawful drug activities. The AMLC had probable
cause that his deposits and investments in
various banks, including Prosperous Bank, were
related to money laundering. Accordingly, the
AMLC now transmits to Prosperous Bank a
formal demand to allow its agents to examine
the banking transactions of Lorenzo, but
Prosperous Bank refuses the demand. Is
Prosperous Bank's refusal justified? Explain
your answer. (2017 BAR)
A: NO. While, as a general rule, the AMLC may
inquire into bank deposits only upon order of any
competent court, there is no need for such court
order in cases of kidnapping, hijacking, violation of
the Dangerous Drugs Act, arson, and murder. Given
that there is probable cause that Lorenzo is engaged
in unlawful activities as a drug trafficker, the AMLC
is authorized to inquire into his bank deposits with
Prosperous Bank.
Q: Rudy is jobless but is reputed to be a jueteng
operator. He has never been charged or
convicted of any crime. He maintains several
bank accounts and has purchased 5 houses and
lots for his children from the Luansing Realty I
Inc. Since he does not have any visible job, the
company reported his purchases to the Anti-
Money Laundering Council (AMLC). Thereafter,
349
AMLC charged him with violation of the Anti-
Money Laundering Law. Upon request of the
AMLC, the bank disclosed to it Rudy's bank
deposits amounting to P100 Million.
Subsequently, he was charged in court for
violation of the Anti-Money Laundering Law.
a. Can Rudy move to dismiss the case on the
ground that he has no criminal record?
b. To raise funds for his defense, Rudy sold the
houses and lots to a friend. Can Luansing
Realty, Inc. be compelled to transfer to the
buyer ownership of the houses and lots?
c. In disclosing Rudy's bank accounts to the
AMLC, did the bank violate any law?
d. Supposing the titles of the houses and lots
are in possession of the Luansing Realty Inc.,
is it under obligation to deliver the titles to
Rudy? (2006 BAR)
A:
a. NO. The contention of Rudy is not tenable
because under AMLA, "money laundering “is
committed when the proceeds of an "unlawful
activity," like jueteng operations, are made to
appear as having originated from legitimate
sources. Money laundering is separate from the
unlawful activity of being a jueteng operator
and requires no previous conviction for the
unlawful activity. (Sec. 3, R.A. No. 9160, as
amended)
b. YES. Rudy is still the owner of the house and lot
in question and as such he may dispose the
same as he pleases. Absent any freeze order
filed by the OSG on behalf of the AMLC, Rudy
may dispose said properties and compel
Luansing Realty to transfer to the buyer
ownership of the properties sold.
c. YES. Under the Anti-money Laundering Law, as
amended, the AMLC may inquire into bank
accounts upon order of any competent court
based in an ex parte application when it has
been established that said accounts are related
to an unlawful activity. In the case at hand, the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Anti-Money Laundering Act

AMLC merely requested the disclosure of said

accounts without court order. The bank F. FREEZING AND FORFEITURE
therefore violated the secrecy of bank account
of Rudy when it allowed the AMLC to look into
said accounts without court order. (Sec. 11, R.A.
Freezing of Monetary Instrument or Property
No. 9160 as amended by Sec. 2, R.A. No. 10167)
(Sec. 10, R.A. No. 9160, as amended)

d. YES. The properties are validly sold in favor of

Purpose of a Freeze Order
Rudy and as such Luansing Realty is under the
obligation to deliver the titles to the buyer. This
To give the government the necessary time to
is without prejudice to the application of freeze
prepare its case and to file the appropriate charges
order by the OSG on behalf of the AMLC.
without having to worry about the possible
dissipation of the assets that are in any way related
to the suspected illegal activity. (Ligot v. Republic,
G.R. No. 176944, 06 Mar. 2013)

Objective of a Freeze Order

The primary objective of a freeze order is to

temporarily preserve monetary instruments or
property that are in any way related to an unlawful
activity or money laundering, by preventing the
owner from utilizing them during the duration of
the freeze order. (Ligot v. Republic, supra)

When may a Freeze Order be issued (Sec. 10(a))

The Court of Appeals may issue a freeze order which

shall be effective immediately, for a period of twenty
(20) days:

a. Upon a verified ex parte petition by the AMLC;

and
b. After determination that probable cause exists
that any monetary instrument or property is in
any way related to an unlawful activity as
defined in Sec. 3(i).

NOTE: No court shall issue a temporary restraining

order or a writ of injunction against any freeze
order, except the Supreme Court. (as amended by
Sec. 4, R.A. No. 10927)

A freeze order is not dependent on a separate

criminal charge, much less does it depend on a
conviction. Based on Sec. 10 of R.A. No. 9160, as
amended, there are only two requisites for the
issuance of a freeze order: (1) the application ex-
parte by the AMLC, and (2) the determination of

UNIVERSITY OF SANTO TOMAS 350

2022 GOLDEN NOTES
 Commercial Law
probable cause by the CA. Probable cause refers to
the sufficiency of the relation between an unlawful
activity and the property or monetary instrument
which is the focal point of Sec. 10 of R.A. No. 9160,
as amended. (Edgardo Yambao v. Republic of the
Philippines, G.R. No. 171054, 26 Jan. 2021)
Summary Hearing
Within the twenty (20)-day period, the Court of
Appeals shall conduct a summary hearing, with
notice to the parties, to determine whether or not to
modify or lift the freeze order or extend its
effectivity. (As amended by Sec. 4, R.A. No. 10927)
Period of the Freeze Order
The total period of the freeze order issued by the
Court of Appeals shall not exceed six (6) months. (As
amended by Sec. 4, R.A. No. 10927)
NOTE: This is without prejudice to an asset
preservation order that the Regional Trial Court
having jurisdiction over the appropriate anti-money
laundering case or civil forfeiture case may issue on
the same account depending upon the
circumstances of the case, where the Court of
Appeals will remand the case and its records:
Provided, That if there is no case filed against a
person whose account has been frozen within the
period determined by the Court of Appeals, not
exceeding six (6) months, the freeze order shall be
seemed ipso facto lifted: Provided, further, That this
new rule shall not apply to pending cases in the
courts. In any case, the court should act on the
petition to freeze within twenty-four (24) hours
from filing of the petition. (As amended by Sec. 4, R.A.
No. 10927)
NOTE: If the application is filed a day before a no
working day, the computation of the twenty-four
(24)-hour period shall exclude the nonworking
days. (As amended by Sec. 4, R.A. No. 10927)
Freeze Order under Section 10 vs. Bank Inquiry
Order under Sec. 11
A freeze order under Section 10 on the one hand is
aimed at preserving monetary instruments or
351
property in any way deemed related to unlawful
activities as defined in Section 3(i) of the AMLA. The
owner of such monetary instruments or property
would thus be inhibited from utilizing the same for
the duration of the freeze order.
On the other hand, a bank inquiry order under
Section 11 does not necessitate any form of physical
seizure of property of the account holder. What the
bank inquiry order authorizes is the examination of
the particular deposits or investments in banking
institutions or non-bank financial institutions. The
monetary instruments or property deposited with
such banks or financial institutions are not seized in
a physical sense, but are examined on particular
details such as the account holder’s record of
deposits and transactions. (Republic v. Eugenio, G.R.
No. 174629, 15 Feb. 2008)
NOTE: The Eugenio ruling with regard to the
distinction of a Freeze Order and Bank Inquiry
Order is no longer applicable since the amendment
in R.A. No. 10167 as it explicitly states that the
proceedings in application for bank inquiry is ex
parte.
Q: Bangladesh Bank Governor Rahman sought
the assistance of BSP Governor Tetangco
regarding the loss of millions of US dollars from
Bangladesh Bank’s Account with the New York
Fed. Governor Rahman requested to conduct an
inquiry and asked for help to recover their
money since some fraudulent payment
transactions were made to the New York Fed in
Favor of RCBC involving US$81,000,000.00.
Upon investigation it was found that four
accounts with the RCBC were the beneficiaries of
the fraudulent transfer. The withdrawals from
the four RCBC bank accounts were eventually
transferred to the account of a certain William
Go. The amount was credited to PhilRem Service
Corporation’s account upon Go’s instructions.
Later on, PhilRem was instructed to deliver the
amount to Bloomberry Resorts and Hotels, Inc.’s
BDO Account.
The AMLC found probable cause that BRHI’s
BDO account was related to unlawful activity of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Anti-Money Laundering Act
hacking, and it issued a resolution authorizing
the AMLC Secretariat to file an ex parte petition
of a freeze order against the subject account,
through the Office of the Solicitor General.
Afterwards, the CA issued the freeze order
effective for 30 days.
For its part, BRHI claims that it is the casino
operator of Solaire and it is not a covered
institution under the Anti-Money Laundering
Act of 2001 at the time the incident happened. It
claims that at the time the remittance, there was
no reason for it to suspect that the amount could
be related to any unlawful activity as the same
was received and deposited in the account of
BRHI in the regular course of business. BRHI
filed an Urgent Motion to Lift Freeze Order while
the AMLC filed an Urgent Motion for Additional
Period of Freeze Order. It further argued that
the petition is moot because the freeze order
cannot be issued or extended for a period longer
than six months. Has the Freeze Order become
moot and academic?
A: YES. Sec. 10 of R.A. No. 9160, as amended,
provides that upon a verified ex parte petition by the
AMLC and after determination that probable cause
exists that any monetary instrument or property is
in any way related to an unlawful activity as defined
in Sec. 3(i) hereof, the Court of Appeals may issue a
freeze order which shall be effective immediately,
and which shall not exceed six (6) months
depending upon the circumstances of the case:
Provided, that if there is no case filed against a
person whose account has been frozen within the
period determined by the court, the freeze order
shall be deemed ipso facto lifted: Provided, further,
That this new rule shall not apply to pending cases
in the courts.
In any case, the court should act on the petition to
freeze within twenty-four (24) hours from filing of
the petition. If the application is filed a day before a
nonworking day, the computation of the twenty-
four (24)-hour period shall exclude the nonworking
days.
A person whose account has been frozen may file a
motion to lift the freeze order and the court must
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
resolve this motion before the expiration of the
freeze order. No court shall issue a temporary
restraining order or a writ of injunction against any
freeze order, except the Supreme Court. Clearly, a
Freeze Order may not be issued indefinitely, lest the
same be characterized as a violation of the person's
right to due process and to be presumed innocent of
a charge. (Republic of the Philippines v. Bloomberry
Resort and Hotels, Inc., G.R. No. 224112, 02 Sept.
2020)
Q: The CA, upon the finding of probable cause
and through a Resolution dated 5 July 2005,
issued a Freeze Order against the subject
monetary instruments of petitioners Ligot and
Yambao. Thereafter, petitioner filed a Motion to
Lift Freeze Order against the monetary
instruments and properties of Edgardo Yambao.
On 20 Sept. 2005, the CA issued a Resolution
wherein the motion to lift the freeze order was
denied and that the urgent motion for the
extension of effectivity of freeze order was
granted. Meanwhile, A.M. No. 05-11-04-SC or the
Rule of Procedure in Cases of Civil Forfeiture,
Asset Preservation, and Freezing of Monetary
Instrument, Property, or Proceeds
Representing, Involving, or Relating to an
Unlawful Activity or Money Laundering Offense
under R.A. No. 9160, as amended, took effect on
15 Dec. 2005. Asserting the applicability of the
said Rule, petitioner filed an Urgent Motion for
Summary Hearing to Limit the Effectivity of
Freeze Order and/or to Declare the Expiration
of the Freeze Order. On 4 Jan. 2006, the CA
issued the challenged Resolution, denying all
pending motions, including those of petitioner’s.
Is the petitioner entitled to due process as
guaranteed by the Constitution and the New
Rules?
A: YES. The Court, in Ligot’s case, clarified that a
freeze order cannot be issued for an indefinite
period. In fact, the continued extension of the freeze
order beyond the six-month period violated Ligot’s
right to due process.
The silence of the law, however, does not in any way
affect the Court’s own power under the Constitution
352
 Commercial Law
to ‘promulgate rules concerning the protection and
enforcement of constitutional rights and procedure
in all courts.’ Pursuant to this power, the Court
issued A.M. No. 05-11-04 SC, limiting the effectivity
of an extended freeze order to six months – to
otherwise leave the grant of extension to the sole
discretion of the CA, which may extend a freeze
order indefinitely or to an unreasonable amount of
time – carries serious implications on an
individual’s substantive right to due process.
(Edgardo Yambao v. Republic of the Philippines as
represented by the Anti-Money Laundering Council,
G.R. No. 171054, 26 Jan. 2021)
Limitation of Freeze Order
The freeze order or asset preservation order issued
under this Act shall be limited only to the amount of
cash or monetary instrument or value of property
that the court finds there is probable cause to be
considered as proceeds of a predicate offense, and
the freeze order or asset preservation order shall
not apply to amounts in the same account in excess
of the amount or value of the proceeds of the
predicate offense. (As amended by Sec. 4, R.A. No.
10927)
Q: SPCMB was most concerned with the article
published in the Manila Times on 25 February
2015 which read: “The Anti-Money Laundering
Council asked the Court of Appeals to allow the
Council to peek into the bank accounts of the
Beenays, their corporations, and a law office
where a family member was once a partner. Also
the bank accounts of the law office linked to the
family, the SPCMB, where the Vice President's
daughter Abigail was a former partner.
By 8 Mar 2015, the Manila Times published
another article reporting that the appellate
court had issued a Resolution granting the ex-
parte application of the AMLC to examine the
bank accounts of SPCMB. SPCMB undertook this
petition for certiorari and prohibition on the
following grounds that the Anti-Money
Laundering Act is unconstitutional insofar as it
allows the examination of a bank account
without any notice to the affected party; Does it
violate the following: (1) right to substantive
353
due process; (2) right to procedural due process
or (3) right to privacy.
A: 1. NO. Sec. 11 of the AMLA providing for ex-parte
application and inquiry by the AMLC into certain
bank deposits and investments does not violate
substantive due process, there being no physical
seizure of property involved at that stage.
A bank inquiry order under Sec. 11 does not
necessitate any form of physical seizure of property
of the account holder. What the bank inquiry order
authorizes is the examination of the particular
deposits or investments in banking institutions or
non-bank financial institutions. The monetary
instruments or property deposited with such
banks or financial institutions are not seized in
a physical sense but are examined on particular
details such as the account holder's record of
deposits and transactions.
2. NO. The AMLC functions solely as an investigative
body in the instances mentioned in Rule 5.b.26.
Thereafter, the next step is for the AMLC to file a
Complaint with either the DOJ or the Ombudsman
pursuant to Rule 6b. Even in the case of Estrada v.
Office of the Ombudsman, where the conflict arose at
the preliminary investigation stage by the
Ombudsman, we ruled that the Ombudsman's
denial of Senator Estrada's Request to be furnished
copies of the counter-affidavits of his co-
respondents did not violate Estrada's constitutional
right to due process where the sole issue is the
existence of probable cause for the purpose of
determining whether an information should be filed
and does not prevent Estrada from requesting a
copy of the counter-affidavits of his co-respondents
during the pre-trial or even during trial.
Plainly, the AMLC's investigation of money
laundering offenses and its determination of
possible money laundering offenses, specifically
its inquiry into certain bank accounts allowed
by court order, does not transform it into an
investigative body exercising quasi-judicial
powers. Hence, Sec. 11 of the AMLA, authorizing a
bank inquiry court order, cannot be said to violate
SPCMB's constitutional right to due process.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Anti-Money Laundering Act
3. NO. We now come to a determination of whether
Sec. 11 is violative of the constitutional right to
privacy enshrined in Sec. 2, Art. III of the
Constitution. We thus subjected Sec. 11 of the AMLA
to heightened scrutiny and found nothing arbitrary
in the allowance and authorization to AMLC to
undertake an inquiry into certain bank accounts or
deposits. It provides safeguards before a bank
inquiry order is issued, ensuring adherence to the
general state policy of preserving the absolutely
confidential nature of Philippine bank accounts:
a. The AMLC is required to establish probable
cause as basis for its ex-parte application for
bank inquiry order;
b. The CA, independent of the AMLC's
demonstration of probable cause, itself
makes a finding of probable cause that the
deposits or investments are related to an
unlawful activity under Sec. 3(i) or a money
laundering offense under Sec. 4 of the AMLA;
c. A bank inquiry court order ex-parte for
related accounts is preceded by a bank
inquiry court order ex-parte for the
principal account which court order ex-parte
for related accounts is separately based on
probable cause that such related account is
materially linked to the principal account
inquired into; and
d. The authority to inquire into or examine the
main or principal account and the related
accounts shall comply with the requirements
of Secs. 2 and 3, Art. III, of the Constitution.
The foregoing demonstrates that the inquiry and
examination into the bank account are not
undertaken whimsically and solely based on the
investigative discretion of the AMLC. In particular,
the requirement of demonstration by the AMLC, and
determination by the CA, of probable cause
emphasizes the limits of such governmental action.
(Subido v. CA, G.R. No. 216914, 06 Dec. 2016)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
FORFEITURE PROVISIONS
(Sec. 12, R.A. No. 9160, as amended)
Definition of Civil Forfeiture
“Civil Forfeiture” (CF) refers to the non-conviction-
based proceedings aimed at forfeiting, in favor of
the government, monetary instruments or
properties related to an unlawful activity or money
laundering offense defined herein. ([r], Sec. 1, Rule 2,
2018 Implementing Rules and Regulations of R.A. No.
9160, as amended)
Prior criminal charge or conviction for the
unlawful activity is NOT a requirement for Civil
Forfeiture proceedings
No prior criminal charge, pendency of a case, or
conviction for an unlawful activity or money
laundering offense is necessary for the
commencement or the resolution of a petition for
civil forfeiture. ([a], Sec. 1, Rule 12, 2018
Implementing Rules and Regulations of R.A. No. 9160,
as amended).
Section 28 of A.M. No. 05-11-04-SC (Rules of
Procedure in Cases of Civil Forfeiture) provides that
an action for civil forfeiture “shall proceed
independently of the criminal prosecution.”
How to initiate Civil Forfeiture (Sec. 12(a))
Upon determination by the AMLC that probable
cause exists that any monetary instrument or
property is in any way related to an unlawful
activity or a money laundering offense, the AMLC
shall file with the appropriate court through the
Office of the Solicitor General, a verified ex-parte
petition for forfeiture, and the Rules of Court on
Civil Forfeiture shall apply. (As amended by Sec. 9,
R.A. No. 10365)
354
 Commercial Law
Forfeiture of Assets of Equivalent Value
The forfeiture shall include those other monetary
instrument or property having an equivalent value
to that of the monetary instrument or property
found to be related in any way to an unlawful
activity or a money laundering offense when:
(D-O-C-C-S)
1. with due Diligence, the former cannot be
located; or
2. it has been Substantially altered, destroyed,
diminished in value, or otherwise rendered
worthless by any act or omission; or
3. it has been Concealed, removed, converted, or
otherwise transferred; or
4. it is located Outside the Philippines or has been
placed or brought outside the jurisdiction of the
court; or
5. it has been Commingled with other monetary
instrument or property belonging to either the
offender himself or a third person or entity,
thereby rendering the same difficult to identify
or be segregated for purposes of forfeiture.
(Ibid.)
Claim on Forfeited Assets (Sec. 12(b))
Where the court has issued an order of forfeiture of
the monetary instrument or property in a criminal
prosecution for any money laundering offense
defined under Sec. 4, the offender or any other
person claiming an interest therein may apply, by
verified petition, for a declaration that the same
legitimately belongs to him and for segregation or
exclusion of the monetary instrument or property
corresponding thereto.
The verified petition shall be filed with the court
which rendered the judgment of forfeiture, within
fifteen (15) days from the date of the finality of the
order of forfeiture, in default of which the said order
shall become final and executor. This provision shall
apply in both civil and criminal forfeiture. (As
amended by Sec. 9, R.A. No. 10365)
355
Payment in Lieu of Forfeiture (Sec. 12(c))
Where the court order for civil or criminal forfeiture
of the monetary instrument or property subject of a
money laundering offense cannot be enforced, the
court may accordingly order the convicted offender
to pay an amount equal to the value of said
monetary instrument or property. (As amended by
Sec. 9, R.A. No. 10365)
Instances when the order of forfeiture cannot be
enforced (Sec. 12(c))
1. When any particular monetary instrument or
property cannot, with due diligence, be located;
2. When it has been substantially altered,
destroyed, diminished in value, or otherwise
rendered worthless by any act or omission,
directly or indirectly, attributable to the
offender;
3. When it has been concealed, removed,
converted;
4. When it is otherwise transferred to prevent the
same from being found or to avoid forfeiture
thereof;
5. When it is located outside the Philippines or has
been placed or brought outside the jurisdiction
of the court;
6. When it has been commingled with other
monetary instruments or property belonging to
either the offender himself or a third person or
entity, thereby rendering the same difficult to
identify or be segregated for purposes of
forfeiture.
NOTE: No court shall issue a temporary restraining
order (TRO) or a writ of injunction against any
provisional asset preservation order or asset
preservation, except the Court of Appeals or the
Supreme Court. (Sec. 12(d) R.A. 9160, as amended by
Sec. 6, R.A. No. 11521)
Venue and Jurisdiction
The venue of civil forfeiture cases is any RTC of the
judicial region where the money instrument,
property or proceeds representing, involving, or
relating to an unlawful activity or to a money
laundering offense is located. It is the preliminary
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Anti-Money Laundering Act

