2023 Pre Week Dean Divina

2023 PRE-WEEK NOTES IN COMMERCIAL LAW
Dean Nilo T. Divina
B. CORPORATIONS
What are the classes of corporations?
Corporations may be classified as follows:
a. As to the Existence of Shares of Stock
i. Stock Corporation: has a capital stock divided into shares and is authorized
to distribute to the holders of such shares dividends or allotments of the
surplus profits based on the shares held.1
ii. Nonstock Corporation: has no capital stock and/or not authorized to

distribute dividends to its members.2
b. As to Relationship of Management and Control:
i. Holding corporation: A corporation that holds stocks in other companies

for purposes of control rather than for mere investment.
A "holding company" is organized and is basically conducting its business by

investing substantially in the equity securities of another company for the purposes
of controlling their policies (as opposed to directly engaging in operating activities)
and "holding" them in a conglomerate or umbrella structure along with other
subsidiaries. Significantly, the holding company itself-being a separate entity-does
not own the assets of and does not answer for the liabilities of the subsidiary or
affiliate. The management of the subsidiary or affiliate still rests in the hands of its
own board of directors and corporate officers.
A holding company may be held liable for the acts of its subsidiary only when it is
adequately proven that: a) there was control over the subsidiary; b) such control was
used to protect a fraud (or gross negligence amounting to bad faith) or evade an
obligation; and c) fraud was the proximate cause of another's existing injury.
1Section 3, RCC.
2Section 3 and 86, RCC.
©2023 Dean Nilo T. Divina, All Rights Reserved. | 1

In this case, it was held that the holding company is not liable for the claims of its
subsidiary’s employees there being no proof that it fraudulently exercised its control
over its subsidiary to fraudulently evade any obligation. This holds true even though
the subsidiary has transferred its assets to the holding company.3
ii. Subsidiary corporation: A company that is owned or controlled by another

company, called the parent company.
The law creating the Bases Conversion and Development Authority

(“BCDA”) provides that it has an authorized capital of One Hundred Billion
pesos (P100,000,000.00) which may be fully subscribed by the Republic of the
Philippines and shall either be paid up from the proceeds of the sales of its
land assets.
It is created, among others, to own, hold and/or administer military

reservations in the country and implement its conversion to other
productive use.
Is it a stock or nonstock corporation?
It is neither a stock nor a nonstock corporation but a governmental authority vested

with corporate powers.
While it has an authorized capital of P100 Billion, it is not divided into shares of
stock. It has no voting shares. There is likewise no provision which authorizes the
distribution of dividends and allotment of surplus profits to BCDA stockholders.
Hence, it is not a stock corporation.
It does not qualify as a nonstock organization because it is not organized for any of
the purposes mentioned under Section 87 of the RCC.4
BCDA is a government instrumentality vested with corporate powers. As such, it is

exempt from the payment of docket fees. A government instrumentality may be
endowed with corporate powers and at the same time retain its classification as a
government "instrumentality" for all other purposes. Government instrumentality
3Maricalum Mining Corporation v. Ely. Florentino, G.R. No. 221813, July 23, 2018
4BasesConversion and Development Authority vs. Commissioner of Internal Revenue, GR No. 205925,
June 20, 2018.

retains its classification as such albeit having been endowed with some if not all
corporate powers.5
What is a de facto corporation?
A de facto corporation is one that is organized with colorable compliance with the
requirements of incorporation under the law and allowed to exist and exercise the
powers of a corporation until its corporate existence is assailed by the State in a quo
warranto proceeding.
What are the elements of a de facto corporation?
The requisites of a de facto corporation are as follows:
a. Existence of a valid law under which it may be incorporated;

b. Attempt in good faith to incorporate; and
c. Actual use or exercise in good faith of corporate powers.
With regard to the second element, attempt in good faith to incorporate, at the very
least, means obtaining a certificate of incorporation from the SEC. The execution of
the articles of incorporation and adoption of bylaws, per se, are not enough to warrant
de facto existence. In other words, there is no bona fide attempt to incorporate until
the SEC at the very least issues the certificate of incorporation.
The filing of articles of incorporation and the issuance of the certificate of

incorporation are essential for the existence of a de facto corporation. In fine, it is the
act of registration with the SEC through the issuance of a certificate of incorporation
that marks the beginning of an entity's corporate existence.6
What is a corporation by estoppel?
A corporation by estoppel is one that exists when two or more persons assume to act
as a corporation knowing it to be without authority to do so.7
5 Bases Conversion and Development Authority vs. Commissioner of Internal Revenue,G.R. No.
205466, January 11, 2021
6Missionary Sisters of Our Lady of Fatima vs. Alzona, et al., G.R. No. 224307, August 6, 2018.
7Ibid.

What are the liabilities under the doctrine of corporation by estoppel?
All persons who assume to act as a corporation knowing it to be without authority to

do so shall be liable as general partners for all debts, liabilities, and damages incurred
or arising as a result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use its lack of corporate personality
as a defense. 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.8
In another case, it was held that the doctrine of corporation by estoppel is founded on
principles of equity and is designed to prevent injustice and unfairness. It applies
when a non-existent corporation enters into contracts or dealings with third persons.
In which case, the person who has contracted or otherwise dealt with the non-existent
corporation is estopped to deny the latter's legal existence in any action leading out
of or involving such contract or dealing. While the doctrine is generally applied to
protect the sanctity of dealings with the public, nothing prevents its application in
the reverse, in fact, the very wording of the law which sets forth the doctrine of
corporation by estoppel permits such interpretation. Such that a person who has
assumed an obligation in favor of a non- existent corporation, having transacted with
the latter as if it was duly incorporated, is prevented from denying the existence of
the latter to avoid the enforcement of the contract. In this case, while the donation
was accepted at the time the donee was not yet incorporated, the subsequent
incorporation of the donee-corporation and its affirmation of the recipient’s authority
to accept on its behalf cured whatever defect that may have attended the acceptance
of the donation, applying the doctrine of corporation by estoppel under the
Corporation Code.9
The Supreme Court likewise stated that the donee could not be considered a de facto
corporation because, at the time of the donation, it was not registered with the SEC.
The filing of articles of incorporation and the issuance of the certificate of
incorporation are essential for the existence of a de facto corporation.
To summarize then, an ostensible corporation when sued on any transaction entered

by it as a corporation or on any tort committed by it as such shall not be allowed to
use its lack of corporate personality as a defense.
8Section 20, RCC.

9Missionary Sisters of Our Lady of Fatima vs. Alzona, et al., G.R. No. 224307, August 6, 2018.

Similarly, 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.10
1. Nationality of corporations
What is the prevailing mode of determining the nationality of corporations

engaged in nationalized activities?
The "control test" is the prevailing mode of determining the nationality of

corporations engaged in nationalized activities. However, when in the mind of the
Court there is doubt as to where beneficial ownership and control reside, based on
the attendant facts and circumstances of the case, then it may apply the “grandfather
rule.”
In fact, the Control Test can be, as it has been, applied jointly with the Grandfather
Rule to determine the observance of foreign ownership restriction in nationalized
economic activities. The Control Test and the Grandfather Rule are not, as it were,
incompatible ownership-determinant methods that can only be applied alternative to
each other. Rather, these methods can, if appropriate, be used cumulatively in the
determination of the ownership and control of corporations engaged in fully or partly
nationalized activities.11
The Grandfather Rule, standing alone, should not be used to determine the Filipino
ownership and control in a corporation, as it could result in an otherwise foreign
corporation rendered qualified to perform nationalized or partly nationalized
activities. Hence, it is only when the Control Test is first complied with that the
Grandfather Rule may be applied. Put in another manner, if the subject corporation’s
Filipino equity falls below the threshold of 60%, the corporation is immediately
considered foreign-owned, in which case, the need to resort to the Grandfather Rule
disappears.12
The Supreme Court stressed, however, that when the 60% Filipino ownership, is
never in doubt, the control test prevails. In the relevant case, it was held that the
10Section20, RCC.
11Narra Nickel Mining and Development Corp. vs. Redmont Consolidated Mines Corp., G.R. No.
195580, April 21, 2014.
12Narra Nickel Mining and Development Corp. vs. Redmont Consolidated Mining Corp., G.R. No.
195580, January 28, 2015.

petition is severely wanting in facts and circumstances to raise legitimate challenges
to the joint venture company’s 60-40 Filipino-Foreigner ownership. The application
of the control test will already yield the result that the company is a Philippine
national. The grandfather rule no longer applies.13
a. Grandfather rule
When is the grandfather rule applied?
The grandfather rule is applied in the following cases:
a. Under the Grandfather Rule Proper, 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.
b. Under the Strict Rule or Grandfather Rule Proper, the combined totals in the
Investing Corporation and the Investee Corporation, when traced (i.e.,
“grandfathered”) to determine the total percentage of Filipino ownership, show
less than 60% requirement.
c. If based on records, Filipinos own at least 60% of the investing corporation but
there is doubt as to where control and beneficial ownership in the corporation
really reside.
In 2015, R Corp., a domestic company that is wholly owned by Filipinos, filed

its opposition to the applications for Mineral Production Sharing
Agreements (MPSA) of O Corp., P Corp., and Q Corp. which were pending
before the Panel of Arbitrators (POA) of the Department of Environment
and Natural Resources (DENR). The three corporations wanted to
undertake exploration and mining activities in the province of Isabela. The
oppositor alleged that at least 60% of the capital shareholdings of the
applicants are owned by B Corp., a 100% Chinese corporation, in violation
of Sec. 2, Art. XII of the Constitution. The applicants countered that they are
qualified corporations as defined under the Philippine Mining Act of 1995
and the Foreign Investments Act of 1991 since B Corp. holds only 40% of the
capital stocks in each of them and not 60% as alleged by R Corp.
The Summary of Significant Accounting Policies statement of B Corp.

reveals that the joint venture agreements of B Corp. with Sigma Corp. and
13Leo Y. Querubin vs. Commission on Elections, et. al.; G.R. No. 218787, December 8, 2015.

