1

EXECUTIVE COUNCIL

REA MAY G. HERMOSURA

Chairperson

JANINE NICOLE C. ORCENA TRISHA ALEXIS R. MAINGAT JAYNIE P. PAJARILLAGA

Vice Chairperson for Academics Secretary Creative Director

SHASHLEY R. BERNARDEZ LANIE GRACE S. LIM IRISH ANA A. SALINAS

Vice Chairperson for Administration Treasurer Volunteer Core Head

CRISTOBAL N. RABINO GRACE PEREZ-SONIDO TIMOTHY JAMES D. PACSON

Operations Head Auditor Ways and Means Officer

COMMERCIAL LAW COMMISSION

John John L. Del Mundo Antoniette A. Pulutan Miguel Luis C. Arguelles

Commissioner, Deputy Subject Head - Deputy Subject Head - Insurance Law Lycelle Mae A. Balaoing
Financial Rehabilitation, Insolvency, Allen Lloide F. Bantigue
Liquidation and Suspension of Payments April Joy G. Batalla
Christine Joy O. David
Subject Head - Financial Rehabilitation, Bianca Chia R. Castro
Ma. Luisa Cashelle P. Madrid John Alexis C. de Guzman
Insolvency, Liquidation and Suspension of,
Deputy Commissioner, Subject Head -
Payments Abby Gail G. Del Rosario
Intellectual Property Law, Deputy Subject
Head - Financial Rehabilitation, Insolvency, Robert P. Dillera
Liquidation and Suspension of Payments Pauline Bernadeth D. Garcia
Christian Paul M. Rito
Ma. Dhelltria G. Garner
Subject Head - Anti-Money Laundering Act
Geni-Pearl Crystal Q. Cauilan Maria Westphalia B. Gozon
Subject Head - Corporation Law Ma. Isis Danielle L. Volante Kirby T. Grande
Deputy Subject Head - Anti-Money Emielle Justine S. Lucas
Jobeluz P. Igdanes Laundering Act Germiniano D. Manio Jr.
Subject Head - Transportation Law Hazel Mitz D. Manuel
Francisco Perez
Brian Jerald E. Paras Michaella B. Reyes
Subject Head - Electronic Commerce Act Lance Jerome G. Ronquillo
Winston Mao Torino
Jan Tristan S. Ramos James Ceasar A. Ventura
Subject Head - Insurance Law Members

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 CENTER FOR LEGAL EDUCATION AND RESEARCH

ATTY. RODERICK M. VILLOSTAS

Director

ATTY. ANTONY J. PARREÑO

ATTY. LESTER NAZARENE V. OPLE
ATTY. RICKSON M. BUENVIAJE
Research Fellows

BRANDO F. DE TORRES
MARICAR S. ASUNCION
Research Staff

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ALL RIGHTS RESERVED © 2022

2
 I. INSURANCE LAW
(P.D. No. 162, as amended by R.A. No. 10607, Insurance Code [ICP])

I. BASIC CONCEPTS

1. What may be insured?

Any contingent or unknown event, whether past or future, which may damnify a person having
insurable interest, or create a liability against him, may be insured. (Sec. 3 (1), ICP)

2. What may not be insured?

No insurance can be taken for or against the drawing of any lottery, or for or against any chance or
ticket in a lottery drawing prize. (Sec. 4, ICP)

3. What is insurable interest? (2017, 2019 Bar)

Insurable Interest is that interest which a person is deemed to have in the subject matter insured,
where he has a relation or connection with or concern in it, such that the person will derive pecuniary
benefit or advantage from the preservation of the subject matter insured and will suffer pecuniary loss
or damage from its destruction, termination, or injury by the happening of the event insured against.
(Lalican vs. Insular Life Assurance Company, G.R. No. 183526, August 25, 2009)

4. Distinguish Insurable Interest in Property vs. Insurable Interest in Life (2001, 2002, and
2012 BAR)

INSURABLE INTEREST IN LIFE INSURABLE INTEREST IN PROPERTY

(Sec. 10, ICP) (Sec. 13, ICP)
As to extent
Unlimited except if effected by a creditor on the life of Limited to the actual value of the interest in
the debtor. property.
As to time when insurable interest must exist
Must exist at the time the policy takes effect and need Must exist when the policy takes effect and when
not exist at the time of the loss. the loss occurs.
As to expectation of benefit to be derived
Expectation of benefit need not have legal basis or
Expectation benefits must have a legal basis.
need not be based on legally enforceable obligation.
As to the beneficiary’s interest
Beneficiary need not have insurable interest over the
life of the insured if the insured himself secured the
Beneficiary must have insurable interest over the
policy. However, if the life insurance was obtained by
thing insured in property insurance.
the beneficiary, the latter must have insurable interest
over the life of the insured.
As to assignment or transfer of the policy (1991, 2011 Bar)
Can be transferred even without the consent of or notice
to the insurer. By express provision of Section 184 of the It is necessary that the transferee has insurable
Insurance Code, it is not necessary that the transferee has interest over the thing insured
insurable interest
5. What are the classes of insurable interest in life insurance?

a. Insurable interest in the insured’s own life

b. Insurable interest in the life of another person

6. If a person procures life insurance on his own life, who may be his beneficiary?

General rule: When Exception: Those disqualified to receive donation under Article 739 of the Civil Code.
one insures his own Article 739. The following donations shall be void:
life, he may designate a. Those made between persons who were guilty of adultery or concubinage at
any person as the the time of the donation;
beneficiary, whether or b. Those made between persons found guilty of the same criminal offense, in
not the beneficiary has consideration thereof;
an insurable interest in c. Those made to a public officer or his wife, descendants and ascendants, by
the life of the insured. reason of his office.

In the case referred to in No. 1, the action for declaration of nullity may be brought
by the spouse of the donor or donee; and the guilt of the donor and donee may be
proved by preponderance of evidence in the same action. (Art. 739, New Civil Code
(NCC))

The beneficiary in this case can be anyone, such as a distant relative or friend, who
need not have any insurable interest in the life of the insured.

Important update: Members of the lesbian, gay, bisexual, transgender, and queer (LGBTQ+) have
the right to designate their domestic partners as beneficiaries. An individual who has secured a life
insurance policy on his or her own life may designate any person as beneficiary provided that such
designation does not fall under the enumerations provided in Article 739 of the Civil Code. (Insurance
Commission, Legal Opinion No. 2020-02, dated March 04, 2020)

7. When is the interest of a beneficiary in an insurance policy 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 following:
a) To other beneficiaries, unless otherwise disqualified.
b) In the absence of other beneficiaries, the proceeds shall be paid in accordance with the policy
contract.
c) If the policy contract is silent, the proceeds shall be paid to the estate of the insured. (Sec. 12,
ICP)

8. What is insurable interest in property insurance? (2019 Bar)

Every interest in property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable
interest in property. (Sec. 13, ICP)

9. What is the scope of insurable interest in Marine Insurance? (APE)

a. The owner of the ship has in all cases
b. One who has an interest in the thing from which profits are expected to proceed has an insurable
interest in the profits (Sec. 107, ICP).
c. The owner of the ship has insurable interest in expected freightage which according to the ordinary
and probable course of things he would have earned but for the intervention of the peril insured
against or other peril incident to the voyage (Sec. 105, ICP).
10. Who are the persons with insurable interest over the ship?
a. Shipowner
b. Cargo owner / Shipper
c. Charterer
d. Lender on bottomry
e. Mortgagee

11. Distinguish over-insurance v. double insurance (1994 Bar)

OVER-INSURANCE DOUBLE INSURANCE(1993, 2005, 2012 Bar)

As to Existence
Over-insurance exist if the insured takes out an Double insurance exists when the same person is
insurance over the property insured in an amount insured by several insurers separately in respect to
which is in excess of the value of his insurable interest the same subject and interest. (Sec. 95, ICP)
(Aquino, Essentials of Insurance, 2018, p. 283 ).
As to Number of Insurers
May be one or more insurers involved Always more than one insurers involved
As to Amount of Insurance
Amount of insurance is beyond the value of insurable There may be no over-insurance as when the sum
interest of the insured. total of the amounts of the policies issued does not
exceed the insurable interest of the insured.

12. What are the requisites of double insurance? (IS2P2)

1. The same interest is involved;

2. There are two or more insurers that insured the person separately;
3. The insurance is over the same subject;
4. The same person is insured; and
5. The same peril is insured against Malayan Insurance Co., Inc. v: Philippine First Insurance Co.,
G.R. No. 184300, July 14, 2012).

13. Can there be double insurance in life insurance?

Yes, there can be double insurance in life insurance but there can never be over-insurance because of
the intrinsic value of life. (Sec. 96, ICP)

14. Is double insurance prohibited?

No, double insurance is not prohibited as provided under Sec. 93 and 94 of the Insurance Code. This
is because even if a person has multiple life insurance policies, the total amount to be paid in case of
death will still not be enough to bring the dead back nor to compensate for the lost intrinsic value of
life.

15. What is a "suicide clause"? (1990, 1993, 1995, 2004, 2018 Bar)

Suicide clause is the period after the first two years of a life insurance. If a suicide happens more than
two years after getting a life insurance policy, the life insurance policy will pay out death benefit to the
policy’s beneficiaries. (Sec. 183, ICP)

16. What are the effects of death through suicide?

The insurer in a life insurance contract shall be liable in case of suicide if:
 1. Suicide was committed after the policy has been in force for a period of two years from the date
of its issue or its last reinstatement, unless the policy provides for a shorter period;
Any stipulation extending the two-year period is void.
2. Suicide committed in a state of insanity; it shall make the insurer liable regardless of the date of
the commission of the suicide (Sec. 183, ICP).

17. What is the effect when the beneficiary killed the insured? (2008 Bar)

General Rule: The interest of a beneficiary in a life insurance Exception:

policy shall be forfeited when the beneficiary is the principal, 1. Accidental killing;
accomplice, or accessory in willfully bringing about the death of 2. Self-defense; and
the insured. In such a case, the share forfeited shall pass on to 3. Insanity of the beneficiary at the time
the other beneficiaries, unless otherwise disqualified. In the he killed the insured. (Sec. 183, ICP)
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, ICP)

18. What is an "incontestability clause"? (1989, 1991, 1994, 1996, 1997, 1998, 2001, 2012,
2019 Bar)

It precludes the insurer from raising the defenses of false representations or concealment of material
facts insofar as health and previous diseases are concerned if the insurance has been in force for at
least two years during the insured’s lifetime. (Manila Bankers Life Insurance Corporation vs. Aban, G.R.
No. 175666, July 29, 2013).

19. What are the requisites before the "incontestability clause" can be invoked?

a. The insurance is a life insurance policy payable on the death of the insured.
b. It has been in force during the lifetime of the insured for at least two years from the date of its
last reinstatement (Sec. 48, ICP). The period of two years may be shortened but it cannot be
extended by stipulation (The Insular Life Assurance Co. Ltd. v. Khu, G.R. No. 195176, April 18,
2016).

II. PERFECTION OF THE INSURANCE CONTRACT (1991, 2003, 2009, 2011, 2014, 2016 Bar)

20. How is a contract of insurance perfected?

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, November 29,
1920).

21. Explain the Theory of Cognition. (2011, 2016 Bar)

It provides that acceptance made by letter shall not bind the person making the offer except from the
time it came to his knowledge.

22. Explain the Theory of Manifestation.

It provides that the contract is perfected at the moment when the acceptance is declared or made by
the offeree
23. On September 25, 2013, Danny Marcial (Danny) procured an insurance on his life with a
face value of P5 M 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 October 1, 2013, RN issued the policy covering Danny’s life
insurance. On October 5, 2013, Danny met a tragic accident and died. Tina claimed the
insurance benefit, but RN was quick to deny the claim because at the time of Danny’s
death, the check was not yet encashed and therefore the premium remained unpaid. Is RN
correct? Will your answer be the same if the check is dated October 15, 2013? (2014 Bar)

No. RN is not correct. The contract of insurance was consummated after the issuance of the check by
Danny for the full amount of the premium and the unconditional delivery of an insurance policy of RN
to Danny. By accepting the PDC, RN has effectively granted credit to Danny to pay the premium.

My answer will still be the same even if the check is dated October 15, 2013. While the loss occurred
prior to the date of the postdated check, its acceptance as a mode of premium payment is effectively
a grant of credit to Danny.

24. What is the contract of adhesion?

A contract of adhesion is one wherein a party, usually a corporation, prepares the stipulations in the
contract, while the other party merely affixes his signature or his “adhesion” thereto. Any ambiguity
therein is resolved against the insurer, or construed liberally in favor of the insured. (Gulf Resorts, Inc.
vs. Philippine Charter Insurance Corporation, G.R. No. 156167, May 16, 2005)

25. What is an Insurance Premium?

It is the agreed price for assuming and carrying the risk. Like the consideration paid to an insurer for
undertaking to indemnify the insured against a specified peril.

26. What is the cash and carry rule under the Insurance Code? (2003 Bar)
Under the cash and carry rule, an insurance policy is generally not binding unless the premium thereof
has not been paid. This is based on Section 77 of the Insurance Code which provides that an insurer
is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by
an insurance company is valid and binding unless and until the premium thereof has been paid.

27. What are the exceptions to the cash and carry rule? (CAPCAGE)
a. Issuance of cover notes (Sec. 52, ICP) (2009 Bar)
b. Acknowledgement of premium payment (Sec. 79, ICP)
c. There is an agreement allowing the insured to pay the premium in installments and partial payment
has been made at the time of loss (Makati Tuscany Condominium v. Court of Appeals, G.R. No.
95546, 1992)
d. Credit extension (Sec. 77, ICP)
e. Acceptance by the obligee of the bond issued by the surety (Sec. 179, ICP)
f. Grace Period in life of industrial life policy (Sec. 77, ICP)
g. Estoppel - (UCPB General Insurance, Inc. v. Masagana Telemart, G.R. No. 137172, 1999)

NOTE: A notice of availability of a check by itself, does not produce the effect of payment of a premium.
(Gaisano v. Development Insurance and Surety Corporation, G.R. No. 190702, February 27, 2017)
28. What is the effect of paying premiums by post-dated checks? (2010, 2014 Bar)

The payment of a premium by a post-dated check at a stated maturity subsequent to the loss is
insufficient to put the insurance into effect if there is no credit agreement (Gaisano v. Development
Insurance and Surety Corp., February 27, 2017).

III. RIGHTS AND OBLIGATIONS OF PARTIES (1991, 2009, 2012 Bar)

29. Who are the parties in an insurance contract?

He assumes the risk of loss and undertakes for a consideration to indemnify the insured
INSURER
upon the happening of a designated peril
He is the person whose loss is the occasion for the payment of the insurance proceeds by
INSURED
the insurer
The insured is also the assured when the proceeds are payable to him. In property
insurance, the assured must have insurable interest over the property ang such insurable
ASSURED interest is covered by the insurance policy. In life insurance, the insured may insure
someone else’s life, and designate himself as beneficiary provided that he has insurable
interest over the life of the person whom he insures
He is the third person designated by the insured to receive the proceeds. In case of failure
BENEFICIARY to designate a beneficiary in a life insurance or the beneficiary designated is disqualified,
the proceeds should accrue to the estate of the insured (Ibid, p.5).

30. What is a “Jason clause” in a charter party? (2015 Bar)

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

IV. RESCISSION OF INSURANCE CONTRACTS (2012 Bar)

31. What are the grounds for rescission of an insurance contract? (No-Det-Con-Con-Wil-MOP-
War)

a. Non-payment of Premium; (Sec. 64, ICP) f. Discovery of fraud or material

b. Determination by the Commissioner that
the continuation of the policy would violate
or would place the insurer in violation of
this Code; (Ibid.)
c. Conviction of a crime arising out of acts
increasing the hazard insured against;
(Ibid.)
d. Concealment ; (Sec. 27, ICP);
e. Discovery of willful or reckless acts or
omissions increasing the hazard insured
against; (Ibid.)
misrepresentation; (Ibid.)
g. Discovery of other insurance coverage that
makes the total insurance in excess of the
property insured; (Ibid.)
h. Physical changes in the property insured
which result in the property becoming
uninsurable; (Ibid.) and
i. Breach of Material Warranty (Sec. 74, ICP)
32. Distinguish Concealment from Representation.

Concealment Representation
As to who may commit
May be committed by the insured or Committed only by insured.
the insurer.
As to acts involved
Concealment cannot refer to future Representation can pertain to future acts because it can be promissory.
acts.
It involves an omission – non- Involves positive assertion or affirmation
disclosure
As to Materiality
Same test of materiality applies
As to Effects – Who can rescind
Same effects on the part of the insured; insurer has right to rescind.

33. Distinguish Warranty from Representation. (1996 Bar)

Warranty Representation
As to Nature
Part of the contract Mere collateral inducement
As to Form
Written on the policy or in a valid Need not be written on the policy or may be oral
rider or attachment, actually or by
reference
As to Materiality
Generally conclusively presumed to Should be established to be material
be material
As to Compliance
Must be strictly complied with Requires only substantial truth and compliance
As to Applicability of Incontestability Clause
Does not apply Applies

II. TRANSPORTATION LAW

I. COMMON CARRIERS

34. Who are common carriers? (1996 Bar)

Common carriers are persons, corporations, firms or associations engaged in the business of carrying
or transporting passengers or goods or both, by land, water, nor air, for compensation, offering their
services to the public. (Art. 1732, NCC)

35. What are the tests to determine whether one is a common carrier: (1996 Bar)

Four-Fold Test of Common Carrier of Goods True-Prolonged Test

a. He must be engaged in the business of carrying The true test for a common carrier is not the quantity
goods for others as a public employment, and or extent of the business actually transacted, or the
must hold himself out as ready to engage in the number and character of the conveyances used in the
activity, but whether the undertaking is a part of
 transportation of goods for person generally as
a business and not as a casual occupation;
b. He must undertake to carry goods of the kind to
which his business is confined;
c. He must undertake to carry by the method by
which his business is conducted and over his
established roads; and
d. The transportation must be for hire. (First
Philippine Industrial Corporation vs. Court of
Appeals, G.R. No. 125948. December 29, 1998)
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. Perena vs.
Sps. Zarate, G.R. No. 157917, August 29, 2012)

36. Distinguish common carrier from private carrier.

Common Carrier Private Carrier
As to definition
A common carrier is defined as persons, A private carrier is defined as one who, without making
corporations, firms or associations engaged in the the activity a vocation, or without holding himself or itself
business of carrying or transporting passengers or out to the public as ready to act for all who may desire
goods or both, by land, water or air, for his or its, services, undertakes, by special agreement in
compensation, offering their services to the public. a particular instance only, to transport goods or persons
(Art. 1732, NCC) from one place to another either gratuitously or for hire.
(Sps Perena vs. Sps. Nicolas, G.R. No. 157917, August
29,2012)
As to passengers
Holds himself out for all people indiscriminately. Contracts with particular individuals or groups only.
As to required diligence
Requires extraordinary Requires only ordinary
diligence. diligence.

As to state regulation
Subject to regulation. Not subject to regulation.
As to stipulation on limiting liability
Parties may not agree on limiting the carrier‘s Parties may agree on limiting the carrier‘s liability,
liability except when provided by law. provided that such agreement is not contrary to law,
morals or good customs.
Presumption as to fault and negligence
Presumption of fault or negligence applies. No fault or negligence is presumed.
As to laws applicable on damages
Law on common carriers. Law on obligations and contracts.

37. When does a common carrier transform to a private carrier?

A common carrier becomes a private carrier when it undertakes to carry a special cargo or chartered
to a special person special person only. (Malayan Insurance Co., Inc. vs. Philippine First Insurance G.R
No. 184300, July 11, 2012)
38. What is the diligence required of a common carrier?
Extraordinary diligence. Following Article 1755 of the Civil Code, common carriers have the obligation
to carry passengers safely as far as human care and foresight can provide, using the utmost diligence
of very cautious persons, with due regard for all the circumstances. (Sanico vs. Colipano, G.R. No.
209969. September 27, 2017, J. Caguioa)

39. Is extraordinary diligence required only in the transportation of passengers and carriage
of goods?
No. Common carriers are required to exercise extraordinary diligence in the performance of their
obligations under contracts of carriage. This extraordinary diligence must be observed not only in the
 transportation of goods and services but also in the issuance of the contract of carriage, including its
ticketing operations.

40. What is the Limited Liability Rule in maritime accidents? (1982, 1985, 1988, 1989, 1991,
1994, 1997, 1999, 2000, 2008, 2011, 2016, 2018 Bar)
The limited liability doctrine applies not only to the goods but also in all cases like death or injury of
passengers (Heirs of Amparo Delos Santos v. Court of Appeals, G.R. No. 51165, June 21, 1990).