seizure of the property which brings it within the property. The asset forfeiture following a conviction
reach of judicial process. (Republic v. Glasgow Credit will apply only to those properties not covered in a
and Collection Services, Inc., G.R. No. 170281, 18 Jan. parallel civil forfeiture case, and vice versa. (Sec. 27,
2008) Rules on Criminal Forfeiture)

NOTE: In its Resolution dated 9 November 2021, the

Supreme Court issued A.M. 03-03-03-SC designated
Special Commercial Courts to hear and decide AMLC
cases, including petitions for civil forfeiture and
criminal forfeitures.

Criminal Forfeiture

The Rule on Criminal Forfeiture refers to the Rule on

Asset Preservation, Seizure, and Forfeiture in
Criminal Cases under Republic Act No. 9160 as
Amended refers to A.M. 21-13-13-SC, which took
effect on 31 May 2021.

Applicability of the Rules on Criminal Forfeiture

The Rule on Criminal Forfeiture applies to all

criminal actions involving either an:

(a) unlawful activity under Section 3(i), AMLA; or

(b) money laundering under Section 4, AMLA.

The Remedy of Asset Forfeiture under the Rules

on Criminal Forfeiture

Under the Rule, the prosecution may pursue the

remedy of asset forfeiture by an allegation in the
criminal information that it will proceed against the
subject of the crime or offense, proceeds or fruits of
the crime of offense, or any property used as the
means of committing a crime or offense.

In this regard, the prosecution may amend a

criminal information, with leave of court, if during
trial, other property not subject of the original
information is shown to be the subject of, the
proceeds or fruits of, or the means used of
committing the crime or offense charged.

Parallel Forfeiture

Pursuit of asset forfeiture under the Rules on

Criminal Forfeiture shall proceed independently of
proceedings for civil forfeiture against the same

UNIVERSITY OF SANTO TOMAS 356

2022 GOLDEN NOTES
 Electronic Commerce Act
VI. ELECTRONIC COMMERCE ACT OF 2000
(R.A. NO. 8792)
Policy of the Law (Sec. 2)
The law is a recognition by the State of:
1. The vital role of information and
communications technology (ICT) in nation-
building;
2. The need to create an information-friendly
environment which supports and ensures the
availability, diversity and affordability of ICT
products and services;
3. The primary responsibility of the private sector
in contributing investments and services in
telecommunications and information
technology;
4. The need to develop, with appropriate training
programs and institutional policy changes,
human resources for the information
technology age, a labor force skilled in the use
of ICT and a population capable of operating
and utilizing electronic appliances and
computers;
5. Its obligation to facilitate the transfer and
promotion of technology and to ensure network
security, connectivity, and neutrality of
technology for the national benefit; and
6. The need to marshal, organize and deploy
national information infrastructures,
comprising in both telecommunications
network and strategic information services,
including their interconnection to the global
information networks.
Objectives of the Law (Sec. 3)
The Act aims to:
1. Facilitate domestic and international dealings,
transactions, arrangements agreements,
contracts and exchanges and storage of
information through the utilization of
electronic, optical, and similar medium, mode,
instrumentality and technology to recognize
the authenticity and reliability of electronic
documents related to such activities; and
357
2. Promote the universal use of electronic
transaction in the government and general
public.
Sphere of Application (Sec. 4)
This Act shall apply to any kind of data message and
electronic document used in the context of
commercial and non-commercial activities to
include domestic and international dealings,
transactions, arrangements, agreements, contracts
and exchanges and storage of information.
A. LEGAL RECOGNITION OF ELECTRONIC DATA
MESSAGES, DOCUMENTS, AND SIGNATURES
Legal Recognition of Electronic Data Messages
(Sec. 6)
Information shall not be denied legal effect, validity,
or enforceability solely on the grounds that it is in
the data message purporting to give rise to such
legal effect, or that it is merely referred to in that
electronic data message.
Electronic Data Messages
This refers to information generated, sent, received,
or stored by electronic, optical, or similar means.
(Sec. 5(c), R.A. No. 8792)
Legal Recognition of Electronic Documents (Sec.
7)
Electronic documents shall have the legal effect,
validity, or enforceability as any other document or
legal writing.
Electronic Document
This refers to information or the representation of
information, data, figures, symbols, or other mode of
written expression, described or however
represented, by which a right is established, or an
obligation extinguished, or by which a fact may be
proved and affirmed, which is received, recorded,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
transmitted, stored, processed, retrieved, or
produced electronically. (Sec. 5(f), R.A. No. 8792)
This includes digitally signed documents and any
print-out or output, readable by sight or other
means, which accurately reflects the electronic data
message or electronic document. (Sec. 1(h), Rule 2,
A.M. No. 01-7-01-SC or the Rules on Electronic
Evidence)
NOTE: Under the Rules on Electronic Evidence, the
term “electronic document” may be used
interchangeably with “electronic data message”.
Divina, 2021; Sec. 1(h), Rules on Electronic Evidence)
Legal Recognition of Electronic Signatures (Sec.
8)
An electronic signature on the electronic document
shall be equivalent to the signature of a person on a
written document if that signature is proved by
showing that a prescribed procedure, not alterable
by the parties interested in the electronic document,
existed under which:
a. A method is used to identify the party sought to
be bound and to indicate said party’s access to
the electronic document necessary for his
consent or approval through the electronic
signature;
b. Said method is reliable and appropriate for the
purpose for which the electronic document was
generated or communicated, in the light of all
circumstances, including any relevant
agreement;
c. It is necessary for the party sought to be bound,
in or order to proceed further with the
transaction, to have executed or provided the
electronic signature; and
d. The other party is authorized and enabled to
verify the electronic signature and to make the
decision to proceed with the transaction
authenticated by the same.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Electronic Signature
This refers to any distinctive mark, characteristic
and/or sound in electronic form, representing the
identity of a person, and attached to or logically
associated with the electronic data message or
electronic document or any methodology or
procedures employed or adopted by a person and
executed or adopted by such person with the
intention of authenticating or approving an
electronic data message or electronic document.
(Sec. 5(e), R.A. No. 8792)
NOTE: For the purposes of the Rules on Electronic
Evidence, an electronic signature includes digital
signature. (Sec. 1(j), Rule 2, Rules on Electronic
Evidence)
Digital Signature
This refers to an electronic signature consisting of a
transformation of an electronic document or an
electronic data message using an asymmetric or
public cryptosystem, such that a person has the
initial untransformed electronic document and the
signer’s public key can accurately determine the
following:
i. Whether the transformation was created using
the private key that corresponds to the
signer’s public key; and
ii. Whether the initial electronic document had
been altered after the transformation was
made. (Sec. 1(j), Rule 2, A.M. No. 01-7-01-SC)
B. PRESUMPTION RELATING TO ELECTRONIC
SIGNATURES
In any proceedings involving an electronic
signature, it shall be presumed that:
a) The electronic signature is the signature of
the person to whom it correlates; and
b) The electronic signature was affixed by that
person with the intention of signing or
approving the electronic document unless
the person relying on the electronically
358
 Electronic Commerce Act
signed electronic document knows or has
notice of defects in or unreliability of the
signature or reliance on the electronic
signature is not reasonable under the
circumstances. (Sec. 9, R.A. No. 8792)
NOTE: Under the Rules on Electronic Evidence,
upon the authentication of an electronic signature,
the disputable presumptions are:
a) The electronic signature is that of the
person to whom it correlates;
b) The electronic signature was affixed by that
person with the intention of authenticating
or approving the electronic document to
which it is related or to indicate such
person's consent to the transaction
embodied therein; and
c) The methods or processes utilized to affix
or verify the electronic signature operated
without error or fault. (Sec. 3, Rule 6, Rules
on Electronic Evidence)
C. ADMISSIBILITY AND EVIDENTIAL WEIGHT OF
ELECTRONIC DATA MESSAGE OR ELECTRONIC
DOCUMENT
Admissibility in Evidence of Electronic Data
Message or Electronic Document (Sec. 12)
In any legal proceedings, nothing in the application
of the rules on evidence shall deny the admissibility
of an electronic data message or electronic
document in evidence:
a) On the sole ground that it is in electronic
form; or
b) On the ground that it is not in the standard
written form, and the electronic data
message or electronic document meeting
and complying with the requirements
under Secs. 6 or 7 of the Act shall be the best
evidence of the agreement and transaction
contained therein.
359
NOTE: Under the Rules on Electronic Evidence, an
electronic document is admissible in evidence if it
complies with the rules on admissibility prescribed
by the Rules of Court and related laws and is
authenticated in the manner prescribed by these
Rules. (Sec. 2, Rule 3, Rules on Electronic Evidence)
Evidential Weight of Electronic Data Message or
Electronic Document (Sec. 12)
In assessing the evidential weight of an electronic
data message or electronic document, the reliability
of the manner in which it was generated, stored or
communicated, the reliability of the manner in
which its originator was identified, and other
relevant factors shall be given due regard.
NOTE: Under the Rules on Electronic Evidence, the
following are the factors for assessing evidentiary
weight:
a) The reliability of the manner or method in
which it was generated, stored, or
communicated, including but not limited to
input and output procedures, controls,
tests and checks for accuracy and reliability
of the electronic data message or
document, in the light of all the
circumstances as well as any relevant
agreement;
b) The reliability of the manner in which its
originator was identified;
c) The integrity of the information and
communication system in which it is
recorded or stored, including but not
limited to the hardware and computer
programs or software used as well as
programming errors;
d) The familiarity of the witness or the person
who made the entry with the
communication and information system;
e) The nature and quality of the information
which went into the communication and
information system upon which the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

electronic data message or electronic
document was based; or
f) Other factors which the court may consider
as affecting the accuracy or integrity of the
electronic document or electronic data
message. (Sec. 1, Rule 7, A.M. No. 01-7-01-
SC)
and Industry with other appropriate government
agencies, the parties to any electronic transaction
shall be free to determine the type of level of
electronic data message and electronic document
security needed, and to select and use or implement
appropriate technological methods that will suit
their needs. (Sec. 24, R.A. No. 8792)