Delta Corp. involve the 0 Corp., P Corp., and Q Corp. The ownership of the
layered corporations and joint venture agreements show that B Corp.
practically exercises control over the 0, P and Q corporations. 0, P and Q
corporations contend that the control test should be applied and its MPSA
applications granted. On the other hand, R Corp. argues that the
"grandfather rule" should be applied. Decide with reasons. (Bar 2009)
The grandfather rule should apply. The Supreme Court held in a similar case that
even though on paper the capital shareholding in a mining company is 60% owned by
Filipinos and 40% by foreigners, if there is a doubt as to the locus of the beneficial
ownership and control, the grandfather rule should apply. Based on the facts, B
Corporation, a Chinese corporation, practically exercises control over O, P and Q
Corporations. Such circumstance creates a doubt as to where control and beneficial
ownership reside that warrants application of the grandfather rule. (Narra Nickel
Mining and Development Corporation vs. Redmont Consolidated Mines Corp, GR No.
195580, January 28, 2015)
The Proposed Corporation will be engaging in the acquisition and

development of real state in the Philippines. The contemplated ownership
structure of the Proposed Corporation provides that 61% will be owned by
Filipinos, 50% of which, by virtue of a Deed of Donation, is owned by a
Filipino minor. However, the shares of stock of the minor incorporator will
be held in trust by her Chinese father, with authority to represent the
minor in all stockholders' meeting of the corporation, while she is still a
minor. She will have full control over the shares only upon attaining the
age of majority.
a. May the Chinese Father of the minor be validly appointed/ designated

as trustee for his daughter’s share without violating the Constitution and
nationality laws?
No. The Proposed corporation is engaged in the acquisition and development of real
estate which is a partially nationalized activity; thus, the Proposed Corporation
must comply with the 40% foreign ownership threshold.
In the determination of the citizenship of shares being held in trust, both the
nationality of the trustee and of the beneficiary should be considered.
Under the proposed structure, the 50% shareholding of Minor C will be under the
control of her Chinese father. Since foreign control over the Proposed Corporation
will exceed 40%, it will not comply with the Constitution and nationality laws. Thus,

the Proposed Corporation cannot engage in real estate business under this
structure.14
b. Can the Chinese trustee qualify as nominee/representative of the

Filipino minor incorporator in the Board of Directors?
Yes, subject to the allowable proportion under the Anti-Dummy Law.
Section 22 of the Revised Corporation Code (RCC) requires stock ownership in order
to be eligible as director. For the purpose of stock ownership qualification, the
general rule is that beneficial ownership is not necessary and that a person who
holds the legal title to stock on the books of the corporation is qualified, although
the beneficial ownership may be in another.
Minor C will be an incorporator of the Proposed Corporation. However, Section 10

of the RCC requires that a natural incorporator must be of legal age. Considering
the above prohibition and the fact that the Chinese father represents the minor in
such incorporation, the legal title to the stocks issued shall be in the name of the
Chinese father. As such, the trustee Chinese father may qualify as a director subject
to the allowable proportion under the Anti-Dummy Law. 15
c. Does the Grandfather rule apply in this case?
No, the Grandfather Rule does not apply in this case. The Grandfather Rule applies
when there is a doubt on the nationality of an investee corporation and such is
determined by tracing or "grandfathering" the shares of an investing corporate
stockholder(s). Here, the nationality of the corporate stockholder, Corporation X, is
not in doubt. What we are analyzing is the 50% share ownership of Minor C, which
can directly be determined without applying the Grandfather Rule.
2. Corporate juridical personality

a. Doctrine of separate juridical personality
The probate court hearing the settlement of the estate of the deceased
stockholder cannot order the lessees of the corporation to remit rentals to the
14 Re: Citizenship of a Trust; Grandfather Rule, SEC-OGC Opinion No. 22-05, April 13, 2022
15 Re: Citizenship of a Trust; Grandfather Rule, SEC-OGC Opinion No. 22-05, April 13, 2022

estate’s administrator. The decedent was not the owner of the rented
property but only of the shares of the corporation that owns the property.16
a. As a general rule, directors, officers, or agents of a corporation cannot be held

personally liable for the obligations incurred by the corporation, unless it can be
shown that such director/officer/agent is guilty of gross negligence or bad faith or
committed an unlawful act and that the same was clearly and convincingly
proven. Thus-
i. The president should not be held solidarily liable with the corporation for the
unpaid commissions due to a marketing agent because no commission of an
unlawful act, gross negligence, or bad faith was alleged in the complaint,
much less proven in the course of the trial.17
ii. There are two obligations in a trust receipt transaction: the first, refers to
money received under the obligation involving the duty to turn it over to the
owner of the merchandise sold, while the second refers to merchandise
received under the obligation to "return" it to the owner. A violation of any of
these undertakings constitutes estafa defined under Art. 315 (1) (b) of the
Revised Penal Code, as provided by Sec. 13 of Presidential Decree 115.
Although the pieces of evidence show that a corporate officer signed the Trust
Receipt Agreements, they do not show that he signed them in his personal
capacity. Without any evidence that respondent personally bound himself to
the debts of the company he represented, the Court cannot hold him civilly
liable under the Trust Receipt Agreements.18
b. The cause of action available to the corporation cannot be generally enforced by

its director, officer, or stockholder and vice-versa.19 Thus-
i. The stockholders are not themselves the real parties in interest to claim and
recover compensation for the damages arising from the wrongful attachment
16Manuela Azucena Mayor vs. Edwin Tiu, G.R. No. 203770, Second Division, November 23, 2016.
17Mactan Rock Industries vs Germo, GR No. 228799, January 10, 2018.
18 BDO UNIBANK, INC. v. ANTONIO CHOA;G.R. No. 237553, 10 July 2019. He is, however, liable
criminally given that under the Trust Receipts Law, if the offender is a corporation, criminal liability
shall be imposed upon the director, officer or any person responsible for the violation. See discussion
on banking laws.
19“Except by way of derivative suit, infra”

of corporate assets. Only the corporation is the real party in interest for that
purpose.20
It was, however, held that the doctrine of separate juridical personality does not apply
if the judgment creditor wanted the officers to be examined not for the purpose of
passing unto them the liability of the respondent corporation, as the judgment
obligor, but only to ascertain the properties and income of the latter which can be
subjected for execution in order to satisfy the final judgment and nothing else.21
Linden Suites demanded payment of the cost of demolition from Meridien

Far East Properties. By virtue of a writ of execution, the Sheriff attempted
to serve the writ on Meridien in its office address in Makati City but failed.
Linden Suites then advised the sheriff to serve the writ to respondent at 2/F,
Soho Central Condominium located in Mandaluyong City, its registered
address in its 2006 General Information Sheet (GIS) that was filed before
the SEC. However, Atty. Baculi, the Legal and Administrative Officer of
Meridien East Realty and Development Corporation (MERDC), informed
him that it was Meridien Development Group, Inc. (MDGI), not Meridien Far
East Properties, which owned the office in the said address. Atty. Baculi
showed a GIS issued by the SEC as proof that the occupant of the said
address was indeed MDGI. Thus, Linden Suites prayed that Meridien Far
East Properties 's officers be directed to appear before the court for an
examination of the income and properties owned by Meridien Far East
Properties for the satisfaction of the RTC Decision.
The officers claimed that their examination is a violation of the doctrine of

separate corporate personality. Is their contention correct?
NO. The well-settled doctrine is inapplicable in the case at bench. Petitioner wanted
the officers to be examined not for the purpose of passing unto them the liability of
respondent as its judgment obligor. In fact, it never averred in the motion any
intention to make the officers liable for respondent's obligation due to the latter's
purported attempts to evade the execution of the final judgment. What is clear
therein is that the sole objective of the examination of the officers was to ascertain
the properties and income of respondent which can be subjected for execution in order
to satisfy the final judgment.22
20 Stronghold Insurance Company, Inc. vs. Tomas Cuenca, et. al., G.R. No. 173297, March 6, 2013.
21 Linden Suites, INC. vs. Meridien Far East Properties, INC. G.R. No. 211969. October 4, 2021
22 ibid

Gesolgon and Santos alleged that they were hired on March 3, 2008 and
April 5, 2008, respectively, by Mikrut as part-time home-based remote
Customer Service Representatives of CyberOne, an Australian company.
Thereafter, they became full time and permanent employees of CyberOne
AU and were eventually promoted as Supervisors. Sometime in October
2009, Mikrut, the Chief Executive Officer (CEO) of both CyberOne AU and
CyberOne PH, asked petitioners, together with Juson, to become dummy
directors and/or incorporators of CyberOne PH to which petitioners agreed.
As a result, petitioners were promoted as Managers and were given
increases in their salaries. The salary increases were made to appear as paid
for by CyberOne PH. However, in the payroll for November 16 to 30, 2010,
Mikrut reduced petitioners' salaries from P50,000.00 to P36,000.00, of which
P26,000.00 was paid by CyberOne AU while the remaining P10,000.00 was
paid by CyberOne PH. Aside from the decrease in their salaries, petitioners
were only given P20,000 each as 13th month pay for the year 2010. Sometime
in March 2011, Mikrut made petitioners choose one from three options: (a)
to take an indefinite furlough and be placed in a manpower pool to be
recalled in case there is an available position; (b) to stay with CyberOne AU
but with an entry level position as home-based Customer Service
Representative; or (c) to tender their irrevocable resignation. Petitioners
alleged that they were constrained to pick the first option in order to save
their jobs. In April 2011, petitioners received P13,000.00 each as their last
salary. Hence, petitioners filed a case against respondents and CyberOne
AU for illegal dismissal. They likewise claimed for non-payment or
underpayment of their salaries and 13th month pay; moral and exemplary
damages; and attorney's fees.
On the other hand, CyberOne PH, Mikrut and Juson denied that any
employer-employee relationship existed between petitioners and CyberOne
PH. They insisted that petitioners were incorporators or directors and not
regular employees of CyberOne PH. They claimed that petitioners were
employees of CyberOne AU and that the NLRC had no jurisdiction over
CyberOne AU because it is a foreign corporation not doing business in the
Philippines. Whether the Doctrine of Piercing the Veil of Corporate Fiction
should be applied in this case?
The Court found the Petition without merit. At the outset, since there is an issue
involving the piercing of the corporate veils of CyberOne PH and CyberOne AU, it
must be emphasized that the records are bereft of any showing that this Court has
acquired jurisdiction over CyberOne AU, a foreign corporation, through a valid
service of summons, although respondent CyberOne PH, Mikrut and Juson were
validly served with summons. Notably, CyberOne AU is a foreign corporation
organized and existing under the laws of Australia and is not licensed to do business

in the Philippines. CyberOne AU did not appoint and authorize respondents
CyberOne PH, a domestic corporation, and Mikrut, the Managing Director of
CyberOne AU and a stockholder of CyberOne PH, as its agents in the Philippines to
act in its behalf. Also, it was not shown that CyberOne AU is doing business in the
Philippines.
While it is true that CyberOne AU owns majority of the shares of CyberOne PH, this,
nonetheless, does not warrant the conclusion that CyberOne PH is a mere conduit of
CyberOne AU. The doctrine of piercing the corporate veil applies only in three basic
instances, namely: (a) when the separate distinct corporate personality defeats public
convenience, as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; (b) in fraud cases, or when the corporate entity is used to justify
a wrong, protect a fraud, or defend a crime; or (c) is used in alter ego cases, i.e., where
a corporation is essentially a farce, since it is a mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.
The Court found that the application of the doctrine of piercing the corporate veil is
unwarranted in the present case. First, no evidence was presented to prove that
CyberOne PH was organized for the purpose of defeating public convenience or
evading an existing obligation. Second, petitioners failed to allege any fraudulent acts
committed by CyberOne PH in order to justify a wrong, protect a fraud, or defend a
crime. Lastly, the mere fact that CyberOne PH's major stockholders are CyberOne
AU and respondent Mikrut does not prove that CyberOne PH was organized and
controlled and its affairs conducted in a manner that made it merely an
instrumentality, agency, conduit or adjunct of CyberOne AU. In order to disregard
the separate corporate personality of a corporation, the wrongdoing must be clearly
and convincingly established. Moreover, petitioners failed to prove that CyberOne AU
and Mikrut, acting as the Managing Director of both corporations, had absolute
control over CyberOne PH. Even granting that CyberOne AU and Mikrut exercised
a certain degree of control over the finances, policies and practices of CyberOne PH,
such control does not necessarily warrant piercing the veil of corporate fiction since
there was not a single proof that CyberOne PH was formed to defraud petitioners or
that CyberOne PH was guilty of bad faith or fraud. Hence, the doctrine of piercing
the corporate veil cannot be applied in the instant case. This means that CyberOne
AU cannot be considered as doing business in the Philippines through its local
subsidiary CyberOne PH. This means as well that CyberOne AU is to be classified as
a non-resident corporation not doing business in the Philippines. Maria Lea Jane I.
Gesolgon V. Cyberone Ph., Inc.G.R. No. 210741, October 14, 2020, Second
Division, Hernando, J.:

b. Doctrine of piercing the corporate veil
What is the doctrine of reverse piercing of the corporate veil?
In a traditional veil-piercing action, the court disregards the existence of the

corporate entity so a claimant can reach the assets of a corporate insider (meaning,
the directors, stockholders, and officers). In reverse piercing action, however, the
plaintiff seeks to reach the assets of the corporation to satisfy claims against
corporate insider. Reverse piercing flows in the opposite direction (of traditional
corporate veil-piercing) and makes the corporation liable for the debt of the
shareholders or members.
Does reverse piercing the corporate veil doctrine find jurisprudential basis?
In previous cases, the Supreme Court said that the doctrine of piercing the corporate
veil has no application where the purpose is not to hold the individual stockholders
liable for the obligation to the corporation but on the contrary to hold the corporation
liable for the obligations of stockholders.23
In International Academy of Management and Economics (I/AME) Litton and