41. Who may avail of the Limited Liability Rule?

The only person who could avail of the Limited Liability Rule is the shipowner—he is the very person
whom the Rule has been conceived to protect—and charterers cannot invoke this as a defense. (Dela
Torre vs. Court of Appeals, G.R. No. 160088, July 13, 2011)

42. Explain the Doctrine of Inscrutable Fault. (1988, 1995, 1997, 1998 Bar)
Under the “doctrine of inscrutable fault”, where fault is established but it cannot be determined which
of the two vessels were at fault, both shall be deemed to have been at fault. (Art. 828 Code of
Commerce in relation to Art. 827 of Code of Commerce)

43. Thinking that the impending typhoon was still 24 hours away, MV Pioneer left port to sail
for Leyte. That was a miscalculation of the typhoon signals by both the shipowner and the
captain as the typhoon came earlier and overtook the vessel. The vessel sank and a number
of passengers disappeared with it. Relatives of the missing passengers claimed damages
against the shipowner. The shipowner set up the defense that under the doctrine of limited
liability, his liability was co- extensive with his interest in the vessel. As the vessel was
totally lost, his liability had also been extinguished.
a. Discuss the doctrine of limited liability in maritime law. (1982, 1985, 1988, 1989, 1991,
1994, 1997, 2008 BAR)
Under the doctrine of limited liability in maritime law, the liability of the shipowner arising from the
operation of a ship is confined to the vessel, equipment, and freight, or insurance, if any, so that if the
shipowner abandoned the ship, equipment, and freight, his liability is extinguished. However, the
doctrine of limited liability does not apply when the shipowner or captain is guilty of negligence.

b. Assuming that the vessel was insured. May the claimants go after the insurance
proceeds?
YES. In case of a lost vessel, the claimants may go after the proceeds of the insurance covering the
vessel.

44. What is the rule on Abandonment with respect to the Limited Liability Rule? (1988 Bar)
Abandonment of the vessel, its appurtenances and freightage, is an indispensable requirement before
the shipowner or ship agent can enjoy the benefits of limited liability principle. If the carrier does not
want to abandon the vessel, then he is still liable beyond the value of the vessel.

II. OBLIGATIONS AND LIABILITIES

OBLIGATIONS
45. What are the duties of a common carrier with respect to the transport of goods?
DUTY TO A common carrier that is granted a certificate of public convenience is duty bound to accept
ACCEPT cargo without any discrimination. (FC Fisher v. Yangco Steamship Company, et al., G.R. No.
8095, November 5, 1914)
 GOODS FOR
TRANSPORT
Responsibility of common carrier ends upon actual or constructive delivery to consignee or
person who has the right to receive the goods. Likewise, the obligation of a common carrier
ceases when the goods are turned over to the customs authorities.
DUTY TO
DELIVER IN
The extraordinary responsibility of the common carrier lasts from the time the goods are
THE PLACE
unconditionally placed in the possession of, and received by the carrier for transportation
AGREED
until the same are delivered, actually or constructively, by the carrier to the consignee, or
UPON
to the person who has a right to receive them, without prejudice to the provisions of Article
1738. (Art. 1736, NCC)

DUTY TO Common carriers are not obligated by law to carry and to deliver merchandise, and persons
MAKE are not vested with the right to prompt delivery, unless such common carriers previously
TIMELY assume the obligation to deliver at a given date or time. (Mendoza vs. Philippine Air Lines,
DELIVERY OF Inc., G.R. No. L-3678, February 29, 1952)
THE GOODS
General Rule: Carrier may only inquire on the nature of the passenger's baggage but not
DUTY TO search or inspect its contents (Nocum v. Laguna Tayabas Bus Company G.R. Na L-23733,
TAKE CARE October 31, 1969).
OF THE
PASSENGERS' Exception: Airline companies are required to inspect each and every cargo brought into
BAGGAGE the aircraft (Sec. 8, RA No 6235 also known as "An Act Prohibiting Certain Acts Inimical to
Civil Aviation, and For Other Purpose").

46. What is the right of stoppage in transit?

The right of stoppage in transit is the right of an unpaid seller to resume possession of the goods at
any time while they are in transit, and he will then become entitled to the same rights in regard to the
goods as he would have had if he had never parted with the possession. (Art. 1530, NCC)

The common carrier is not bound to exercise extraordinary diligence when the shipper or owner has
made use of the right of stoppage in transit. (Art. 1737, NCC)

47. What are the duties of a common carrier with respect to the transport of passengers?

As a rule, the relation of carrier and passenger does not cease at the moment the
DUTY TO passenger alights from the carrier's vehicle at a place selected by the carrier at the point
TRANSPORT THE of destination, but continues until the passenger has had a reasonable time or a
PASSENGER reasonable opportunity to leave the carrier's premises. And, what is a reasonable time or
SAFELY TO HIS a reasonable delay within this rule is to be determined from all the circumstances. Thus,
DESTINATION a person who, after alighting from a train, walks along the station platform is considered
still a passenger. (La Mallorca vs. CA, G.R. No. L-20761, July 27, 1966)
DUTY TO MAKE
SURE THAT THE Passengers do not contract merely for transportation. They have a right to be treated by
CARRIER’S the carrier's employees with kindness, respect, courtesy and due consideration. They are
EMPLOYEES entitled to be protected against personal misconduct, injurious language, indignities and
TREAT THE abuses from such employees. So it is, that any rule or discourteous conduct on the part
PASSENGERS of employees towards a passenger gives the latter an action for damages against the
WITH carrier. In requiring compliance with the standard of extraordinary diligence from
KINDNESS, common carriers, the law seeks to compel them to control their employees, to tame their
RESPECT, reckless instincts, and to force them to take adequate care of human beings and their
COURTESY AND property. (Sps. Fernando vs. Northwest Airlines, Inc., G.R. No. 212038, February 8,
DUE 2017)
CONSIDERATION
DUTY TO The basic rule that applies to carriage of goods shall also apply to carriage of passengers,
TRANSPORT that is, the carrier must commence its trip within a reasonable time. The carrier shall be
 PASSENGER made liable when the vessel or vehicle is unreasonably delayed. (Sps. Fernando vs.
WITH Northwest Airlines, Inc., G.R. No. 212038, February 8, 2017)
REASONABLE
DISPATCH

48. What is the Doctrine of Continuing Offer?

It is the duty of the carriers of passengers to stop their conveyances for a reasonable length of time in
order to afford passengers an opportunity to board and enter, and they are liable for injuries suffered
by boarding passengers resulting from the sudden starting up or jerking of their conveyances while
they do so. (Dangwa Transportation Co., Inc. vs CA, G.R. No. 95582, October 7, 1991)

49. When does the duty of a common carrier to exercise extraordinary diligence begin?
By Land By Sea By Air
Duty to exercise utmost diligence begins Duty to exercise utmost
when a passenger has accepted the offer, as diligence begins upon the
when he is attempting to board the issuance of the contract of
conveyance. Duty to exercise utmost carriage.
diligence begins as soon as a
The common carrier is duty bound to stop person with bona fide Ticketing, as the act of issuing
their conveyances for reasonable length of intention of taking passage the contract of carriage, is
time in order to afford passengers an places himself in the necessarily included in the
opportunity to board and enter, and they are employees and is accepted as exercise of extraordinary
liable for injuries suffered by boarding a passenger. diligence. (Manay, Jr. vs. Cebu
passengers resulting from the sudden Air, Inc., G.R. No. 210621, April
starting up or jerking of their conveyances 4, 2016)
while they do so. (Continuing Offer Doctrine)

LIABILITIES

50. What is the liability of a common carrier with respect to hand-carried baggage?
The baggage of passengers in their personal custody or in that of their employees while being
transported shall be regarded as necessary deposits. The common carrier shall be responsible for such
baggage as depositaries, provided that: Notice was given to the common carrier, or to their employees,
of the baggage brought by the passengers; and Passenger took the Precautions which the common
carrier advised relative to the care and vigilance of their baggage (Art. 1998, NCC)

51. What is the liability of a common carrier with respect to checked-in baggage?
Article 1754 of the Civil Code does not exempt the common carrier from liability in case of loss, but
only highlights the degree of care required of it depending on who has the custody of the belongings.
Hence, the law requires the common carrier to observe the same diligence as the hotel keepers in case
the baggage remains with the passenger; otherwise, extraordinary diligence must be exercised .
(Sulpicio Lines, Inc. vs. Sesant, G.R. No. 172682. July 27, 2016)

52. May a common carrier be held liable even when the baggage is not declared and charges
are not paid?
A common carrier is liable for the loss of baggage although not declared and the charges not paid, if it
accepted them for transportation. Where the common carrier accepted its passenger's baggage for
transportation and even had it placed in the vehicle by its own employee, its failure to collect the freight
charge is the common carrier's own lookout. It is responsible for the consequent loss of the baggage.
(Sarkies Tours Philippines vs. CA, G.R. No. 108897 October 2, 1997)
53. Distinguish negligence based on culpa contractual and based on culpa aquiliana.

CULPA CONTRACTUAL CULPA AQUILIANA

As to Source of Obligation
Contract. Quasi-Delict.
As to Liability of Employee
No liability there being no privity of contract. Solidarily liable with the Employer.
As to Availability of Defense
Due diligence in the selection and supervision of Due diligence in the selection and supervision of the
the employee is not a defense. employee is a defense under Article 2180.
As to What Capacity Liable
Liable as a contracting party. Liable as an Employer.

54. When does a common carrier become liable under culpa contractual?

A common carrier becomes liable under culpa contractual for the death of, or injury to, passengers
when:
(i) Through the negligence or willful acts of its employees; or
(ii) Willful acts or negligence of other passengers or of strangers, if common carrier's employees
through the exercise of due diligence could have prevented or stopped the act. (Light Rail Transit
Authority vs. Navidad, G.R. No. 145804. February 6, 2003).

55. What is the liability of a common carrier for the acts of others?

For acts of employees – Common carriers are liable for the deaths of or injuries to passengers through
the negligence or willful acts of 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. (Art. 1759, par. 1,
NCC) This liability does not cease upon proof that they exercised all the diligence of a good father of
the family in the selection and supervision of their employees. (Art. 1759, par. 2, NCC)

For acts of other passengers and strangers – A common carrier is responsible for injuries suffered by
a passenger on account of the willful acts or negligence of the passengers or of strangers, if the
common carrier’s employees through the exercise of diligence of a good father of the family could have
prevented or stopped the act or omission. (Art. 1763, NCC)

56. What is the registered owner rule? (1988, 2012 Bar)

Under this rule, the person who is the registered owner of a vehicle is liable for any damage caused by
the negligent operation of the vehicle although the same was already sold or conveyed to another
person at the time of the accident. (Filcar Transport Services vs. Espinas, G.R. No. 174156, June 20,
2012)

Exception: When the vehicle was stolen from a garage without the owner‘s knowledge and consent.
(Duavit vs. Court of Appeals, GR 82318, May 18, 1989)
III. DEFENSES AVAILABLE TO A COMMON CARRIER (1994, 1995, 1996, 1998, 2001, 2002,
2009, 2016, 2019 Bar)

57. What is the theory of presumption of negligence?

Under this theory, 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. (Unitrans International Forwarders, Inc. v. Insurance
Company of North America, G.R. No. 203865, March 13, 2019, J. Caguioa)

58. WWCF arranged with Spouses Fabre, owner of a minibus, for the transportation of its 33
members from Manila to La Union and back. Cabil, the driver, was unfamiliar with the area
took a detour. The road was slippery because it was raining, causing the bus, which was
running at the speed of 50 kilometers per hour, to skid to the left road shoulder. The bus
turned over and landed on its left side. Several passengers were injured. The trial court
held Spouses Fabre (common carrier) and Cabil (driver) solidarily liable for the injuries
suffered by the passengers. Spouses Fabre interposes as defense that they observed due
diligence in the selection and supervision of the employee. Are they correct?
No. As common carriers, the Fabres were bound to exercise "extraordinary diligence" for the safe
transportation of the passengers to their destination. This duty of care is not excused by proof that
they exercised the diligence of a good father of the family in the selection and supervision of their
employee. As Art. 1759 of the Code provides: Common carriers are liable for the death of or injuries
to passengers through the negligence or wilful 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.
(Spouses Fabre v. Court of Appeals, G.R. No. 111127, July 26, 1996)

59. Define Contributory Negligence.

Contributory negligence is conduct on the part of the injured party, contributing as a legal cause to the
harm he has suffered, which falls below the standard to which he should conform for his own
protection. (Sealoader Shipping Corp. vs. Grand Cement Manufacturing Corp., G.R. Nos. 167363 &
177466, December 15, 2010)

60. What is the Doctrine of Last Clear Chance?

When both parties involved in the accident were both negligent, the negligence of the party will not be
considered the proximate cause if the other party has the last clear chance of avoiding the injury. Thus,
if the plaintiff has the last clear chance of avoiding the injury, the defendant may no longer be held
liable. In such a case, the negligence of the plaintiff – which is not just contributory negligence – will
be considered an efficient intervening cause.

When not applicable: To collision of vessels at sea under the Code of Commerce; both are solidarily
liable for the loss of cargo carried by either, not only in the case where both vessels may be shown to
be actually blameworthy but also in the case where it is obvious that only one was at fault but the
proof does not show which. (Government of the P. I. vs. Philippine Steamship Co., G.R. No.
18957, January 16, 1923)
IV. EXTENT OF LIABILITY (1991, 1996 Bar)

61. What is the required proof in recovery of damages from a common carrier?
Damages cannot be presumed and courts in giving an award, must point out specific facts that could
afford a basis for measuring whatever compensatory or actual damages are borne. Burden of proof
rests on the plaintiff who is claiming actual damages against the carrier.

62. What is the extent of recovery of damages in a breach of contract of carriage?

In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable
shall be those that are the natural and probable consequences of the breach of the obligation, and
which the parties have foreseen or could have reasonably foreseen at the time the obligation was
constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages
which may be reasonably attributed to the non-performance of the obligation. (Art. 2201, NCC)

63. What are the kinds of limiting stipulations?

1. Exculpatory contracts – those exempting the carrier from any and all liability for loss or damage
occasioned by its own negligence.
2. Unqualified limitation – provides for unqualified limitation of such liability to an agreed valuation.
3. Limiting liability – limiting the liability of the carrier to an agreed valuation unless the shipper
declares a higher value and pays a higher rate of freight.

64. What is the limit of liability under the Warsaw convention?

Liability to Liability for Checked-in Liability for Hand-Carried Baggage – 5,000 francs
Passengers – Baggage - 250 francs per per passenger
250,000 francs kilogram
per passenger Guatemala Protocol: $1,000 per passenger
Guatemala Protocol: Note: The Guatemala Protocol has not yet been ratified.
Guatemala $1,000 per kilogram
Protocol: Exception: In case of special Montreal Agreement and CAB Rules on Limit on
$100,000 per declaration of value and Liability
passenger payment of a supplementary (2012 Bar)
Exception: sum by consignor, the carrier Under Sec. 15 of the Economic Regulation No. 9 of the
Agreement to a is liable to not more than the CAB, in case of death or bodily injury sustained by a
higher limit declared sum unless it proves passenger, the relevant Convention and inter-carrier
that the sum is greater than agreement shall apply.
the actual value.
However, if international carriage is performed under
the 1966 Montreal Intercarrier Agreement:
i. For International Flights – USD 75, 000.00 except
if a provision is made for a separate award for legal
fees, then the limit will be USD 58, 000.00
ii. For Domestic Flights – compensation shall be
based on the stipulated amount in the relevant
convention which governs international flights, the
same to be given in Peso denominations.

Note: The liability under such limit is independent of the

negligence of the carrier.
 III. CORPORATION LAW
(Provisions of B.P. Blg. 68, as amended by R.A. No. 11232)
I. GENERAL PRINCIPLES

65. What is a corporation?

A corporation is an artificial being created by operation of law, having the right of succession and the
powers, attributes, and properties expressly authorized by law or incidental to its existence. (Section
2, Revised Corporation Code [RCC])

66. What are the classes of corporations?

As to the existence of shares of stock

Stock corporations (2001, 2004 Bar) Non-Stock Corporation (2004 Bar)
Stock corporations are those which have capital stock
divided into shares and are authorized to distribute to
Non-stock corporations are those which have no capital
the holders of such shares, dividends, or allotments of
stock, do not issue stocks, and do not distribute
the surplus profits on the basis of the shares held. All
dividends to its members.
other corporations are nonstock corporations. (Sec. 3,
RCC)

As to whether for public or private purpose

Public corporation Private corporation Quasi-public corporations
(2004 Bar) (2004 Bar)
Quasi-public corporations are
A public corporation is created corporations like railroad and canal
for the purpose of government corporations that are engaged in
A private corporation is formed for
and management of public private business affected with public
some private purpose, welfare,
affairs founded by the State interest. (Philippine National
benefit, aim, or end.
and managed by it for Railways vs. Intermediate Appellate
governmental purposes. Court, G.R. No. 70547 January 22,
1993)

As to governing law
Government-owned and controlled corporation Private Corporation
(GOCC)
What is the nature of government-owned and What is the governing law of private
controlled corporations? corporations?
GOCCs are regarded as private corporations. That the Private corporations are governed by the RCC.
government may own the controlling shares in the
corporation does not diminish the fact that the latter What is the governing law for non-chartered
owes its existence to the Corporation Code. (Philippine GOCCs?
National Construction Corp. vs. Pabion, G.R. No. The RCC is also the governing law for non-chartered
131715, December 8, 1999) GOCC.

What governs GOCCs with original charter or

created by special law?
GOCCs with original charter or created by special law
are governed by the special law creating it; civil service
laws Section 16, Article XII of the 1987 Constitution
expressly prohibits the creation or establishment of
private corporations through special laws except
government-owned or controlled corporations.
(Veterans Federation of the Philippines vs. Reyes, G.R.
No. 155027, February 28, 2006)
What governs GOCCs incorporated under the
general law of the RCC?
GOCCs incorporated under the general law or RCC are
governed by the RCC and the Labor Code (Salenga vs.
Court of Appeals, G.R. No. 174941, February 1, 2012)

As to their legal right to corporate existence (2012 Bar)

De Jure Corporation De Facto Corporation
A de jure corporation or “a matter of law” A de facto corporation or “a matter of fact” corporation
corporation is a corporation that fulfilled all is a coporation organized with colorable compliance with
requirements mandated by law and can successfully the requirements mandated by law and shall not be
resist a suit by the State to challenge its existence inquired collaterally in any private suit in which such
corporation may be a party. Such inquiry may be made
by the Solicitor General in a quo warranto proceeding.
(Sec. 19, RCC)

As to relationship of management and control

Holding Subsidiary corporation Affiliates Parent company
corporation (2012 Bar)
A holding corporation A subsidiary corporation is Two companies are A parent company owns
holds stocks in other a corporation owned or affiliates when one enough voting stock in
companies for controlled by another company owns less than another company to
purposes of control company called the parent the majority of the voting control management and
company stock of the other operation.

As to place of incorporation
Domestic Corporation Foreign Corporation
A domestic corporation is formed, organized, or A foreign corporation is formed, organized, or existing
existing under Philippine laws; (Sec. 140, RCC) under laws other than those of the Philippines and whose
laws allow Filipino citizens and corporations to do
business in its own country or State. (Sec. 140, RCC)

As to whether they are for religious purpose or not

Ecclesiastical Lay
Ecclesiastical corporations are exclusive of spiritual Lay corporations are corporations for purposes other
persons; established for the furtherance of religion than (ibid.)
and for the perpetuation of church rights

As to whether they are for charitable purpose or not

Eleemosynary Civil
Eleemosynary corporations are corporations for Civil corporations are corporations organized for the
charitable and benevolent purposes benefit of its members.