Formation of Validity of Electronic Contracts D. OBLIGATION OF CONFIDENTIALITY

(Sec. 16)

GR: An offer, the acceptance of an offer and such

Except for the purposes authorized under this Act,
other elements required under existing laws for the
any person who obtained access to any electronic
formation of contracts may be expressed in,
key, electronic data message or electronic
demonstrated and proved by means of electronic
document, book, register, correspondence,
data messages or electronic documents. (Sec. 16(1),
information, or other material pursuant to any
R.A. No. 8792)
powers conferred under this Act, shall not convey to
or share the same with any other person. (Sec. 32,
NOTE: No contract shall be denied validity or
R.A. No. 8792)
enforceability on the sole ground that it is in the
form of an electronic data message or electronic
document, or that any or all of the elements
required under existing laws for the formation of
contracts is expressed, demonstrated and proved by
means of electronic data messages or electronic
documents. (Ibid.)

XPN: When the parties otherwise agree.

Electronic transactions made through

networking among banks

Electronic transactions made through networking

among banks, or linkages thereof with other entities
or networks, and vice versa, shall be deemed
consummated upon the actual dispensing of cash or
the debit of one account and the corresponding
credit to another. (Sec. 16(2), R.A. No. 8792)

NOTE: The obligation of one bank, entity, or person

similarly situated to another arising therefrom shall
be considered absolute and shall not be subjected to
the process of preference of credits. (Ibid.)

Choice of security methods

Subject to applicable laws and/or rules and

guidelines promulgated by the Department of Trade

UNIVERSITY OF SANTO TOMAS 360

2022 GOLDEN NOTES
 Financial Rehabilitation, Insolvency, Liquidation, and
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a. A sole proprietorship duly registered with

VII. FINANCIAL REHABILITATION, INSOLVENCY, the Department of Trade and Industry
LIQUIDATION and SUSPENSION OF PAYMENTS (DTI);
b. A partnership duly registered with the
(R.A. No. 10142, FR Rules [A.M. No. 12-12-11- Securities and Exchange Commission
SC], and FLSP Rules [A.M. No. 15-04-06-SC]) (SEC);
c. A corporation duly organized and existing
under Philippine laws; or
d. An individual debtor who has become
Policy of the Law (Sec. 2, Financial Rehabilitation
insolvent. (Sec. 4(k), Ibid.)
and Insolvency Act (FRIA))

Excluded from the Term Debtor (Sec. 5, FRIA)

1. To encourage debtors, both juridical and
natural persons, and their creditors to
1. Bank – refers to any duly licensed bank or
collectively and realistically resolve and adjust
quasi-bank that is potentially or actually subject
competing claims and property rights;
to conservatorship, receivership, or liquidation
2. To ensure a timely, fair, transparent, effective,
proceedings under the New Central Bank Act
and efficient rehabilitation or liquidation of
(R.A. No. 7653) or succeeding legislation;
debtors;
3. To ensure or maintain certainty and
2. Insurance Company - refers to those
predictability in commercial affairs, preserve
companies that are potentially or actually
and maximize the value of the assets of these
subject to insolvency proceedings under the
debtors, recognize creditor rights and respect
Insurance Code (P.D. 1460) or succeeding
priority of claims, and ensure equitable
legislation;
treatment of creditors who are similarly
situated;
3. Pre-need Company - refers to any corporation
4. When rehabilitation is not feasible, to facilitate
authorized/licensed to sell or offer to sell pre-
a speedy and orderly liquidation of these
need plans; and
debtor's assets and the settlement of their
obligations.
4. National and Local Government Agencies or
Units
Nature of the Proceedings (Sec. 3, FRIA)

NOTE: Government financial institutions other than

1. In rem - Jurisdiction over all persons affected
banks and government-owned-or-controlled
by the proceedings shall be considered as
corporations are covered by this Act unless their
acquired upon publication of the notice of the
specific charter provides otherwise. (Sec. 5, FRIA)
commencement of the proceedings in any
newspaper of general circulation in the
Philippines;
2. Summary and non-adversarial.

Covered Persons

1. Individual debtor – a natural person who is a

resident and citizen of the Philippines that has
become insolvent; (Sec. 4(o), FRIA)
2. Debtor – unless specifically excluded by a
provision of this Act, refers to:

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A. BASIC CONCEPTS
1. REHABILITATION
Rehabilitation shall refer to the restoration of the
debtor to a condition of successful operation and
solvency, if it is shown that its continuance of
operation is economically feasible and its creditors
can recover by way of the present value of payments
projected in the plan, more if the debtor continues
as a going concern than if it is immediately
liquidated. (Sec. 4(g), FRIA)
Corporate rehabilitation is a remedy for
corporations, partnerships, and associations who
foresee the impossibility of meeting their debts
when they respectively fall due. (De Leon, 2021; Viva
Shipping Lines, Inc. v. Keppel Philippines Mining, Inc.,
G.R. No. 177382, 17 Feb. 2016)
A corporation under rehabilitation continues with
its corporate life and activities to achieve solvency,
or a position where the corporation is able to pay its
obligations as they fall due in the ordinary course of
business. (Viva Shipping Lines, Inc. v. Keppel
Philippines Mining, Inc., supra)
Types of Rehabilitation Proceedings
1. Court-supervised - which may be voluntary or
involuntary; (Secs. 12 & 13, FRIA)
2. Pre-negotiated; (Sec. 76, FRIA) and
3. Out-of-Court or informal. (Sec. 83, FRIA)
Purpose of Rehabilitation
Rehabilitation proceedings have a two-pronged
purpose, namely:
(a) to efficiently and equitably distribute the
remaining assets of the insolvent debtor to its
creditors; and
(b) to provide the debtor with a fresh start. (De Leon,
2021; Asiatrust Development Bank v. First Aikka
Development, Inc. and Univac Development, Inc., G.R.
No. 179558, 1 June 2011)
UNIVERSITY OF SANTO TOMAS
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2. INSOLVENT
Insolvent shall refer to the financial condition of a
debtor that is generally unable to pay its or his
liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or
his assets. (Sec. 4(p), FRIA)
Insolvency shall refer to the financial incapacity of
the debtors to pay their liabilities as they fall due in
the ordinary course of business or whenever their
liabilities are greater than their assets. (Sec. 5(k),
Rule 1, A.M. No. 12-12-11-SC)
NOTE: As used in the Financial Rehabilitation and
Insolvency Act or FRIA, the term “insolvent” covers
both bankruptcy and illiquidity. (De Leon, 2021)
3. LIQUIDATION
Liquidation shall refer to the proceedings on
Liquidation of Insolvent Juridical Debtor (Chapter
V), Voluntary Liquidation (Chapter VI[B]),
Involuntary Liquidation (Chapter VI[C]), and
Provisions Common to Liquidation in Insolvency of
Individual and Juridical Debtors (Chapter VII). (Sec.
5[l], Rule 1, A.M. No.15-04-06-SC)
Liquidation vs. Rehabilitation
Liquidation is diametrically opposed to
rehabilitation. Both cannot be undertaken at the
same time. In rehabilitation, corporations have to
maintain their assets to continue business
operations. In liquidation, on the other hand,
corporations preserve their assets in order to sell
them. Without these assets, business operations are
effectively discontinued. The proceeds of the sale
are distributed equitably among creditors, and
surplus is divided, or losses are re-allocated. (De
Leon, 2021; Viva Shipping Lines, Inc. v. Keppel
Philippines Mining, Inc., G.R. No. 177382, 17 Feb.
2016)
Types of Liquidation
1. Voluntary – when the petition is filed by the
debtor;
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 Financial Rehabilitation, Insolvency, Liquidation, and
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2. Involuntary – when the petition is filed by the

creditor. (De Leon, 2021)

4. SUSPENSION OF PAYMENTS

This is a petition filed by an individual debtor who

possesses sufficient property to cover all his debts
but foresees the impossibility of meeting them
when they respectively fall due. (Sec. 94, FRIA)

A petition for suspension of payment is a remedy

available to an individual debtor who seeks to
suspend the payments outside of the necessary or
legitimate expenses of his business while the
proceedings are pending.

This petition is always voluntary since it is filed by

the debtor. Creditors cannot file a petition for
suspension of payment against the debtor. (De Leon,
2021)

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FACULTY OF CIVIL LAW
 Commercial Law

TYPES OF REHABILITATION PROCEEDINGS

COURT-SUPERVISED PRE-NEGOTIATED
Who may initiate
1. Voluntary proceedings
Initiated by the debtor when approved by:
a. The owner (sole proprietorship);
b. A majority of the partners (partnership);
c. A majority vote of the board of directors or
trustees and authorized by the vote of the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock (stock
corporation); or
d. The vote of at least two-thirds (2/3) of the An insolvent debtor, by itself or jointly with any of its
members, in a stockholder's or member's creditors. (Sec. 76, FRIA)
meeting duly called for the purpose in case of
a (non-stock corporation). (Sec. 12, FRIA)

2. Involuntary proceedings
Any creditor or group of creditors with a claim of, or
the aggregate of whose claims is, at least One million
pesos (Php1,000,000.00) or at least twenty-five
percent (25%) of the subscribed capital stock or
partners' contributions, whichever is higher. (Sec. 13,
FRIA)

How initiated
1. Voluntary proceedings
By filing a verified petition for rehabilitation with the
court and on the grounds specifically provided.

Grounds: A group of debtors may jointly file a petition

for rehabilitation under this Act when:
a. One or more of its members foresee the
impossibility of meeting debts when they
respectively fall due, and the financial distress
would likely adversely affect the financial
condition and/or operations of the other
members of the group; and/or
b. The participation of the other members of the
group is essential under the terms and
conditions of the proposed Rehabilitation Plan.
NOTE: The petition shall be verified to establish the
insolvency of the debtor and the viability of its
rehabilitation. (Sec. 12, FRIA)
By filing a verified petition with the court for the
approval of a pre-negotiated Rehabilitation Plan
which has been endorsed or approved by creditors
holding at least two-thirds (2/3) of the total
liabilities of the debtor, including:
1. Secured creditors holding more than fifty
percent (50%) of the total secured claims of the
debtor; and
2. Unsecured creditors holding more than fifty
percent (50%) of the total unsecured claims of
the debtor. (Sec. 76, FRIA)

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2. Involuntary proceedings
By filing a verified petition for rehabilitation with the
court if:

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

claim/s of the petitioner/s, and that the due and
demandable payments thereon have not been
made for at least sixty (60) days or that the debtor
has failed generally to meet its liabilities as they
fall due; or
b. A creditor, other than the petitioner/s, has
initiated foreclosure proceedings against the
debtor that will prevent the debtor from paying its
debts as they become due or will render it
insolvent. (Sec. 13, FRIA)

NOTE: The petition shall be verified to establish the

substantial likelihood that the debtor may be
rehabilitated. (Sec. 14, FRIA)

Contents of petition
1. Voluntary proceedings
Petition shall include as a minimum:
a. Identification of the debtor, its principal activities,
and its addresses;
b. Statement of the fact of and the cause of the
debtor's insolvency or inability to pay its
obligations as they become due;
c. The specific relief sought pursuant to this Act;
The petition shall include, as a minimum:
d. The grounds upon which the petition is based;
a. A schedule of the debtor's debts and liabilities;
e. Other information that may be required under this
b. An inventory of the debtor's assets;
Act depending on the form of relief requested;
c. The pre-negotiated Rehabilitation Plan,
f. Schedule of the debtor's debts and liabilities
including the names of at least three (3) qualified
including a list of creditors with their addresses,
nominees for rehabilitation receiver; and
amounts of claims and collaterals, or securities, if
d. A summary of disputed claims against the debtor
any;
and a report on the provisioning of funds to
g. An inventory of all its assets including receivables
account for appropriate payments should any
and claims against third parties;
such claims be ruled valid, or their amounts be
h. A Rehabilitation Plan;
adjusted. (Sec. 76, FRIA)
i. The names of at least three (3) nominees to the
position of rehabilitation receiver; and
j. Other documents required to be filed with the
petition pursuant to this Act and the rules of
procedure as may be promulgated by the Supreme
Court. (Sec. 12, FRIA)

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2. Involuntary proceedings
Shall include:
a. Identification of the debtor, its principal activities,
and its address;
b. The circumstances sufficient to support a petition
to initiate involuntary rehabilitation proceedings
under Section 13 of this Act;
c. The specific relief sought under this Act;
d. A Rehabilitation Plan;
e. The names of at least three (3) nominees to the
position of rehabilitation receiver;
f. Other information that may be required under this
Act depending on the form of relief requested; and
g. Other documents required to be filed with the
petition pursuant to this Act and the rules of
procedure as may be promulgated by the Supreme
Court. (Sec. 14, FRIA)