Company, Inc. vs. Litton and Company, Inc.,24 however, the Supreme Court applied
the reverse piercing doctrine and made a nonstock corporation liable for the debts of
its member.
In this case, a lawyer-lessee failed to pay his rentals. The lessor filed a complaint for
unlawful detainer and secured a favorable judgment. Judgment was not immediately
executed but it was eventually revived. The sheriff levied a piece of real property in
the name of International Academy of Management and Economics Incorporated
(I/AME), a nonstock corporation, in order to execute the judgment against the lessee,
who is a member of I/AME. The Supreme Court agreed with the Court of Appeals and
sustained the levy, ruling that the corporation is an alter ego of the lessee and the
lessee- the natural person is the alter ego of the corporation. The lessee falsely
represented himself as president of the corporation in the Deed of Sale when he
bought the property at a time when the corporation had not yet existed.
Uncontroverted facts also revealed that the lessee and the corporation are one and
23Francisco Motors vs. Court of Appeals, G.R. No. 100812, Second Division, June 25, 1999, Umali vs.
Court of Appeals, G.R. No. 89561, September 13, 1990; Indophil Textile Mill Workers Union vs. Calica,
G.R. No. 96490, February 3, 1992.
24International Academy of Management and Economics (I/AME) vs. Litton and Company, Inc., G.R.
No. 191525, December 13, 2017.

the same person: The lessee is the conceptualizer and implementor of the corporation
and the majority contributor of the corporation. I/AME is basically the corporate
entity used by the lessee as his alter ego for the purpose of shielding his assets from
the reach of his creditors.
3. Capital structure
a. Corporate term
With the enactment of RCC, is the corporate term of a corporation now

deemed perpetual without the need of amending its Articles of
Incorporation (AOI) with the requisite 2/3 affirmative vote of its
outstanding shares?
The corporate term of a corporation is deemed extended and amended to perpetual

existence pursuant to paragraph 2, Section 11 of the RCC which provides:
“Section 11. Corporate Term. — A corporation shall have perpetual

existence unless its articles of incorporation provide
otherwise. Corporations with certificates of incorporation issued
prior to the effectivity of this Code, and which continue to exist
shall have perpetual existence, unless the corporation, upon a vote of
its stockholders representing a majority of its outstanding capital stock,
notifies the SEC that it elects to retain its specific corporate term pursuant
to its articles of incorporation: xxx” (Emphasis supplied)
It is clear from the aforementioned provision that the corporate term of a corporation
existing prior to, and which continues to exist upon the effectivity of the RCC, shall
be automatically deemed perpetual without any further action on the part of the
corporation.
Further, since the automatic conversion of the corporate term to perpetual existence
does not require an amendment of the AOI, the 2/3 affirmative vote of the outstanding
shares to amend the AOI would not be required.25
Based on the afore-quoted provisions, corporations existing prior to, and which
continues to exist after the effectivity of the RCC, are ipso jure granted perpetual
existence without any further action on their part. Given this, the Articles of
Incorporation of all corporations who satisfies the requirements under Section 11 of
25Re:Corporate Term of Existing Corporations under the RCC, SEC-OGC Opinion No. 28-19, July 22,
2019.

the RCC are deemed amended to the effect that their corporate term is now
perpetual. A positive act on the part of corporations is only required if they intend to
limit their corporate term to a certain period.26
Corporations with certificate of incorporation issued prior to the effectivity of the RCC
and which continue to exist may elect to retain its specific corporate term pursuant
to its articles of incorporation but subject to the following rules:
1. A notice with attached Directors' Certificate, certifying the decision to retain

the specific corporate term as specified in the Articles of Incorporation must be
filed with the Commission.
2. The decision to retain the specific corporate term as specified in the Articles of
Incorporation must be approved in a meeting duly held for the purpose by a
majority vote of the Board of Directors or Trustees and by the vote of the
stockholders representing a majority of the outstanding capital stock,
including the non-voting shares, or a majority of the members, in case of a non-
stock corporation.
3. The notice must be filed within a period of two years from February 23, 2019,
or until February 23, 2021, pursuant to Section 185 of the RCC.
4. The corporate term of corporations which fail to comply with the required
notification shall be treated as perpetual after the lapse of the two-year
period.27
Classification of shares
The Articles of Incorporation of a corporation provides for voting rights

privilege of its founders’ shares, as follows:
“In terms of voting rights, FOUNDERS’ shares shall have a 1:10

ratio as opposed to 1:1 ratio for the COMMON shares. In the other
words, one FOUNDERS’ share is equivalent to ten votes. All shares
regardless of whether it is FOUNDERS’ or COMMON shall be
allowed to vote on all matters of the holding corporation, including
the right to vote and be voted for in the election of directors.”
26 SEC-OGC Opinion No. 20-02, Re: Corporate Term under the Corporation Code, 03 November 2020
27 SEC Memorandum Circular No. 22, s. 2020, August 18, 2020

Is the 1:10 voting rights ratio for founders’ shares subject to a limited period
not to exceed five (5) years provided under Section 7 of the RCC?
The 1:10 voting rights ratio for founders’ shares is not subject to the limited period
not to exceed five (5) years provided under Section 7 of the RCC since this provision
only applies to the exclusive right to vote and be voted for in the election of directors.28
Redeemable shares
ABC Corporation was registered with the SEC in 2011. In 2016, it decreased
its capital stock to one billion twelve million four hundred seventy-six
thousand pesos (Php1,012,476,000.00) and reclassified its shares into
common and redeemable preferred shares. XYZ Corporation is currently
the sole subscriber to the preferred shares, and that the Company intends
to redeem and retire two million three hundred fifty-eight thousand six
hundred ninety (2,358,690) preferred shares issued to XYZ Corporation.
a. Can ABC redeem the preferred shares even without retained earnings?
Although the general rule is that there must be unrestricted retained earnings before
a corporation can redeem, repurchase, or reacquire its own shares, the exception is
when the shares to be redeemed are redeemable as provided in the articles of
incorporation and certificates of stock of the corporation. But to redeem said shares,
there must be sufficient assets to cover the debts and liabilities of the corporation, as
discussed hereunder.
b. Will the redemption of the preferred shares result in a reduction of the

subscribed capital stock of ABC Corporation if its Articles of
Incorporation does not provide for the reissuable feature of redeemed
shares?
Where the redeemed preferred shares are not reissuable, the same will be considered
retired. The retirement of treasury shares of this nature has the effect of decreasing
the capital stock of the corporation. If the redeemed preferred shares are reissuable
as provided in the articles of incorporation, they shall not be considered retired, and
therefore, will not decrease the capital stock of the corporation.
28Close Holding Corporation; Founder's Shares, SEC-OGC Opinion No. 02-10, January 15, 2010.

In the case of ABC Corporation, its articles of incorporation is silent on the reissuable
nature of its redeemable preferred shares. Accordingly, once they are redeemed, the
same shall be considered retired and are no longer reissuable. In turn, the retirement
of the treasury shares corresponding to the redeemed preferred shares has the effect
of decreasing the capital stock of the Company.29
Mehitabel Incorporated’s outstanding capital stock has a total par value

of One Hundred Thirty-One Million Pesos (PhP131,000,000.00) divided
into: a) Common Shares: Twenty-One Million (21,000,000) with par value of
One Peso (Php1.00) per share; and b) Preferred Shares: One Hundred Ten
Million (110,000,000) with par value of One Peso (Php1.00) per share.
The preferred shares are non-voting, non-participating, non-convertible

and redeemable at the option of Mehitabel within five (5) years from the
date of issue at par value of One Peso (Php1.00) per share.
Mehitabel intends to redeem, at par value, all of the One Hundred Ten
Million (110,000,000.00) preferred shares it has issued.
The Audited Financial Statements of Mehitabel reflect a retained earnings

deficit of Seventy-Nine Million Three Hundred Forty-Five Thousand Eight
Hundred Forty-Three Pesos (P79,345,843.00). However, Mehitabel has
sufficient assets to cover its debts and liabilities prior to and after the
proposed redemption. The proposed redemption will not cause insolvency
or result in the inability of the Company to meet its debts as they mature.
Subsequent to the proposed redemption, the preferred shares reacquired

will be considered retired and will no longer be reissued. The Company
will remove these redeemed preferred shares from the treasury by
applying for a decrease in its authorized capital stock.
a. Can Mehitabel redeem the preferred shares at par value even

without unrestricted retained earnings?
Yes. Section 40 of the Revised Corporation Code (RCC) states the general rule that
there must be unrestricted retained earnings before a corporation can redeem,
repurchase, or reacquire its own shares. An exception to this general rule is Section
8 of the RCC which defines redeemable shares and provides that such shares may
29Re: Redemption of Preferred Shares; Subscribed Capital Stock, SEC-OGC Opinion No. 20-19, May
27, 2019.

be purchased by the corporation from the holders thereof upon the expiration of a
fixed period, regardless of the existence of unrestricted retained earnings in the
books of the corporation.
Redeemable shares are shares, usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either issuing corporation, or the
stockholder, or both at a certain redemption price.
However, while redeemable shares may be redeemed regardless of the existence of

unrestricted retained earnings, this is subject to the condition that the corporation
has, after such redemption, assets in its books to cover debts and liabilities inclusive
of capital stock. Redemption, therefore, may not be made where the corporation is
insolvent or if such redemption will cause insolvency or inability of the corporation
to meet its debts as they mature.
Considering that Mehitabel has, after such redemption, sufficient assets in its books
to cover debts and liabilities inclusive of capital stock, it may purchase its
redeemable shares from the holders thereof upon the expiration of a fixed period,
as provided in its articles of incorporation and certificates of stock representing the
said shares, regardless of the existence of unrestricted retained earnings in its
books.
b. Can Mehitabel retire the preferred shares after redemption and

remove the same from the treasury by applying for the amendment
of its Articles of Incorporation to decrease its authorized capital
stock?
Yes. Once redeemed, a corporation's redeemable preferred shares become part of

the corporation's treasury shares.
While redeemed preferred shares are considered retired, the same remains in
treasury until removed from their treasury status by decreasing the authorized
capital stock of the corporation.
In the case of Mehitabel, its amended Articles of Incorporation is silent on the