As to whether they are open to the public or not

Open Corporations Close corporation
Open corporations are corporations formed to Close corporations are corporations whose articles of
openly accept outsiders or stockholders or investors incorporation provide that:

All of the corporation’s issued stocks of all classes,

exclusive of treasury shares, shall be held of record by
not more than a specified number of persons, not
exceeding twenty;

All issued stocks of all classes shall be subject to one or

more specified restrictions on transfer permitted; and
 Corporation shall not list in any stock exchange or make
any public offering of its stocks of any class (Sec. 95,
RCC)

Special corporations
Educational corporations Religious corporations
Non-stock Stock educational Corporation sole Religious societies

What is the limit What shall govern the A corporation sole is a Religious societies are
for the number of number and directors for corporation formed for the religious corporations
trustees in a non- institutions organized as purpose of administering incorporated by any
stock educational stock corporations? and managing, as trustee, religious society, religious
corporation? for institutions organized as the affairs, property and order, diocese, synod, or
Non-stock stock corporations, the temporalities of any district organization of any
educational number and term of religious denomination, religious denomination,
corporation are directors shall be governed sect, or church, by the sect or church. (Sec. 114,
corporations whose by the provisions on stock chief archbishop, bishop, RCC)
trustees of corporations (Sec. 106, priest, rabbi, or other
educational RCC) presiding elder of such
institutions organized religious denomination,
as nonstock sect or church. (Sec. 108,
corporations shall not RCC) (2004, 2012 Bar)
be less than five nor
more than fifteen,
provided that the
number of trustees
shall be in multiples of
five (Sec. 106, RCC)

67. What is a corporation by estoppel?

A corporation by estoppel is a group of persons who holds itself out as a corporation and enters into a
contract with a third person on the strength of such appearance. Anyone who assumes an obligation
to an ostensible corporation as such cannot resist performance thereof on the ground that there was
in fact no corporation. (Sec. 20, RCC)

68. What is a corporation by prescription?

A corporation by prescription are corporations not formally organized as such but has been duly
recognized by immemorial usage as a corporation, with rights and duties enforceable under the law.

69. What are corporations vested with public interest? (2020 Bar)
i. Publicly-held corporations under Section 17.2 of the SRC whose securities are registered with the SEC,
corporations listed with an exchange or with assets of at least P50,000,000.00 and having 200 or more
holders of shares, each holding at least 100 shares of a class of its equity shares;
ii. Banks and quasi-banks, non-stock savings and loan associations, pawnshops, corporations engaged
in money service business, preneed, trust and insurance companies, and other financial intermediaries;
and
iii. Other corporations engaged in businesses vested with public interest similar to the above, as may be
determined by the SEC. (Sec. 22, RCC)
 A. NATIONALITY OF CORPORATIONS
(1988, 1998, 2011, 2012, 2013 Bar)

70. What are the tests to determine the nationality of a corporation?

Incorporation Test
The nationality of the
corporation is determined by the
place of incorporation. A
corporation is a Philippine
national if it is organized and
existing under Philippine laws,
regardless of nationality of the
shareholders.
Control Test (1988)
The mode of determining the
nationality of a corporation engaged
in nationalized areas of activities,
provided for under the Constitution
and other applicable laws, where
corporate shareholders with foreign
shareholdings are present, by
ascertaining the nationality of the
controlling stockholder of the
corporation.
Shares belonging to corporations or
partnerships at least 60% of the
capital of which is owned by Filipino
citizens shall be considered as of
Philippine nationality, but if the
percentage of Filipino ownership in
the corporation or partnership is less
than 60%, only the number of shares
corresponding to such percentage
shall be counted as of Philippine
nationality. (Narra Nickel Mining and
Development Corp vs. Redmont
Consolidated Mines Corp., G.R.
195580, January 28, 2015)
Grandfather Rule (2016 Bar)
The percentage of Filipino equity in a
corporation engaged in nationalized
and/or partly nationalized areas of
activities, provided for under the
Constitution and other applicable
laws, is accurately computed, in
cases where corporate shareholders
with foreign shareholdings are
present, by attributing the
nationality of the second or even
subsequent tier of ownership to
determine the nationality of the
corporate shareholder.
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." —
the Grandfather Rule is a
"supplement" to the Control Test so
that the intent underlying the
averted Sec. 2, Art. XII of the
Constitution be given effect. (Narra
Nickel Mining and Development Corp
vs Redmont Consolidated Mines
Corp., G.R. 195580, Jan. 28, 2015)

71. To determine compliance to the required percentage of ownership, to which class of shares
should it be applied?
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 x x x. (Roy III vs. Herbosa, G.R. No. 207246, November 22, 2016,
J. Caguiao)

72. Who is a beneficial owner?

Any person who, directly or indirectly, through any contract, arrangement, understanding, relationship
or otherwise, has or shares voting power (which includes the power to vote or direct the voting of such
security) and/or investment returns or power (which includes the power to dispose of, or direct the
disposition of such security) x x x. (Roy III vs. Herbosa, G.R. No. 207246, November 22, 2016, J.
Caguiao)

73. How do you construe full beneficial ownership?

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title
is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or
 transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals. (Roy III vs.
Herbosa, G.R. No. 207246, November 22, 2016, J. Caguiao)

B. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY

(1995, 1996, 199, 2000, 2011, 2012, 2014, 2018 Bar)
74. What is the Doctrine of Separate Juridical Personality?
A corporation has a personality separate and distinct from its members. A corporation has a legal
personality separate and distinct from that of people comprising it. (Secosa, et. al. vs. Heirs of Erwin
Francisco, G.R. No. 160039, January 29, 2004)

75. When does a private corporation commence its corporate existence?

A private corporation organized under this Code commences its corporate existence and juridical
personality from the date the Commission issues the certificate of incorporation under its official seal.
(Sec. 18, RCC)

76. When does a corporation sole commence its corporate existence?

A corporation sole, after filing the verified articles of incorporation along with the documents required
in Sec. 110 with the SEC, immediately becomes endowed with corporate personality. This serves as an
exception to the rule that a corporation acquires juridical personality only upon the issuance of a
certificate of incorporation by the said government agency.

77. What is the principle of limited liability?

By virtue of that doctrine, stockholders of a corporation enjoy the principle of limited liability: the
corporate debt is not the debt of the stockholder. Thus, being an officer or a stockholder of a
corporation does not make one's property the property also of the corporation. (Bustos vs. Millian
Shoes Inc., G.R. 185024, April 4, 2017)

78. May a corporation be entitled to moral damages? (1998 Bar)

Exceptions:
1. When the corporation has a good reputation that is debased,
resulting in its humiliation in the business realm. (Coastal Pacific
General rule: A corporation is not
Trading, Inc. vs. Southern Rolling Mills Co., Inc., G.R. No.
entitled to moral damages because it
118692, July 28 2006);
has no feelings, no emotions and no
senses. (ABS-CBN vs. Court of Appeals,
2. In cases of libel, slander or any other form of defamation. Article
GR. 128690, January 1999)
2219(7) does not qualify whether the plaintiff is a natural or
juridical person. (Filipinas Broadcasting Network, Inc. vs. AMEC-
BCCM, G.R. No. 141994, January 17, 2005)

C. DOCTRINE OF PIERCING OF THE CORPORATE VEIL

(1994, 1996, 2001, 2004, 2006, 2014, 2019 Bar)

79. What is the Doctrine of Piercing the Corporate Veil?

The corporation’s separate juridical personality may be disregarded when there is an abuse of the
corporate form. Whenever the doctrine applies, the principal and the conduit will be treated as one;
the controlled corporation will be deemed to have, “so to speak, no separate mind, will or existence of
its own, and is but a conduit for its principal.” (WPM International Trading, Inc. and Warlito Manlapaz
vs. Labayen, G.R. No. 182770, September 17, 2014)
80. Is the doctrine of piercing the corporate veil applicable to Non-Stock Organizations?

Yes. Non-profit corporations are not immune from the doctrine of piercing the corporate veil. The
court’s view piercing of the corporation as an equitable remedy, which justifies said courts to scrutinize
any organization however organized and in whatever manner it operates. Moreover, control of
ownership does not hinge on stock ownership. (Intl. Academy of Management and Economics vs.
Litton and Company, G.R. No. 191525, Dec. 13, 2017)

81. What are the kinds of piercing the corporate veil?

Traditional veil-piercing Reverse piercing action

a court disregards the existence
of the corporate entity so a
claimant can reach the assets of
a corporate insider (Intl.
Academy of Management and
Economics vs. Litton and
Company, G.R. No. 191525,
Dec. 13, 2017)
flows in the opposite direction (of traditional corporate veil-piercing) and
makes the corporation liable for the debt of the shareholders
Outside Reverse Inside Reverse Piercing — in insider
Piercing — occurs when a reverse piercing, the controlling members will
party with a claim against attempt to ignore the corporate fiction in
an individual or corporation order to take advantage of a benefit available
attempts to be repaid with to the corporation, such as an interest in a
assets of a corporation lawsuit or protection of personal assets. (Intl.
owned or substantially Academy of Management and Economics vs.
controlled by the defendant Litton and Company, G.R. No. 191525, Dec.
13, 2017)

82. When is the application of piercing the corporate veil not justified?

The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not
sufficient to justify their being treated as one entity. If used to perform legitimate functions, a
subsidiary’s separate existence may be respected, and the liability of the parent corporation as well as
the subsidiary will be confined to those arising in their respective businesses. (Philippine National Bank
vs. Ritratto Group, Inc., G.R. No. 142616. July 31, 2001)

83. Respondents, who were employed as security guards by Petitioner Symex, were not paid
their overtime pay, rest day pay, SIL pay, and 13th month pay. The Respondents,
thereafter, filed a case against the Petitioner Corporation. Capt. Cura, the Operations
Manager of Petitioner Symex, told the respondents that they would not be given a duty
assignment unless they withdrew the complaint before the Labor Arbiter. Respondents
then amended their complaint before the Labor Arbiter to include illegal dismissal. In their
defense, petitioners Symex and its President and Chairman, Arcega, maintained that they
did not illegally dismiss the respondents and claimed that they are still included in the roll
of security guards. Should Arcega be held solidarily liable with Petitioner Symnex for
respondents’ monetary awards?

No. The Court has repeatedly emphasized that the piercing of the veil of corporate fiction is frowned
upon and can only be done if it has been clearly established that the separate and distinct personality
of the corporation is used to justify a wrong, protect fraud, or perpetrate a deception. Arcega is merely
one of the officers of Symex and to single him out and require him to personally answer for the liabilities
of Symex are without basis. To disregard the separate juridical personality of a corporation, the
wrongdoing must be established clearly and convincingly. It cannot be presumed. (Symex Security
Services, Inc. V. Magdalino O. Rivera, Jr.. G.R. No. 202613, November 08, 2017, Caguioa, J.)
II. DE FACTO CORPORATIONS VERSUS CORPORATION BY ESTOPPEL (1986, 1994, 2004 Bar)

84. Distinguish De Facto Corporation from Corporation by Estoppel.

DE FACTO CORPORATION CORPORATION BY ESTOPPEL

As to existence
It exists as a corporation, separate and distinct A corporation may exist on the ground of estoppel by
from the stockholders or members. virtue of the agreement, admission, or conduct of the
parties such that they will not be permitted to deny the
fact if the existence of the corporation. But it is neither
a corporation de jure nor de facto because of serious
defects in its incorporation or organization, and it does
not involve a theory that the irregular corporation has
acquired a corporate status generally.
As to who can question its corporate existence/
Only the State through the Solicitor General in a Any third person who relied in its representation in good
quo warranto proceeding. (Sec. 19, RCC) faith.
As to liabilities of the stockholders
Stockholder are liable in the same way as Stockholders are liable as general partners for all debts,
stockholders of a de jure corporation. They are liabilities and damages incurred. (Sec. 20, RCC)
liable only to the extent of their subscription to the
corporation. Those liable as general partners are
persons who assume themselves to be a
corporation when they have no legal authority to
do so. (Sec. 20, RCC).

III. CORPORATE POWERS

85. What are the powers of a corporation according to classification?

Express powers Implied or incidental powers Inherent powers

Those which are expressly
granted under the Revised
Corporation Code and those
embodied in the corporation’s
article of incorporation, as
sanctioned by the State.
These are the corporation’s “powers,
attributes and properties… incident
to its existence,” which may be
“essential or necessary to carry out
its purpose or purposes as stated in
its articles of incorporation.
Those which are not expressly
stated but are deemed to be within
the capacity of corporate entities.
The inherent powers of a
corporation are also included in the
enumeration of express powers
under Section 35(k) of the RCC.
Acts outside these powers are ultra
vires acts. The statutory provision
prohibiting them is Section 44 of the
RCC.

86. What is the power of the corporation to have perpetual existence?

Unlike the Old Corporation Code which prescribed a maximum corporate term of 50 years unless
extended, corporations are now expressly allowed to have perpetual existence unless their certificate
of incorporation provides otherwise.

87. Can a corporation’s life start without the By-Laws?

Yes. The existence of the power of the corporation to adopt By-Laws does not, ordinarily and of
necessity, make the exercise of such power essential to its corporate life or to the validity of its acts.
By-Laws are meant to regulate the manner of conducting the internal affairs of the corporation.
88. When must the By-Laws be filed?

R.A. No. 11232 removed the requirement that if the by-laws, if not simultaneously filed with the articles
of incorporation, must be subsequently filed with the SEC within one (1) month after receipt of official
notice of the issuance of the certificate of incorporation. However, Section 21 of the RCC now provides
that "if a corporation does not formally organize and commence its business within five (5) years from
the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the day
following the end of the five (5)-year period.”

89. May a corporation use its capital stock to purchase its own shares?
General rule: Corporation cannot use its capital stock to purchase its own shares, that is, corporate
assets below the Legal or Stated Capital but only Surplus Profits.
Exception:
a. In the redemption of redeemable shares (Sec. 8, RCC);
b. In case of deadlock in a close corporation, when SEC orders the corporation to purchase shares of
any stockholder at fair value (Sec. 103, RCC); and

90. What are the requirements to allow a corporation to acquire its own shares of stock?
1. The acquisition is for a legitimate corporate purpose or purposes; and
2. The corporation has unrestricted retained earnings in its books to cover the shares to be purchased
or acquired.

91. What are dividends?

Part or portion of the profits of the enterprise which the corporation sets apart for ratable distribution
among the holders of the capital stock. Dividends are corporate profits allocated, lawfully declared and
ordered by the directors to be paid to the stockholders on demand or at a fixed time.

92. Define property dividends, stock dividends, and cash dividends.

Stock Dividends Cash Dividends

Property Dividends
Paid in property instead of cash
where the surplus is in that form
and it is practicable to do so
distribute them among the
shareholders.
(1989, 2005, 2011 Bar)
When dividends are declared, the
earnings are distributed to the
stockholders in the form of shares of
stock. In involves the conversion of
surplus or undivided profits into
capital.
(1989, 2005 Bar)
Distribution of funds or money paid
to stockholders generally as part of
the corporation's current earnings or
accumulated profits.

93. What are Unrestricted Retained Earnings?

The amount of accumulated profits and gains realized out of the normal and continuous operations of
the company after deducting therefrom distributions to stockholders and transfers to capital stock or
other accounts which is:
1. Not appropriated by its Board of Directors 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 as special reserve for probable contingencies

94. What is an 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. The term "ultra
vires" is "distinguished from an illegal act for the former is merely voidable which may be enforced by
 performance, ratification, or estoppel, while the latter is void and cannot be validated. (Atrium
Management Corporation vs. Court of Appeals, G.R. No. 109491, February 28, 2001)

95. Differentiate Ultra Vires Act vs. Illegal Act

ULTRA VIRES ACT ILLEGAL ACT
As to Not necessarily an illegal act if it only one One that is contrary to law, and is
nature that is outside the conferred powers of the necessarily an ultra vires act.
corporation.
As to Merely voidable which may be enforced or Void and cannot be validated.
effect validated by performance, ratification, or
estoppel.

96. What are the consequences of ultra vires acts?

If the contract is
The courts will not set aside or interfere to deprive either party of what has been
executed on both
acquired under them
sides
If the contract is
It will not be enforced at the suit of either party, because their enforcement is not
executory on both
required by any equitable principles, and will be contrary to public policy
sides
If the contract is Courts in some jurisdictions, although not in all, will enforce in favor of the party who
executed on one has executed the same on his part against the other party who has received and
side, and retained the benefits on the ground that equitable principles and outweighing
executory on the considerations of public policy, require that the latter should not be permitted, while
other retaining the benefits of the contract, to escape liability on the ground that it was ultra
vires.
Contracts, whether
wholly executory or
Because they are made for a purpose not within the scope of the business of the
executed on one
corporation, the ultra vires purpose being unknown to the other party, are enforceable
side, apparently
against the corporation
authorized, but in
fact, ultra vires

97. What is the trust fund doctrine?

The trust fund doctrine provides that subscriptions to the capital stock of a corporation constitute a
fund to which the creditors have a right to look for the satisfaction of their claims. ( Ong vs. Tiu, G.R.
Nos. 144476 and 144629, April 8, 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.
98. Is the trust fund doctrine limited to the stockholders’ subscriptions?
The trust fund doctrine is not limited to stockholders’ subscriptions. The scope of the doctrine
encompasses not only the capital stock but also other property and assets generally regarded in equity
as a trust fund for the payment of corporate debts. (Halley vs. Printwell, Inc. G.R. No. 157549, May
30, 2011)

99. What is the scope of the trust fund doctrine?

The trust fund doctrine is not limited to reaching the stockholder's unpaid 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.

100. When is the trust fund doctrine violated?

a. When the corporation releases or condones payment of the unpaid subscription.
 b. When there is payment of dividends without unrestricted retained earnings.
c. When properties are transferred in fraud of creditors.
d. When properties are disposed of or undue preference is given to some creditors even if the
corporation is insolvent

IV. BOARD OF DIRECTORS AND TRUSTEES

101. How does a corporation exercise its powers?

A corporation exercises its corporate powers through its board of directors. This power may be validly
delegated to its officers, committees, or agencies. "The authority of such individuals to bind the
corporation is generally derived from law, corporate bylaws or authorization from the board, either
expressly or impliedly by habit, custom or acquiescence in the general course of business." (TERP
Construction Corporation vs Banco Filipino Savings and Mortgage Bank, G.R. No. 221771, 18
September 2019)

102. Who can exercise the corporate powers?

It is declared under Sec. 22 that corporate powers shall be exercised, and all corporate business
conducted by the board of directors, and this principle is recognized in the by-laws of the corporation
in question which contain a provision declaring that the power to make contracts shall be vested in
the board of directors. (TERP Construction Corporation vs Banco Filipino Savings and Mortgage Bank,
G.R. No. 221771, 18 September 2019)
103. What is the Doctrine of Centralized Management?

Under the doctrine or principle of centralized management, all corporate powers, all corporate
properties, and all corporate businesses of the corporation are vested with its board of directors or
trustees, except for cases that require shareholders’ or members’ approval. (Sec. 22, RCC)
104. What is the importance of the concentration of powers in the board of directors or
trustees?
The concentration in the board of the powers of control of the corporate business and appointment
of corporate officers and managers is necessary for efficiency in any large organization. Stockholders
are too numerous, scattered and unfamiliar with the business of a corporation to conduct its business
directly. And so the plan of corporate organization is for the stockholders to choose the directors who
shall control and supervise the conduct of corporate business. (Filipinas Port Services vs. Victoria Go,
et.al, G.R. No. 161886, March 6,2007)
105. What is the Doctrine of Apparent Authority? (2015 Bar)
The doctrine of apparent authority provides that even if no actual authority has been conferred on
an agent, his or her acts, as long as they are within his or her apparent scope of authority, bind the
principal. However, the principal's liability is limited to third persons who are reasonably led to believe
that the agent was authorized to act for the principal due to the principal's conduct. (Calubad vs
Ricarcen Development Corporation, GR No. 202364, 30 August 2017)

106. What is the Business Judgement Rule?

The Business Judgment Rule provides that 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. (Filipinas Port Services vs. Go
G.R. No. 161886, March 16, 2007)
 2. TENURE AND QUALIFICATIONS OF DIRECTORS OR TRUSTEES

107. Differentiate Term vs. Tenure

Term Tenure
As to Time Covered
the time during which the officer may claim to represents the term during which the incumbent
hold the office as of right and fixes the interval actually holds office
after which the several incumbents shall succeed
one another
As to applicability of Holdover Principle
not affected by the holdover includes holdover
As to Duration
Fixed by statute and it does not change simply May be shorter (or, in case of holdover, longer) than
because the office may have become vacant, nor the term for reasons within or beyond the power of the
because the incumbent holds over in office incumbent
beyond the end of the term due to the fact that
a successor has not been elected and has failed
to qualify.
(Valle Verde Country Club v. Africa, G.R. No. 151969, September 4, 2009)
For Non-stock educational corporations, trustees thereafter elected to fill vacancies, occurring before
the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected
thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. (Sec. 106,
RCC) (2012 Bar)

108. What is the term of the board of directors?

In stock corporations, Directors shall be elected for a term of one (1) year, while in non-stock
corporation, Trustees shall be elected for a term not exceeding three (3) years. (Sec. 22, RCC)

109. What is the term of directors and officers if no election is held?

If no election is held, the directors and officers shall hold position under a hold‐over capacity until
their successors are elected and qualified.