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How initiated
B. MODES OF REHABILITATION
By filing a verified
petition for
By filing a verified
rehabilitation with the
1. COURT-SUPERVISED REHABILITATION petition for
court and on the
rehabilitation with the
grounds specifically
court.
a. VOLUNTARY VS. INVOLUNTARY provided. (Sec. 12,
FRIA)
NOTE: The petition shall
If an insolvent debtor initiates rehabilitation
be verified to establish
proceedings, the proceedings are voluntary. (Sec. NOTE: The petition
the substantial
12, FRIA) shall be verified to
likelihood that the
establish the
debtor may be
On the other hand, if a creditor or group of creditors insolvency of the
rehabilitated. (Sec. 14,
initiates rehabilitation proceedings, the debtor and the viability
FRIA)
proceedings are involuntary. (De Leon, 2021) of its rehabilitation.
(Sec. 12, FRIA)
VOLUNTARY INVOLUNTARY
Who may file Grounds
Initiated by the debtor
when approved by: a. There is no genuine
a. The owner (sole a. One or more of its issue of fact or law
proprietorship); members foresee on the claim/s of the
b. A majority of the the impossibility of petitioner/s, and
partners meeting debts that the due and
(partnership); when they demandable
c. A majority vote of the respectively fall payments thereon
Any creditor or group of due, and the have not been made
board of directors or
creditors with a claim of, financial distress for at least sixty (60)
trustees and
or the aggregate of would likely days; or
authorized by the
whose claims is, at least adversely affect b. the debtor has failed
vote of the
One million pesos the financial generally to meet its
stockholders
(Php1,000,000.00) or at condition and/or liabilities as they fall
representing at least
least twenty-five operations of the due; or
two-thirds (2/3) of
percent (25%) of the other members of c. at least one creditor,
the outstanding
subscribed capital stock the group; and/or other than the
capital stock (stock
or partners' b. The participation petitioner/s, has
corporation); or
contributions, of the other initiated foreclosure
d. The vote of at least
whichever is higher. members of the proceedings?"
two-thirds (2/3) of
(Sec. 13, FRIA) group is essential against the debtor
the members, in a
stockholder's or under the terms that will prevent the
member's meeting and conditions of debtor from paying
duly called for the the proposed its debts as they
purpose in case of a Rehabilitation become due or will
(non-stock Plan. (Sec. 12, FRIA) render it insolvent.
corporation). (Sec. 12, (Sec. 5, Rule 2, A.M.
FRIA) No. 12-12-11-SC)

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Contents of the petition pursuant to this Act

a. Identification of and the rules of
the debtor, its procedure as may
principal activities be promulgated by
and its addresses; the Supreme Court.
b. Statement of the (Sec. 12, FRIA)
fact of and the
cause of the Venue
a. Identification of the
debtor's insolvency
debtor, its principal
or inability to pay The petition for rehabilitation shall be filed in the
activities and its
its obligations as Regional Trial Court which has jurisdiction over the
address;
they become due; principal office of the debtor alleged to be insolvent
b. The circumstances
c. The specific relief as specified in its articles of incorporation or
sufficient to support
sought pursuant to partnership or in its registration papers with the
a petition to initiate
this Act; Department of Trade and Industry (DTI) in cases of
involuntary
d. The grounds upon sole proprietorship, as the case may be. Where the
rehabilitation
which the petition principal office of the corporation, partnership or
proceedings under
is based; association as registered in the Securities and
Sect. 13 of this Act;
e. Other information Exchange Commission (SEC) is in Metro Manila, the
c. The specific relief
that may be action must be filed in the Regional Trial Court of the
sought under this
required under this city or municipality where the head office is located.
Act;
Act depending on
d. A Rehabilitation
the form of relief A petition for voluntary or involuntary
Plan;
requested; rehabilitation involving a group of debtors shall be
e. The names of at least
f. Schedule of the filed in the Regional Trial Court which has
three (3) nominees
debtor's debts and jurisdiction over the principal-office of, any of the
to the position of
liabilities including debtors alleged to be insolvent, as specified in its
rehabilitation
a list of creditors articles of incorporation or partnership, or
receiver;
with their registration papers with the DTI in cases of sole
f. Other information
addresses, proprietorship, as the case may be. (Sec. 6, Rule 1,
that may be
amounts of claims A.M. No. 12-12-11-SC)
required under this
and collaterals, or
Act depending on
securities, if any; b. COMMENCEMENT ORDER (INCLUDING STAY
the form of relief
g. An inventory of all ORDER)
requested; and
its assets including
Other documents
receivables and Commencement Order
required to be filed with
claims against third
the petition pursuant to
parties; If the court finds the petition for rehabilitation to be
this Act and the rules of
h. A Rehabilitation sufficient in form and substance, it shall, within five
procedure as may be
Plan; (5) working days from the filing of the petition, issue
promulgated by the
i. The names of at a Commencement Order. (Sec. 15, FRIA)
Supreme Court. (Sec. 14,
least three (3)
FRIA)
nominees to the If, within the same period, the court finds the
position of petition deficient in form or substance, the court
rehabilitation may, in its discretion, give the petitioner/s a
receiver; and reasonable period of time (i.e., not more than 5
j. Other documents working days) within which to amend or
required to be filed supplement the petition, or to submit such
with the petition documents as may be necessary or proper to put the