"reissuable" nature of its redeemable preferred shares. As such, once its shares are
redeemed, the same shall be considered retired and may no longer be reissued. To
eliminate the treasury shares, Mehitabel must file an application for decrease of
authorized capital stock and comply with all the requirements set forth in Section
37 of the RCC which states among others, that no decrease of authorized capital

stock shall be approved by the Commission if its effect shall prejudice the rights of
corporate creditors.30
Based on the foregoing SEC opinions, the redemption of non-reissuable redeemable

shares will result in the retirement of the redeemed shares and in the reduction of
the capital stock of the corporation. The capital stock is effectively reduced without
having to formaly amend the articles of incorporation. However, the redeemed shares
stay in the treasury ( even though they are non-reissuable ). To eliminate these
treasury shares, the Corporation must apply for the corresponding reduction of
capital stock.
On September 15, 2007, XYZ Corporation issued to Paterno 800 preferred

shares with the following terms:
"The Preferred Shares shall have the following rights,

preferences, qualifications, and limitations, to wit:
1. The right to receive a quarterly dividend of One Per Centum (1%),
cumulative and participating;
2. These shares may be redeemed, by drawing of lots, at any time
after two (2) years from date of issue, at the option of the
Corporation; x x x."
Today, Paterno sues XYZ Corporation for specific performance, for

the payment of dividends on, and to compel the redemption of, the preferred
shares, under the terms and conditions provided in the stock certificates.
Will the suit prosper? Explain.
The suit will prosper if XYZ Corporation has sufficient unrestricted retained
earnings. Otherwise, Paterno cannot compel XYZ Corporation to pay dividends.
Holders of preferred shares are not creditors of the corporation and their preference
as to dividends only applies if the corporation declares dividends out of the
corporation’s surplus profits. Republic Planters Bank vs Agana, GR No. 51765,
March 3, 1997
Paterno cannot compel the corporation to redeem the shares because based on the
terms of issuance, the redemption is at the option and discretion of the Corporation.
(Bar 2009)
Re: Redemption and Retirement of Preferred Shares; Reduction of Capital Stock, SEC-OGC Opinion
30
No. 21-10, September 21, 2021

i. Treasury shares
The law clearly sets out the parameters when a corporation may reacquire its shares
and convert them into treasury shares. According to Section 9 of the Corporation
Code31, "treasury shares are shares of stock which have been issued and fully paid
for, but subsequently reacquired by the issuing corporation by purchase, redemption,
donation or through some other lawful means." Apart from reacquiring the shares
through some lawful means, the Corporation Code is also explicit that while a
corporation has the power to purchase or acquire its own shares, the corporation must
have unrestricted retained earnings in its books to cover the shares to be purchased
or acquired. In addition, in cases where the reason for reacquiring the shares is
because of the unpaid subscription, the Corporation Code is likewise explicit that the
corporation must purchase the same during a delinquency sale and not to direct the
reduction on the number of subscribed shares to what has been paid. Simply agreeing
in a meeting for their reduction, thereby releasing the stockholder from his obligation
to pay the unpaid subscriptions, cannot be the mode by which said unpaid
subscriptions are settled. To allow corporations to do such an act would violate the
aforementioned trust fund doctrine in corporation law.32
May a Company treat the treasury shares as part of its issued shares?
Treasury shares are shares that have been earlier issued and are regarded as
property acquired and currently owned by the corporation and not by any of its
stockholders. Being the owner of treasury shares, the corporation may opt to retire,
sell, or distribute as property dividends said shares.
Thus, a company may treat the treasury shares as part of the issued shares as long
as they are not cancelled or retired. Treasury shares do not revert to the unissued
shares of a corporation but are regarded as property acquired by the corporation
which may be reissued or resold by the corporation at a price to be fixed by the Board
of Directors. Since treasury shares do not revert back to unissued shares, they do not
lose their status as "issued shares." When outstanding shares are acquired in
treasury, their issued status is not disturbed. These are still part of the issued capital
stock although no longer outstanding. This is so because the amount paid for the
acquisition of treasury shares does not represent a return of capital to the
31 Same as under the RCC

32 Salido, Jr. v. Aramaywan Metals, G.R. No. 233857, March 18, 2021

stockholders but an investment out of retained earnings on a salable property known
as treasury shares.33
4. Incorporation and organization
May the corporate creditors enforce payment of the unpaid subscription?
Yes, a creditor is allowed to maintain an action upon any unpaid subscriptions (in the
same collection suit against the corporation) and thereby step into the shoes of the
corporation for the satisfaction of the debt. To make out a prima facie case in a suit
against stockholders of an insolvent corporation to compel them to contribute to the
payment of its debts by making good the balances upon their subscriptions, it is only
necessary to establish that the stockholders have not in good faith paid the par value
of the stocks of the corporation. Subscriptions to the capital stock of a corporation
constitute a fund to which creditors have the right to look for the satisfaction of their
claims.34
In another case, however, the Supreme Court, citing Halley v Printwell, recognized
three instances when the creditor is allowed to maintain an action upon any unpaid
subscriptions based on the trust fund doctrine: (1) where the debtor corporation
released the subscriber to its capital stock from the obligation of paying for their
shares, in whole or in part, without a valuable consideration, or fraudulently, to the
prejudice of creditors; and (2) where the debtor corporation is insolvent or has been
dissolved without providing for the payment of its creditors. 35. In this case, the
Supreme Court ruled that the trust fund doctrine can not be invoked to justify a
collection suit against both the corporation-lessee and its stockholders since the lessor
did not plead the insolvency or dissolution of the corporation.
d. Consideration for stocks
Is appraisal right available for members of a nonstock corporation?
No, appraisal right is only available for stockholders in a stock corporation. Members
of a nonstock corporation are entitled to the residual assets of the corporation only in
case of dissolution and their distributive rights to the assets are defined in the articles
of incorporation, or provided in a plan of distribution approved by at least majority of
33Minimum Stock Subscription and Treasury Shares, SEC-OGC Opinion No. 16-16, June 27, 2016.
34Halley vs. Printwell, Inc., G.R. No. 157549, May 30, 2011.
35 Jennifer M. Enano-Bote, et al v. Jose Ch Alvarez and SBMA G.R. No 223572. November 10, 2020,

the board of trustees and 2/3s of entire members. By allowing members of the
nonstock corporation to exercise appraisal right, they, in effect, will be entitled to the
return of their contribution to the corporation and the residual corporate assets, even
without dissolution, contrary to the nature of nonstock corporation.
Yenetic Corporation wants to increase its Authorized Capital Stock (which

is currently fully subscribed and issued) to be able to increase its working
capital to undertake business expansions.
The Board of Directors consults with you as legal counsel on the proper
answers to the following issues:
a. If the increase in authorized capital stock is formally submitted to the

stockholders in a meeting duly called for the purpose, what is the vote
necessary for the stockholders' ratification, and may the dissenting
stockholders exercise their appraisal right?36
Any provision or matter stated in the articles of incorporation, including an increase

of capital stock, may be amended by a majority vote of the board of directors and the
vote or written assent of the stockholders representing at least 2/3s of the outstanding
capital stock. Stockholders cannot exercise any appraisal right in case of an
amendment to the articles of incorporation to increase capital stock because this is
not one of the cases allowed by law where appraisal right may be exercised (Section
81 and 37 of the RCC) unless amendment consists of the issuance of additional shares
which are give preference superior over existing share, or the corporation is a close
corporation where a stockholder may demand the payment of the fair value of his
shares for any reason whatsoever,37
b. Once the increase in the authorized capital stock of Yenetic has been
legally effected with the SEC, can the new shares from the unissued
shares be offered to a new limited group of investors without having to
offer them to the shareholders of record since no pre-emptive right is
provided for in the AOI and Bylaws of Yenetic?38
The new shares from the unissued portion of the increased capital stock cannot be
offered to a new limited group of investors without having to offer them to the
362018 Bar Exam.

37Section104, RCC.
382018 Bar Exam.

shareholders of record just because no pre-emptive right is provided for in the AOI
and Bylaws of Yenetic. This is because pre-emptive right exists unless denied in the
articles of incorporation or waived by the stockholders.
EPCC is a nonstock corporation. Article 6 of EPCC Articles of Incorporation

states: "That the number of trustees of the association shall be 15.
Based on the foregoing:
a. Should there be 11 nominees to the Board of Trustees, which is below the

required number of trustees to be elected [fifteen (15)] as provided by the
Corporation’s Articles of Incorporation, are all 11 considered
automatically elected regardless of the number of votes received by
each?
b. What is the minimum number of trustees/nominees in order for the

election to be valid?
a. While the Corporation Code requires the presence of at least a majority of the
members of a nonstock corporation for the election of its Board, it does not require
such number of votes for one to be declared elected. Under the aforecited provision,
the candidates receiving the highest number of votes shall be declared elected.
Thus, for a candidate to be elected as trustee, said candidate must be among the group
of candidates who received the highest number of votes. In case the number of
candidates does not exceed the number of seats in the board, said candidates,
provided they received votes, can be said to have received the highest number of votes,
as the law requires only plurality of the votes cast at the election.
b. SEC has previously opined that an election of less number of directors than the
number which the meeting was called to elect is valid as to those actually elected.
Thus, the stockholders or members of a corporation may opt to elect a number of

directors/trustees less than the number of directors/trustees as fixed in the articles of
incorporation. Such a situation would merely give rise to a vacancy in the board,
which may be later filled up. The power of the board is not suspended by vacancies in
the board unless the number is reduced below a quorum.
The number of candidates elected, however, is not without importance.
The grant of corporate power is to the Board as a body, and not to the individual
members thereof, and that the corporation can be bound only by the collective act of
the Board. In relation to this, the Board can only transact business if it reaches a

quorum, which is at least a majority of the number of trustees as fixed in the articles
of incorporation or bylaws, unless the Articles of Incorporation, the Bylaws, or the
Master Deed, in the case of a condominium corporation, provide for a greater number.
For the decisions of the Board to be valid as a corporate act, at least a majority of
such a majority or quorum has to concur. However, for the election of officers, the
vote of a majority of all the members of the Board as fixed in the articles of
incorporation, rather than of a majority of a quorum, shall be required.39
What happens if no election is held, or the owners of majority of the

outstanding capital stock or majority of the members entitled to vote are
not present in person, by proxy, or through remote communication or not
voting in absentia at the meeting?
The meeting may be adjourned and the outgoing directors or trustee shall serve in a
hold-over capacity.40
The non-holding of elections and the reasons therefor 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. The SEC shall have the power to issue such orders as may be
appropriate, including orders directing the issuance of a notice stating the time and
place of the election, designated presiding officer, and the record date or dates for the
determination of stockholders or members entitled to vote.
Notwithstanding any provision of the articles of incorporation or bylaws to the

contrary, the shares of stock or membership represented at such meeting and entitled
to vote shall constitute a quorum for purposes of conducting an election under this
section.41 This is otherwise known as the rule on emergency quorum.
39Re:Election of Trustees; Less than the Number of Seats, SEC-OGC Opinion No. 09-14, June 2, 2014.
40Section 23, RCC.
41Section 25, RCC.