110. What is the holdover principle? (2013 Bar)

Director serves for a term of one (1) year and until their successors are elected and qualified. This
means that if no election is conducted or no qualified candidate is elected, the incumbent director
shall continue to act as such in a hold-over capacity until an election is held and qualified candidate
is so elected. (Detective and Protective Bureau vs. Cloribel, G.R. No. L-23428, November 29, 1968)

111. What are the instances wherein the BOD may be done away with?

In Close corporations, as they may do away with the BOD, management of corporate affairs may be
vested directly to the stockholders themselves in which case the stockholders are to be considered
as the directors; there is no specific number of years for the term of the director. (Sec. 96, RCC)

112. What are the qualifications of a director or trustee? (1998, 2000, 2001, 2003, 2005, 2014
Bar)

1. Must own at least 1 share of the capital stock in his own name, or if the corporation is a non-
stock corporation, he must be a member thereof; (Sec. 23, RCC)
 - A director who ceases to own at least one (1) share of stock or a trustee who ceases to be a
member of the corporation shall cease to be such. (Sec. 22, RCC)
- It is sufficient that the legal title as it appears in the books is in the director since the legal
title is what counts. What is material is the legal title, not beneficial ownership of the stock as
appearing on the books of the corporation. (Lee vs. Court of Appeals, G.R. No. 93695,
February 4,1992)
2. Must be a natural person, of legal age, possess full legal capacity.
3. Must not be convicted by final judgment of an offense punishable by imprisonment for a period
exceeding 6 years (Sec. 26, RCC)
4. Other qualifications as may be prescribed in the by-laws of the corporation. (Sec. 46, RCC)
- The by-laws, under Sec. 46, may also provide for additional qualifications and disqualifications
for membership in the Board. Although, it may not go away with the minimum qualifications
and disqualifications as provided for under Sec. 22 and 26.

113. The BOD of X Co, acting on a standing authority of the stockholders to amend the by-
laws, amended its by-laws so as to disqualify any of its stockholders who is also a
stockholder and director of a competitor from being elected to its BOD. Y, a stockholder
holding sufficient assets to assure him of a seat in the BOD, filed a petition with the SEC
for a declaration of nullity of the amended by-laws. He alleged among other things that
as a stockholder, he had acquired rights inherent in stock ownership such as the right to
vote and be voted upon in the election of directors. Is the stockholder‘s petition tenable?
(1998, 2000, 2001, 2003 Bar)
No. In a similar case Gokongwei vs. SEC, it was held that 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 BOD if he is engaged in any business which competes
with that of the Corporation is valid. A director stands in a competition 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. In the case at bar,
the petition of Y is not tenable because he has no vested right to be elected as a director. 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. Such amendment made in the by-laws is valid.

114. Who are Independent Directors? (2012 Bar)

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)

3. ELECTION AND REMOVAL OF DIRECTORS OR TRUSTEES

(1983, 1991, 2001, 2010, 2011, 2012, 2014, 2016)

115. How are independent directors elected?

Independent directors must be elected by the shareholders present or entitled to vote in absentia
during the election of directors. (Sec. 22, RCC)

116. What is Cumulative voting?

A matter of right granted to stockholders to multiply their number of shares by the number of the
directors to be elected, sum of which is his total number of votes, which he may cast in favor of only
one candidate or distribute them to many candidates as he may deem fit as long as it will not exceed
 his total number of votes. (Sec. 23, RCC) In stock corporations, it is a matter of right. In non-stock
corporations, it can only be allowed if it is provided in the Articles of Incorporation or By-laws. (Sec.
88, RCC)

117. What are the requirements in the election of corporate officers? (2010 Bar)
Immediately after their election, the directors of a corporation must formally organize and elect:
a. The president who must be a director;
b. The treasurer who may or may not be a director;
c. The secretary who should be a resident and a citizen of the Philippines; and
d. Such other officers as may be provided for in the by-laws.
e. Compliance officer – if the corporation is vested with public interest. (Sec. 24, RCC)

As a general rule, a person As an exception, a president As an exception to the exception,

may hold two (2) or more
positions concurrently
Note: The chairman of the board is not prohibited from being elected as treasurer or secretary (Sec.
24, RCC).
In a non-stock
corporation, other corporate
officers may be elected,
unless the articles and by-
laws provide otherwise,
directly by the members.
(Sec. 91, RCC)
CANNOT serve as a secretary or the president may serve as the
treasurer at the same time. secretary or treasurer at the same
time if the RCC allows the same.
(Sec. 24, RCC)
In a close corporation, they are to In case of a One Person
be elected by the stockholders, Corporation (OPC), the single
unless otherwise provided in the stockholder may be self-appointed
articles or by-laws. (Sec. 96, RCC) as treasurer but not as corporate
secretary. (Sec. 122, RCC)

118. What happens if no election is held?

The non-holding of elections and the reasons shall be reported to the SEC 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. If no new date has been designated,
or if the rescheduled election is likewise not held, the SEC may, upon the application of a stockholder,
member, director or trustee, and after verification of the unjustified non-holding of the election,
summarily order that an election be held.

119. May a director or trustee be removed from office? (2016 Bar)

General rule: Removal may be with or without cause.
Exception: If the director to be removed 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)

120. When may stockholders or members fill the vacancy in the position of board director or
trustee?
1. If the vacancy may be filled by the remaining directors or trustees but the board refers the matter
to stockholders or members;
2. Expiration of term
3. Removal
4. Increase in the number of directors
5. Grounds other than removal or expiration of term, e.g. death, resignation, abandonment,
or disqualification where the remaining directors do not constitute a quorum for the purpose of
filling the vacancy. (Sec. 28, RCC)
121. What is the notice requirement in removal?
If the removal was held in the same day, the removal must be so stated in the agenda and notice of
the said meeting. Such case is the same when it is held at a subsequent stockholders meeting either
by special or regular. Because one of the essential requirements for a valid meeting is NOTICE of the
agenda. (Sec. 28, RCC)

122. When may a vacancy be filled from among the officers of the corporation by unanimous
vote?
(1) The vacancy prevents the remaining directors from constituting a quorum; and
(2) Emergency action is required to prevent grave, substantial, and irreparable loss or damage to the
corporation. (Sec. 28, RCC)

3. DUTIES, RESPONSIBILITIES AND LIABILITIES FOR UNLAWFUL ACTS

(1991, 1993, 1994, 1996, 1997, 1999, 2005, 2011, 2012, 2015 Bar)

123. What is the Forbidden Profits Rule?

Directors and officers are fiduciary representatives of the corporation and as such, they are not
allowed to obtain any personal profit, commission, bonus or gain for their official actions. (Sec. 33,
RCC)

124. What is the Doctrine of Corporate Opportunity?

If there is presented to a corporate officer or director a business opportunity, which the corporation
has an interest or a reasonable expectancy, the self-interest of the officer or director will be brought
into conflict with that of his corporation. The law does not permit him to seize the opportunity even
if he will use his own funds in the venture. If he seizes the opportunity thereby obtaining profits to
the expense of the corporation, he must account all the profits by refunding the same to the
corporation. (Sec. 33, RCC)

125. What is the requirement for the ratification of the acts of the director?

The corporation may choose to ratify the acts of the director. However, this requires a vote of two-
thirds (2/3) of the outstanding capital stock. Otherwise, he must account all the profits by refunding
the same to the corporation. (Aquino, 2011, p. 310)

126. Differentiate Sections 30 and 33 of the Code regarding ratification.

Section 30
The second paragraph of Section 30 which
makes a director liable to account for profits if
he attempts to acquire or acquires interests
adverse to the corporation in respect to any
matter reposed in him in confidence as to which
equity imposes a disability upon him to deal in
his own behalf is not subject to ratification by
the stockholders.
Section 33
In Section 33, if a director acquires for himself a business
opportunity which should belong to the corporation, he is
bound to account for such profits unless his act is ratified by
the stockholders representing 2/3 of the outstanding capital
stock. Thus, if a violation of loyalty consists of a matter
which has been reposed in him in confidence, the same is
not subject to ratification. If the acquisition is merely that of
a business opportunity which has not been reposed in him
in confidence, the same may be subject to ratification by the
stockholders.
127. Are directors, trustees, and officers personally liable for their actions taken on behalf of
the corporation?

General rule: Members of the Board, who Exception:

purport to act in good faith for and on behalf of What are the instances when personal liability may
the corporation within the lawful scope of their attach to directors, trustees or officers of the
authority, are not liable for the consequences of corporation?
their acts. When the acts are of such nature and Exception: When sufficient proof exists on record that
done under those circumstances, they are the officers acted fraudulently, beyond his authority or
attributed to the corporation alone and no when the officer agrees to be personally liable on behalf
personal liability is incurred. (Price v. Innodata of the corporation.
Phils., Inc., G.R. No. 178505, September 30,
2008)
Note: The provisions on seizing corporate opportunity and disloyalty (Secs. 30 and 33, RCC) shall
also apply to corporate officers. (Price v. Innodata Phils., Inc., G.R. No. 178505, September 30, 2008)

128. What is the Special Fact Doctrine?

General rule: Exception:

Majority view: Directors only owe their duty to the
corporation. They owe no fiduciary duty to
stockholders, but they may deal with each other
at fair and reasonable terms, as if they were
unrelated. No duty to disclose facts known to the
director or officer. (Taylor vs. Wright, 53 N.Y.S.
423 May 29, 1945)
Note: Minority View (Realistic View) recognizes
the directors’ obligation to the stockholders
individually as well as collectively, and refuses to
permit him to profit at the latter’s expense by the
use of information obtained as a result of official
position and duties.
Conceding the absence of a fiduciary relationship in the
ordinary case, where special circumstances or facts are
present which make it inequitable for the director to
withhold information from the stockholder – courts
nevertheless hold that the duty to disclose arises and
concealment is fraud. Such as, concealment of the
defendant purchaser's identity (the corporate officer had
used an agent go between to avoid detection of his
actions by the seller here); or failure to disclose
significant facts that materially affected the price of the
stock. (Strong v. Repide, 213 U.S. 419, May 3, 1909)

129. Are directors or trustees entitled to compensation? (1991 Bar)

General rule: Exception:

As a general rule, directors or trustees are not
entitled to compensation in their capacity as such,
because they are supposed to render their
services to the corporation gratuitously, and the
return upon their shares adequately furnishes the
motives for service, without compensation.
(Western Institute of Technology, Inc., et al. vs
Salas, et al., G.R. No. 113032, August 21,1997 )
1. Reasonable per diems
2. As provided in the by-laws or upon a majority vote of
the stockholders at a regular or special meeting; and
3. If they are performing functions other than that of a
director.
However, in no case shall the total yearly compensation
of directors, as such directors, exceed 10% percent of
the net income before income tax of the corporation
during the preceding year.

V. STOCKHOLDERS AND MEMBERS (1973, 1989, 1994, 2011, 2013, 2019 Bar)

130. What is a Subscription Contract? (1989, 1994, 2011, 2013, 2019 Bar)

This is any contract for the acquisition of unissued stock in an existing corporation or a corporation
still to be formed notwithstanding the fact that the parties refer to it as a purchase or some other
contract. (Sec 59, RCC)
131. Differentiate Purchase/Transfer of Shares vs. Subscription of Shares.

Purchase/ Transfer of Shares Subscription of Shares

As to shares involved
Pertains to shares already issued by the Pertains to unissued shares of the corporation.
corporation.
As to how the rights can be exercised
Buyer/ transferee cannot exercise the rights Subscriber is entitled to exercise the rights of a
pertaining to the purchased sales without full stockholder even without full payment of the
payment of the purchase price, unless the sale subscription; provided the subscriber is not delinquent.
agreement otherwise provides.
As to when may creditor enforce payment
The creditor of the corporation cannot enforce The creditor of the corporation may enforce payment on
payment of the unpaid purchase price for lack the unpaid subscriptions under the trust fund doctrine.
of privity to the contract.

132. What is a Pre-incorporation Subscription?

A subscription of shares in a corporation still to be formed shall be irrevocable for a period of at least
six (6) months from the date of subscription, unless all of the other subscribers consent to the
revocation, or the corporation fails to incorporate within the same period or within a longer period
stipulated in the contract of subscription. No pre-incorporation subscription may be revoked after the
articles of incorporation is submitted to the Commission. (Sec. 60, RCC)

133. May the subscription of shares be revoked?

General rule: Exception:

A subscription for shares a. Lapse of a period of 6 months from the date of subscription;
of stock of a corporation b. Within six months from date of subscription and all the subscribers consent
still to be formed is to the revocation; or
irrevocable. c. The corporation fails to incorporate within the same period or within a longer
period stipulated in the contract of subscription.
Note: No pre-incorporation subscription may be revoked after the articles of incorporation is
submitted to the Commission. (Sec. 60, RCC)

134. What is the rule when consideration is not in cash?

Where the consideration is other than actual cash, or consists of intangible property such as patents
or copyrights, the valuation thereof shall initially be determined by the stockholders or the board of
directors, subject to the approval of the Commission. (Sec. 61, RCC)

1. RIGHTS AND OBLIGATIONS OF STOCKHOLDERS AND MEMBERS

135. What are the rights of stockholders?

Control and Participation in Proprietary Rights Other Fundamental Rights

Management Rights
1. Right to elect and remove
directors (Secs. 23 and 27,
RCC);
2. Right to adopt, amend, or
repeal the by-laws or adopt a
new by-laws (Secs. 45 and 47,
RCC);
3. Right to attend and vote in
person or by written proxy at
1. Right to pre-emption in the 1. Right to demand payment in the
issuance of shares (Sec. 38, exercise of appraisal right (Secs.
RCC); 40 and 80, RCC);
2. Right to dividends when 2. Right to recover stocks
declared (Sec. 42, RCC); unlawfully sold for delinquent
3. Right to issuance of stock payment of subscription (Sec.
certificate for fully paid shares 68, RCC);
(Sec. 62, RCC); 3. Right to inspect books and
records (Sec. 73, RCC); (1988
Bar)
 stockholder’s meetings (Secs.
49 and 57, RCC);
4. Right to compel the calling of
meetings (Sec. 49, RCC);
5. Right to approve or ratify
certain corporate actions (Sec.
50, RCC);
6. Right to enter into voting trust
agreements (Sec. 58, RCC);
and
7. Right to have the corporation
voluntarily dissolved (Secs. 134
and 135, RCC)
4. Right to transfer of stocks in 4. Right to be furnished with the
the corporate books (Sec. 62, most recent financial statements
RCC); or reports (Sec. 74, RCC); and
5. Right to exercise appraisal 5. Right to file individual,
right (Sec. 80, RCC); and representative, and/or derivative
6. Right to proportionate suit.
participation in the distribution
of assets in liquidation (Secs.
134, 135, and 139, RCC)

136. Meetings of the Board of Directors/Trustees vs. Stockholders/Members (1993 Bar)

Occurrence
Regular Stockholder or member Once a year
Special Board or trustee Once a month unless the By-laws provide otherwise
Notice
At least 21 days prior written notice unless the Bylaws otherwise
Stockholder or member
Regular provide
Board or trustee At least 2 days notice unless the By laws otherwise provide
Stockholder or member At least 1 week notice unless the By laws otherwise provide
Special
Board or trustee least 2 days notice unless the By laws otherwise provide
Quorum (2009 Bar)
At least majority of the outstanding capital stock or majority of
the members unless the RCC or Bylaws provide otherwise
Regular Stockholder or member
Bylaws may provide for a less or greater than majority in
determining quorum
At least majority of the board as fixed in the Articles of
Incorporation or Bylaws
Special Board or trustee
Bylaws may provide for a greater than but not lesser than
majority in determining quorum
Venue
Stockholder or Principal office
member If not practicable, city or municipality where principal office located
Board or trustee Anywhere unless otherwise provided in the Bylaws
Mode of Presence
Stockholder or In person or by proxy or through remote communication or in absentia when allowed
member by Bylaws
Proxy voting is not allowed.
Directors/Trustee If directors/trustees are voting in their capacity as stockholders/members, they may
vote by proxy.

a. DOCTRINE OF EQUALITY OF SHARES

137. What is the Doctrine of Equality of Shares?

Each share shall be equal in all respects to every other share, except as otherwise provided in the
articles of incorporation and in the certificate of stock. (Sec. 6, RCC)
 2. PARTICIPATION IN MANAGEMENT (1992 Bar)

138. When is voting through remote communication or in absentia allowed?

Voting through remote communication or in absentia shall be allowed only when so authorized in the
by-laws or by majority of the Board of Director or Trustees, except in corporation vested with public
interest where voting through remote communication or in absentia is available despite the absence
of provision in the by-laws allowing the same (Sec. 58, in relation to Sec. 49, RCC)

B. VOTING TRUST

139. Differentiate Voting Trust Agreement vs. Proxy

Voting Trust (1992 Bar) Proxy

As to It is an agreement whereby one or more
nature stockholders of a stock corporation may
create a voting trust for the purpose of
conferring upon a trustee or trustees the right
to vote and other rights pertaining to the
shares for a period not exceeding five (5)
years at any one time. (Sec. 58, RCC)
A proxy is a form of agency created in
instances when a person is unable to
personally cast his or her vote; hence, the act
of voting is delegated to another person.
(Cezar Yatco Real Estate Services, Inc., vs.
Bel-Air Village Association Inc., G.R. No.
211780, November 21, 2018)

Note: In case of a voting trust specifically

required as a condition in a load agreement,
said voting trust may be for a period
exceeding five (5) but shall automatically
expire upon full payment of the load. (Sec. 58,
RCC)
As to Voting trust is a control device by which a Through proxies, stockholders can ensure
purpose group may gain or retain control over the their participation and voting during the
management of the corporation. This control stockholders meeting and protect their
device is allowed as long as it is not entered interest even though they may not by
into for purposes of circumventing the laws physically present
against anti-competitive agreements, abuse
of dominant position, anti-competitive
mergers and acquisitions, violations of
nationality and capital requirements, or for
the perpetration of fraud.
As to
revocabili Irrevocable Generally revocable
ty
As to
Legal title to the share is transferred to the
transfer of No transfer of title
trustee
title
As to
cancellati
The certificate of stock shall be cancelled and No cancellation of the certificate shall be
on of
a new one issued in the trustee’s name made
certificate
s
As to
notarial
It must be notarized Need not be notarized
requireme
nt
As to who
The trustor-shareholder cannot vote The shareholder retains his right to vote
can vote
 As to use
in It cannot be for a specific meeting It can be for a specific meeting
meetings
As to use The proxy cannot further delegate his/her
of proxy The trustee can vote by proxy authority to vote and must therefore vote in
person
As to
The trustee votes in his/her own right as
presence The proxy is the agent of the shareholder
holder of legal title
of agency
As to
privilege The proxy, as such, cannot be elected as a
The trustee can be elected as a director
of the director
elected

3. PROPRIETARY RIGHTS
(1987, 1991, 1999, 2001, 2007, 2011, 2012, 2017, 2018, 2019 Bar)

a. RIGHT TO DIVIDENDS (1991, 2009 Bar)

140. Are stockholders entitled to the amount paid for the shares of dividends?

No. Stockholders are entitled to dividends pro rata based on the total number of shares that they
own and not on the amount paid for the shares.

141. Are stock corporations allowed to retain surplus profits in excess of 100%?

General rule: Exceptions:

Stock 1. When justified by definite corporate expansion projects or programs approved by the
corporations are board of directors; or
prohibited from 2. When the corporation is prohibited under any loan agreement with any financial
retaining surplus institution or creditor, whether local or foreign, from declaring dividends without its/his
profits in excess consent, and such consent has not yet been secured; or
of 100% of their 3. When it can be clearly shown that such retention is necessary under special
paid-in capital circumstances obtaining in the corporation, such as when there is need for special
stock reserve for probable contingencies (Sec. 43, RCC)

b. RIGHT TO INSPECT

142. What is the right to inspect?

Corporate records, regardless of the form in which they are stored, shall be open to inspection: by
any director, trustee, stockholder or member of the corporation in person or by a representative at
reasonable hours on business days, and a demand in writing may be made by such director, trustee
or stockholder at their expense, for copies of such records or excerpts from said records. (Sec. 73,
RCC)

143. Who cannot inspect the books and records?

PA requesting party who is not a stockholder or member of record, or is a competitor, director,

officer, controlling stockholder or otherwise represents the interests of a competitor shall have no
right to inspect or demand reproduction of corporate records.
144. What is a stock and transfer book?

A stock and transfer book is a book which records all stocks in the name of the stockholders
alphabetically arranged; the installments paid or unpaid on all stocks for which subscriptions have
been made, and the date of payment of any installment; a statement of every alienation, sale or
transfer of stock made, the date thereof, and by and to whom made; and such other entries as the
by-laws may prescribe.