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 Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments
petition in proper order. In such case, the five (5)
working days provided above for the issuance of the
Commencement Order shall be reckoned from the
date of the filing of the amended or supplemental
petition or the submission of such documents. (De
Leon, 2021; Sec. 15, FRIA; Sec. 7, Rule 2, A.M. No. 12-
12-11-SC)
The rehabilitation proceedings shall commence
upon the issuance of the Commencement Order
which shall:
1. Identify the debtor, its principal business or
activity/ies and its principal place of business;
2. Summarize the ground/s for initiating the
proceedings;
3. State the relief sought under this Act and any
requirement or procedure particular to the
relief sought;
4. State the legal effects of the Commencement
Order, including those mentioned in Section 17
hereof;
5. Declare that the debtor is under rehabilitation;
6. Direct the publication of the Commencement
Order in a newspaper of general circulation in
the Philippines once a week for at least two (2)
consecutive weeks, with the first publication to
be made within seven (7) days from the time of
its issuance;
7. If the petitioner is the debtor, direct the service
by personal delivery of a copy of the petition on
each creditor holding at least ten percent (10%)
of the total liabilities of the debtor as
determined from the schedule attached to the
petition within five (5) days; if the petitioner/s
is/are creditor/s, direct the service by personal
delivery of a copy of the petition on the debtor
within five (5) days;
8. Appoint a rehabilitation receiver who may or
may not be from among the nominees of the
petitioner/s, and who shall exercise such
powers and duties defined in this Act as well as
the procedural rules that the Supreme Court
will promulgate;
9. Summarize the requirements and deadlines for
creditors to establish their claims against the
debtor and direct all creditors to file their
369
claims with the court at least five (5) days
before the initial hearing;
10. Direct the Bureau of Internal Revenue (BIR) to
file and serve on the debtor its comment on or
opposition to the petition or its claim/s against
the debtor under such procedures as the
Supreme Court may hereafter provide;
11. Prohibit the debtor's suppliers of goods or
services from withholding the supply of goods
and services in the ordinary course of business
for as long as the debtor makes payments for
the services or goods supplied after the
issuance of the Commencement Order;
12. Authorize the payment of administrative
expenses as they become due;
13. Set the case for initial hearing, which shall not
be more than forty (40) days from the date of
filing of the petition for the purpose of
determining whether there is substantial
likelihood for the debtor to be rehabilitated;
14. Make available copies of the petition and
rehabilitation plan for examination and copying
by any interested party;
15. Indicate the location or locations at which
documents regarding the debtor and the
proceedings under this Act may be reviewed
and copied;
16. State that any creditor or debtor, who is not the
petitioner, may submit the name or nominate
any other qualified person to the position of
rehabilitation receiver at least five (5) days
before the initial hearing;
17. Include a Stay or Suspension Order which
shall:
1. suspend all actions or proceedings, in
court or otherwise, for the
enforcement of claims against the
debtor;
2. Suspend all actions to enforce any
judgment, attachment or other
provisional remedies against the
debtor;
3. Prohibit the debtor from selling,
encumbering, transferring or disposing
in any manner any of its properties
except in the ordinary course of
business; and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
4. Prohibit the debtor from making any
payment of its liabilities outstanding as
of the commencement date except as
may be provided herein. (Sec. 16, FRIA)
Effects of the Commencement Order (2017 BAR)
1. It vests the rehabilitation receiver with all the
powers and functions provided for in the Act,
such as the right to review and obtain all
records to which the debtor's management and
directors have access, including bank accounts
of whatever nature of the debtor, subject to the
approval by the court of the performance bond
filed by the rehabilitation receiver; (Sec. 17,
FRIA)
2. It prohibits, or otherwise serves as the legal
basis for rendering null and void the results of
any extrajudicial activity or process to seize
property, sell encumbered property, or
otherwise attempt to collect on or enforce a
claim against the debtor after the
commencement date. (Sec. 17, FRIA)
XPN: The court may authorize the sale, transfer,
conveyance or disposal of encumbered
property of the debtor, or property of others
held by the debtor where there is a security
interest pertaining to third parties under a
financial, credit or other similar transactions if,
upon application of the rehabilitation receiver
and with the consent of the affected owners of
the property, or secured creditor/s in the case
of encumbered property of the debtor and, after
notice and hearing, the court determines that:
a. Such sale, transfer, conveyance, or
disposal is necessary for the continued
operation of the debtor's business; and
b. The debtor has made arrangements to
provide a substitute lien or ownership
right that provides an equal level of
security for the counter-party's claim
or right.
Provided, That properties held by the debtor
where the debtor has authority to sell such as
trust receipt or consignment arrangements may
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
be sold or disposed of by the debtor, if such sale
or disposal is necessary for the operation of the
debtor's business, and the debtor has made
arrangements to provide a substitute lien or
ownership right that provides an equal level of
security for the counter-party's claim or right.
(Sec. 50, FRIA)
NOTE: Sale or disposal of property under
section 50 shall not give rise to any criminal
liability under applicable laws. (Sec. 50, FRIA)
3. It serves as the legal basis for rendering null and
void any set-off after the commencement date
of any debt owed to the debtor by any of the
debtor's creditors;
4. It serves as the legal basis for rendering null and
void the perfection of any lien against the
debtor's property after the commencement
date;
NOTE: The court may rescind or declare as null
and void any sale, payment, transfer or
conveyance of the debtor's unencumbered
property or any encumbering thereof by the
debtor or its agents or representatives after the
commencement date which are not in the
ordinary course of the business of the debtor:
Provided, however, That the unencumbered
property may be sold, encumbered or
otherwise disposed of upon order of the court
after notice and hearing:
a. If such are in the interest of
administering the debtor and
facilitating the preparation and
implementation of a Rehabilitation
Plan;
b. In order to provide a substitute lien,
mortgage or pledge of property under
the Act;
c. For payments made to meet
administrative expenses as they arise;
d. For payments to victims of quasi delicts
upon a showing that the claim is valid
and the debtor has insurance to
reimburse the debtor for the payments
made;
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 Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments
e. For payments made to repurchase
property of the debtor that is auctioned
off in a judicial or extrajudicial sale
under this Act; or
f. For payments made to reclaim
property of the debtor held pursuant to
a possessory lien. (Sec. 52, FRIA)
5. It consolidates the resolution of all legal
proceedings by and against the debtor to the
court: Provided, however, that the court may
allow the continuation of cases in other courts
where the debtor had initiated the suit. (Sec. 17,
FRIA)
NOTE: Attempts to seek legal or other recourse
against the debtor outside these proceedings shall
be sufficient to support a finding of indirect
contempt of court.
The effects of the Commencement Order and the
Stay or Suspension Order on the suspension of
rights to foreclose or otherwise pursue legal
remedies shall apply to government financial
institutions, notwithstanding provisions in their
charters or other laws to the contrary. (Sec. 20,
FRIA)
Q: Kaizen Builders entered into an investment
agreement with Ophelia Ursais for
P2,200,000.00. However, it was later rescinded,
and it was stipulated that Kaizen Builders will
pay the amount of P380,000.00 on installment
basis while the remaining P1,500,000.00 shall
bear an interest of 1.5% or P22,500.00 per
month. Despite repeated demands, Kaizen
Builders stopped remitting the monthly interest
and refused to deliver the P380,000.00. This
prompted Ophelia to file a complaint for sum of
money against Kaizen Builders. Later on, during
the pendency of the trial in the Court of Appeals,
Kaizen Builders filed before the special
commercial court a petition for corporate
rehabilitation to which the rehabilitation court
issued a Commencement Order which
consolidated all legal proceedings by and
against Kaizen Builders and suspended all
actions for the enforcement of claims against it.
371
The Court of Appeals, however, denied the
motion and explained that the appeal would not
affect the rehabilitation case since the two
proceedings involved different parties, issues
and reliefs. Kaizen Builders argued that the CA
acted with grave abuse of discretion in denying
the motion for consolidation and prayed that the
proceedings before the CA be suspended within
the duration of the rehabilitation case. Is Kaizen
builders correct in its assertion that
proceedings before the CA be suspended within
the duration of the rehabilitation case?
A: YES. Sections 16 and 17 of R.A. No. 10142
authorizes the rehabilitation court to issue a
Commencement Order that includes a Stay Order,
which have the effects of suspending all actions for
the enforcement of claims against the debtor and
consolidating the resolution of all legal proceedings
by and against it.
The indiscriminate suspension of actions for claims
is intended to expedite the rehabilitation of the
distressed corporation. It enables the management
committee or the rehabilitation receiver to
effectively exercise its/his powers free from any
judicial or extrajudicial interference that might
unduly hinder or prevent the rescue of the debtor
company. To allow such other actions to continue
would only add to the burden of the management
committee or rehabilitation receiver, whose time,
effort, and resources would be wasted in defending
claims against the corporation.
The Commencement Order ipso jure suspended the
proceedings in the CA at whatever stage it may be,
considering that the appeal emanated from a money
claim against a distressed corporation which is
deemed stayed pending the rehabilitation case.
Moreover, the appeal before the CA is not one of the
instances where a suspension order is inapplicable.
The CA should have abstained from resolving the
appeal. Taken together, the CA clearly defied the
effects of a Commencement Order and disregarded
the state policy to encourage debtors and their
creditors to collectively and realistically resolve and
adjust competing claims and property rights.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
(Kaizen Builders, Inc. vs. Court of Appeals, G.R. No.
226894, 03 Sept. 2020)
Q: SPRDC and SPFC are engaged in the
construction, development, maintenance, and
lease of commercial buildings. Among their
projects, SPFC holds a long-term lease over the
Food Terminal, Inc. (FTI) Complex in Taguig
City, upon which it erected its Sunshine Plaza
Mall. The 1997 Asian Financial Crisis inflicted
financial setbacks on SPRDC and SPFC,
prompting them to file a joint Petition for
Rehabilitation. The City Government of Taguig
(CGT) is among the creditors claiming unpaid
realty taxes due on the operation of the
Sunshine Plaza Mall. The RTC-Makati issued a
Resolution approving SPRDC and SPFC's Revised
Rehabilitation Plan, noting as a strategic
offsetting scheme that the plan envisioned to
source its funds to pay those financial
obligations from lease rentals of available units
at the two malls, one of which is the Sunshine
Plaza Mall. Pursuant to the Order and the
Revised Rehabilitation Plan, the CGT and SPFC
executed a MOA instituting an offsetting scheme,
whereby SPFC agreed to lease out unoccupied
units of the Sunshine Plaza Mall to the CGT and
apply accruing rentals to the realty tax credit
due to the CGT "until the credit is fully
consumed."
The CGT leased portions of the Sunshine Plaza
Mall to operate the Pamantasan ng Lungsod ng
Taguig (PLT) and its canteen. Besides PLT and
its canteen, the CGT leased additional areas of
the Sunshine Plaza Mall in order to establish and
operate a government satellite office. Pursuant
to Executive Order No. 032, Series of 2005 (EO
32), the CGT institutionalized the One-Stop Local
Government Centers (OSLGC) to carry out its
Simplified Revenue and Tax Generation and
Collection Program. However, unlike the MOA,
which served as basis for the lease of areas
where the PLT and its canteen operate, no
similar definitive agreement whereby the CGT
agreed to lease additional portions of the
Sunshine Plaza Mall in order to operate the Area
III OSLGC. Still, there exists a Booking Term
Sheet (BTS), signed by an Ana Esperanza A.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Pagsisihan, designated as the "Area 3 Manager,"
which provides terms and conditions for the
lease of an area of the Sunshine Plaza Mall for
the operation of a "Satellite Office."
Believing its realty tax delinquencies had
already been offset by accrued rentals from the
arrangements, the SPGC sent a Letter to the OIC
of the CGT City Treasurer, invoking the MOA's
stipulations on such offset. The OIC of the CGT
City Treasurer responded claiming that the
offset features apply to unpaid realty taxes as of
December 31, 2006, but not those incurred
beyond such date; that SPGC's claim for unpaid
rentals is at best based on the BTS, but
disavowed the authority of Ana Esperanza
Pagsisihan to execute such BTS, and that the
same does not mention any offsetting scheme;
ultimately, requiring SPGC to pay its realty tax
delinquencies. SPGC was constrained to pay the
realty tax delinquencies under protest. Thus,
SPFC was motivated to file the Urgent Motion for
Collection, praying that the CGT be directed to
pay its unpaid rentals, CUSA fees, and utilities
over the areas it leased in the Sunshine Plaza
Mall. The CGT submitted its Comment and
Opposition arguing, among others, that the RTC-
Makati had no jurisdiction to act on said motion.
The RTC-Makati issued an Order granting the
Urgent Motion for Collection.
Does the RTC-Makati, acting as a rehabilitation
court, have the jurisdiction to issue the order
granting the motion of SPGC for collection
against CGT?
A: YES. A Rehabilitation Court is empowered to
issue orders necessary to carry out the
Rehabilitation of the Insolvent Debtor.
Presently, the governing statute on rehabilitation is
Republic Act No. 10142, or the Financial
Rehabilitation and Insolvency Act of 2010 (FRIA),
and the procedural rules embodied in A.M. No. 12-
12-11-SC, or the Financial Rehabilitation Rules of
Procedure (2013). That the RTC-Makati could very
well act on the Urgent Motion for Collection, and
grant the motion in the Order, is well-entrenched in
jurisprudence. As the Court held in Bureau of
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 Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments
Internal Revenue v. Lepanto Ceramics, Inc., the
"inherent purpose of rehabilitation is to find ways
and means to minimize the expenses of the
distressed corporation during the rehabilitation
period by providing the best possible framework for
the corporation to gradually regain or achieve a
sustainable operating form." Further, the Court
emphasized in Allied Banking Corporation v.
Equitable PCI Bank, Inc., that "once jurisdiction is
acquired, the court can subject all those affected to
orders consistent with the rehabilitation of the
insolvent debtor, including the reversal of any
transfer, payment, or sale made after the filing of the
petition."
True, as pointed out by the CGT, none of the
foregoing documents explicitly declare that
occupancy for the OSLGC Area 3 Satellite Office was
for the purpose of offsetting SPGC's unpaid realty
taxes. Yet, the fact remains that such arrangement
was entered into during the course of rehabilitation
proceedings, no less under the auspices of the
controlling Revised Rehabilitation Plan, which was
"envisioned to source its funds to pay those financial
obligations from lease rentals of available units" in
SPGC's malls.
Hence, the foregoing transactions are but specific
elements of the overarching Revised Rehabilitation
Plan, implementation of which the RTC-Makati had
jurisdiction over. Consistently, the Urgent Motion
for Collection sought an incidental relief towards
the successful rehabilitation of the SPGC. After all, a
motion is a "necessary incident" designed "to bring
a material but incidental matter arising in the
progress of the case" as "it relates to some question
that is collateral to the main object of the action and
is connected with and dependent upon the principal
remedy." Thus, the RTC-Makati possessed the
jurisdiction to act on the Urgent Motion for
Collection and grant the same in the Order. (City
Government of Taguig v. Shoppers Paradise Realty,
G.R. No. 246179, 14 July 2021)
373
Waiver of taxes and fees due to the National
Government and to Local Government Units
Upon issuance of the Commencement Order by the
court, and until the approval of the Rehabilitation
Plan or dismissal of the petition, whichever is
earlier, the imposition of all taxes and fees, including
penalties, interests and charges thereof, due to the
national government or to LGUs shall be considered
waived, in furtherance of the objectives of
rehabilitation. (Sec. 19, FRIA)
Effectivity or duration of the Commencement
Order
Unless lifted by the court, the Commencement Order
shall be effective for the duration of the
rehabilitation proceedings for as long as there is a
substantial likelihood that the debtor will be
successfully rehabilitated. (Sec. 21, FRIA)
Minimum requirements to determine whether
there is substantial likelihood for the debtor to
be successfully rehabilitated
1. The proposed Rehabilitation Plan submitted
complies with the minimum contents
prescribed by the Act;
2. There is sufficient monitoring by the
rehabilitation receiver of the debtor's business
for the protection of creditors;
3. The debtor has met with its creditors to the
extent reasonably possible in attempts to reach
a consensus on the proposed Rehabilitation
Plan;
4. The rehabilitation receiver submits a report,
based on preliminary evaluation, stating that
the underlying assumptions and the financial
goals stated in the petitioner's Rehabilitation
Plan are realistic, feasible and reasonable; or, if
not, there is, in any case, a substantial likelihood
for the debtor to be successfully rehabilitated
because, among others:
a. There are sufficient assets with which to
rehabilitate the debtor;
b. There is sufficient cash flow to maintain
the operations of the debtor;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
c. The debtor's owner/s, partners,
stockholders, directors and officers have
been acting in good faith and with due
diligence;
d. The petition is not a sham filing intended
only to delay the enforcement of the rights
of the creditor/s or of any group of
creditors; and
e. The debtor would likely be able to pursue
a viable Rehabilitation Plan;
5. The petition, the Rehabilitation Plan and the
attachments thereto do not contain any
materially false or misleading statement;
6. If the petitioner is the debtor, that the debtor
has met with its creditor/s representing at least
three-fourths (3/4) of its total obligations to the
extent reasonably possible and made a good
faith effort to reach a consensus on the
proposed Rehabilitation Plan; if the
petitioner/s is/are a creditor or group of
creditors, that the petitioner/s has/have met
with the debtor and made a good faith effort to
reach a consensus on the proposed
Rehabilitation Plan; and
7. The debtor has not committed acts of
misrepresentation or in fraud of its creditor/s
or a group of creditors. (Sec. 21, FRIA)
Effect of Creditor’s Failure to File Notice of Claim
A creditor whose claim is not listed in the schedule
of debts and liabilities and who fails to file a notice
of claim in accordance with the Commencement
Order but subsequently files a belated claim shall
not be entitled to participate in the rehabilitation
proceedings but shall be entitled to receive
distributions arising therefrom. (Sec. 23, FRIA)
NOTE: Claim shall refer to all claims or demands of
whatever nature or character against the debtor or
its property, whether for money or otherwise,
liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed,
including, but not limited to:
1. All claims of the government, whether national
or local, including taxes, tariffs and customs
duties; and
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
2. Claims against directors and officers of the
debtor arising from acts done in the discharge
of their functions falling within the scope of
their authority: Provided, That, this inclusion
does not prohibit the creditors or third parties
from filing cases against the directors and
officers acting in their personal capacities. (Sec.
4(c), FRIA)
No Diminution of Secured Creditor’s Right
GR: The issuance of the Commencement Order and
the Suspension or Stay Order, and any other
provision of the Act, shall not be deemed in any way
to diminish or impair the security or lien of a
secured creditor, or the value of his lien or security.
XPN: The secured creditor’s right to enforce said
security or lien may be suspended during the term
of the Stay Order.
The court, upon motion or recommendation of the
rehabilitation receiver, may allow a secured
creditor to enforce his security or lien, or foreclose
upon property of the debtor securing his/its claim,
if the said property is not necessary for the
rehabilitation of the debtor.
The secured creditor and/or the other lien holders
shall be admitted to the rehabilitation proceedings
only for the balance of his claim, if any. (Sec. 60,
FRIA)
STAY OR SUSPENSION ORDER
When the Stay or Suspension Order shall not
apply (Sec. 18, FRIA)
1. To cases already pending appeal in the Supreme
Court as of commencement date: Provided, That
any final and executory judgment arising from
such appeal shall be referred to the court for
appropriate action;
2. Subject to the discretion of the court, to cases
pending or filed at a specialized court or quasi-
judicial agency which, upon determination by
the court, is capable of resolving the claim more
quickly, fairly and efficiently than the court:
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 Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments
Provided, That any final and executory
judgment of such court or agency shall be
referred to the court and shall be treated as a
non-disputed claim;
3. To the enforcement of claims against sureties
and other persons solidarily liable with the
debtor, and third party or accommodation
mortgagors as well as issuers of letters of credit,
unless the property subject of the third party or
accommodation mortgage is necessary for the
rehabilitation of the debtor as determined by
the court upon recommendation by the
rehabilitation receiver;
4. To any form of action of customers or clients of
a securities market participant to recover or
otherwise claim moneys and securities
entrusted to the latter in the ordinary course of
the latter's business as well as any action of
such securities market participant or the
appropriate regulatory agency or self-
regulatory organization to pay or settle such
claims or liabilities;
5. To the actions of a licensed broker or dealer to
sell pledged securities of a debtor pursuant to a
securities pledge or margin agreement for the
settlement of securities transactions in
accordance with the provisions of the Securities
Regulation Code and its implementing rules and
regulations;
6. To the clearing and settlement of financial
transactions through the facilities of a clearing
agency or similar entities duly authorized,
registered and/or recognized by the
appropriate regulatory agency like the Bangko
Sentral ng Pilipinas (BSP) and the SEC as well as
any form of actions of such agencies or entities
to reimburse themselves for any transactions
settled for the debtor; and
7. To any criminal action against the individual
debtor or owner, partner, director or officer of
a debtor shall not be affected by any proceeding
commenced under this Act.
375
Q: PVB entered into a Note Facility Agreement
with debtor PhilPhos Corporation in the
aggregate amount of P5 billion. To secure
payment, TIDCORP, with express conformity of
PhilPhos Corporation, executed a Guarantee
Agreement whereby it guaranteed payment of
the outstanding notes without the benefit of
excussion. Devastated by a typhoon, PhilPhos
filed a Petition for Voluntary Rehabilitation
before the RTC. The RTC, acting as
Rehabilitation Court, issued a Commencement
Order, which included a Stay Order. Thereafter,
PVB filed a complaint for specific performance
against TIDCORP to claim under the Guarantee
Agreement. TIDCORP argued that the RTC
cannot validly try the case because of the
Rehabilitation Court’s Stay Order, which
enjoined the enforcement of all claims, actions
and proceedings against PhilPhos. Is the
argument of TIDCORP tenable?
A: NO. The Stay Order of the Rehabilitation court did
not divest the RTC’s jurisdiction to hear and decide
PVB’s Complaint. Section 18 (c) of the FRIA
explicitly states that a stay order shall not apply "to
the enforcement of claims against sureties and other
persons solidarily liable with the debtor, and third
party or accommodation mortgagors as well as
issuers of letters of credit,
It must be noted that the Stay Order relied upon by
petitioner TIDCORP merely ordered the staying and
suspension of enforcement of all claims and
proceedings against the petitioner PhilPhos and not
against all the other persons or entities solidarily
liable with the debtor. (Trade and Investment
Development Corporation of the Philippines v.
Philippine Veterans Bank, G.R. No. 233850, 01 July
2019, J. Caguioa)
c. REHABILITATION RECEIVER AND
MANAGEMENT COMMITTEE
Rehabilitation Receiver
Rehabilitation receiver shall refer to the person or
persons, natural or juridical, appointed as such by
the court pursuant to this Act and which shall be
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
entrusted with such powers and duties as set forth
herein. (Sec. 4(hh), FRIA)
If the rehabilitation receiver is a juridical entity, it
must designate a natural person/s who possess/es
all the qualifications and none of the
disqualifications as its representative, it being
understood that the juridical entity and the
representative/s are solidarily liable for all
obligations and responsibilities of the rehabilitation
receiver. (Sec. 28, FRIA)
Minimum Qualifications of a Rehabilitation
Receiver
1. A citizen of the Philippines or a resident of the
Philippines in the six (6) months immediately
preceding his nomination;
2. Of good moral character and with
acknowledged integrity, impartiality and
independence;
3. Has the requisite knowledge of insolvency and
other relevant commercial laws, rules and
procedures, as well as the relevant training
and/or experience that may be necessary to
enable him to properly discharge the duties and
obligations of a rehabilitation receiver; and
4. Has no conflict of interest: Provided, that such
conflict of interest may be waived, expressly or
impliedly, by a party who may be prejudiced
thereby. (Sec. 29, FRIA)
Principal Duties of a Rehabilitation Receiver
The rehabilitation receiver shall be deemed an
officer of the court with the following principal
duties:
1. Preserving and maximizing the value of the
assets of the debtor during the rehabilitation
proceedings;
2. Determining the viability of the rehabilitation of
the debtor;
3. Preparing and recommending a Rehabilitation
Plan to the court; and
4. Implementing the approved Rehabilitation
Plan. (Sec. 31, FRIA)
5. Take an oath and file a bond, in such amount to
be fixed by the court, conditioned upon the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
faithful and proper discharge of his powers,
duties and responsibilities. (Sec. 34, FRIA)
6. Make an appropriate disclosure of conflict of
interest either to the court or to the creditors in
case of out-of-court rehabilitation proceedings.
(Sec. 40, FRIA)
Powers, Duties, and Responsibilities of a
Rehabilitation Receiver
1. To verify the accuracy of the factual allegations
in the petition and its annexes;
2. To verify and correct, if necessary, the
inventory of all of the assets of the debtor, and
their valuation;
3. To verify and correct, if necessary, the schedule
of debts and liabilities of the debtor;
4. To evaluate the validity, genuineness, and true
amount of all the claims against the debtor;
5. To take possession, custody, and control, and to
preserve the value of all the property of the
debtor;
6. To sue and recover, with the approval of the
court, all amounts owed to, and all properties
pertaining to the debtor;
7. To have access to all information necessary,
proper, or relevant to the operations and
business of the debtor and for its rehabilitation;
8. To sue and recover, with the approval of the
court, all property or money of the debtor paid,
transferred, or disbursed in fraud of the debtor
or its creditors, or which constitute undue
preference of creditor/s;
9. To monitor the operations and the business of
the debtor to ensure that no payments or
transfers of property are made other than in the
ordinary course of business;
10. With the court's approval, to engage the
services of or to employ persons or entities to
assist him in the discharge of his functions;
11. To determine the manner by which the debtor
may be best rehabilitated, to review, revise
and/or recommend action on the Rehabilitation
Plan and submit the same or a new one to the
court for approval;
12. To implement the Rehabilitation Plan as
approved by the court, if so, provided under the
Rehabilitation Plan;
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 Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments
13. To assume and exercise the powers of
management of the debtor, if directed by the
court pursuant to Section 36 hereof;
14. To exercise such other powers as may, from
time to time, be conferred upon him by the
court; and
15. To submit a status report on the rehabilitation
proceedings every quarter or as may be
required by the court motu proprio, or upon
motion of any creditor, or as may be provided,
in the Rehabilitation Plan. (Sec. 31, FRIA)
NOTE: Unless appointed by the court under Sec. 36
(Management Committee), the rehabilitation
receiver shall not take over the management and
control of the debtor but may recommend the
appointment of a management committee over the
debtor in the cases provided by this Act.
Removal of the Rehabilitation Receiver
The rehabilitation receiver may be removed at any
time by the court, either motu proprio or upon
motion by any creditor/s holding more than fifty
percent (50%) of the total obligations of the debtor,
on such grounds as the rules of procedure may
provide which shall include, but are not limited to,
the following:
1. Incompetence, gross negligence, failure to
perform or failure to exercise the proper degree
of care in the performance of his duties and
powers;
2. Lack of a particular or specialized competency
required by the specific case;
3. Illegal acts or conduct in the performance of his
duties and powers;
4. Lack of qualification or presence of any
disqualification;
5. Conflict of interest that arises after his
appointment; and
6. Manifest lack of independence that is
detrimental to the general body of the
stakeholders. (Sec. 32, FRIA)
377
MANAGEMENT COMMITTEE
Role of the Management Committee
When appointed, the management committee shall
take the place of the management and the governing
body of the debtor and assume their rights and
responsibilities. (Sec. 37, FRIA)
NOTE: Members of the management committee are
considered also as officers of the court.
How the Management Committee is Appointed
Upon motion of any interested party, the court may
appoint and direct the rehabilitation receiver to
assume the powers of management of the debtor, or
appoint a management committee that will
undertake the management of the debtor, upon
clear and convincing evidence of any of the
following circumstances:
1. Actual or imminent danger of dissipation, loss,
wastage or destruction of the debtor's assets or
other properties;
2. Paralyzation of the business operations of the
debtor; or
3. Gross mismanagement of the debtor, or fraud or
other wrongful conduct on the part of, or gross
or willful violation of this Act by, existing
management of the debtor or the owner,
partner, director, officer, or representative/s in
management of the debtor. (Sec. 36, FRIA)
Qualifications of Members of the Management
Committee
The qualifications and disqualifications of the
members of the management committee shall be set
forth in the procedural rules, taking into
consideration the nature of the business of the
debtor and the need to protect the interest of all
stakeholders concerned. (Sec. 38, FRIA)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
COMMON PROVISIONS
Employment of Professionals
Upon approval of the court, and after notice and
hearing, the rehabilitation receiver or the
management committee may employ specialized
professionals and other experts to assist each in the
performance of their duties. Such professionals and
other experts shall be considered either employees
or independent contractors of the rehabilitation
receiver or the management committee, as the case
may be. (Sec. 39, FRIA)
Conflict of Interest
No person may be appointed as a rehabilitation
receiver, member of a management committee, or
be employed by the rehabilitation receiver or the
management committee if he has a conflict of
interest.
An individual shall be deemed to have a conflict of
interest if he is so situated as to be materially
influenced in the exercise of his judgment for or
against any party to the proceedings. Without
limiting the generality of the foregoing, an
individual shall be deemed to have a conflict of
interest if:
1. He is a creditor, owner, partner or stockholder
of the debtor;
2. He is engaged in a line of business which
competes with that of the debtor;
3. He is, or was, within five (5) years from the
filing of the petition, a director, officer, owner,
partner or employee of the debtor or any of the
creditors, or the auditor or accountant of the
debtor;
4. He is, or was, within two (2) years from the
filing of the petition, an underwriter of the
outstanding securities of the debtor;
5. He is related by consanguinity or affinity within
the fourth civil degree to any individual
creditor, owner/s of a sole proprietorship-
debtor, partners of a partnership-debtor or to
any stockholder, director, officer, employee or
underwriter of a corporation-debtor; or
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
6. He has any other direct or indirect material
interest in the debtor or any of the creditors.
(Sec. 40, FRIA)
NOTE: Any party to the proceeding adversely
affected by the appointment of any person with a
conflict of interest to any of the positions
enumerated above may however waive his right to
object to such appointment and, if the waiver is
unreasonably withheld, the court may disregard the
conflict of interest, taking into account the general
interest of the stakeholders.
Immunity
The rehabilitation receiver and all persons
employed by him, and the members of the
management committee and all persons employed
by it, shall not be subject to any action, claim or
demand in connection with any act done or omitted
to be done by them in good faith in connection with
the exercise of their powers and functions under
this Act or other actions duly approved by the court.
(Sec. 41, FRIA)
d. DETERMINATION OF CLAIMS
Registry of Claims
Within 20 days from his assumption into office, the
rehabilitation receiver shall establish a preliminary
registry of claims. The rehabilitation receiver shall
make the registry available for public inspection
and provide publication notice to the debtor,
creditors, and stakeholders on where and when
they may inspect it. All claims included in the
registry of claims must be duly supported by
sufficient evidence. (Sec. 44, FRIA)
Opposition or Challenge of Claims
Within 30 days from the expiration of the period
stated in the immediately preceding section, the
debtor, creditors, stakeholders and other interested
parties may submit a challenge to claim/s to the
court, serving a certified copy on the rehabilitation
receiver and the creditor holding the challenged
claim/s.
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 Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments
Upon the expiration of the 30-day period, the
rehabilitation receiver shall submit to the court the
registry of claims which shall include undisputed
claims that have not been subject to challenge.
(Sec. 45, FRIA)
Appeal
Any decision of the rehabilitation receiver
regarding a claim may be appealed to the court. (Sec.
46, FRIA)
e. REHABILITATION PLAN
It refers to a plan by which the financial well-being
and viability of an insolvent debtor can be restored
using various means including, but not limited to,
debt forgiveness, debt rescheduling, reorganization
or quasi-reorganization, dacion en pago, debt-equity
conversion and sale of the business (or parts of it)
as a going concern or setting-up of new business
entity as prescribed in Sec. 62 hereof, or other
similar arrangements as may be approved by the
court or creditors. (Sec. 4(ii), FRIA.)
Contents of a Rehabilitation Plan (Sec. 62, FRIA)
1. Specify the underlying assumptions, the
financial goals and the procedures proposed to
accomplish such goals;
2. Compare the amounts expected to be received
by the creditors under the rehabilitation plan
with those that they will receive if liquidation
ensues within the next one hundred twenty
(120) days;
3. Contain information sufficient to give the
various classes of creditors a reasonable basis
for determining whether supporting the plan is
in their financial interest when compared to the
immediate liquidation of the debtor, including
any reduction of principal interest and
penalties payable to the creditors;
4. Establish classes of voting creditors;
5. Establish subclasses of voting creditors if prior
approval has been granted by the court;
6. Indicate how the insolvent debtor will be
rehabilitated including, but not limited to, debt
forgiveness, debt rescheduling, reorganization,
379
or quasi-reorganization, dacion en pago, debt-
equity conversion and sale of the business (or
parts of it) as a going concern, or setting-up of a
new business entity or other similar
arrangements as may be necessary to restore
the financial well-being and viability of the
insolvent debtor;
7. Specify the treatment of each class or subclass
described in subsections (d) and (e);
8. Provide for equal treatment of all claims within
the same class or subclass, unless a particular
creditor voluntarily agrees to less favorable
treatment;
9. Ensure that the payments made under the plan
follow the priority established under the
provisions of the civil code on concurrence and
preference of credits and other applicable laws;
10. Maintain the security interest of secured
creditors and preserve the liquidation value of
the security unless such has been waived or
modified voluntarily;
11. Disclose all payments to creditors for pre-
commencement debts made during the
proceedings and the justifications thereof;
12. Describe the disputed claims and the
provisioning of funds to account for
appropriate payments should the claim be
ruled valid, or its amount adjusted;
13. Identify the debtor's role in the implementation
of the plan;
14. State any rehabilitation covenants of the debtor,
the breach of which shall be considered a
material breach of the plan;
15. Identify those responsible for the future
management of the debtor and the supervision
and implementation of the plan, their affiliation
with the debtor and their remuneration;
16. Address the treatment of claims arising after
the confirmation of the rehabilitation plan;
17. Require the debtor and its counterparties to
adhere to the terms of all contracts that the
debtor has chosen to confirm;
18. Arrange for the payment of all outstanding
administrative expenses as a condition to the
plan's approval unless such condition has been
waived in writing by the creditors concerned;
19. Arrange for the payment of all outstanding
taxes and assessments, or an adjusted amount
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
pursuant to a compromise settlement with the
BIR or other applicable tax authorities;
20. Include a certified copy of a certificate of tax
clearance or evidence of a compromise
settlement with the BIR;
21. Include a valid and binding resolution of a
meeting of the debtor's stockholders to increase
the shares by the required amount in cases
where the plan contemplates an additional
issuance of shares by the debtor;
22. State the compensation and status, if any, of the
rehabilitation receiver after the approval of the
plan; and
23. Contain provisions for conciliation and/or
mediation as a prerequisite to court assistance
or intervention in the event of any
disagreement in the interpretation or
implementation of the rehabilitation plan.
f. CREDITOR APPROVAL AND CONFIRMATION
Creditor Approval of the Rehabilitation Plan
The rehabilitation receiver shall notify the creditors
and stakeholders that the Plan is ready for their
examination. Within 20 days from the said
notification, the rehabilitation receiver shall
convene the creditors, either as a whole or per class,
for purposes of voting on the approval of the Plan.
The Plan shall be deemed rejected unless approved
by all classes of creditors whose rights are adversely
modified or affected by the Plan.
The Plan is deemed to have been approved by a class
of creditors if members of the said class holding
more than fifty percent (50%) of the total claims of
the said class vote in favor of the Plan. The votes of
the creditors shall be based solely on the amount of
their respective claims based on the registry of
claims submitted by the rehabilitation receiver.
(Sec. 64, FRIA)
Cram Down Effect
A Rehabilitation Plan may be approved by the court
even over the oppositions of the creditors holding a
majority of the corporation’s total liabilities if there
is a showing that rehabilitation is feasible, and the
opposition of the creditors is manifestly
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
unreasonable. (Bank of the Philippine Islands v.
Sarabia Manor Hotel Corporation, G.R. No. 175844,
29 July 2013)
Confirmation of Rehabilitation
If no objections are filed within the relevant period
or, if objections are filed, the court finds them
lacking in merit, or determines that the basis for the
objection has been cured, or determines that the
debtor has complied with an order to cure the
objection, the court shall issue an order confirming
the Rehabilitation Plan.
The court may confirm the Rehabilitation Plan
notwithstanding unresolved disputes over claims if
the Rehabilitation Plan has made adequate
provisions for paying such claims.
For the avoidance of doubt, the provisions of other
laws to the contrary notwithstanding, the court
shall have the power to approve or implement the
Rehabilitation Plan despite the lack of approval, or
objection from the owners, partners or stockholders
of the insolvent debtor: Provided that, the terms
thereof are necessary to restore the financial well-
being and viability of the insolvent debtor. (Sec. 68,
FRIA)
Effects of Confirmation of the Rehabilitation
Plan
1. The Rehabilitation Plan and its provisions shall
be binding upon the debtor and all persons who
may be affected by it, including the creditors,
whether or not such persons have participated
in the proceedings or opposed the
Rehabilitation Plan or whether or not their
claims have been scheduled;
2. The debtor shall comply with the provisions of
the Rehabilitation Plan and shall take all actions
necessary to carry out the Plan;
3. Payments shall be made to the creditors in
accordance with the provisions of the
Rehabilitation Plan;
4. Contracts and other arrangements between the
debtor and its creditors shall be interpreted as
continuing to apply to the extent that they do
380
 Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments

not conflict with the provisions of the 2. PRE-NEGOTIATED REHABILITATION

Rehabilitation Plan;
5. Any compromises on amounts or rescheduling
a. HOW INITIATED
of timing of payments by the debtor shall be
binding on creditors regardless of whether or
An insolvent debtor, by itself or jointly with any of
not the Plan is successfully implemented; and
its creditors, may file a verified petition with the
6. Claims arising after approval of the Plan that are
court for the approval of a pre-negotiated
otherwise not treated by the Plan are not
Rehabilitation Plan which has been endorsed or
subject to any Suspension Order. (Sec. 69, FRIA)
approved by creditors holding at least two-thirds
(2/3) of the total liabilities of the debtor, including
NOTE: These effects shall also be applicable to an
secured creditors holding more than fifty percent
approved a Pre-negotiated Rehabilitation Plan. (Sec.
(50%) of the total secured claims of the debtor and
82, Ibid)
unsecured creditors holding more than fifty percent
(50%) of the total unsecured claims of the debtor.
g. FAILURE OF REHABILITATION
(Sec. 76, FRIA)

The rehabilitation proceedings under Chapter II

Contents of the Petition for the Approval of a
(Court-Supervised Rehabilitation) shall, upon
Pre-Negotiated Rehabilitation Plan
motion by any stakeholder of the rehabilitation
receiver, be terminated by order of the court either
The petition shall include as a minimum:
declaring a successful implementation of the
1. A schedule of the debtor's debts and liabilities;
Rehabilitation Plan or a failure of rehabilitation.
2. An inventory of the debtor's assets;
(Sec. 74, FRIA)
3. The pre-negotiated Rehabilitation Plan,
including the names of at least 3 qualified
There is failure of rehabilitation in the following
nominees for rehabilitation receiver; and
cases:
4. A summary of disputed claims against the
debtor and a report on the provisioning of funds
1. Dismissal of the petition by the court;
to account for appropriate payments should
2. The debtor fails to submit a Rehabilitation Plan;
any such claims be ruled valid, or their amounts
3. Under the Rehabilitation Plan submitted by the
adjusted. (Sec. 76, FRIA)
debtor, there is no substantial likelihood that
the debtor can be rehabilitated within a
b. PERIOD AND EFFECT OF APPROVAL
reasonable period;
4. The Rehabilitation Plan or its amendment is
Period for Approval of Rehabilitation Plan
approved by the court but in the
implementation thereof, the debtor fails to
The court shall have a maximum period of 120 days
perform its obligations thereunder or there is a
from the date of the filing of the petition to approve
failure to realize the objectives, targets or goals
the Rehabilitation Plan. If the court fails to act within
set forth therein, including the timelines and
the said period, the Rehabilitation Plan shall be
conditions for the settlement of the obligations
deemed approved. (Sec. 81, FRIA)
due to the creditors and other claimants;
5. The commission of fraud in securing the
Effect of Approval
approval of the Rehabilitation Plan or its
amendment; and
Approval of the pre-negotiated Rehabilitation Plan
6. Other analogous circumstances as may be
shall have the same legal effect as confirmation of a
defined by the rules of procedure. (Sec. 74,
Plan. (Sec. 82, FRIA)
FRIA)