Triple A Corporation (Triple A) was incorporated in 1960, with 500 founders’
shares and 78 common shares as its initial capital stock subscription.
However, Triple A registered its stock and transfer book only in 1978, and
recorded merely 33 common shares as the corporation’s issued and
outstanding shares.
[a] In 1982, Juancho, the sole heir of one of the original incorporators
filed a petition with the Securities and Exchange Commission (SEC) for
the registration of his property rights over 120 founders’ shares and 12
common shares. The petition was supported by a copy of the Articles of
Incorporation indicating the incorporators’ initial capital stock
subscription. Will the petition be granted? Why or why not? (Bar 2009)
Yes. The articles of incorporation defines the charter of the corporation and the
contractual relationship between the State and the corporation, the State and the
stockholders, and between the corporation and the stockholders. Its contents are thus
binding upon both the corporation and the stockholders, conferring on Juancho a
clear right to have his stockholding recorded. The stock and transfer book can not be
used as the sole basis for determining shares issued to stockholders more so when the
articles of incorporation show a significantly larger amount of shares issued and
outstanding compared to that listed in the stock and transfer book. ( Lanuza vs Court
of Appeals, GR No. 131394, March 28, 2005 )
[b] On May 6, 1992, a special stockholders’ meeting was held. At this

meeting, what would have constituted a quorum? Explain.
A quorum consists of the majority of the voting shares of the corporation Thus the
quorum for such meeting would be 289 shares or a majority of the 578 shares issued
and outstanding as indicated in the articles of incorporation. This includes the 33
common shares reflected in the stocks and transfer book, there being no mention or
showing of any transaction effected from the time of Triple A’s incorporation in 1960
up to the said meeting.
[c] 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 instalment;
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.( Section
74 of the Corporation Code )

May the bylaws reflect the actual delegation of authority to the board of
directors to amend the bylaws?
Under the RCC, the delegation of authority should be made through a shareholders’
or members’ resolution. The bylaws cannot reflect the actual delegation. The
delegated authority is temporary. It may be revoked anytime by a majority vote of
the shareholders or members.42 If the delegation is in the bylaws, the authority
cannot be simply recalled for it would have required an amendment to the bylaws
itself.
a. Effects of non-use of corporate charter
When should the corporation formally organize and commence its business?
A corporation should formally organize and commence its business within five years
from the date of its incorporation, otherwise, its certificate of incorporation shall be
deemed revoked as of the day following the end of the five-year period.43
Under the OCC, the corporation must organize within two years from incorporation.
The RCC requires the corporation to both organize and commence business within
five years from date of incorporation.
However, if a corporation has commenced its business but subsequently becomes

inoperative for a period of at least five consecutive years, the SEC may, after due
notice and hearing, place the corporation under delinquent status.
Note that failure to formally organize and commence business within five years from
incorporation results in the automatic revocation of the certificate of incorporation,
whereas commencement of business but subsequent lack of operation for five
consecutive years does not. Nevertheless, while the law provides for the automatic
revocation of the certificate of incorporation for failure to organize and commence
business within the said five year period, it nevertheless requires an affirmative act
on the part of the SEC motu proprio or upon filing of a verified complaint by any
interested party.44
42SEC-OGC Opinion 18-08, dated April 20, 2018.

43Section 21, RCC.
44 Section 138, RCC

5. Corporate powers
a. General powers; theory of general capacity
Discuss the specific powers of the corporation under the theory of general
capacity.
a. Power of a Corporation to Sue and Be Sued in its Corporate Name
The only instance that board resolution is not necessary in filing legal action on behalf
of the corporation is through a derivative suit. A derivative suit is an action filed by
a minority stockholder in the name and on behalf of the corporation to enforce a
corporate right or cause of action against the directors and officers who committed a
wrongful act against the corporation. Obviously, the directors who committed the
wrongful act, being in control of the corporation, are not expected to adopt a resolution
to authorize the filing of legal action to nullify their very own acts. To require a board
resolution on the part of the suing stockholder will render illusory the right of a
stockholder to file a derivative suit. In Tan Wing Talk case, it was also held that the
minority stockholder could have sued on a derivative cause of action but he must
allege and comply with the conditions for a derivative suit.45
However, where a corporation under the effective control of the majority is wronged,
board-sanctioned litigation should take precedence over derivative actions. After all,
the law expressly vests the power to sue in the board of directors, and a remedy based
on equity, (such as derivavite suit), can prevail only in the absence of one provided by
statute. In other words, majority stockholders who have undisputed corporate control
cannot resort to derivative suits when there is nothing preventing the corporation
itself from filing the case.46
It was also held that the chairperson and president of a corporation may sign the
verification and certification without need of board resolution. Moreover, lack of
authority of a corporate officer to undertake an action on behalf of the corporation
may be cured by ratification through the subsequent issuance of a board resolution.47
45See discussion on derivative suit, infra.

46 Ago Realty, ibid
47 Jorgenetics Swine Improvement Corporation v. Thin Agri-Products, Inc., G.R. No. 201044 & 222691,
May 05, 2021,

a. Specific powers; theory of specific capacity
What is the Theory of Specific Capacity?
Under the Theory of Specific Capacity, a corporation cannot exercise powers except
those expressly or impliedly given to it.
The specific powers of a corporation can be found in Sections 36 to 43 of the RCC.
What are the different corporate powers and their respective voting
requirements?
Powers of Board of Directors Outstanding Capital

Corporation Stock (or members, for
nonstock corporations)
Sec. 15 – Amendment of At least majority of the At least 2/3 of the
Articles of Incorporation board outstanding capital stock
Sec. 23 – Election of At least majority of the
Directors outstanding capital stock
Sec. 24 – Appointment of At least majority of the
Corporate Officers board
Removal of Corporate At least majority of the
Officers board
Sec. 27 – Removal of At least 2/3 of the
Directors/Trustees outstanding capital stock
Sec. 28 – Filling Vacancy If the ground is not If the ground is expiration,
in the Board expiration of the term, removal, increase in number
removal, increase in of directors; or If the ground
number of board seats is not expiration, removal,
and the remaining increase in number of board
directors constitute a seats but the remaining
quorum – Majority of the directors do not constitute a
remaining quorum – at least majority of
directors/trustees the outstanding capital stock
Sec. 29 – Payment of At least majority of the
Compensation to outstanding capital stock
Directors
Sec. 34 – Appointment of Majority of the quorum
the members of the
Executive Committee
Sec. 34 – Creation of Majority of the quorum
Special Committees

Powers of Board of Directors Outstanding Capital
Sec. 36 – At least majority of the At least 2/3 of the
Extension/Shortening of board outstanding capital stock
the Term
Sec. 37 – Incurring, At least majority of the At least 2/3 of the
Creating or Increasing board outstanding capital stock
Bonded Indebtedness;
Increasing or Decreasing
Capital Stock
Incurring Debt in the Majority of the quorum
Ordinary Course of
Business
Sec. 39 – Sale or other In the ordinary course of
Disposition of Assets business - Majority of the
quorum
All or substantially all of At least 2/3 of the
corporate assets – At outstanding capital stock
least majority of the
board
Sec. 41 – Invest Funds in Majority of the quorum
the Primary Purpose
Invest Funds to Majority of the quorum
Incidental Purpose for
which Corporation is
Created
Invest the Funds in a At least majority of the At least 2/3 of the
Secondary Purpose or board outstanding capital stock
another business
Sec. 42 - Declaration of Majority of the quorum
Cash Dividends
Sec. 42 - Declaration of Majority of the quorum At least 2/3 of the
Stock Dividends outstanding capital stock
Sec. 43 - Enter into Majority of the quorum At least majority of the
Management Contract for both managed and outstanding capital stock of
managing corporation each managed and managing
corporation (but at least 2/3
of the outstanding capital
stock is required from the
managed corporation in case
interlocking directors and
stockholders)

Powers of Board of DirectorsOutstanding Capital
Sec. 45 – Adoption of By- Majority of the outstanding
laws capital stock
Sec. 46 – Amendment of At least majority of the At least majority of the
Bylaws board outstanding capital stock.
If authority to amend will be

delegated by stockholders to
the board at least 2/3 of the
outstanding capital stock.
Revocation of the delegation

made to the Board – At least
majority of the outstanding
capital stock.
Sec. 61 – Fixing the Majority of the quorum or At least majority of the
Issued Value of No Par (pursuant to authority outstanding capital stock
Value Shares (if not conferred by the Articles
fixed in the Articles of of Incorporation or the
Incorporation) Bylaws)
Sec. 75 – Merger or At least majority of the At least 2/3 of the
Consolidation board outstanding capital stock
Sec 102- Amendment of At least majority of the At least 2/3 of the

articles of incorporation board 48 outstanding capital stock
of a close corporation
Sec. 134 – Voluntary At least majority of the At least majority of the
Dissolution Where No board outstanding capital stock
Creditors are Affected
Sec. 135 – Voluntary At least majority of the At least 2/3 of the
Dissolution Where board outstanding capital stock
Creditors are Affected
48 Section 102 of the RCC does not expressly require board approval. Nevertheless, to obviate
technicality when filing such application for amendment, it is best to include in the certificate of
amendment a statement that board approval was obtained. After all, amendments of AOI of stock
corporation, in general, require both board and stockholders’ approvals.