145. Where shall the stock and transfer book be kept?

The stock and transfer book shall be kept in the principal office of the corporation or in the office of
its stock transfer agent and shall be open for inspection by any director or stockholder of the
corporation at reasonable hours on business days. (Sec. 73, RCC)

c. PRE-EMPTIVE RIGHT (1999, 2001, 2011, 2012, 2019 Bar)

146. What is pre-emptive right?

It is the preferential right granted to all stockholders of a corporation to subscribe to all issues or
disposition of shares of any class, in proportion to their respective shareholdings.(Sec. 38, RCC) The
right may be restricted or denied by the articles of incorporation, and subject to certain exceptions
and limitations. 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 will be deemed to have waived it.

147. What is the extent of the pre-emptive right of stockholders 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 articles of incorporation provide otherwise. (Sec. 101, RCC)

148. Differentiate Sec. 38 vs. Sec. 101

Sec. 38 Sec. 101

The shareholders of an ordinary stock
corporation cannot exercise their
preemptive right in case the shares are to
be issued in compliance with the laws
requiring minimum stock ownership or
shares issued in good faith with approval of
⅔ OCS for payment to the debts or
properties needed to be paid by the
corporation. The treasury shares are
included (Note Sec. 38 uses the word
“any”).
Sec. 101. In case of close corporation, if not denied by the
provision of AOI can exercise its preemptive right even for
money, payment of indebtedness or property. Exceptions will
not apply to close corporation, unless provided in the AOI.
Any shareholder of a close corporation, may for any reason,
compel the close corporation to buy shares which shall not
be less than the par or issued value, provided that the close
corporation has the sufficient funds exclusive of outstanding
capital stock.

d. RIGHT OF FIRST REFUSAL

149. What is the right of first refusal?

It is the right granted to stockholders of existing corporations to buy the shares of stock of another
stockholder at a fixed price and only valid if made on reasonable terms and consideration.
 4. REMEDIAL RIGHTS
(1988, 1993, 2003, 2004, 2005, 2009, 2012, 2014, 2016, 2019 Bar)

150. Define remedial rights.

These refer to remedies the stockholder may pursue depending on the issues involved.

151. What are the three kinds of suits?

Individual Suit Representative Suit Derivative Suit

An individual suit is A representative suit is A derivative suit is an action brought by one or more
instituted by a filed by a shareholder stockholders or members in the name and on behalf of
shareholder in his behalf and in the corporation to redress wrongs committed against it or
individually for his behalf likewise of other to protect or vindicate corporate rights, whenever the
own behalf against stockholders similarly officials of the corporation refuse to sue or are the ones
the corporation for situated and with a to be sued or hold control of the corporation. (Ching vs.
injury to his or her common cause against Subic Bay Golf & Country Club, Inc., GR No. 174353,
interest as a the corporation. September 10, 2014)
shareholder. The (Republic Bank vs.
right of action and Cuaderno, G.R. No. L- For whom is a derivative suit filed?
recovery belongs to 22399, March 30, A stockholder filing a derivative suit is not suing in his own
the shareholders 1967) behalf but in behalf of the corporation, the fact that his
(direct action). (Cua, shareholding is significant does not preclude him from
Jr. vs. Tan, G.R. No. filing the suit. It is also not necessary that a stockholder
181455-56, be a director to be entitled to file a derivative suit. (San
December 4, 2009) Miguel Corp. vs. Khan, G.R. No. 85339, August 11, 1989)

5. INTRA-CORPORATE DISPUTES
(1994, 1996, 1997, 2004, 2006, 2009, 2014, 2019 Bar)

152. What are intra-corporate disputes?

Remedies in case of any wrongful or fraudulent act of directors, officers or agents of the corporation

Individual or personal Representative or class suit Derivative suit

suit
Brought by a shareholder
for direct injury to his rights
such as denial to inspect
corporate books and
records or pre-emptive
rights
Cause of action belongs to
the individual stockholder
personally
(Villamor vs. Umale, G.R.
Nos. 172843, 172881,
September 24, 2014)
One or more members of a class
sue for themselves as a class or for
all to whom the right was denied,
either as an individual action or as
a derivative suit.
Cause of action belongs to a group
of stockholders filed to protect the
stockholders similarly situated
(Cua Jr. vs. Tan, G.R. No. 181455-
56, December 04, 2009)
Action based on injury to the
corporation – to enforce a corporate
right – wherein the corporation itself is
joined as a necessary party and
recovery is in favor of and for the
corporation. It is a suit granted to any
stockholder to institute a case to
remedy a wrong done directly to the
corporation and indirectly to the
stockholders.
Concerns a wrong to the corporation
itself. The real party in interest is the
corporation, not the stockholders filing
the suit. It concerns “a wrong to the
corporation itself.” The real party in
interest is the corporation, not the
stockholders filing the suit. The
stockholders are technically nominal
parties but are nonetheless the active
persons who pursue the action for and
on behalf of the corporation.
 (Florente vs. Florente, G.R. No. 174909,
January 20, 2016)

VI. CAPITAL STRUCTURE (1996, 2001, 2004, 2005, 2012, 2013, 2016, 2018 Bar)
153. Are stock corporations required to have a minimum capital stock?

Stock corporations shall not be required to have a minimum capital stock, except as otherwise
provided specifically provided by special law. (Sec. 12, RCC)

154. Who are incorporators?

Stockholders or members mentioned in the articles of incorporation as originally forming and
composing the corporation and who are signatories thereof. (Sec. 5, RCC)

155. Numbers and Qualifications of Incorporators

1. Natural or juridical persons (Sec. 10, RCC)
2. Two to Fifteen in number
3. Must be of legal age
4. Each must own or subscribe to at least one (1) share of the capital stock. (Sec. 10, RCC)
5. Juridical persons shall be represented by a duly authorized representative.
Note: Only a One Person Corporation (OPC) may have a single stockholder, as well as a sole director.
Accordingly, its registration must comply with the corresponding separate guidelines on the
establishment of an OPC.

1. SHARES OF STOCK
(1993, 1996, 2001, 2004, 2005, 2012, 2013, 2015, 2016, 2018 Bar)
156. Are shares of stock considered as personal properties?

Yes, 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 other person legally
authorized to make the transfer. (Teng vs. SEC, G.R. No. 184332, February 17, 2016)

157. What are the allowable forms of consideration for the issuance of shares of stock?

1. Actual cash paid to the corporation

2. Property, tangible or intangible actually received by the corporation AND necessary or convenient
for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock
issued;
3. Labor performed for or services actually rendered to the corporation
4. Previously incurred indebtedness of the corporation;
The indebtedness is the one that is acknowledged by the Board. Even indebtedness is subject to
the confirmation of the SEC regarding valuation.
5. Amounts transferred from unrestricted retained earnings to stated capital;
6. Outstanding shares exchange for stocks the event of reclassification or conversion
7. Shares of stock in another corporation; or
8. Other generally accepted forms of consideration. (Sec. 61, RCC)

158. What are the other generally acceptable forms of consideration?

1. Future services
2. Promissory notes
3. Value less than the stated par value (Sec. 61, par. 3, RCC)
 c. WATERED STOCK (1993, 2015 Bar)

159. What are “watered stocks”?

Stocks issued for a consideration less than the par or issued price thereof. (Sec. 61, RCC). “Water”
in the stock represents the difference between the fair market value at the time of the issuance of
the stock and the par or issued value of said stock. Both par and no-par stock can thus be watered
stock.

Note: No-par shares can be watered stock; when they are issued for less than their issued value as
fixed by the corporation in accordance with law.

160. What is the liability of directors for issuance of watered stock?

Directors and officers who consented to the issuance of watered stocks are solidarily liable with the
holder of such stocks to the corp. and its creditors for the difference between the fair value received
at the time of the issuance and the par or issued value of the share. (Sec. 64, RCC)

d. SITUS OF THE SHARES OF STOCK

161. What is the situs of the shares of stock?

General rule: Exception: Exception to the Exception:

The situs of shares of stock is the
domicile of the corporation (Tayag vs.
Benguet Consolidated Inc., G.R. No. L-
23145, November 29, 1968)
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. vs. Goldstar Elevator
Phils., Inc., G.R. No. 161026, Oct. 24,
2005)
In property taxation – the When a nonresident alien has shares
situs of intangible of stock in a domestic corporation,
property, such as shares then the situs will be in the Philippines;
of stocks, is at the and
domicile or residence of
the owner. (Wells Fargo For purposes of the estate tax, the
Banc et al. vs. Internal gross estate of a resident decedent,
Revenue, G.R. No. 46720, whether citizen or alien, or a citizen
June 28, 1940) decedent, whether resident or
nonresident, includes his intangible
personal property wherever situated.

e. CLASSES OF SHARES OF STOCK

(2009, 2012, 2013, 2018, 2020 Bar)

162. What are the classes of shares of stock?

CLASSIFICATION OF SHARES
It is a basic class of stock ordinarily and usually issued without extraordinary rights or
Common privileges and entitles the shareholder to a pro rata division of profits. It usually carries
with it the right to vote, and frequently, the exclusive the right to do so.
Preferred
Shares (2009, These entitle the shareholder to some priority on distribution of dividends and assets over
2013, 2018, those holders of common shares. Preferred shares may be issued only with a stated par
2020 Bar) value. (Sec. 6, RCC)

Voting Shares There shall always be a class or series of shares which have complete voting rights. (Sec.
(2020 Bar) 6, par. 2, RCC)
 In the absence of a provision in the Articles of Incorporation, and consistent with the
Doctrine of Equality of Shares, the shares in a stock corporation are considered voting
shares.
These shares may be deprived of voting rights when they are classified as redeemable
or preferred shares. (Sec. 6, par. 2, RCC)
Non-Voting Note: Redeemable shares or preferred share may still have voting rights.
Shares (2020
Bar) No share may be deprived of voting rights except those classified and issued as
“preferred” or “redeemable” shares, unless otherwise provided in this Code provided that
there shall always be a class or series of shares with complete voting rights. (Sec. 6, RCC)
Shares of stock issued with a value fixed in the AOI and the certificates of stock. Such
Par Value
face value merely represents the lowest possible price at which the corporation may issue
(2012 Bar)
the stock and are often well-below their trading or market value
Shares of stock issued without face value in the AOI or the certificates of stock. The
Board of Directors will set the issue price upon issuance of the stock as it is made available
for subscription.
No Par Value
Non-par value shares are deemed fully paid and non-assessable so holders of such are
(2012 Bar)
not liable to the corporation or its creditors.
The consideration received is treated as capital and cannot be declared as dividends.
These shares having no stated value in the Articles of Incorporation
These are shares which have been issued and fully paid for, but subsequently re-acquired
Treasury by the issuing corporation by purchase, redemption, donation or through some other
Shares lawful means. Such shares may again be disposed of for a reasonable price fixed by the
BOD. (Sec. 9, NCC)
Redeemable
Shares (2009, These are shares purchased or taken up by the corporation upon the expiration of a fixed
2013 Bar) period (Sec. 8, RCC); right to vote may be restricted (Sec. 6, RCC)

Founder’s These shares are classified as such in the Articles of Incorporation, which are given
Share certain rights and privileges not enjoyed by the owners of other stocks. These may be
given special preference in voting rights and dividend payments.
Escrow Shares Held by a third person to be released only upon the performance of a condition or the
happening of a certain event contained in the agreement.
Scripless Shares listed in the stock exchange traded without the necessity of complying with the
Shares formalities under the law on the transfer of shares but only a computerized book entry is
required to effect the transfer.

2. CERTIFICATE OF STOCK

163. What is a certificate of stock?

A piece of paper or document which evidences the ownership of shares and a convenient of
instrument for the transfer of title. It expresses the contract between the corporation and the
stockholder, but is not essential to the existence of a share of stock or the nature of the relation of
stockholder to the Corporation. (Makati Sports Club Inc. vs. Cheng, G.R. No, 178523 June 16, 2010)

164. When is the issuance of uncertificated shares allowed?

The Commission may require corporations whose securities are traded in trading markets and which
can reasonably demonstrate their capability to do so to issue their securities or shares of stocks in
uncertificated or scripless form in accordance with the rules of the Commission. (Sec. 62, RCC)

Scripless shares are shares which are held in a securities account. Scripless trading is a method of
securities trading in which the settlement of transactions take place via book entry instead of physical
exchange and delivery of securities certificates.
165. Is a stock certificate a negotiable instrument?

They are quasi-negotiable instruments in the sense that they may be transferred by endorsement
made by the owner or his atty-in-fact and delivery thereof to the transferor. But they are non-
negotiable instruments in the sense that they are subject to all the rights and defenses which the
true or lawful owner may have as may be obtained under a particular set of facts or circumstances.
(Embassy Farms, Inc. vs. Court of Appeals, G.R. No. 80682, August 13, 1990)

166. When is a certificate of stock issued to a subscriber?

A stock is issued to a subscriber upon the full amount of the subscription together with interest and
expenses in case of delinquent shares. (Sec. 63, RCC)

167. When may an action be brought against any corporation which shall have issued a
certificate of stock in lieu of that which is lost, stolen, or destroyed?

No action may be brought against any corporation which shall have issued a certificate of stock in
lieu of that which is lost, stolen or destroyed pursuant to the procedure provided by law, except in
cases of fraud, bad faith, or negligence on the part of the corporation and its officers. (Sec. 72, RCC)

3. DISPOSITION AND ENCUMBRANCE OF SHARES (1981, 1988, 2011, 2013 Bar)

168. What is the doctrine of indivisibility of subscription contract?

A stockholder who has not paid the full amount of his subscription cannot transfer part of his
subscription in view of the indivisible nature of a subscription contract

169. Is the sale of all shares not fully paid transferrable?

The entire subscription, although not yet fully paid, may be transferred to a single transferee, who
as a result of the transfer must assume the unpaid balance. It is necessary, however, to secure of
the consent of the corporation since the transfer of subscription rights and obligations contemplates
a novation of contract which under Article 1293 of the Civil Code cannot be made without the consent
be made without the consent of the creditor.

170. What are the conditions on the restrictions on the transfer of shares that a corporation
may impose?

The corporation may impose restrictions on the transfer of shares subject to the following requisites:
1. Restrictions on the right to transfer shares must appear in the articles of incorporation, in the by-
laws, as well as in the certificate of stock; otherwise, the same shall not be binding on any
purchaser in good faith
2. Restrictions shall not be more onerous than granting the existing stockholders or the corporation
the option to purchase the shares to the transferring stockholder with such reasonable terms,
conditions, or period stated
3. Upon the expiration of the said period, the existing stockholders of the corporation fails to exercise
the option to purchase, the transferring stockholder may sell their shares to any third person.
(Sec. 97, RCCP)

171. What are the requisites of a valid transfer?

a. There must be a delivery of the stock certificate;

 b. The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally
authorized to make the transfer;
c. No transfer shall be valid, except as between the parties, until the transfer is recorded in the books
of the corporation showing:
i. The names of the parties to the transaction
ii. The date of the transfer,
iii. The number of the certificate or certificates and
iv. The number of shares transferred (Teng vs. Securities and Exchange Commission, G.R. No.
184332, February 17, 2016)

VII. DISSOLUTION AND LIQUIDATION (1968, 1988, 1997, 2000, 2001, 2002, 2004, 2011,
2012, 2015 Bar)

172. Define Dissolution.

Dissolution of a corporation is the extinguishment or cancellation of the corporate franchise and the
termination of its corporate existence for business purposes.

1. MODES OF DISSOLUTION

VOLUNTARY DISSOLUTION (1968, 2002, 2012 Bar)

173. What are the voluntary modes of dissolution?

The voluntary modes of dissolution are:

a. Verified request for dissolution which does not prejudice the rights of creditors having a claim
against it;
b. Petition for dissolution where creditors are affected;
c. Shortening of the corporate term;
d. Merger or consolidation; and
e. Affidavit of dissolution by a corporation sole

174. What is the effect of the expiration of the corporate term?

In the case of expiration of corporate term, dissolution shall automatically take effect on the day
following the last day of the corporate term stated in the articles of incorporation, without the need
for the issuance by the Commission of a certificate of dissolution. (Sec. 136, RCC) (2004, 2012
Bar)

175. What are the Other Modes of Voluntary Dissolution?

1. Dissolution by merger or consolidation (Sec. 79, RCC)

Upon issuance of 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. Affidavit of dissolution by a
corporation sole

2. Affidavit of dissolution by a corporation sole (Sec. 113, RCC)

A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the
Commission a verified declaration of dissolution, setting forth:
a. the name of the corporation;
 b. the reason for dissolution and winding up;
c. the authorization for the dissolution of the corporation by the particular religious
denomination, sect or church; and
d. the names and addresses of the persons who are to supervise the winding up of the affairs
of the corporation

INVOLUNTARY DISSOLUTION (2012 Bar)

176. What is involuntary dissolution?

A corporation may be dissolved by the SEC motu proprio or upon filing of a verified complaint by any
interested party.

177. What are the grounds for involuntary dissolution of the corporation?
a. Non-use of corporate charter as provided under Section 21 of the RCC;
b. Continuous inoperation of a corporation as provided under Section 21 of the RCC;
c. Upon receipt of a lawful court order dissolving the corporation;
d. Upon finding by final judgment that the corporation procured its incorporation through fraud;
e. Upon finding by final judgment that the corporation:
1. Was created for the purpose of committing, concealing or aiding the SEC of securities
violations, smuggling, tax evasion, money laundering, or graft and corrupt practices;
2. Committed or aided in the SEC of securities violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices, and its stockholders knew of the same; and
3. Repeatedly and knowingly tolerated the SEC of graft and corrupt practices or other fraudulent
or illegal acts by its directors, trustees, officers, or employees.

178. What is the effect of the Non-use of corporate charter?

If a corporation does not formally organize and commence its business within 5 years from the date
of incorporation, its certificate of incorporation shall be deemed revoked as of the day following the
end of the five-year period. (Sec. 21, RCC)

179. What is the effect of the continuous inoperation of a corporation?

If a corporation has commenced its business but becomes inoperative for at least five (5) consecutive
years - delinquent status. A delinquent corporation shall have a period of two (2) years to resume
operations and comply with all requirements that the SEC shall prescribe.

180. What is the consequence of dissolution?

A corporation that has already been dissolved, be it voluntarily or involuntarily, retains no juridical
personality to conduct its business save for those directed towards corporate liquidation. In other
words, the corporation ceases to be a body corporate for the purpose of continuing the business for
which it was organized. But it shall, nevertheless, be continued as a body corporate for three (3)
years after the time when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose
of and convey its property and to divide its assets. (PNB vs. Court of First Instance of Rizal, et.al.,
G.R. No. 63201, May 27, 1992)

181. When does the juridical personality of a corporation cease?

Upon the expiration of the 3-year period to wind-up its affairs, the juridical personality of the
corporation ceases for all intent and purpose, and as a general rule, can no longer sue or be sued.
(Gonzales vs. Sugar Regulatory Administration, G.R. No. 84606, June 28, 1989)
 2. METHODS OF LIQUIDATION (1997 Bar)

182. What is liquidation?

The process of settling the affairs of the corporation after its dissolution. This consists of:
a. collection of all that is due the corporation
b. the settlement and adjustment of claims against it
c. the payment of its debts, and
d. 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
(Yu vs. Yukayguan, et al., G.R. No. 177549, June 18, 2009)

183. What is the purpose for the continued 3 years existence of a corporation?

The continued existence for three (3) years shall not be for the purpose of continuing the business,
but only for the purpose of:
1. Prosecuting and defending suits by or against it;
2. Enabling it to settle and close its affairs;
3. Permitting it to dispose of and convey its property; and
4. Allowing it to distribute its assets. (Sec. 139, RCC)

184. Under what instance shall the three-year period not apply?

When the liquidation of a dissolved corporation has been placed in the hands of a receiver, the three-
year period fixed by law within which to complete the task of liquidation will not apply, and the
receiver may institute all actions leading to the liquidation of the corporation even after the expiration
of 3 years. (Sumera vs. Valencia, G.R. 45485, May 3, 1939)

185. What is the effect if the three-year extended life has expired without a trustee or receiver
designated?

The board of directors (or trustees) itself may be permitted to continue as “trustees” by legal
implication to complete the corporate liquidation. Still in the absence of board of directors or trustees,
those having 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 representation with SEC.
(Clemente vs. Court of Appeals, G.R. No. 82407, March 27, 1995)

VIII. OTHER CORPORATIONS

1. CLOSE CORPORATIONS (1988, 1994, 1995 Bar)

186. Differentiate Close Corporations vs. Ordinary Corporations.

Close Corporation Ordinary Corporation

As to limit of stock There is a limitation on the number of There is no limit as to the number of
holders stockholders to twenty (20) shareholders
As to restriction on There must be a restriction on transfer A restriction on the transfer of shares need
transfer of shares. not be provided for
As to qualification Specific qualifications to be eligible as Qualifications of stockholders are not
and eligibility stockholder are usually provided for normally prescribed.
As to public
Public offering of shares is prohibited Public offering of shares is not prohibited.
offering of shares
 May be managed directly by the
As to conduct of Managed by the Board of Directors and
stockholders, as the Articles of
management not by the stockholders
Incorporation may provide
There are no rules on deadlock; the
As to rules on powers are given to SEC in case of
There are rules on deadlock
deadlock deadlock in case of close corporations are
not available
As to a Generally, a shareholder cannot withdraw
A shareholder may withdraw and ask
shareholder’s and compel the corporation to purchase
the corporation to purchase his shares
withdrawal his shares

187. When is there a deadlock?

There is a deadlock when the directors or stockholders are so divided respecting the management of
the corporation’s business and affairs that the votes required for any 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. (Section 103, RCCP)

2. NON-STOCK CORPORATIONS (1993 Bar)

188. What are the requisites of a non-stock corporation?

1. It does not have a capital stock divided in to shares.
2. No part of its income is distributable as dividends to its members
3. Non-stock corporations must 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. (Section 87, RCCP)

189. What is the rule on membership on non-stock corporations?

5

General rule: Exception:

Membership in a Non-Stock Corporation and Articles of Incorporation or by laws may provide for
all rights arising therefrom is non rules of prescribing transfer of membership.
transferrable. (Section 89, RCCP)
190. How many trustees are allowed in non-stock corporations?
The number of trustees shall be fixed in the articles of incorporation or bylaws. It may or may not
be more than fifteen (15). (Sec. 91, RCCP)

3. FOREIGN CORPORATIONS(1998, 2002, 2013, 2018 Bar)

191. What constitutes doing or “transacting business in the Philippines”?

To be doing or “transacting business in the Philippines,” 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.