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 Commercial Law

3. OUT-OF-COURT OR INFORMAL Requisites

RESTRUCTURING AGREEMENT OR
REHABILITATION PLAN 1. Such agreement is approved by creditors
representing more than fifty percent (50%) of
the total liabilities of the debtor;
a. MINIMUM REQUIREMENTS
2. Notice thereof is published in a newspaper of
general circulation in the Philippines once a
For an out-of-court or informal
week for two (2) consecutive weeks; and
restructuring/workout agreement or Rehabilitation
3. The standstill period does not exceed one
Plan to qualify, it must meet the following minimum
hundred twenty (120) days from the date of
requirements:
effectivity. (Sec. 85, FRIA)

1. The debtor must agree to the out-of-court or

The notice must invite creditors to participate in the
informal restructuring/workout agreement or
negotiation for out-of-court rehabilitation or
Rehabilitation Plan;
restructuring agreement and notify them that said
agreement will be binding on all creditors if the
2. It must be approved by creditors representing
required majority votes prescribed in Sec. 84 of the
at least sixty-seven percent (67%) of the
Act are met. (Sec. 85, FRIA)
secured obligations of the debtor;

Effect of court actions or other proceedings

3. It must be approved by creditors representing
at least seventy-five percent (75%) of the
Any court action or other proceedings arising from,
unsecured obligations of the debtor; and
or relating to, the out-of-court or informal
restructuring/workout agreement or Rehabilitation
4. It must be approved by creditors holding at
Plan shall not stay its implementation, unless the
least eighty-five percent (85%) of the total
relevant party is able to secure a temporary
liabilities, secured and unsecured, of the
restraining order or injunctive relief from the Court
debtor. (Sec. 84, FRIA)
of Appeals. (Sec. 88, FRIA)

b. STANDSTILL PERIOD
c. CRAM DOWN EFFECT
Standstill period shall refer to the period agreed
Cram Down Effect
upon by the debtor and its creditors to enable them
to negotiate and enter into an out-of-court or
A Rehabilitation Plan may be approved by the court
informal restructuring/workout agreement or
even over the oppositions of the creditors holding a
rehabilitation plan. (Sec. 5(q), Rule 1, A.M. No. 12-12-
majority of the corporation’s total liabilities if there
11-SC)
is a showing that rehabilitation is feasible, and the
opposition of the creditors is manifestly
The standstill agreement may include provisions
unreasonable. Also known as the “cram-down”
identical with or similar to the legal effects of a
clause, this provision, which is currently
commencement order. (Ibid.)
incorporated in the FRIA, is necessary to curb the
majority creditors’ natural tendency to dictate their
Against whom a Standstill Period is Effective and
own terms and conditions to the rehabilitation,
Enforceable
absent due regard to the greater long-term benefit
of all stakeholders.
A standstill period shall be effective and enforceable
not only against the contracting parties but also
Otherwise stated, it forces the creditors to accept
against the other creditors. (Sec. 85, FRIA)
the terms and conditions of the Rehabilitation Plan,
preferring long-term viability over immediate but

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 Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments

incomplete recovery. (Bank of the Philippine Islands from the date of the last publication of the notice
v. Sarabia Manor Hotel Corporation, G.R. No. 175844, thereof. (Sec. 86, FRIA)
29 July 2013)

The court has the power to “cram-down” the

Rehabilitation Plan, i.e., the power to approve or
implement the Rehabilitation Plan despite the lack
of approval, or objection from the owners, partners,
stockholders, or creditors of the insolvent debtor,
provided that the terms thereof are necessary to
restore the financial well-being and viability of the
insolvent debtor. (De Leon, 2021; Secs. 64 and 68,
FRIA)

Thus, notwithstanding the rejection of the

Rehabilitation Plan by the creditors, the court may
confirm the Rehabilitation Plan if all of the following
circumstances are present:

1. The Rehabilitation Plan complies with the

requirements specified in this Act;
2. The rehabilitation receiver recommends the
confirmation of the Rehabilitation Plan;
3. The shareholders, owners or partners of the
juridical debtor lose at least their controlling
interest as a result of the Rehabilitation Plan;
and
4. The Rehabilitation Plan would likely provide
the objecting class of creditors with
compensation which has a net present value
greater than that which they would have
received if the debtor were under liquidation.
(De Leon, 2021; Sec. 64, FRIA)

A restructuring/workout agreement or
Rehabilitation Plan that is approved pursuant to an
informal workout framework (out of court or
informal restructuring agreements) shall have the
same legal effect as confirmation of a Plan under
Section 69 of FRIA. The notice of the Rehabilitation
Plan or restructuring agreement or Plan shall be
published once a week for at least three (3)
consecutive weeks in a newspaper of general
circulation in the Philippines.

The Rehabilitation Plan or restructuring agreement

shall take effect upon the lapse of fifteen (15) days

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 Commercial Law
C. LIQUIDATION
1. VOLUNTARY LIQUIDATION VS.
INVOLUNTARY LIQUIDATION VS.
CONVERSION
Kinds of Debtors:
1. Juridical debtors; and
2. Individual debtors.
Liquidation of Insolvent Juridical Debtors
VOLUNTARY LIQUIDATION INVOLUNTARY LIQUIDATION
Who may initiate
By 3 or more creditors the
aggregate of whose claims is at
least either Php1,000,000.00 or at
least 25% of the subscribed
capital stock or partner's
An insolvent debtor may apply
contributions of the debtor,
for liquidation by filing a
whichever is higher, may apply for
petition for liquidation with
and seek the liquidation of an
the court. (Sec. 90, FRIA)
insolvent debtor by filing a
petition for liquidation of the
debtor with the court. (Sec. 91,
FRIA)
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2022 GOLDEN NOTES
CONVERSION
Rehabilitation proceedings may be
converted into liquidation proceedings
and may be initiated by: (De Leon,
2021)
a. By the court upon a finding that
(1) the debtor is insolvent; and that
(2) there is no substantial
likelihood for the debtor to be
successfully rehabilitated. (Sec.
25(c), FRIA)
b. By the court if there is an
objection to the Rehabilitation Plan
and the court determines that the
debtor acted in bad faith, or that it
is not feasible to cure the defect.
(Sec. 67, FRIA)
c. Upon motion or motu proprio if
the court does not confirm the
Rehabilitation Plan within 1 year
from the date of filing of the
petition. (Sec. 72, FRIA)
d. Upon a breach of, or upon a failure
of the Rehabilitation Plan the
court, upon motion by an
affected party may (1) issue an
order directing that the breach be
cured within a specified period of
time, falling which the proceedings
may be converted to a liquidation;
or (2) Issue an order converting
Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments
The petition shall be verified,
shall establish the insolvency
of the debtor and shall contain,
whether as an attachment or
as part of the body of the
petition:
the proceedings to a liquidation;
(Sec. 74, FRIA)
e. By the court if the termination of
proceedings is due to failure of
rehabilitation or dismissal of the
petition for reasons other than
technical grounds, the proceedings
shall be immediately converted;
(Sec. 75, FRIA)
f. By the court upon determination
that the debtor or creditors
supporting the pre-negotiated
Rehabilitation Plan acted in bad
faith, or that the objection is non-
curable. (Sec. 80, FRIA)
g. At any time during the pendency of
court-supervised or pre-
negotiated rehabilitation
proceedings, the debtor may
initiate liquidation proceedings.
(Sec. 90, FRIA; Sec. 2, Rule 2, A.M.
No. 15-04-06-SC)
h. At any time during the pendency of
or after a rehabilitation court-
supervised or pre-negotiated
rehabilitation proceedings, 3 or
more creditors whose claims is at
least either Php1,000,000.00 or at
least 25% of the subscribed capital
or partner's contributions of the
debtor, whichever is higher. (Sec.
91, FRIA)
i. By the court in cases authorized
by law, or upon the
recommendation of the
rehabilitation receiver or
management committee that the
rehabilitation of the debtor is no
longer feasible. (Sec. 92, FRIA; Sec.
9., Rule 2, A.M. No. 15-04-06-SC)
Contents of the petition
The petition shall show that:
a. There is no genuine issue of
fact or law on the claim/s of
the petitioner/s, and that the
due and demandable
payments thereon have not
385 UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law

a. A schedule of the debtor's been made for at least 180

debts and liabilities days or that the debtor has
including a list of creditors failed generally to meet its
with their addresses, liabilities as they fall due; and
amounts of claims and b. There is no substantial
collaterals, or securities, if likelihood that the debtor
any; may be rehabilitated. (Sec. 91,
b. An inventory of all its FRIA)
assets including
receivables and claims
against third parties; and
c. The names of at least 3
nominees to the position
of liquidator. (Sec. 90,
FRIA)

Liquidation of Insolvent Individual Debtors

VOLUNTARY LIQUIDATION INVOLUNTARY LIQUIDATION

Who may file
An individual debtor whose properties are not
Any creditor or group of creditors. (Sec. 105, FRIA)
sufficient to cover his liabilities. (Sec. 103, FRIA)
Minimum Amount of Aggregate Debt
The debt must exceed P500,000. (Sec. 103, FRIA) The debt must be at least P500,000. (Sec. 105, FRIA)

How and where to initiate

By filing a verified petition with the court of the By filing a verified petition for liquidation with the
province or city in which he has resided for 6 months court of the province or city in which the individual
prior to the filing of such petition. (Sec. 103, FRIA) debtor resides. (Sec. 105, FRIA)
Contents of the petition
The following shall be considered acts of insolvency,
and the petition for liquidation shall set forth or allege
at least one of such acts:

a. That such person is about to depart or has

departed from the Republic of the Philippines,
with intent to defraud his creditors;
He shall attach to his petition a schedule of debts and
b. That being absent from the Republic of the
liabilities and an inventory of assets. (Sec. 103, FRIA)
Philippines, with intent to defraud his creditors,
he remains absent;
NOTE: The filing of such petition shall be an act of
c. That he conceals himself to avoid the service of
insolvency. Acts of insolvency need not be alleged.
legal process for the purpose of hindering or
(Sec. 103, FRIA)
delaying the liquidation or of defrauding his
creditors;
d. That he conceals, or is removing, any of his
property to avoid its being attached or taken on
legal process;
e. That he has suffered his property to remain under
attachment or legal process for three (3) days for

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Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments

the purpose of hindering or delaying the

liquidation or of defrauding his creditors;
f. That he has confessed or offered to allow
judgment in favor of any creditor or claimant for
the purpose of hindering or delaying the
liquidation or of defrauding any creditor or
claimant;
g. That he has willfully suffered judgment to be
taken against him by default for the purpose of
hindering or delaying the liquidation or of
defrauding his creditors;
h. That he has suffered or procured his property to
be taken on legal process with intent to give a
preference to one or more of his creditors and
thereby hinder or delay the liquidation or defraud
any one of his creditors;
i. That he has made any assignment, gift, sale,
conveyance or transfer of his estate, property,
rights or credits with intent to hinder or delay the
liquidation or defraud his creditors;
j. That he has, in contemplation of insolvency, made
any payment, gift, grant, sale, conveyance or
transfer of his estate, property, rights or credits;
k. That being a merchant or tradesman, he has
generally defaulted in the payment of his current
obligations for a period of thirty (30) days;
l. That for a period of thirty (30) days, he has failed,
after demand, to pay any moneys deposited with
him or received by him in a fiduciary capacity;
and
m. That an execution having been issued against him
on final judgment for money, he shall have been
found to be without sufficient property subject to
execution to satisfy the judgment. (Sec. 105,
FRIA)
Effect of Absence of Debtor

Applies even in the case of absent debtor under Sec.

The debtor is not absent as he files the petition.
108 of the FRIA.

Posting of Bond
The petitioning creditor/s shall post a bond in such
sum as the court shall direct, conditioned that if the
petition for liquidation is dismissed by the court, or
Posting of bond by creditors not required. withdrawn by the petitioner, or if the debtor shall not
be declared an insolvent, the petitioners will pay to
the debtor all costs, expenses, damages occasioned by
the proceedings, and attorney's fees. (Sec. 105, FRIA)

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Issuance of Liquidation Order

Issued after trial.

Upon filing of such creditors’ petition, court shall

issue a show-cause order against the individual
debtor, at a time and place to be fixed therein why he
Issued without trial.
should not be adjudged an insolvent.

If the court finds petition sufficient in form and

Upon good cause shown, the court may issue an order
substance, it shall, within 5 working days, issue a
forbidding the individual debtor from making
liquidation order. (Villanueva, 2018; Sec. 104, FRIA)
payments of any of his debts, and transferring any
property belonging to him. If the individual debtor
shall default or if, after trial, the issues are found in
favor of petitioning creditors, the court shall issue
the liquidation order. (Villanueva, 2018)

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 Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments

2. PROCEDURE
The liquidation process refers to the proceeding
where claims are filed, and the assets of the
insolvent debtor are disposed of and the proceeds
are divided among the creditors.
j. Set the case for hearing for the election and
appointment of the liquidator, which date shall
not be less than thirty (30) days nor more than
forty-five (45) days from the date of the last
publication.
Effects of the Liquidation Order (Sec. 113, FRIA)

a. LIQUIDATION ORDER; EFFECTS

Upon issuance of the Liquidation Order:
Liquidation Order
a. The juridical debtor shall be deemed dissolved
and its corporate or juridical existence
If, after considering the comments filed, the court
terminated;
determines that the petition is meritorious, it will
b. Legal title to and control of all the assets of the
issue the Liquidation Order. (De Leon, 2021; Sec. 91,
debtor, except those that may be exempt from
FRIA; Sec. 8, Rule 2, A.M. No. 15-04-06-SC)
execution, shall be deemed vested in the
liquidator or, pending his election or
The Court may also issue the Liquidation order if the
appointment, with the court;
debtor on whom summons is properly served fails
c. All contracts of the debtor shall be deemed
to file a comment on or opposition to the petition
terminated and/or breached, unless the
within the period given by the court. (Sec. 18, Rule 3,
liquidator, within ninety (90) days from the
A.M. No. 15-04-06-SC)
date of his assumption of office, declares
otherwise and the contracting party agrees;
Contents of a Liquidation Order (Sec. 112, FRIA)
d. No separate action for the collection of an
unsecured claim shall be allowed. Such actions
The liquidation order shall:
already pending will be transferred to the
Liquidator for him to accept and settle or
a. Declare the debtor insolvent;
contest. If the liquidator contests or disputes
b. Order the liquidation of the debtor and, in the
the claim, the court shall allow, hear, and
case of a juridical debtor, declare it as dissolved;
resolve such contest except when the case is
c. Order the sheriff to take possession and control
already on appeal. In such a case, the suit may
of all the property of the debtor, except those
proceed to judgment, and any final and executor
that may be exempt from execution;
judgment therein for a claim against the debtor
d. Order the publication of the petition or motion
shall be filed and allowed in court; and
in a newspaper of general circulation once a
e. No foreclosure proceeding shall be allowed for
week for two (2) consecutive weeks;
a period of one hundred eighty (180) days.
e. Direct payments of any claims and conveyance
of any property due the debtor to the liquidator;
Secured Creditor and Secured Claim
f. Prohibit payments by the debtor and the
transfer of any property by the debtor;
Secured creditor refers to a creditor with a secured
g. Direct all creditors to file their claims with the
claim. (Sec. 4(kk), FRIA)
liquidator within the period set by the rules of
procedure;
Secured claim shall refer to a claim that is secured
h. Authorize the payment of administrative
by a lien. (Sec. 4(jj), FRIA)
expenses as they become due;
i. State that the debtor and creditors who are not
petitioner/s may submit the names of other
nominees to the position of liquidator; and