When is the increase or decrease in capital stock effective?
It is effective only upon approval by the SEC and its issuance of a certificate of filing
of increase or decrease of capital stock.
Sinophil entered into a Share Swap Agreement (Swap Agreement) with

Metroplex and Paxell. Under the Swap Agreement, Metroplex and Paxell
would transfer 40% of their shareholdings in Legend International Resorts
Limited (Legend) for a combined 35.5% stake in Sinophil.
Sinophil and Belle subsequently executed a Memorandum of Agreement

(Unwinding Agreement) with Metroplex and Paxell rescinding the Swap
Agreement. After the execution of the Unwinding Agreement, Metroplex
and Paxell were unable to return 1.87 billion of the Sinophil shares while
another two billion Sinophil shares remained pledged by Metroplex in favor
of International Exchange Bank and Asian Bank. Thereafter, the
shareholders of Sinophil voted for the reduction of Sinophil's authorized
capital stock where the amended Articles of Incorporation was approved by
CRMD and CFD. Such approval was published. Petitioners Yaw Chee
Cheow (Yaw), Metroplex and Paxell filed a Petition for Review Ad Cautelam
Ex Abundanti before the SEC assailing the approval by the CRMD and the
CFD of the amendments to Sinophil”s Articles of Incorporation. It also
argues that unless the questioned act of respondents of irregularly or
illegally reducing Sinophil's issued capital stock is restrained permanently,
"the same will operate as a fraud on investors such as the Petitioners and
will also likely cause grave or irreparable injury or prejudice to the
investing public."
Is the SEC correct in upholding the validity of the reduction of Sinophil’s

authorized capital stock and denying the prayer for the issuance of a cease
and desist order?
YES. Section 38 of the Corporation Code clearly lists down the requirements for a
corporation to decrease its capital stock. Section 38 is clear. A corporation can only
decrease its capital stock if the following are present:
1. Approval by a majority vote of the board of directors;

2. Written notice of the proposed diminution of the capital stock, and of the time
and place of a stockholders' meeting duly called for the - purpose, addressed to
each stockholder at his place of residence;
3. 2/3 of the outstanding capital stock voting favorably at the said stockholders'
meeting;

4. Certificate in duplicate, signed by majority of the directors and countersigned
by the chairman and secretary of the stockholders' meeting stating that legal
requirements have been complied with;
5. Prior approval of the SEC; and
6. Effects do not prejudice the rights of corporate creditors.
There is no validity nor legal basis to the allegation of petitioners that prior approval
of all the stockholders is required for the reduction in capital stock. Suffice it to state
that under Section 38 of the Corporation Code, such decrease only requires the
approval of a majority of the board of directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) vote of the outstanding capital stock. So long
as written notice of the proposed increase or diminution of the capital stock was made
to all stockholders, the presence and approval of at least 2/3 of the capital stock is
enough to make the increase or diminution valid. This is the plain language of the
provision over which no other interpretation may be made.
After a corporation faithfully complies with the requirements laid down in Section
38, the SEC has nothing more to do other than approve the same. Pursuant to Section
38, the scope of the SEC's determination of the legality of the decrease in authorized
capital stock is confined only to the determination of whether the corporation
submitted the requisite authentic documents to support the diminution. Simply, the
SEC's function here is purely administrative in nature. The SEC is not vested by law
with any power to interpret contracts and interfere in the determination of the rights
between and among a corporation's stockholders. Neither can the SEC adjudicate on
the contractual relations among these same stockholders.
Also. for third persons or parties outside the corporation like the SEC to interfere to
the decrease of the capital stock without reasonable ground is a violation of the
"business judgment rule."
Here, Petitioner complied with the requirements laid down by Section 38 of the
Corporation Code. It thereby becomes incumbent upon the SEC to approve the
decrease of the corporation’s authorized capital stock.
As to the cease and desist order, the same shall likewise be denied because the
corporation's simple act of disclosing the decrease and delisting to the PSE was more
than enough notice to the investing public. Disclosure of corporate actions to the
stock exchange is intended to apprise the investing public of the condition and
planned corporate actions of the listed corporation, thereby providing investors with
sufficient, relevant and material information as to the nature of the investment
vehicle and the relationship of the risks and returns associated with it. It cannot

operate as a fraud on investors such as the Petitioners and will also likely cause grave
or irreparable injury or prejudice to the investing public. 49
Philippine Stock Exchange, Inc. (“PSE”) has two prospective strategic

investors which manifested its intent to subscribe to the unsubscribed
shares of the PSE. The legal counsel of the PSE posits that the pre-emptive
right of the existing shareholders does not apply to the intended
subscription based on the following grounds: (1) the shares to be offered to
the strategic investors are not new shares but are sourced from the PSE's
unsubscribed capital stock; and/or, (2) the sale to the strategic investors is
in furtherance of the ownership limits prescribed by Section 33.2 (c) of the
Securities and Regulation Code (“SRC”) which provides for the maximum
ownership of the stockholders of the PSE, and thus falls under the
exceptions recognized by Section 38 of the RCC. Is the position of legal
counsel of PSE tenable?
Section 38 of the RCC explicitly states that unless denied in the articles of
incorporation or the issuance falls under any of the enumerated exceptions, all
existing stockholders of record are entitled to exercise pre-emptive right to subscribe
to “all issues or disposition of shares of any class” of a stock corporation.
Since Section 38 of the RCC uses the phrase "all issues or disposition of shares of any
class," pre-emptive right extends not only to the issuance of new shares resulting
from an increase in capital stock but also to the issuance of previously unsubscribed
shares which form part of the existing authorized capital stock, as well as to the
disposition of treasury shares.
Considering that Section 38 of the RCC does not distinguish between newly issued
shares and previously unsubscribed shares, the pre-emptive right is available to
existing shareholders of PSE upon its issuance of unsubscribed authorized capital
stock to potential strategic investors.
Neither does the issuance of shares to potential strategic investors fall under the
exceptions enumerated in Section 38 of the RCC. It is apparent from Section 38 of the
RCC that pre-emptive right does not extend to the issue of shares made in compliance
with laws requiring stock offerings or minimum stock ownership by the public.
However, PSE's issuance of shares to potential strategic investors to comply with
Section 33.2 (c) of the SRC cannot be considered as one in compliance with laws
49Metroplex Berhard and Paxell Investment LImited v. Sinophil Corporation, et al) , G.R. No. 208281,
June 28, 2021

requiring stock offerings or minimum stock ownership. Section 33.2 (c) of the SRC
clearly provides a maximum, not the minimum, limit on stock ownership, and does
not necessarily require the issuance of shares to comply with the legal requirements
provided therein.50
“X” Realty, Inc., a corporation engaged in the subdivision business, has an

authorized capital of P8, 000,000, divided into 8 million shares with P 1.00
par value, all of which has been fully subscribed. At a special meeting of the
board of directors, the majority vote decided, on the basis of the
recommendation of its Executive Committee, that the corporation purchase
a 5-hectare property offered to it because it was ideal for its subdivision
business, the price offered was lower than the prevailing market price, and
John Roque, the owner of the property, was willing to accept P2, 000,000
worth of shares of the corporation in exchange of, or as payment for, his
property. No cash was involved in the transaction. Thus, the board
approved a resolution increasing the authorized capital stock from
P8,000,000 to P10 Million, stipulating that the additional 2,000,000 shares
shall be issued in exchange for the 5-hectare property and that the existing
stockholders shall have no pre-emptive right to subscribe to the additional
shares as the same were being issued to pay for the property.
Was the action of the Board correct and sufficient?
The action of the Board of Directors was correct, but not sufficient. Under Sections
38 and 61 of the RCC, shares may be issued for property needed for corporate
purposes but subject to SEC approval to ensure that the real property is fairly valued,
to prevent the issuance of watered stocks. The increase of capital stock is also subject
to the approval of the stockholders representing at least 2/3s of the outstanding
capital stock. No SEC and stockholders approvals were indicated in the problem.51
a. Power to sell or dispose corporate assets
AAA Corporation is a bank. The operations of AAA Corporation as a bank

were not doing well. So, to avert any bank run, AAA Corporation, with the
approval of the Monetary Board, sold all its assets and liabilities to BBB
50Availabilityof Pre-Emptive Rights; Ownership Restrictions in the PSE, SEC-OGC Opinion No. 41-
11, October 5, 2011.
511982 Bar Exam but answered under the RCC.

Banking Corporation which includes all deposit accounts. In effect then,
BBB Corporation will service all deposits of all depositors of AAA
Corporation.
Will the sale of all assets and liabilities of AAA Corporation to BBB Banking
Corporation automatically dissolve or terminate the corporate existence of
AAA Corporation? Explain your answer.52
No, the sale of all the assets and liabilities of AAA Corporation to BBB Banking
Corporation will not result in the automatic dissolution or termination of the
existence of the former. Such sale is not one of the modes of dissolution under the
Corporation Code. Moreover, having assets is not a condition for the continuation of
juridical existence.
XXX Corporation (XXX) and its sister company, YYY Corporation (YYY), are
both under judicial receivership. The receiver has the option to sell all or
substantially all of the properties of YYY to XXX, or simply merge the two
corporations. Under either option, the requirements under the Corporation
Code have to be complied with.
The receiver seeks your advice on whether the Bulk Sales Law will apply to
either, or both, options. What will your advice be? Explain.
I will advise the receiver that the Bulk Sales Law does not apply to both options.
Section 8 of the Bulk Sales Law expressly provides that it will not apply to executors,
administrators, receivers, and assignees in insolvency, or public officers, acting under
judicial process. In this case, the receiver is acting under judicial process.( Bar 2009)
b. Power to acquire own shares
It is imperative that there must be unrestricted retained earnings before it may

purchase its own shares. Otherwise, this would lead to an unauthorized increase of
shares of stock, as well as constitutes a violation of the trust fund doctrine. The
rationale for this is that share repurchase constitutes in effect a distribution to the
stockholders which, if abused and without proper safeguards, will deplete and impair
522012 Bar Exam.

the assets of the corporation, to the prejudices of the stockholders and creditors of the
corporation.53
c. Power to declare dividends
May the profits realized from the sale of treasury shares be declared as
dividends?
Gains from the sale of treasury shares are not allowed to be declared as dividends.
Based on SRC Rule 68, gains from the sale of treasury shares shall be regarded as
additional paid-in capital stock.
Thus, the SEC, in its previous opinion, resolved that profits realized from the sale of
treasury shares are treated as part of "capital" or "paid-in surplus" and cannot
therefore be declared either as stock or cash dividends.54
Can treasury shares be distributed as property dividends to the

stockholders?
Treasury shares are regarded as property owned by the corporation and cannot be
distributed as property dividends among the stockholders in the absence of
unrestricted retained earnings other than the amount equivalent to the cost of
treasury shares, because to do so would violate the trust fund doctrine.55
CCAC is a general partnership duly registered with the SEC. It is a joint

venture partnership between Concepcion Industrial Corporation and
Carrier Air Conditioning Philippines, Inc. As a joint venture partnership,
CCAC does not have a Board of Directors that has the exclusive power to
control the assets of the corporation, or the absolute power to declare
dividends out of the unrestricted retained earnings of the company. On the
basis of the foregoing, does Section 42 of the RCC on the “Power to declare
dividends” apply to CCAC?
53SEC Opinion, ibid.

54Atty.Augusto Sunico, SEC Opinion, April 14, 1988.
55Treasury Shares, SEC-OGC Opinion No. 06-12, April 20, 2012.