192. What are the consequences if a foreign corporation does business in the Philippines
without a license?
A foreign corporation transacting business in the Philippines without a license, or its successors or
assigns, shall:
1. Not be permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines;
 2. 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)

193. What is the purpose of appointing a resident agent?

The power of the resident agent is limited to the authority to receive, for and in behalf of the
corporation, services and other legal processes in all actions and other legal proceedings against the
foreign corporation.

194. What is the effect of service of summons and notices to the resident agent?

When the defendant is a foreign private juridical entity which has transacted or is doing business in
the Philippines, service may be made on its resident agent designated in accordance with law for
that purpose, or it there be no such agent, on the government official designated by law to that
effect, or on any of its officers or agents, directors or trustees within the Philippines. (Sec. 14, Rule
14, 1997 Rules of Civil Procedure as amended by SC A.M. No. 19-10-20-SC)

e. PERSONALITY TO SUE AND SUABILITY (2012 Bar)

195. What is the personality of a foreign corporation to sue?

1. A foreign corporation transacting or doing business in the Philippines with a license can sue
before Philippine courts.
2. Subject to certain exceptions, a foreign corporation doing business in the country without a
license cannot sue in Philippine courts.
3. If it is not transacting business in the Philippines, even without a license, it can sue before
Philippine courts.

4. ONE-PERSON CORPORATIONS (OPC) (2020 Bar)

196. Who cannot form an OPC?

Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, and non-
chartered government-owned and controlled corporations may not incorporate as One Person
Corporations: Provided, further that a natural person who is licensed to exercise a profession may
not organize as an OPC for the purpose of exercising such profession except as otherwise provided
under special laws. (Sec. 116, RCC)

197. What is the capital stock requirement of an OPC?

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)

198. Who shall take the place of a single stockholder in managing the affairs of the
corporation in case of the latter’s death or incapacity?

The single stockholder shall designate a nominee and an alternate nominee who shall, in the event
of the single stockholder’s death or incapacity:
1. Take the place of the single stockholder as director; and
2. Shall manage the corporation’s affairs (Sec. 124, RCC)
199. What is the term of a nominee and an alternate nominee?

a. Temporary incapacity of the single stockholder – the nominee shall sit as director and manage
the affairs of the OPC until the stockholder, by self-determination, regains the capacity to assume
such duties.
b. Death or Permanent Incapacity of the single stockholder – the nominee shall sit as director and
manage the affairs of the OPC until the legal heirs of the single stockholder have been lawfully
determined, and the heirs have designated one of them or have agreed that the estate shall be
the single stockholder of the OCP.

The alternate nominee shall sit as director and manage the OPC in case of the nominee’s inability,
incapacity, death, or refusal to discharge the functions as director and manager of the corporation,
and only for the same term and under the same conditions applicable to the nominee. (Sec. 125,
RCC)

200. When may an ordinary corporation be converted to an OPC?

When a single stockholder acquires all the stocks of an ordinary stock corporation, the latter may
apply for conversion into a One Person Corporation, subject to the submission of such documents as
the Commission may require. (Sec. 131, RCC)

201. When may an OPC be converted to an Ordinary Stock Corporation?

An OPC may be converted into an ordinary stock corporation:

1. After due notice to the Commission of such fact and of the circumstances leading to the conversion;
2. After compliance with all other requirements for stock corporations under this Code and applicable
rules

IX. MERGERS AND CONSOLIDATIONS (1999, 2012, 2016 Bar)

202. Differentiate merger vs. consolidation.

MERGER CONSOLIDATION
Uniting of two or more corporations by the
Uniting or amalgamation of two or more
transfer of property to one of them which
As to nature existing corporations to form a new
continue in existence, the other or the others
corporation.
being dissolved and merged therein.
As to creation There is no new corporation created. A single new corporation is created.
As to The other constituent corporations are All corporations are dissolved, but a new
dissolution dissolved except the surviving corporation. one is created.
The surviving corporation acquires all the All assets, liabilities, and capital stock of
As to
assets, liabilities, and capital stock of all all consolidated corporation are
conveyance
constituent corporations. transferred to the new corporation

203. When shall the merger or consolidation take effect?

The merger or consolidation shall take effect upon issuance by the SEC of the certificate approving
the articles and plan of merger or of consolidation. (SEC. 78, RCC)

204. What are the limitations of merger or consolidation?

1. It should not result to an illegal combination as proscribed in Act No. 3518;

2. It should not substantially lessen the competition between the corporations;
3. It should not restrain commerce in any section of the community; and
 4. It should not create a monopoly of any line of commerce.

205. What is the Nell Doctrine? (2017 Bar)

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. (The Edward
J. Nell Company vs. Pacific Farms, Inc., G.R. No. L-20850, November 29, 1965)

IV. INTELLECTUAL PROPERTY CODE

(R.A. 8293, as amended by R.A. 9150, R.A. 9502, and R.A. 10372)

206. Distinguish Patents vs. Trademark vs. Copyright. (2015 Bar)

Patents Trademark Copyright

A patent refers to any
technical solution of a
problem in any field of human
activity which is new, involves
an inventive step, and is
industrially applicable. (Pearl
& Dean (Phil.), Incorporated
vs. Shoemart, Incorporated,
G.R. No. 148222 August 15,
2003)
It is the right granted to an
inventor by the State, or by the
regional office acting for several
States, which allows the inventor
to exclude anyone else from
commercially exploiting his
invention for a limited period
(WIPO, Understanding Industrial
Property, p. 5)
As to definition
A trademark is 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. In relation
thereto, a trade name means the
name or designation identifying or
distinguishing an enterprise. (Pearl &
Dean (Phil.), Incorporated vs.
Shoemart, Incorporated, G.R. No.
148222 August 15, 2003)
As to Rights Granted
Trademarks are acquired solely
through registration. (Zuneca
Pharmaceutical Natrapharm,
Inc., G.R. No 211850, September
8, 2020, J. Caguioa)
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).
As to Purpose
A copyright is confined to literary and
artistic works which are original
intellectual creations in the literary and
artistic domain protected from the
moment of their creation. (Pearl & Dean
(Phil.), Incorporated vs. Shoemart,
Incorporated, G.R. No. 148222 August
15, 2003)
Copyright, in the strict sense of the term,
is purely a statutory right. Being a mere
statutory grant, the rights are limited to
what the statute confers. It may be
obtained and enjoyed only with respect
to the subjects and by the persons, and
on terms and conditions specified in the
statute. Accordingly, it can cover only
the works falling within the statutory
enumeration or description. (Pearl &
Dean (Phil.), Incorporated vs. Shoemart,
Incorporated, G.R. No. 148222 August
15, 2003)
 (1) It seeks to foster and reward (1) To indicate the origin or ownership (1) To promote creativity
invention; of the goods and to which it is (2) Encourage creation of works.
(2) It promotes disclosure of affixed; (ABS-CBN Corp. v. Gozon,
inventions to stimulate (2) To guarantee that those articles G.R. No. 195956, 2015)
further innovation and to come up to a certain standard of
permit the public to practice quality;
the invention once the patent (3) To advertise the goods (Mirpuri v.
expires; and CA, G.R. No. 114508, November 19,
(3) To ensure that ideas in the 1999)
public domain remain there
for the free use of the public
and it is only after an
exhaustive examination by
the patent office that patent
is issued. (Pearl & Dean
(Phil.), Inc. vs. Shoemart,
Inc., G.R. No. 148222, August
15, 2003)
As to Elements
(a) Novelty (a) The validity of the mark; (a) Literary or artistic work
(b) Inventive step; and (b) The plaintiff’s ownership of the mark; (b) Originality - Independently
(c) Industrial and created
applicability (c) The use of the mark or its colorable (c) Expression
imitation by the alleged infringer results
in “likelihood of confusion.”
As to When Rights are Obtained
Upon creation but registration
Upon issuance of letters of
Upon registration. (Sec 122, IPC) needed only to recover damages in
patent by IPO
cases of infringement
As to Term of Protection
10 years and may be renewed for periods of
20 years from the of the 10 years at its expiration upon payment of Generally up to 50 years after death
application (Sec. 54, IPC) the prescribed fee and upon filing of a of the author (Sec. 213, IPC)
request. (Sec. 145-146, IPC)

207. Can an article of commerce serve as a trademark and at the same time enjoy patent and
copyright protection? Explain and give an example. (2010 Bar)

Yes, because an article of commerce may have different objector purpose which can be separately
covered by the three intellectual property rights.

A stamped or marked container of goods can be registered as a trademark. The ornamental design
appearing on the container of goods can be copy- righted if it can be conceptually separated from
the utilitarian aspect of the container. Such design if it can be used as pattern for industrial product
or handicraft can also be covered by a patent for industrial design. Thus, a container of goods which
has an original ornamental design can be registered as a trademark, can be copyrighted, and can be
registered as an industrial design.

208. Are trademark, copyright and patent interchangeable?

No, trademark, copyright and patents are different intellectual property rights that cannot be
interchanged with another. These three legal rights are completely distinct and separate from one
another and the protection afforded by one cannot be used interchangeably to cover items or works
that exclusively pertain to the others.
I. PATENTS

209. What are patentable inventions?

Any technical solution of a problem in any field of human activity which is new, involves an
inventive step and is industrially applicable. (Sec. 21, IPC)

Statutory Classes of Patentable Inventions. It may be, or may relate to:

1. A product, such as a machine, a device, an article of manufacture, a composition of matter, a
microorganism;
2. A process, such as a method of use, a method of manufacturing, a non-biological process, a
microbiological process;
3. Computer-related inventions; and
4. An improvement of any of the foregoing (Rule 201, Revised IRR for Patents, Utility Models
and Industrial Designs)

210. What are the rights conferred to the owner of the patent? (1990 Bar)

Product to restrain, prohibit and prevent any unauthorized person or entity from making, using,
offering for sale, selling or importing that product; (Sec. 71.1 (a), IPC)
Process to restrain, prevent or prohibit any unauthorized person or entity from using the process,
and from manufacturing, dealing in, using, selling or offering for sale, or importing any
product obtained directly or indirectly from such process. (Sec. 71.1 (b), IPC)
Other patent owners shall also have the right to assign, or transfer by succession the patent, and
rights of to conclude licensing contracts for the same. (Sec. 71.2, IPC)
Patent
Owners

211. What are the grounds for cancellation of patents?

Any interested person may, upon payment of the required fee, petition to cancel the patent or any
claim thereof, or parts of the claim, on any of the following grounds:
(D-ICON)
1. 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
2. Patent is found invalid in an action for infringement (Sec. 82, IPC); or
3. Patent is contrary to public order or morality. (Sec. 61.1, IPC)
4. Patent includes matters outside the scope of the disclosure contained in the application (Sec
21, IPC; Sec. 1, Regulations on Inter Partes Proceeding).
5. What is claimed as the invention is not new or patentable;

212. What constitutes patent infringement?

Infringement is the making, using, offering for sale, selling, or importing a patented product or a
product obtained directly or indirectly from a patented process, or the use of a patented process
without the authorization of the patentee. (Sec. 76.1, IPC)

213. What are the remedies for patent infringement? (1993 Bar)

1. Administrative Actions (Sec. 10.2, IPC)

2. Disposal or destruction of Infringing material. (Sec. 76.5, IPC)
3. Civil action for damages plus attorney’s fees and other expenses for litigation. (Sec. 76.2, IPC)
4. Criminal Action for Repetition of Infringement (Sec. 84, IPC)
II. TRADEMARKS (1990, 1991, 1994, 1996, 2005, 2010, 2016 2019)

214. Distinguish Marks vs. Collective Marks vs. Trade Name.

Marks Collective Marks Trade Name (2011 Bar)

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, IP
Code)
It is “intellectual property
deserving protection by
law”, and “susceptible to
registration if it is crafted
fancifully or arbitrarily and
is capable of identifying
and distinguishing the
goods of one
manufacturer or seller
from those of another.”
(Dy vs. Koninklijke Philips
Electronics, N.V., G.R. No.
186088. March 22, 2017)
Any visible sign The name or designation identifying or
designated as such in the distinguishing an enterprise (Sec. 121.3, IPC).
application for 1. A trade name is any individual name or
registration and capable surname, firm name, device or word used by
of distinguishing the manufacturers, industrialists, merchants and
origin or any other others to identify their businesses, vocations or
common characteristic, occupations (Converse Rubber Corp., v.
including the quality of Universal Rubber Products, Inc., G.R. No.
goods or services of 279076, January 8, 1987).
different enterprises 2. Trade name is any designation which:
which use the sign under a. is adopted and used by person to denominate
the control of the goods which he markets, or services which he
registered owner of the renders, or business which he conducts, or
collective mark (Sec. has come to be so used by other, and
121.2, IPC). b. through its association with such goods,
services or business, has acquired a special
significance as the name thereof, and,
c. the use of which for the purpose stated in (a)
is prohibited neither by legislative enactment
nor by otherwise defined public policy. (Juan
vs. Juan, G.R. No. 221732. August 23, 2017)

215. What are the degrees of distinctiveness of marks?

1. Coined or fanciful marks — invented words or signs that have no real meaning (e.g., Google,
Kodak). These marks are the strongest and have the greatest chance of being registered.
2. Arbitrary marks — words that have a meaning but have no logical relation to a product (e.g.,
SUNNY as a mark covering mobile phones, APPLE in relation to computers/phones).
3. Suggestive marks — marks that hint at the nature, quality or attributes of the product, without
describing these attributes (e.g., SUNNY for lamps, which would hint that the product will bring
light to homes). If not considered as bordering on descriptive, this may be allowed.
4. Descriptive marks — describe the feature of the product such as quality, type, efficacy, use,
shape, etc. The registration of descriptive marks is generally not allowed under the IP Code.
5. Generic marks — words or signs that name the species or object to which they apply (e.g.,
CHAIR in relation to chairs). They are not eligible for protection as marks under the IP Code.
(Kolin Electronics Co. Inc. vs. Kolin Philippines International Inc., G.R. No. 228165, February
9, 2021, J. Caguioa)

216. How is trademark acquired?

In Zuneca Pharmaceutical v. Natrapharm, Inc., the Supreme Court abandoned its previous rulings
"that registration does not confer ownership of the trademark and that the first user in good faith
defeats the right of the first filer in good faith. Instead, it was held that trademarks are acquired
solely through registration. (Zuneca Pharmaceutical Natrapharm, Inc., G.R. No 211850, September
8, 2020, J. Caguioa)
217. Did the Supreme Court abandon the first-to-file rule?

By ruling that trademark is acquired solely through registration, the Supreme Court did not,
nevertheless, abandon the first to file rule. While it is the fact of registration which confers
ownership of the mark and enables the owner thereof to exercise the rights expressed in the IF
Code, the first to file rule nevertheless prioritizes the first filer of the trademark application and
operates to prevent any subsequent applicant from registering the mark. (Zuneca Pharmaceutical
Natrapharm, Inc., G.R. No 211850, September 8, 2020, J. Caguioa)

218. What is the effect of failure to file A Declaration of Actual Use (DAU)?

Failure to file declaration of actual use automatically results in the denial of the registration or the
cancellation of the registration by operation of law. (Secs. 124.2 & 145, IPC)

219. When should a Declaration of Actual Use (DAU) be filed?

1. Within 3 years from the filing date of the application (3rd Year DAU);
2. Within 1 year from the 5th anniversary of the registration of the mark (5th Year DAU);
3. Within 1 year from the date of renewal; and
4. Within 1 year from the 5th anniversary of each renewal.

220. When should a Declaration of Non-Use (DNU) be filed?

1. Within three (3) years from filing date of the application;

2. Within the prescribed periods mentioned in Rule 204 when use of a registered mark or a mark
subject of an active application has been interrupted or discontinued by a pending litigation.

221. What is the significance of the certificate of registration of a trademark?

A certificate of registration of a mark shall be prima facie evidence of:

1. The validity of the registration,
2. The registrant's ownership of the mark, and
3. The registrant's exclusive right to use the same in connection with the goods or services and
those that are related thereto specified in the certificate. (Sec. 138, IPC)

222. What are the requirements for a mark to be registered?

1. It is a visible sign (not sounds or scents)

2. Capable of distinguishing one’s goods and services from another. (Sec. 121.2, IPC).

NOTE IMPORTANT JURISPRUDENCE: Under the IP Code, the ownership of a trademark

is acquired by its registration. While subsequent use of the mark and proof thereof are required
to prevent the removal or cancellation of a registered mark or the refusal of a pending application
under the IP Code, this should not be taken to mean that actual use and proof thereof are necessary
before one can own the mark or exercise the rights of a trademark owner. (Zuneca Pharmaceutical
Natrapharm, Inc., G.R. No 211850, September 8, 2020, J. Caguioa)

Ownership of a trade name may be acquired not necessarily by registration but by adoption and
use in trade or commerce (Zuneca Pharmaceutical v. Natraphann, Inc., G.R. No, 711850,
September 8, 2020, J. Caguiao)
223. Is registration with the IPO a prerequisite in an infringement suit of a trade name?

No. A trade name previously used in trade or commerce in the Philippines need not be registered
with the IPO before an infringement suit may be filed by its owner against the owner of an infringing
trademark. The IPC eliminated such requirement. (Coffee Partners v. San Francisco Coffee and
Roastery, Inc., G.R. No. 169504, March 3, 2010)

224. What are the requirements for a geographically descriptive mark to acquire secondary
meaning?

1. The secondary meaning must have arisen as a result of substantial commercial use of a mark
in the Philippines
2. Such use must result in the distinctiveness of the mark insofar as the goods are concerned,
and;
3. Proof of substantially exclusive and continuous commercial use in the Philippines for five (5)
years before the date on which the claim of distinctiveness is made perceptibly disqualified
from trademark registration (Shang Properties Realty Co. and Shang Properties, Inc. v St.
Francis Dev’t. C., GR No. 190706, July 21, 2014)

225. How do you determine well-known marks?

The question of whether or not a trademark is considered “well-known” is factual in nature,

involving as it does the appreciation of evidence adduced before the BLA-IPO. (Sehwani, Inc. v.
In-N-Out Burger, Inc., G.R. No. 171053, October 15, 2007)

226. Is the knowledge of the general public of the mark taken into account in determining
whether it is a well-known mark?

No, 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.