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Rights of Secured Creditors (Sec. 114, FRIA)
The Liquidation Order shall not affect the right of a
secured creditor to enforce his lien in accordance
with the applicable contract or law.
A secured creditor may:
1. Waive his rights under the security or lien,
prove his claim in the liquidation proceedings
and share in the distribution of the assets of the
debtor; or
2. Maintain his rights under his security or lien.
If the secured creditor maintains his rights under
the security or lien:
1. The value of the property may be fixed in a
manner agreed upon by the creditor and the
liquidator. When the value of the property is
less than the claim it secures, the liquidator may
convey the property to the secured creditor and
the latter will be admitted in the liquidation
proceedings as a creditor for the balance; if its
value exceeds the claim secured, the liquidator
may convey the property to the creditor and
waive the debtor's right of redemption upon
receiving the excess from the creditor;
2. The liquidator may sell the property and satisfy
the secured creditor's entire claim from the
proceeds of the sale; or
3. The secured creditor may enforce the lien or
foreclose on the property pursuant to
applicable laws.
Powers, Duties and Responsibilities of the
Liquidator
The liquidator shall be deemed an officer of the
court with the principal duty of preserving and
maximizing the value and recovering the assets of
the debtor, with the end of liquidating them and
discharging to the extent possible all the claims
against the debtor. (Sec. 119, FRIA)
Prior to entering upon his powers, duties and
responsibilities, the liquidator shall take an oath
and file a bond, in such amount to be fixed by the
court, conditioned upon the proper and faithful
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
discharge of his powers, duties and responsibilities.
(Sec. 117, FRIA)
The powers, duties, and responsibilities of the
liquidator shall include, but not be limited to:
1. To sue and recover all the assets, debts and
claims, belonging or due to the debtor;
2. To take possession of all the property of the
debtor except property exempt by law from
execution;
3. To sell, with the approval of the court, any
property of the debtor which has come into his
possession or control;
4. To redeem all mortgages and pledges, and to
satisfy any judgment which may be an
encumbrance on any property sold by him;
5. To settle all accounts between the debtor and his
creditors, subject to the approval of the court;
6. To recover any property or its value,
fraudulently conveyed by the debtor;
7. To recommend to the court the creation of a
creditors' committee which will assist him in the
discharge of his functions, and which shall have
powers as the court deems just, reasonable and
necessary; and
8. Upon approval of the court, to engage such
professionals as may be necessary and
reasonable to assist him in the discharge of his
duties.
In addition to the rights and duties of a
rehabilitation receiver, the liquidator shall have the
right and duty to take all reasonable steps to
manage and dispose of the debtor's assets with a
view towards maximizing the proceedings
therefrom, to pay creditors and stockholders, and to
terminate the debtor's legal existence.
A liquidator shall be subject to removal pursuant to
procedures for removing a rehabilitation receiver.
(Sec. 119, FRIA)
3. DETERMINATION OF CLAIMS
Registry of Claims
Within twenty (20) days from his assumption into
office, the liquidator shall prepare a preliminary
390
 Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments
registry of claims of secured and unsecured
creditors.
Secured creditors who have waived their security or
lien or have fixed the value of the property subject
of their security or lien by agreement with the
liquidator and is admitted as a creditor for the
balance, shall be considered as unsecured creditors.
The liquidator shall make the registry available for
public inspection and provide publication notice to
creditors, individual debtors, owner/s of the sole
proprietorship-debtor, the partners of the
partnership-debtor and shareholders or members
of the corporation-debtor, on where and when they
may inspect it. All claims must be duly proven
before being paid. (Sec. 123, FRIA)
Right of Set-off
If the debtor and a creditor are mutually debtor and
creditor of each other, one debt shall be set off
against the other, and only the balance, if any, shall
be allowed in the liquidation proceedings. (Sec. 124,
FRIA)
Opposition or Challenge to Claims
Within thirty (30) days from the expiration of the
period for filing of applications for recognition of
claims, creditors, individual debtors, owner/s of the
sole proprietorship-debtor, partners of the
partnership-debtor and shareholders or members
of the corporation-debtor and other interested
parties may submit a challenge to a claim or claims
to the court, serving a certified copy on the
liquidator and the creditor holding the challenged
claim. (Sec. 125, FRIA)
Finality of the Claims
Upon the expiration of the thirty (30)-day period,
the rehabilitation receiver shall submit to the court
the registry of claims containing the undisputed
claims that have not been subject to challenge. Such
claims shall become final upon the filing of the
register and may be subsequently set aside only on
391
grounds of fraud, accident, mistake or inexcusable
neglect. (Sec. 125, FRIA)
Liquidation Plan
Within three (3) months from his assumption into
office, the Liquidator shall submit a Liquidation Plan
to the court. The Liquidation Plan shall, as a
minimum, enumerate all the assets of the debtor, all
the claims against the debtor and a schedule of
liquidation of the assets and payment of the claims.
(Sec. 129, FRIA)
Sales of Assets in Liquidation
The liquidator may sell the unencumbered assets of
the debtor and convert the same into money. The
sale shall be made at public auction.
However, a private sale may be allowed with the
approval of the court if:
1. The goods to be sold are of a perishable nature,
or are liable to quickly deteriorate in value, or
are disproportionately expensive to keep or
maintain; or
2. The private sale is for the best interest of the
debtor and his creditors. With the approval of
the court, unencumbered property of the
debtor may also be conveyed to a creditor in
satisfaction of his claim or part thereof.
With court’s approval, unencumbered property of
Debtor may also be conveyed to a creditor in
satisfaction of his claim or part thereof. (Sec. 131,
FRIA)
Concurrence and Preference of Credits
The Liquidation Plan and its implementation shall
ensure that the concurrence and preference of
credits as enumerated in the Civil Code of the
Philippines 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 the debtor shall enjoy first preference
under Article 2244 of the Civil Code, unless the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Commercial Law
claims constitute legal liens under Articles 2241 and
2242 thereof. (Sec. 133, FRIA)
The rules on preference and concurrence of credits
are of no consequence where the value of the
property or the value of all the assets is sufficient to
pay in full all the creditors. Hence, the rules become
material only when insolvency proceedings - when
the assets are insufficient for then some creditors of
necessity will not be paid or some creditors will not
obtain the full satisfaction of their claims.
(Philippine Savings Bank v. Hon. Gregorio Lantin, G.R.
No. L-33929, 2 Sept. 1983)
D. SUSPENSION OF PAYMENTS; SUSPENSION OF
PAYMENT ORDER
Suspension of Payments (Sec. 96, FRIA)
Upon motion filed by the individual debtor, the
court may issue an order suspending any pending
execution against the individual debtor: Provided
that properties held as security by secured creditors
shall not be the subject of such suspension order.
The suspension order shall lapse when three (3)
months shall have passed without the proposed
agreement being accepted by the creditors or as
soon as such agreement is denied.
No creditor shall sue or institute proceedings to
collect his claim from the debtor from the time of the
filing of the petition for suspension of payments and
for as long as proceedings remain pending except:
1. Those creditors having claims for personal
labor, maintenance, expense of last illness and
funeral of the wife or children of the debtor
incurred in the sixty (60) days immediately
prior to the filing of the petition; and
2. Secured creditors.
Suspension of Payment Order (Sec. 95, FRIA)
If the court finds the petition sufficient in form and
substance, it shall, within five (5) working days from
the filing of the petition, issue an Order:
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
a. Calling a meeting of all the creditors named in
the schedule of debts and liabilities at such time
not less than 15 days nor more than 40 days
from the date of such Order and designating the
date, time and place of the meeting;
b. Directing such creditors to prepare and present
written evidence of their claims before the
scheduled creditors' meeting;
c. Directing the publication of the said order in a
newspaper of general circulation published in
the province or city in which the petition is filed
once a week for two (2) consecutive weeks,
with the first publication to be made within
seven (7) days from the time of the issuance of
the Order;
d. Directing the clerk of court to cause the sending
of a copy of the Order by registered mail,
postage prepaid, to all creditors named in the
schedule of debts and liabilities;
e. Forbidding the individual debtor from selling,
transferring, encumbering, or disposing in any
manner of his property, except those used in the
ordinary operations of commerce or of industry
in which the petitioning individual debtor is
engaged so long as the proceedings relative to
the suspension of payments are pending;
f. Prohibiting the individual debtor from making
any payment outside of the necessary or
legitimate expenses of his business or industry,
so long as the proceedings relative to the
suspension of payments are pending; and
g. Appointing a commissioner to preside over the
creditors' meeting.
Not Covered by the Suspension of Payment
Order
1. Those creditors having claims for personal
labor, maintenance, expense of last illness, and
funeral of the wife or children of the debtor
incurred in the 60 days immediately prior to
filing of the petition; and
2. Secured creditors. (Sec. 96, FRIA)
Failure of Individual Debtor to perform the
agreement (Sec. 102, FRIA)
If the individual debtor fails, wholly or in part, to
perform the agreement decided upon at the meeting
392
 Financial Rehabilitation, Insolvency, Liquidation, and
Suspension of Payments

of the creditors, all the rights which the creditors
had against the individual debtor before the
agreement shall revest in them. In such case the
individual debtor may be made subject to the
insolvency proceedings in the manner established
by the FRIA.
opposition is manifestly unreasonable. (Bank of the
Philippine Islands v. Sarabia Manor Hotel
Corporation, G.R. No. 175844, 29 July 2013)
Involuntary Liquidation of Individual Debtor vs.
Involuntary Liquidation of Juridical Debtor

Q: SARABIA filed a petition for corporate INDIVIDUAL DEBTOR JURIDICAL DEBTOR

rehabilitation with prayer for the issuance of a As to Number of Creditors
stay order before the RTC as it foresaw the
At least three (3) There can be one or
impossibility to meet its maturing obligations to
creditors required. more creditors.
its creditors when they fall due. It was later on
approved by the lower courts. BPI mainly argues As to Minimum Amount of Debt
that the approved rehabilitation plan did not The debt or aggregate
give due regard to its interests as a secured of debts must be at
creditor in view of the imposition of a fixed least one million pesos
The debts must be at
interest rate of 6.75% p.a. and the extended loan (P1,000,000) or
least Five Hundred
repayment period. Is BPI correct? equivalent to 25% of
Thousand Pesos
the subscribed capital
(P500,000)
A: NO. BPI is not correct. Although undefined in the or partner’s
Interim Rules, it may be said that the opposition of a contribution,
distressed corporation’s majority creditor is whichever is higher.
manifestly unreasonable if it counter-proposes As to Continuation of Business
unrealistic payment terms and conditions which
The business
would, more likely than not, impede rather than aid The individual can
organization will be
its rehabilitation. The unreasonableness becomes continue business.
dissolved.
further manifest if the rehabilitation plan, in fact,
provides for adequate safeguards to fulfill the As to Proof of Acts of Insolvency
majority creditor’s claims, and yet the latter persists
There must be an act An act of insolvency is
on speculative or unfounded assumptions that his
of insolvency. not required.
credit would remain unfulfilled.

It must be pointed out that oppositions which push
for high interest rates are generally frowned upon
in rehabilitation proceedings given that the
inherent purpose of a rehabilitation is to find ways
and means to minimize the expenses of the
distressed corporation during the rehabilitation
period. It is the objective of a rehabilitation
proceeding to provide the best possible framework
for the corporation to gradually regain or achieve a
sustainable operating form. Hence, if a creditor,
whose interests remain well-preserved under the
existing rehabilitation plan, still declines to accept
interests pegged at reasonable rates during the
period of rehabilitation, and, in turn, proposes rates
which are largely counter-productive to the
rehabilitation, then it may be said that the creditor’s
Q: On July 18, 2010, R.A. No. 10142, or FRIA,
lapsed into law. It took effect on August 31, 2010,
but its implementing rule was only promulgated
on August 27, 2013. FRIA expressly repealed the
Insolvency Law of 1909 and impliedly repealed
laws, orders, and rules that were inconsistent
with its provisions. On September 9, 2010, after
FRIA had taken effect, Interco, et al. filed a
Petition for Suspension of Payments and
Rehabilitation before the rehabilitation court.
On the day of the initial hearing, the
rehabilitation court declared that the
proceedings shall be governed by the 2008
Rules on Corporate Rehabilitation.

393 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Commercial Law

Interco, et al. argue that the Court of Appeals

erred in ruling that FRIA is applicable since the
rehabilitation court's decision to apply the 2008
Rules on Corporate Rehabilitation has become
the law of the case. They likewise maintain that
while their Petition for Suspension of Payments
and Rehabilitation was filed after FRIA had
taken effect, the law is inapplicable since its
provisions are not self-executory. Is Interco, et
al.’s contention tenable?

A: NO. The absence of an implementing rule alone

cannot render a law inoperative. Every law is
presumed valid, until and unless judicially declared
invalid.

Interco, et al. misread Section 146 of FRIA in

insisting that the law's provisions do not apply to
their case. Section 146 provides:

“SECTION 146. Application to Pending Insolvency,

Suspension of Payments and Rehabilitation Cases. -
This Act shall govern all petitions filed after it has
taken effect. All further proceedings in insolvency,
suspension of payments and rehabilitation cases
then pending, except to the extent that in the
opinion of the court their application would not be
feasible or would work injustice, in which event the
procedures set forth in prior laws and regulations
shall apply.”

As the CA correctly found, the discretion given to

rehabilitation courts in applying the 2008 Rules on
Corporate Rehabilitation instead of FRIA pertains
only to petitions for rehabilitation filed before and
are pending at the time FRIA took effect. In cases
involving petitions for rehabilitation filed after
FRIA's effectivity, the rehabilitation court has no
option and is mandated to apply the provisions of
FRIA. (Banco De Oro Unibank, Inc. v. International
Copra Export Corp., Interco Manufacturing Corp., Icec
Land Corp., And Kimee Realty Corp., G.R. Nos. 218485-
86 and 218493-97, 28 Apr. 2021)

UNIVERSITY OF SANTO TOMAS 394

2022 GOLDEN NOTES