Dividend declaration only applies only to stock corporations. A partnership has
neither shares of stocks or capital stock, nor does it have a board of directors that can
declare dividends out of its unrestricted retained earnings. Furthermore, dividends
are property of the corporation and is payable only when the board of directors
declares them as dividends even if there are existing profits of the corporation. On
the other hand, in partnership, profits are already due to the partners during the life
of the partnership/joint venture in proportion to their interest as set forth in their
agreement and are deemed to have been actually or constructively received in the
same taxable year.
Therefore, CCAC, being a joint venture partnership, is not governed by Section 42 of

the RCC but by the pertinent provisions of the Civil Code on Partnerships. 56
d. Power to enter into management contract

k. Doctrine of individuality of subscription
What is the doctrine of individuality of subscription?
This means that a subscription is one, entire and indivisible whole contract. This
indivisibility of subscription is absolute as Section 63 of the RCC speaks no exception.
The purpose of the doctrine is to prevent the partial disposition of a subscription,

which is not fully paid, because if it is permitted and the stockholder subsequently
becomes delinquent in the payment of his subscription, the corporation may not be
able to sell as many of his subscribed shares as would be necessary to cover the total
amount from him pursuant to Section 67 of the RCC.
l. Doctrine of equality of shares
What is the doctrine of equality of shares?
The doctrine of equality of shares means that all stocks issued by the corporation are
presumed equal, with the same privileges and liabilities, provided that the articles of
incorporation is silent on such differences57. Stated otherwise, each share shall be
equal in all respects to every other share, except as otherwise provided in the articles
56Re:Applicability of Section 43 of the Corporation Code to Joint Venture Partnership, SEC-OGC

Opinion No. 13-17, November 3, 2017.
57Commissioner of Internal Revenue vs. Court of Appeals, GR No. 108576, January 20, 1999.

of incorporation and the certificate of stock.58Thus, all shares have the same rights
and privileges unless classified differently in the Articles of Incorporation, and such
classification is not contrary to law. Preferred shares, therefore, have the same voting
rights similar to common shares unless the preferred shares are denied such right in
the articles of incorporation.
Any restriction on shares should also be stated in the articles of incorporation,

otherwise, it is not valid. In a couple of cases,59the Supreme Court held that any lien
on shares, like being held as security for payment of dues and assessments, must be
in the articles of incorporation, not only in the bylaws, otherwise, it is invalid.60
m. Ultra vires acts
X Corp., whose business purpose is to manufacture and sell vehicles,

invested its funds in Y Corp., an investment firm, through a resolution of its
Board of Directors. The investment grew tremendously on account of Y
Corp.'s excellent business judgment. But a minority stockholder in X Corp.
assails the investment as ultra vires. Is he right and, if so, what is the status
of the investment?
a. Yes, it is an ultra vires act of the corporation itself but voidable only,
subject to stockholders’ ratification.
b. Yes, it is an ultra vires act of its Board of Directors and thus void.
c. Yes, it is an ultra vires act of its Board of Directors but voidable only,
subject to stockholders’ ratification.
d. Yes, it is an ultra vires act of the corporation itself and, consequently,
void.
Answer: c. Yes, it is an ultra vires act of its Board of Directors but voidable only,
subject to stockholders’ ratification.61
When is there an ultra vires act on the part of [a] the corporation; [b] the
board of directors; and [c] the corporate officers. (Bar 2009)
58Section 6, RCC.
59Valley Golf and Country Club vs. Vda de Caram, GR No. 158805, April 16, 2009; Calatagan Golf
Club, Inc. vs. Clemente, Jr., GR NO. 165443, April 16, 2009.
60See also discussion on restriction on transfers, infra.
612011 Bar Exam.

a. Under Section 45 of the Corporation Code (“Code”), no corporation shall possess
or exercise any corporate power except those conferred by the Code or by its
articles of incorporation and except such as are necessary or incidental to the
exercise of the powers so conferred. When the corporation does an act or engages
in an activity which is outside of its express, implied or incidental powers set out
in the Code and its articles of incorporation, the act is deemed to be ultra vires.
b. The Board commits an ultra vires act when it engages in an activity without the
ratificatory or affirmative vote of the stockholders in those instances where the
Corporation Code so requires such vote or in cases where corporate powers are
reserved solely to the stockholders.
c. When a corporate officer enters into a contract on behalf of the corporation

without having been so expressly or impliedly authorized by the laws of the
Corporation or by the board of Directors, even when the act or contract falls
within the corporation’s express, implied or incidental power, then the
unauthorized act of the corporate officer is deemed to be ultra vires.
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.62 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.
It must be noted, however, that the trust fund doctrine is not limited to the
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.63
When is the trust fund violated?
The Trust Fund Doctrine is violated in the following cases:
62Ong vs. Tiu, G.R. Nos. 144476 and 144629, April 8, 2003.
63Halley vs. Printwell, Inc., G.R. No. 157549, May 30, 2011; 2015 and 2019 Bar Exams.

a. The corporation has distributed its capital among the stockholders without
providing for the payment of creditors.
b. It released the subscribers to the capital stock from their unpaid subscriptions.
It was held that in cases where the reason for reacquiring the shares is because of
the unpaid subscription, the Corporation Code is likewise explicit that the
corporation must purchase the same during a delinquency sale and not to direct the
reduction on the number of subscribed shares to what has been paid. Simply agreeing
in a meeting for their reduction, thereby releasing the stockholder from his obligation
to pay the unpaid subscriptions, cannot be the mode by which said unpaid
subscriptions are settled. To allow corporations to do such an act would violate the
aforementioned trust fund doctrine in corporation law.64
c. It transferred corporate property in fraud of its creditors.

d. It distributed properties to stockholders except by way of dissolution and
liquidation, the redemption of redeemable shares, and reduction of capital
stock.65
e. When it declared dividends without unrestricted retained earnings.66
f. When it acquired its shares without unrestricted retained earnings.67
6. Stockholders and members

a. Fundamental rights of a stockholder
i. Manner of voting
What are the modes of voting in a stockholders’ or members’ meeting under

the RCC?
The right to vote of stockholders or members may be exercised in person, through a

proxy, or when so authorized in the bylaws, through remote communication or in
absentia.68
At all elections of directors or trustees, the right to vote through remote

communication or in absentia may be exercised in corporations vested with public
interest, notwithstanding the absence of a provision in the bylaws of such
64 Agapito Salido, Jr. v. Aramaywan Metals Development Corporation, et al., G.R. No. 233857, March
18, 2021
65Ong vs. Tiu, G.R. Nos. 144476 and 144629, April 8, 2003; 2007 and 2015 Bar Exams.
66Section 42, RCC.
67 Section 41, RCC.
68Ibid.

corporations. A stockholder or member who participates through remote
communication or in absentia shall be deemed present for purposes of quorum.69
Please note that while Section 49 of the RCC provides that the right to vote through
remote communication or in absentia may be exercised when so authorized in the
bylaws (except stockholders of corporations vested with public interest which may
exercise it despite the absence of such provision in the bylaws), Section 57 of the RCC
(on the manner of voting) and Section 23 (on the election of directors) allow voting
through remote communication or in absentia, when authorized by the bylaws, or by
the majority of the board.
b. Proprietary rights
i. Right to dividends70
ii. Appraisal right
Yenetic Corporation wants to increase its authorized capital stock (which

is currently fully subscribed and issued) to be able to increase its working
capital to undertake business expansions.
The board of directors consults with you as legal counsel on the proper
answers to the following issues:
a. Can Yenetic's Articles of Incorporation (“AOI”) be formally amended to

remove the right of appraisal on all dissenting stockholders in all matters
under the law which requires a ratification vote of the stockholders?
Yenetic’s AOI cannot be amended to remove appraisal right of the stockholders on

matters requiring stockholders’ approval if the law grants them such appraisal
right, like:
i. In case any amendment to the articles of incorporation has the effect of

changing or restricting the rights of any stockholder or class of shares, or
of authorizing preferences in any respect superiors to those of outstanding
shares of any class, or of extending or shortening the term of corporate
existence.
69Section 23, RCC.

70 See previous discussion on dividends

ii. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets.
iii. In case of merger.
iv. In case of investment of funds in the secondary purpose of the corporation
or another business.
Appraisal right is a statutory right. It cannot be denied to the stockholders in

cases where the law allows such right.71
ABC Corporation proposed to amend its articles of incorporation to deny

the pre-emptive right of its stockholders. In the stockholders’ meeting
where the matter was taken up, “X”, a stockholder, voted against the
proposal. He, thereafter, demanded the payment of his shares.
Unfortunately, when he made a demand for payment, the Corporation had
no unrestricted retained earnings. Thus, his demand for payment was not
acted upon. He filed a collection suit. While the case was pending, the
corporation posted surplus profit.
a. Is the exercise of appraisal right as a result of the amendment of the

articles of incorporation correct?
Yes, because the amendment of the articles of incorporation to deny pre-emptive right
restricts his right as a stockholder to subscribe to issuance and disposition of shares
by the corporation. Under Section 80 of the RCC, such kind of amendment allows for
the exercise of appraisal right.
b. Is “X” entitled to payment?
No, his demand for payment and collection suit are premature because, at the time
of demand, the corporation had no available surplus profit. The fact that the
corporation posted retained earnings during the pendency of the case did not cure the
prematurity of cause of action. The availability of surplus profit did not retroact to
the date of demand for payment.72
Please note while the law requires that demand for payment should be made within
30 days the vote was taken, this is on the assumption there are available unrestricted
retained earnings. Otherwise, the stockholder must wait. Based on Turner vs.
712018 Bar Exam.

72 Turner vs. Lorenzo Shipping Corporation, G.R. No. 157479, November 24, 2010.

Lorenzo Shipping Corporation73, once surplus profit is available, the stockholder
must make another demand for payment. Only if he is refused that he can file the
action in court to enforce the payment of the fair value of his shares.
i. Right to inspect
Is the stockholder’s possession of a stock certificate a condition precedent

for the exercise of the right of inspection?
No, a stockholder may exercise his right of inspection even though he is not in the
possession of a stock certificate. A stock certificate is prima facie evidence that the
holder is a shareholder of the corporation, but the possession of the certificate is not
the sole determining factor of one’s stock ownership. It expresses the contract
between the corporation and the stockholder, but it is not essential to the existence
of a share in stock or the creation of the relation of a shareholder to the corporation.
More so, if the stockholder being denied the right of inspection is a former director
of the corporation. The corporation would not have allowed his election as a director
if he was disqualified for lack of stock ownership.74
Moreover, a stock certificate is issued only upon full payment of the subscription 75
and holder of subscribed shares not fully paid which are not delinquent has all the
rights of a stockholder,76 including the right of inspection.
Is an action to recover possession of a stock transfer from the former

secretary of the corporation enforceable by criminal prosecution based on
violation of the stockholders’ right of inspection?
No, a criminal action based on the violation of a stockholder's right to examine or

inspect the corporate records and the stock and transfer book of a corporation can
only be maintained against corporate officers or any other persons acting on behalf
of such corporation. A violation of Section 74 of the OCC (now, Section 73 of the
RCC) contemplates a situation wherein a corporation, acting thru one of its officers
or agents, denies the right of any of its stockholders to inspect the records, minutes
and the stock and transfer book of such corporation.
73G.R. No. 157479, November 24, 2010.

74Abra Valley. Grace Borgona Insigne, Et Al. vs. Abra Valley Colleges, Inc. And Francis Borgona, G.R.
No. 204089, July 29, 2015.
75Section 63, RCC.
76Section 71, RCC.