The power to determine whether a trademark is well-known lies in the "competent authority of the
country of registration or use." This competent authority would be either the registering authority
if it has the power to decide this, or the courts of the country in question if the issue comes before
a court. (Sehwani Incorporated v. In-N-Out Burger, Inc., G.R. No. 171053, October 15, 2007;
Fredco Manufacturing Corporation v. President and Fellows of Harvard College, G.R. No. 185917,
June 1, 2011)

227. What rights are conferred by the registration of trademark?

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

228. Is the protection afforded to trademark owners limited to identical and similar goods?

No. The scope of protection extends to protection from infringers with related goods, and to market
areas that are the normal expansion of business of the registered trademark owners. The protection
to which the owner of a trademark is entitled is not limited to guarding his goods or business from
 actual market competition with identical or similar products of the parties, but extends to all cases
in which the use by a junior appropriator of a trade-mark or trade-name is likely to lead to a
confusion of source, as where prospective purchasers would be misled into thinking that the
complaining party has extended his business into the field or is in any way connected with the
activities of the infringer; or when it forestalls the normal potential expansion of his business"
(Mcdonalds’s Corporation vs L.C. Big Mak Burger, Inc., Aug. 18, 2004)

229. State the Principle of Specificity.

The Principle of Specificity means that the protection granted by trademark registration extends
only to specified goods and closely related goods. Under Section 138 of the Intellectual Property
Code, it is provided that a "certificate of registration 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." Thus, the mere fact that one person has adopted and used a trademark
on his goods does not prevent the adoption and use of the same trademark by others on unrelated
articles of a different kind.

230. When may the IPO cancel the certificate of trademark registration?
The certificate of registration may be cancelled in the following cases:
a. Failure to file declaration of actual use within one (1) year from the fifth anniversary of the
trademark registration: (Sec. 147, in relation to Section72.1, IPC)
b. Failure to file declaration of actual use within three (3) years from filing of the application for
trademark registration; (ibid.)
c. At any time, if the registered owner of the mark without legitimate reason fails to use the
mark within the Philippines, or to cause it to be used in the Philippines by virtue of a license
during an uninterrupted period of three (3) years or longer. (Sec. 151.1 IPC)
d. 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, October
20, 2010)
e. While registration vests ownership over a mark, bad faith may still be a ground for the
cancellation of trademark registrations. (Medina v. Global Quest Ventures, Inc., G.R. No.
213815, February 8, 2021)

231. What is trademark infringement?

Trademark infringement refers to unauthorized use of a registered mark that causes confusion on
the part of the buying public.

232. Who are liable for trademark infringement?

A person shall be liable for trademark infringement if, without the consent of the owner of the
registered mark, he:
(1) Uses in commerce any reproduction or colorable imitation of a registered mark or the same
container or a dominant feature thereof in connection with the sale, offering for sale,
distribution, advertising of any goods or services which is likely to cause confusion, or to cause
mistake, or to deceive;
(2) Reproduces or colorably imitates a registered mark or a dominant feature thereof and applies
such reproduction or colorable imitation to signs, packages, or advertisements intended to be
used in commerce upon or in connection with the sale, offering for sale, distribution, or
advertising of goods or services which likely to cause confusion, or to cause mistake, or to
deceive.
233. What are the two types of confusion arising from the use of similar or colorable
imitation marks?

Confusion of Goods/Services Confusion of Business/Origin

(product confusion) (source or origin confusion)

Exists when the ordinary prudent purchaser
would be induced to purchase one product or
service because of the similarity of the marks or
trade names used on the same kind of product
or service.
(Skechers, U.S.A, Inc. v. Inter Pacific Industrial
Trading Corp. et. al., GR No. 164321 March 23,
2011) (2014 Bar)
Exists when one party's product or service though
different from that of another, is such as might
reasonably be assumed to originate from the latter and
the public would then be deceived into the belief that
there is some connection between the parties which in
fact is absent.
(Skechers, U.S.A., Inc. v. Inter Pacific industrial Trading
Corp et. al, GR No. 164321, March 23, 2011) (2014 Bar)

Exist when the products are competing Exist when the products are non-competing but related
(McDonald’s Corporation v. L.C. Big Mak enough to produce confusion or affiliation (McDonald’s
Burger, Inc., et al., G.R. No. 143993, August Corporation v. L.C. Big Mak Burger, Inc., et al., G.R. No.
18, 2004) 143993, August 18, 2004)

Test on confusion of goods or services:
1. dominancy test; and
2. holistic test (abandoned - see note on Kolin
case)
Test on confusion of origin: Whether the non-
competing articles may be classified under two different
classes because-they are deemed not to possess the
same descriptive properties (Ang v. Teonoro, G.R. No.
L-48226, December 14, 1942).

234. What are the factors to consider in determining the likelihood of confusion?
1. The resemblance between the trademarks;
2. The similarity of the goods to which the trademarks are attached;
3. The likely effect on the purchaser; and
4. The registrant’s express or implied consent and other fair and equitable considerations. (Mighty
Corporation v. E. & J. Gallo Winery, G.R. No. 154342, July 14, 2004)

235. How do you determine if there are confusing similarities between two marks?
The Supreme Court (SC) has abandoned the “holistic test” in evaluating trademark resemblance
and emphasized the adoption of the “dominancy test.”

The Dominancy Test focuses on the similarity of the prevalent features of the competing marks.
Meanwhile, the Holistic Test requires that the entirety of the marks in question be considered in
resolving confusing similarity. There was no hard and fast rule in determining which test should be
applied. There are more Supreme Court decisions that applied the Dominancy Test.

The SC noted that Section 155.1 of the Intellectual Property Code explicitly incorporated the
“dominancy test,” by defining infringement as the “colorable imitation of a registered mark… or a
dominant feature thereof.” (Kolin Electronics Co. Inc. vs Kolin Phils. International Inc., G.R. No.
228165, Feb. 9, 2021, J. Caguioa)

236. What is the idem sonans rule in trademark?

Idem sonans is a Latin term meaning sounding the same or similar; having the same sound. It is
a legal doctrine in which a person’s identity is presumed known despite the misspelling of his or
her name. The rule on idem sonans is also a test to resolve the confusing similarity of trademarks.
237. Define unfair competition. (2019 Bar)
Unfair competition has been defined as 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. (Republic Gas Corporation v. Petron Corporation, G.R. No. 194062, June 17, 2013;
Bar 2019)

238. Who may file an action of Unfair Competition?

A person who has identified in the mind of the public the goods he manufactures or deals in, his
business or services from those of others, whether or not a registered mark is employed. Such
person has a property right in the goodwill of the said goods, business or services so identified,
and said right shall be protected in the same manner as other property rights. ( Sec. 168.1, IPC)

239. Distinguish trademark infringement from unfair competition (1996, 2003, 2015 Bar)

Trademark Infringement Unfair Competition

As to Definition
Unauthorized use of a trademark Passing off of one’s goods as those of another
As to Scope
Limited but more exclusive scope Broader and more inclusive scope
As to Requirement of Fraudulent Intent
Unnecessary Essential
As to Requirement for Prior Registration
Prerequisite to the action Unnecessary
As to Goods or Services Involved
Same class Different classes
(Del Monte Corp. vs. CA, GR Nos. L-78325, January 25, 1990)

240. In what way is an infringement of a trademark similar to that which pertains to unfair
competition? (2003 Bar)
Infringement of trademark and unfair competition both has the ability to disrupt fair competition
among business enterprises and other businesses. Both can create confusion, mistake, and
deception as to the minds of the consumers with regard to the source or identity of their products
or services due to its similarity in appearance or packaging.

241. Can there be trademark infringement without unfair competition?

Yes, there can be trademark infringement without unfair competition such as when the infringer
discloses on the labels containing the mark that he manufactures the goods, preventing the public
from being deceived that the goods originate from the trademark owner. (Superior Commercial
Enterprises, Inc. v. Kunnan Enterprises, G.R. No. 169974, April 20, 2010)

III. COPYRIGHT

242. What are the classifications of protected works? (1995 Bar)

a. Original Literary or Artistic Works
b. Derivative Works
243. What are derivative works?
Derivative works, which are creations that are based on an existing work, shall also be protected
by copyright.
(1) Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations
of literary or artistic works; and
(2) Collections of literary, scholarly or artistic works, and compilations of data and other materials
which are original by reason of the selection or coordination or arrangement of their contents.
(Sec. 173.10, IPC)

244. What is the treatment of the law over derivative works?

The above works shall be protected as a new works: Provided however, that such new work shall
not affect the force of any subsisting copyright upon the original works employed or any part
thereof, or be construed to imply any right to such use of the original works, or to secure or extend
copyright in such original works. (Sec. 173.2, IPC)

245. What are non-copyrightable works?

Unprotected Works of the government Collection of an author’s work,
subject matters author has exclusive right
No protection shall No copyright shall subsist in any work of The author of speeches, lectures,
extend, under the the Government of the Philippines. (Sec. sermons, addresses, and dissertations
law, to: 176.1, IPC) mentioned in the preceding
1. any idea, paragraphs shall have the exclusive
procedure, Elements: right of making a collection of his
system, method (1) the creator must be an officer or works. (Section 176.2, IPC)
or operation, employee of the government
concept, (2) the work was done as part of his
principle, regularly prescribed official duties
discovery or
mere data as General Rule: Prior approval of the
such, even if government agency or office wherein the
they are work is created shall be necessary for
expressed, exploitation of such work for profit. Such
explained, agency or office may, among other things,
illustrated or impose as a condition the payment of
embodied in a royalties. (Sec. 176.1, IPC)
work;
2. news of the day Exception: No prior approval or
and other conditions shall be required for the use of
miscellaneous any purpose of statutes, rules and
facts having the regulations, and speeches, lectures,
character of sermons, addresses, and dissertations,
mere items of pronounced, read or rendered in courts of
press justice, before administrative agencies, in
information; or deliberative assemblies and in meetings of
3. any official text public character. (Sec 176.1, IPC)
of a legislative,
administrative
or legal nature,
as well as any
official
translation
thereof. (Sec.
175, IPC)
246. What are the rights conferred by a copyright? (2011 Bar)

Right to Proceeds in
Copyright or economic Subsequent Transfers of
Moral rights
rights Copyright (Droit De Suite or
Follow Up Rights)
It shall consist of the The author of a work shall, In every sale or lease of an original
exclusive right to carry out, independently of the economic rights work of painting or sculpture or of
authorize or prevent the in Section 177 or the grant of an the original manuscript of a writer or
following acts: assignment or license with respect to composer, subsequent to the first
1. Reproduction of the such right, have the right: disposition thereof by the author, the
work or substantial 1. Creator's right to be attributed or author or his heirs shall have an
portion of the work; credited whenever his work will inalienable right to participate in the
2. Dramatization, be used by another (Sec. 193.1, gross proceeds of the sale or lease to
translation, adaptation, IPC) the extent of five percent (5%). This
abridgment, 2. To make any alterations of his right shall exist during the lifetime of
arrangement or other work prior to, or to withhold it the author and for 50 years after his
transformation of the from publication. (Sec. 193.2, death. (Section 200, IPC)
work; IPC)
3. The first public 3. Creator's right of integrity Rights which are not covered
distribution of the against "derogatory treatment under Droit De Suite
original and each copy (Sec. 193.3, IPC) 1. Prints
of the work by sale or 4. Author's right against false 2. Etchings
other forms of transfer attribution (Sec. 193.4, IPC) 3. Engravings
of ownership; 4. Works of applied art, or
4. Rental of the original or Waiver of moral rights 5. Works of similar kind wherein
a copy General Rule: An author may waive the author primarily derives gain
5. Public display of the his from the proceeds of
original or a copy of the some but not all his moral rights by reproductions. (Section 201,
work; a written instrument. (Sec. 195, IPC) IPC)
6. Public performance of
the work; and Exception: No such waiver shall be
7. Other communication valid where its effects are to permit
to the public of the another:
work (Section 177, IPC) 1. To use the name of the author,
or the title of his work, or
otherwise to make use of his
reputation with respect to any
version or adaptation of his work
which, because of alterations
therein, would substantially tend
to injure the literary or artistic
reputation of another author.
(Section 195.1, IPC)
2. To use the name of the author
with respect to a work he did not
create. (Section 195.2, IPC)
247. What is the rule on copyright ownership? (1989, 1995, 2004, 2008, 2010, 2011, 2013
Bar)

CREATION OWNER
Original literary and artistic
Author of the work (Section 178.1, IPC)
works

General rule: Co-authors shall be the original owners of the copyright

in the absence of agreement, the co-authors’ rights shall be governed by the
rules on co-ownership
Works of joint authorship
Exception: If the work consists of parts that can be used separately and the
author of each part can be identified, the author of each part, in the part
that he has created. (Section 178.2, IPC)

Work created by an author
during and in the course of his
employment
Commissioned Work (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)
Employee: if the creation of the object of copyright is not a part of his regular
duties even if the employee uses the time, facilities and materials of the
employer.
The employer, if the work is the result of the performance of his regularly-
assigned duties, unless there is an agreement, express or implied, to the
contrary. (Section 178.3, IPC)
As to ownership: to person who so commissioned the work
As to Copyright: Shall remain with the creator, unless there is a written
stipulation to the contrary (Section 178.4, IPC)
Producer, the author of the scenario, the composer of the music, the film
director, and the author of the work so adapted

However, subject to contrary or other stipulations among the creators, the

Audiovisual work
producers shall exercise the copyright to an extent required for the exhibition
of the work in any manner, except for the right to collect performing license
fees for the performance of musical compositions, with or without words,
which are incorporated into the work. (Section 178.5, IPC)
Writer but subject to the provisions of Article 723 of the Civil Code. (Sec.
178.6, IPC)

Letters Letters and other private communications in writing are owned by the person
to whom they are addressed or delivered, but they cannot be published or
disseminated without the consent of the writer or his heirs (Art. 723, New
Civil Code).
General Rule: Publishers shall be deemed to represent the authors of articles
and other writings published without the names of the authors or under
pseudonyms.
Anonymous and
Exception:
Pseudonymous Works
1. contrary appears
2. Pseudonyms or adopted name leaves no doubts as to the author’s identity,
3. if the author of the anonymous works discloses his identity. (Section 170,
IPC)
248. What is fair use?
Fair use has been defined as a privilege to use the copyrighted material in a reasonable manner
without the consent of the copyrighted owner or as copying the theme or ideas rather than their
expression. xxx Commercial use of the copyrighted work can be weighed against fair use. (ABS-
CBN Corp. vs. Gozon, G.R. No. 195956, March 11, 2015)

249. Factors in determining if the use of a copyrighted work is within the limits of the
doctrine of fair use:
In determining whether the use made of a work in any particular case is fair use, the factors to be
considered shall include:
1. The purpose and character of the use, including whether such use is of a commercial nature
or is for non-profit educational purposes;
2. The nature of the copyrighted work;
3. The amount and substantiality of the portion used in relation to the copyrighted work as a
whole; and
4. The effect of the use upon the potential market for or value of the copyrighted work. ( Section
185.1, IPC)

250. Define Copyright Infringement.

Infringement of a copyright is a trespass on a private domain owned and occupied by the owner
and, therefore, protected by law.

251. How is Copyright Infringement committed.

Copyright infringement is committed by any person who shall use original literary or artistic works,
or derivative works, without the copyright owner’s consent in such a manner as to violate copy and
economic rights. For a claim of copyright infringement to prevail, the evidence on record must
demonstrate: (1) ownership of a validly copyrighted material by the complainant; and (2)
infringement of the copyright by the respondent. (Olaño vs. Lim Eng Co, G.R. No. 195835. March
14, 2016)

It is not necessarily required that the entire copyrighted work, or even a large portion of it, be
copied. If so much is taken that the value of the original work is substantially diminished, there is
an infringement of copyright and to an injurious extent, the work is appropriated. In cases of
infringement, copying alone is not what is prohibited. The copying must produce an “injurious
effect.” (Habana et al vs. Robles et al., G.R. No. 131522, July 19, 1999)

V. ANTI-MONEY LAUNDERING ACT (AMLA)

(R.A. No. 9160, AS AMENDED BY R.A. NO. 9194 AND R.A. NO. 10365)

I. COVERED INSTITUTIONS/ PERSONS AND THEIR OBLIGATIONS (2011, 2012 Bar)

252. Enumerate the institutions and persons covered by the Anti-Money Laundering Act.

1. Supervised or regulated by the Bangko Sentral ng Pilipinas (BSP)

2. Supervised or regulated by the Insurance Commission (IC)
3. Supervised or regulated by the Securities and Exchange Commission
4. Jewelry dealers
5. Company service providers
6. Persons who provide for any of the following services:
a. Managing of client money, securities, or other assets;
b. Management of bank, savings, or securities account;
 c. Organization or contribution for the creation, operation, or management of companies;
and
d. Creation, operation or management of juridical persons or arrangements, and buying and
selling business entities. (Sec. 3(a), RA 9160, as amended by RA 10365)

Lawyers and accountants are not considered as covered persons if they render services under
item 6 provided the following requisites are present.
a. They are acting as independent legal professionals
b. Authorized to practice in the Philippines; and
They are subject to the provisions of their respective codes of conduct and/or
professional responsibility or any of its amendments. (Sec. 3(a), RA 9160, as amended
by RA 10365)
7. Casinos, including internet and ship-based casinos
8. Real estate developers and brokers; (Sec. 2, RA 11521 amending Sec. 3(a) of RA 9160)
9. Offshore gaming
a. Offshore Gaming Operator
b. Service Providers

II. COVERED AND SUSPICIOUS TRANSACTIONS

253. What are “covered transactions” and "suspicious transactions.” (2015 Bar)

COVERED TRANSACTIONS SUSPICIOUS TRANSACTIONS

1. General Covered Transactions – A
transaction in Cash or other
equivalent monetary instrument
exceeding ₱500,000 within one (1)
banking day (Sec 3(b), RA No
9160);
2. Transactions in cash or other
equivalent monetary instrument by
dealers of jewelry, precious metals,
and precious stones in excess of
₱1,000,000 (Sec 3(a)(4), RA No
9160); and
3. Real estate single cash transactions
involving an amount in excess of
₱7,500,000 or its equivalent in any
other currency. (Sec. 2, RA 11521
amending Sec. 3(a), RA No 9160)
4. Single Casino cash transactions
including internet and ship-based
casinos involving an amount in
excess of ₱5,000,000 or its
equivalent in any other currency.
(Sec. 2, RA 11521 amending Sec.
3(a) RA 9160)
“Suspicious transactions” are transactions with covered
institutions, regardless of the amounts involved, where any of
the following circumstances exist:
1. There is no underlying legal or trade obligation, purpose or
economic justification;
2. The client is not properly identified;
3. The amount involved is not commensurate with the
business or financial capacity of the client;
4. Taking into account all known circumstances, it may be
perceived that the client’s transaction is structured in order
to avoid being the subject of reporting requirements under
Act;
5. Any circumstance relating to the transaction which is
observed to deviate from the profile of the client and/or the
client’s past transactions with the covered institution.
6. The transactions is in anyway related to an unlawful activity
or offense under this Act that is about to be, is being or has
been committed; or
7. Any transaction that is similar or analogous to any of the
foregoing. (Sec. 3(b-1), RA 9160)

254. What are the prohibited acts during reporting of covered or suspicious transactions?
1. When reporting covered or suspicious transactions, covered institution and its officers and
employees are prohibited from:
2. Communicating to any person or media of such fact
3. Publish or air such report by the mass media, e-mail, or other device (Sec. 9(c), RA 9160).
255. Explain the safe harbor provision.
The safe harbor provision is a statutory privilege which arises when reporting covered or suspicious
transactions to the AMLC, covered institutions and their officers and employees, shall not be
deemed to have violated the secrecy of bank deposits law and similar laws. (Rule 9.3.c., RIRR)

256. What is money laundering and when is it committed?

Money laundering is a crime whereby the proceeds of an unlawful activity are transacted, thereby
making them appear to have originated from legitimate sources. (Sec. 4, RA 9160). It is committed
by any covered person who, knowing that a covered or suspicious transaction is required under
this Act to be reported to the AMLC, fails to do so.

257. What is the basis of the authority of the Anti-Money Laundering Council to inquire into
deposits or funds without committing a violation of the law on secrecy of bank deposits

ALMC's authority is statutory. It is based on Section 11 of the AMLA which provides that
notwithstanding the provisions of B.A. No. 1405 as amended, R.A. No. 6426 as amended, R.A. No.
8791, and other laws, the AMLC may inquire into or examine bank deposits or investments,
including related accounts, with any banking institution or non-bank financial institution upon order
of a competent court when it has been established that there is a probable cause that the deposits
or investments, including related accounts involved, are related to unlawful activity, as defined by
AMLA or a money laundering offense under the same law.

III. FREEZING AND FORFEITURE

258. What is a Freeze Order?

A Freeze Order is an order issued by the Court of Appeals that blocks or restrains monetary
instruments or properties in any way related to an unlawful activity from being transacted,
withdrawn, deposited, transferred, removed, converted, concealed, or otherwise moved or
disposed without affecting the ownership. This is in line with the state policy of our Anti-Money
Laundering laws to protect and preserve the integrity of the Philippine financial system.

259. What is Forfeiture?

Civil Forfeiture 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. (Sec. 1[r], Rule 2, 2018 RIRR of AMLA)

260. Who initiates Civil Forfeiture?

The AMLC shall institute civil forfeiture proceedings and all other remedial proceedings, through
the Office of the Solicitor General, to confiscate all monetary instruments or properties related to
ML/TF or associated unlawful activity, in accordance with Rule 12 hereof. (Sec. 1.11, Rule 6[D)],
2018 RIRR, RA 9160)

VI. ELECTRONIC COMMERCE ACT

(R. A. No. 8792)

261. What is electronic data?

An electronic data refers to information generated, sent, received or stored by electronic, optical
or similar means. (Sec. 5 (c), R.A. 8792; Sec. 2 (g), and Rule 2, Rules on Electronic Evidence)
262. What is electronic document?
An electronic document refers to information or the representation of information, data, figures,
symbols or other modes of written expression, described or however represented, by which a right
is established or an obligation extinguished, or by which a fact may be proved and affirmed, which
is received, recorded, transmitted, stored, processed, retrieved or produced electronically. ( Sec. 5
(f), R.A. 8792)

263. What is electronic signature?

An electronic signature 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. 8792, Sec. 2
(h), Rule 2, Rules on Electronic Evidence)

264. What is a digital signature?

A digital signature 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 having the initial untransformed electronic document and the signer's public key can
accurately determine: 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. 2 (e), Rule 2, Rules on Electronic Evidence)

265. Distinguish presumptions relating to electronic signatures and digital signatures?

In electronic signatures it shall be presumed that:

1. The electronic signature is the signature of the person to whom it correlates; and ( Sec. 9, R.A.
8972)
2. 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 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. 8972)

3. 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 (Sec. 3, Rule 6, Rules on Electronic Evidence)

Whereas in digital signatures, upon the authentication of a digital signature, it shall be

presumed, in addition to those mentioned in the immediately preceding section, that:
1. The information contained in a certificate is correct;
2. The digital signature was created during the operational period of a certificate;
3. No cause exists to render a certificate invalid or revocable;
4. The message associated with a digital signature has not been altered from the time it was
signed; and,
5. A certificate had been issued by the certification authority indicated therein. (Sec. 4, Rule 6,
Rules on Electronic Evidence)
266. What are the rules on the admissibility and evidentiary weight of an Electronic Data
Message or Electronic Document?

Electronic Documents Electronic Signatures

Admissibility
An electronic document is admissible in evidence if it An electronic signature or a digital signature
complies with the rules on admissibility prescribed by authenticated in the manner prescribed by the
the Rules of Court and related laws and is Rules on Electronic Evidence is admissible in
authenticated in the manner prescribed by the Rules evidence as the functional equivalent of the
on Electronic Evidence. (Sec. 2, Rule 3, Rules on signature of a person on a written document.
Electronic Evidence) (Sec. 1, Rule 6, Rules on Electronic Evidence)
Manner of authentication
Before any private electronic document offered as An electronic signature may be authenticated in
authentic is received in evidence, its authenticity must any of the following manner:
be proved by any of the following means: 1. By evidence that a method or process was
1. by evidence that it had been digitally signed by the utilized to establish a digital signature and
person purported to have signed the same; verify the same;
2. by evidence that other appropriate security 2. By any other means provided by law; or
procedures or devices as may be authorized by the 3. By any other means satisfactory to the judge
Supreme Court or by law for authentication of as establishing the genuineness of the
electronic documents were applied to the electronic signature. (Sec. 2, Rule 6, Rules on
document; or Electronic Evidence)
3. by other evidence showing its integrity and
reliability to the satisfaction of the judge. (Sec. 2,
Rule 5, Rules on Electronic Evidence)

267. What is the rule on obligation of confidentiality?

GENERAL RULE EXCEPTION

Any person who obtained access to any
electronic key, electronic data message or
electronic document, book, register,
correspondence, information, or other material
pursuant to any powers conferred under this
Act, shall not convey to or share the same
with any other person.
Except for the purposes authorized under this Act (Sec.
32, RA 8792)Electronic key refers to a secret code which
secures and defends sensitive information that crosses
over public channels into a form decipherable only with
a matching electronic key. (Sec. 1 (i), Rule 2, Rules on
Electronic Evidence)

VI. FINANCIAL REHABILITATION, INSOLVENCY, LIQUIDATION

and SUSPENSION OF PAYMENTS
(R.A. No. 10142, FR Rules [A.M. No. 12-12-11-SC], and FLSP Rules [A.M. No.15-04-
06-SC])

I. BASIC CONCEPTS

REHABILITATION

268. What is rehabilitation?

Rehabilitation refers to the restoration of the debtor to a condition of successful operation and
solvency, if it is shown that: a. its continuance of operation is economically feasible; and b. its
creditors can recover, by way of the present value of payments projected in the plan, more if the
3 debtor continues as a going concern than if it is immediately liquidated. (Sec. 4 (gg), FRIA)
269. PA Assurance (PA) was incorporated in 1980 to engage in the sale of pre-need
educational plans. It sold open-ended educational plans which guaranteed the
payment of tuition and other fees to planholders irrespective of the cost at the time of
availment. It also engaged in the sale of fixed value plans which guaranteed the
payment of a pre-determined amount to planholders. In 1982, PA was among the
country's top corporations. However, it subsequently suffered financial difficulties.

On September 8, 2005, PA filed a Petition for Corporate Rehabilitation before the

Regional Trial Court (RTC) of Makati City. On October 17, 2005, ten (10) plan holders
filed an Opposition and Mo- tion to Exclude Planholders from Stay Order on the ground
that planholders are not creditors as they (planholders) have a trust relationship with
PA. Are the planholders correct?

No. The plan-holders are not correct. Under the Interim Rules of Procedure on Corporate
Rehabilitation of 2000 (Interim Rules), which took effect on December 15, 2000, stay order issued
by the rehabilitation court enjoins the enforcement of claims against the debtor, its guarantors and
sureties not liable solidarily with the principal debtor. Under the Interim Rules, "claim" shall include
"all claims or demands of whatever nature or character against the debtor or its property, whether
for money or other- wise." "Creditor" shall mean "any holder of a claim." Hence, the claim of the
plan-holders from PA is included in the definition of "claims" under the Interim Rules. NB The
answer is still valid even if it were to be based on FRIA which supplanted the Interim Rules.

270. What is insolvency?

Insolvency refers to the financial condition of a debtor that is: a. generally unable to pay liabilities
as they fall due on the ordinary course of business; or b. has liabilities that are greater than its or
his assets. (Sec. 4(p), FRIA)

271. Enumerate the types of insolvency.

a. Cash Flow Insolvency - corporation’s assets are not enough to cover its liabilities
b. Technical or Balance Sheet Insolvency - the corporation has enough assets but it foresees its
inability to pay its obligations for more than one year (Philippine National Bank v. Court of
Appeals, G.R. No. 165571, 20 January 2009)

272. What are the remedies of an insolvent business?

a. Rehabilitation
i. Pre-Negotiated Rehabilitation;
ii. Court Supervised Rehabilitation; and
iii. Out of Court Rehabilitation.
b. Suspension of Payments (Individual Debtor only); and
c. Liquidation

LIQUIDATION

273. What is liquidation?

Liquidation is the act or process of settling or making clear, fixed, and determinate that which
before was uncertain or unascertained. Liquidation is the comprehensive process of settling
accounts, ascertaining and adjusting debts, collecting and paying off claims.
274. What is the purpose of liquidation?

The purpose of liquidation is to wind up the affairs of the entity and distribute its assets among its
creditors.

275. Enumerate the types of liquidation.

Voluntary liquidation refers to a proceeding initiated by the debtor. An insolvent individual

debtor may ask the court for protection, through an action for suspension of payments or voluntary
liquidation. Creditors of insolvent debtors, on the other hand, have the option of filing a petition
for involuntary liquidation of the insolvent individual debtor.

Involuntary liquidation, refers to a proceeding initiated by creditors. Creditors of insolvent

individual debtors may file an action for involuntary liquidation of the insolvent debtor.

II. MODES OF REHABILITATION

1. COURT-SUPERVISED REHABILITATION

a. VOLUNTARY VS. INVOLUNTARY (1991 Bar)

276. Who can file a petition to a rehabilitation proceeding?

In voluntary proceedings, the following can file a petition for a rehabilitation proceeding:
a) If sole proprietorship, owner
b) If partnership, majority of partners
c) If corporation, majority of directors/trustees, authorized by 2/3 of stockholders/members

While in involuntary proceedings, any creditor or group of creditors with a claim of, or the aggregate
of whose claims is, whichever of is higher of at least P1,000,000; or at least 25% of the subscribed
capital stock or partners' contributions (Sec. 4, Rule 2, FRR)

277. What are the grounds to initiate a petition for a involuntary rehabilitation proceedings?

1. The creditors’ due and demandable claims have not been paid for at least 60 days or that the
debtor has failed generally to meet its liabilities as they fall due; or
2. A creditor, other than the petitioners, 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.

278. What is the venue for voluntary and involuntary rehabilitation proceedings?

It is the RTC having jurisdiction over the principal office of the debtor as specified in its articles of
incorporation or partnership or in its registration papers with the DTI in cases of sole proprietorship
(Sec. 6, Rule 1, FRR)

279. Define a commencement order.

A commencement order shall refer to the order issued by the court under Section 16 of FRIA. (Sec.
4 (e), FRIA)
280. What are the three circumstances that affect the effectivity and duration of a
commencement order?

The Commencement Order shall be effective for the duration of the rehabilitation proceedings,
unless:
1) Earlier lifted by the court;
2) The Rehabilitation Plan is seasonably confirmed or approved; or
3) The Rehabilitation proceedings are ordered terminated by the court (Sec. 11, Rule 2, FRR)

281. What is a stay or suspension order?

A stay or suspension order shall refer to an order issued in conjunction with the commencement
order that shall suspend all actions or proceedings, in court or otherwise, for the enforcement of
claims against the debtor; suspend all actions to enforce any judgment, attachment or other
provisional remedies against the debtor; prohibit the debtor from selling, encumbering, transferring
or disposing in any manner any of its properties except in the ordinary course of business; and
prohibit the debtor from making any payment of its liabilities outstanding as of the commencement
date except as may be provided herein. (Sec. 5, Rule 1, FRR)

282. When will a stay order not apply?

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 has the effect of staying enforcement only with respect to claims made against
the debtor, its guarantors and persons not solidarily liable with the debtor. (Trade and Investment
Development Corporation of the Philippines v. Philippine Veterans Bank, G.R. No. 233850, July 1,
2019, J. Caguioa)

III. REHABILITATION RECEIVER AND MANAGEMENT COMMITTEE

1. Rehabilitation Receiver – Salient Points (1999, 2014 Bar)

283. Define rehabilitation receiver.

A rehabilitation receiver is a person or persons, natural or juridical, appointed as such by the court
pursuant to this Act and which shall be entrusted with such powers and duties as set forth herein .
(Sec. 5[p], Rule 1,FRR)

284. What are the principal duties of a rehabilitation receiver?

The following are the principal duties of a rehabilitation receiver:

a. Preserving and maximizing the value of the assets of the debtor during the proceedings;
b. Determining the viability of the rehabilitation;
c. Preparing and recommending a Rehabilitation Plan to the court; and Implementing the
approved Rehabilitation Plan (Sec. 26, Rule 2, FRR)

2. The Management Committee

285. What is the composition of a management committee?

The management committee shall be composed of three qualified members appointed by the court,
as follows:
1) Nominated by the debtor;
 2) Nominated by the creditor/s holding more than 50% of the total obligations of the debtor;
3) A chairman nominated by the first and second members within 10 days from the appointment
(Sec. 34, Rule 2, FRR)

In case of failure to nominate, the court shall appoint the member failed to be nominated, as the
case may be (FRR, Rule 2, Sec. 34). The management committee may overrule or revoke the
actions of the previous management or governing body of the debtor. (Sec. 33, Rule 2, FRR)

286. Enumerate the roles and qualifications of a management committee.

The role of a management committee involves the following:
1) Take custody of and control all assets owned or possessed by the debtor;
2) Take the place of the management and governing body of the debtor; and
3) Assume the powers, rights and responsibilities of the debtor (Sec. 33, Rule 2, FRR)

287. Does a management committee enjoy immunity from suit?

Yes, in the Same manner with a rehabilitation receiver. (Sec. 41, FRIA)

IV. DETERMINATION OF CLAIMS

288. What is a claim?

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
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)

V. REHABILITATION PLAN
289. Define rehabilitation plan.
A rehabilitation Plan shall refer 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 Section 62 hereof, or other similar arrangements as may be
approved by the court or creditors. (Sec. 4 (ii), FRIA)

290. When is a rehabilitation plan deemed approved?

The Plan is deemed to have been approved by a class of creditors if members of the said class
holding more than 50% of the total class vote in favor of the plan. (Sec. 62, Rule 2, FRR) The court
may confirm the Rehabilitation Plan notwithstanding unresolved disputes over claims if the
Rehabilitation Plan has made adequate provisions for paying such claims. (Sec. 66, Rule 2, FRR)

291. What are the grounds for objection on the rehabilitation plan?
The objections to a rehabilitation plan shall be limited to the following grounds:
1. The creditors' support was induced by fraud;
 2. The documents or data relied upon in the Rehabilitation Plan are materially false or misleading;
or
The Rehabilitation Plan is in fact not supported by the voting creditors. (Sec. 64, Rule 2, FRR)

292. When will the termination of proceedings take place?

At any time from the filing of the petition, any interested party or the rehabilitation receiver may
file a motion for the termination of the proceedings.

293. Discuss the consequences in cases when there is a breach or failure of plan.
Upon a breach of or upon a failure of the plan, court, upon motion by an affected party may issue
an order directing that breach be cured within a specified period of time, failing in which
proceedings may be converted to liquidation or convert the proceedings to a liquidation. It may
remedy the breach consistent with the present regulation, other applicable law and the best
interests of the creditors. It can aslo allow debtor or receiver to submit amendments to the plan,
approval of which shall be governed by the same requirements for the approval thereof. And lastly,
to enforce provisions of Plan, through a writ of execution.

294. Who files a pre-negotiated rehabilitation?

The debtor who, by itself or jointly with any of its creditors, may file a verified petition with the
court for the approval of a pre-negotiated Rehabilitation Plan. Provided it is endorsed by the
holder of at least 2/3 of the total liabilities of debtor, which shall include: secured creditors
holding more than 50% of the total secured claims of Debtor; and unsecured creditors holding
more than 50% of the total unsecured claims of Debtor.

295. What are the grounds for objection to a pre-negotiated rehabilitation plan?
Any creditor or other interested party can object only on the following grounds:
a. The allegations in the petition or Pre-Negotiated Rehabilitation Plan are materially false or
misleading;
b. The majority of any class of creditors do not in fact support the Plan.
c. The support of the creditors was induced by fraud; or
The Plan does not accurately account for a claim against a debtor and the claim is not
categorically declared as a contested claim ( Sec. 5, Rule 3, FRR).

296. What is the effect of approval of a pre-negotiated rehabilitation paln?

It shall have the same legal effect as confirmation of a Rehabilitation Plan under Sec. 66, Rule 2
of the Financial Rehabilitation Rules (Sec. 9, Rule 3, FRR).

297. What is a standstill period?

A standstill period shall refer to the period agreed upon by the debtor and its creditors to enable
them to negotiate and enter into an out-of-court or informal restructuring/workout agreement or
rehabilitation plan pursuant to Rule 4 of these Rules. The standstill agreement may include
provisions identical with or similar to the legal effects of a commencement order under Section 9,
Rule 2 of these Rules. (Sec. 4 (q), Rule 1, FRR)

298. Explain the cram down effect principle.

The "cram-down” principle consists of two things.
1) Binding effect of the approved plan on the debtor, and
2) Power of Court to approve plan despite opposition of creditors.
 The “cram-down” clause is necessary to curb the majority creditors’ natural tendency to dictate
their own terms and conditions to the rehabilitation, absent due regard to the greater long-term
benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the terms and
conditions of the rehabilitation plan, preferring long-term viability over immediate but incomplete
recovery. (Bank of the Philippine Islands vs. Sarabia Manor Hotel Corporation, GR No. 175844,
2013)

VII. LIQUIDATION (2017 BAR)

1. VOLUNTARY LIQUIDATION VS. INVOLUNTARY LIQUIDATION VS CONVERSION

299. What is voluntary liquidation?
Voluntary liquidation is a proceeding initiated and applied for by the insolvent debtor himself. (Sec.
90, FRIA)

300. What is involuntary liquidation?

Involuntary liquidation is a proceeding is initiated by the creditors of the insolvent debtor after
sufficient demonstration that their claims are uncontested, due, and demandable but the debtor is
unwilling or unable to pay all his outstanding debts. (Sec. 91, FRIA)

301. What is conversion?

Conversion is the act whereby an insolvent debtor under court-supervised or pre-negotiated
rehabilitation is ordered by the court to be liquidated upon proper motion by the insolvent debtor,
his creditors, or the rehabilitation receiver. (Sec. 92, FRIA)

302. What is the role of the liquidator upon the submission of disputed claims?
The liquidator shall resolve disputed claims and submit his findings thereon to the court for final
approval. The liquidator may disallow claims, subject to final approval of the court (Sec. 126, FRIA)

303. When will rescission or annulment of transactions prior to commencement of

liquidation take place?
Any transaction occurring prior to the issuance of the Liquidation Order or, in case of the conversion
of the rehabilitation proceedings prior to the commencement date, entered into by the debtor or
involving its assets, may be rescinded or declared null and void on the ground that the same was
executed with intent to defraud a creditor or creditors or which constitute undue preference of
creditors (Sec. 127, FRIA; Sec. 21, Rule 4, FLSPR).

304. Explain the liquidation plan in determination of claims.

Within 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:
a) all the assets of the debtor not exempt from execution;
b) a list of all creditors and their claims which have been duly proved as shown in the final registry
of claims; and
c) a proposed mode and schedule of liquidation of the assets and payment of the claims.
The Liquidation Plan shall make provisions for, among others, disputed claims and any action for
rescission or nullity of certain transactions. (Sec. 23, Rule 4, FLSPR).
305. When can a right to set-off exist?
A right to set-off exist if the debtor and 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; Sec. 18, Rule 4, FLSPR).

306. What is the importance of the concurrence and preference of credits in the liquidation
plan?
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
Rule, credits for services rendered by employees or laborers to the debtor shall enjoy first
preference under Article 2244 of the Civil Code, unless the claims constitute legal liens under
Articles 2241 and 2242 thereof. (Sec. 25, Rule 4, FLSPR).

VIII. SUSPENSION OF PAYMENTS; SUSPENSION OF PAYMENT ORDER (1988, 1995, 1998,

2017, 2019 Bar)

307. What is suspension of payments?

A suspension of payments is a remedy available to an individual debtor who, although possessing
sufficient property to cover all his debts, foresees the impossibility of meeting them when they
respectively fall due. (Sec. 94, FRIA)

308. Where is the venue for petition for suspension of payments?

It is with the RTC of the province or city in which he has resided for six (6) months prior to the
filing of his petition (Sec. 94, FRIA).

309. Who may file suspension of payments?

An individual debtor who, possessing sufficient property to cover all his debts but foreseeing the
impossibility of meeting them when they respectively fall due, may file a verified petition that he
be declared in the state of suspension of payments by the court of the province or city in which he
has resides for six (6) months prior to the filing of his petition. (Sec. 1, Rule 3, FLSPR)

310. Distinguish insolvency from suspension of payment. (1988, 1995, 1998 Bar)

In insolvency, the liabilities of the debtor are more than his assets, while in suspension of payments,
assets of the debtor are more than his liabilities. In insolvency, the assets of the debtor are to be
converted into cash for distribution among his creditors, while in suspension of payments, the
debtor is only asking for time within which to convert his frozen assets into liquid cash with which
to pay his obligations when the latter fall due.

311. Union Corporation was declared insolvent by order of the court. All creditors of Union
were asked to file their claims and attend a meeting to elect the assignee in insolvency.
Merchant Finance Corporation (MFC) has a claim for P500,000, which is secured by a
mortgage on a piece of land worth P1M. MFC seeks your advice as counsel whether it
should participate in the foregoing proceedings. What advice would you give MFC?
(1987 BAR)

I would advise MFC that, having a contractual mortgage (the value of the mortgaged property
being well over the secured obligation), it should refrain from participating in the proceedings and
instead pursue its preferential right to foreclose the mortgage.