The proprietary right of the corporation to be in possession of such records and book,
though certainly legally enforceable by other means, cannot be enforced by a
criminal prosecution based on a violation of the Corporation Code.77
Is the right of inspection extinguished by the dissolution of the

corporation?
The termination of the life of a juridical entity does not, by itself, cause the
extinction or diminution of the rights and liabilities of such entity nor those of its
owners and creditors. Thus, the revocation of the corporation’s registration does not
automatically strip off the stockholder of his right to examine pertinent documents
and records of the corporation.78
The rights and remedies against, or liabilities of, the officers shall not be removed
or impaired by reason of the dissolution of the corporation. Corollary then, a
stockholder's right to inspect corporate records subsists during the period of
liquidation. Accordingly, if the stockholder was deprived of the exercise of an
effective right of inspection, offenses had in fact been committed, regardless of lack
of criminal intent.79
c. Remedial rights
What is a derivative suit?
A derivative suit is an action filed by stockholder in the name and on behalf of the
corporation to enforce a corporate right or cause of action to set aside the wrongful
acts of the corporation’s directors and officers.
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 pursued the action for
and on behalf of the corporation.80
77Aderito Z. Yujuico vs. Cezar T. Quiambao et al; G.R. No. 180416, 02 June 2014.
78Alejandro· D.C. Roque vs. People of the Philippines, G.R. No. 211108, June 7, 2017.
79Alfredo L. Chua vs. People of the Philippines, G.R. No. 216146, August 24, 2016.
802019 Bar Exam; Florete vs. Florete, GR. No. 174909, January 20, 2016.

What are the elements of a derivative suit?
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies

(“Interim Rules”) provides the five requisites for filing derivative suits:
“SECTION 1. Derivative action. - A stockholder or member may bring an action

in the name of a corporation or association, as the case may be, provided, that:
a. He was a stockholder or member at the time the acts or transactions

subject of the action occurred and at the time the action was filed;
b. He exerted all reasonable efforts, and alleges the same with

particularity in the complaint, to exhaust all remedies available under
the articles of incorporation, bylaws, laws or rules governing the
corporation or partnership to obtain the relief he desires;
c. No appraisal rights is available for the act or acts complained of; and
d. The suit is not a nuisance or harassment suit.”
In case of a nuisance or harassment suit, the court shall forthwith dismiss the case.
The fifth requisite for filing derivative suits, while not included in the enumeration,
is implied in the first paragraph of Rule 8, Section 1 of the Interim Rules: The action
brought by the stockholder or member must be "in the name of [the] corporation or
association to enforce a corporate right or cause of action.”81
Petitioner Metrobank is engaged in the banking business, while respondent

Salazar Realty Corp. (SARC) is engaged in the real estate business.
SARC filed an action for quieting of title and nullification of contracts

against Metrobank before the RTC of Tacloban. It alleged that Tacloban
RAS, another domestic corporation, secured several loans covered by
81Oscar C. Reyes vs. Hon. Regional Trial Court of Makati, Branch 142, Zenith Insurance Corporation,
and Rodrigo C. Reyes, G.R. No. 165744, 11 August 2008; Anthony Yu, et al., vs. Joseph Yukayguan, et
al., GR No. 177549, January 18, 2009; Juanito Ang, for and in behalf of Sunrise Marketing (Bacolod),
Inc. vs. Sps. Roberto and Rachel Ang, G.R. No. 201675, June 19, 2013; Alfredo L. Villamor, Jr., vs.
John S. Umale, G.R. Nos. 172843 & 172881, 24 September 2014; Nestor Ching vs. Subic Bay Golf
And Country Club, Inc., Et Al., G.R. No. 174353 September 10, 2014.

mortgages over substantially all of SARC’s properties. The mortgage was
approved by certain officers and directors of SARC.
When Tacloban RAS defaulted on the loan, Metrobank foreclosed the

mortgage. SARC's certificates of title were eventually cancelled and new
ones were issued in Metrobank's favor.
Ramon Ang Salazar, Jr., Robert Ang Salazar, Roger Ang Salazar and
Rosemarie Salazar Fernandez (Ramon et al.) as incorporators and
stockholders filed a legal action in behalf of SARC. They argued that the
loan agreement was entered into without authority to do so, and that the
mortgage contract is void for being ultra vires since Tacloban RAS is not a
subsidiary of SARC.
Meanwhile, in a comment with motion to dismiss, Metrobank argued that

the petition filed by SARC through Ramon et al. is a derivative suit and is
therefore an intra-corporate controversy over which regular courts like
Branch 9 of the Tacloban City RTC have no jurisdiction. Metrobank thus
prayed that the petition be dismissed for lack of standing on the part of both
Ramon et al. and SARC, and for lack of jurisdiction.
Did the Tacloban RTC have jurisdiction over the derivative suit to annul a
mortgage allegedly entered into by corporate officers without proper
authorization and where the defendants are third parties with no relation
to the suing corporation.
YES. Upon the transfer of the SEC's jurisdiction over intra-corporate disputes
pursuant to Section 5.2 of the SRC and the 2001 Interim Rules and Procedures
(IRPIC), the distinction between "intra-corporate" and "non-intra-corporate"
derivative suits was obliterated; and jurisdiction over all derivative suits was
returned to the trial courts.
The transfer of jurisdiction effected by Section 5.2 of the SRC was directed at "the
courts of general jurisdiction," that is, to the RTCs in general, rather than to the
special commercial courts alone. In authorizing the Supreme Court to designate
special commercial courts, the statute did not delegate the power to define subject
matter jurisdiction; rather, it authorized the Supreme Court to designate the
specific branches of the RTCs which will exercise the jurisdiction that has been
vested in the RTCs in general.
This interpretation supersedes previous rulings which mandated the dismissal of

intra-corporate cases that were mistakenly filed with the regular RTCs. Under the
current rules, mistakenly filed intra- corporate cases and non-intra-corporate cases
can now be shuttled to the proper RTC.

Special commercial courts are still considered courts of general jurisdiction, and are
therefore empowered not only to hear and decide cases under its general jurisdiction,
but also to assume jurisdiction over parties unrelated to the corporation.
a. Was the derivative suit filed by Ramon et al. proper?
No. While SARC's suit is indeed a derivative suit which is transferable to the relevant
special commercial court […] it nevertheless suffers from fatal defects which merit
its dismissal.
[Derivative suits] may be brought provided that the following requisites, which must
be specifically alleged in the complaint, are met:
(1) The party suing on the corporation or association's behalf was a stockholder or
member at the time the acts or transactions subject of the action occurred and
at the time the action was filed;
(2) Such party exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
(5) The suit must be brought in the name of the corporation.
The petition's allegations clearly reveal that the crux of the dispute is the illegal and
ultra vires approval of the mortgage by the SARC board without the consent of the
suing shareholders, and despite the vacancies in the board created by the deaths of
Ramon. Sr. and Consuelo. These allegations unmistakably show the existence of a
"controversy arising out of intra- corporate relations," with the suing shareholders
assailing the decisions of Ralph and the SARC board. The non-joinder of Ralph and
the other officers or shareholders of SARC, or even of Tacloban RAS, is of no moment,
because non-joinder of parties is not a ground for dismissal, and the court can order
their inclusion at any time. 82
82 It should be noted that in the case of Florete v. Florete, the Supreme Court ruled that failure to
implead the corporation in a derivative suit is fatal to a derivative cause of action. It is submitted that
while non-joinder of parties is not a ground for dismissal of the complaint as the court may order their
inclusion anytime, a different rule should apply when it comes to derivative suit because in such kind
of suit, the real party-in-interest is the corporation.

While the reliefs sought are directed at Metrobank and the officers who conducted
the auction sale, the suing shareholders' cause of action is ultimately rooted in the
illegal and improper ratification and authorization of the mortgage contract by Ralph
and the SARC board.
Among the grounds raised by SARC for the nullification of the mortgage contract is
that it constitutes an encumbrance of substantially all the assets of the corporation
which must be authorized by its stockholders in a meeting for that purpose, pursuant
to Section 40 of the Corporation Code. Under that provision, a mortgage of all or
substantially all of the corporation's assets is subject to the exercise of the appraisal
right. It was therefore incumbent upon herein respondents to make particular
allegations regarding their availment of their appraisal rights or the impossibility or
futility thereof.
Under the 2001 IRPIC, a derivative suit must particularly allege that there are no
appraisal rights available against the assailed corporate action. Conversely, if
appraisal rights are available, such fact must be alleged and the non-availment
thereof must be properly explained, more so since a derivative suit must particularly
allege that the stockholder exerted all reasonable efforts to exhaust all remedies
available under the laws and regulations governing the corporation.
Furthermore, SARC's petition lacks a categorical statement that it is not a

nuisance or harassment suit. In order to provide legal justification for what is
essentially an unauthorized suit filed on behalf of the corporation, stockholders who
resort to the equitable remedy of a derivative suit must categorically declare under
oath that the remedy is being sought for just and legitimate purposes and not as a
form of nuisance or harassment. This principle is now enshrined in Rule 8, Section 1
of the 2001 IRPIC, which explicitly states that nuisance or harassment suits shall be
dismissed.83
Atlantis Realty Corporation (ARC), a local firm engaged in real estate

development, plans to sell one of its prime assets --- a three-hectare land
valued at about P100-million. For this purpose, the board of directors of
ARC unanimously passed a resolution approving the sale of the property for
P75-million to Shangrila Real Estate Ventures (SREV), a rival realty firm.
The resolution also called for a special stockholders meeting at which the
proposed sale would be up for ratification.
83

Atty. Edric, a stockholder who owns only one (1) share in ARC, wants to stop
the sale. He then commences a derivative suit for and in behalf of the
corporation, to enjoin the board of directors and the stockholders from
approving the sale.
[a] Can Atty. Edric, who owns only one (1) share in the company, initiate
a derivative suit? Why or why not?
Yes, Atty. Edric can initiate a derivative suit on behalf of the corporation to enforce
its corporate right or cause of action to stop the sale of the property for a price which
is clearly disadvantageous to the corporation. Derivative suit is a remedy available
to the stockholder to assail and nullify the wrongful acts committed by the very
directors and officers entrusted with the management of the corporation and
therefore, not expected to rectify their wrongful acts even though the same are
prejudicial to the corporation. The suing stockholder will then take the cudgels for
the corporation to protect its interest.
[b] If such a suit is commenced, would it constitute an intra-corporate

dispute? If so, why and where would such a suit be filed? If not, why not?
(Bar 2009)
Yes, such suit would constitute an intra-corporate dispute under the Supreme Court-
issued Interim Rules of Procedure for Intra-Corporate Controversy ( Rule I, Section
1 ( 4 ). Independently of said rules, derivative suit is in the nature of intra-corporate
controversy because it is a suit initiated by a stockholder against other stockholders
who are officers and directors of the same corporation and pertains to the enforcement
of their rights and obligations under the Corporation Code. Such suit should be filed
in the RTC of the city where the principal office of the corporation is located ( Section
5 of the Interim Rules )
[c] Will the suit prosper? Why or why not?
No. The suit will not prosper. In the case of Villamor, Jr. v. Umale (G.R. Nos. 172843
& 172881, September 24, 2014), the Supreme Court held that an intra-corporate
dispute is dismissible unless the following are alleged in the complaint : a) the
stockholder is suing on behalf of the corporation to enforce a corporate right or cause
of action; b) plaintiff must be a stockholder at the time the cause of action accrued
and at the time of filing unless the cause of action is continuing in nature in which
case it is enough that he is a plaintiff at the time of filing; c) exhaustion of intra-
corporate remedies to obtain the relief he desires under the; corporation’s articles of
incorporation and by-laws; d ) no appraisal right is available and e) complaint is not
a nuisance or harassment suit. Here, the first two elements are alleged but the rest
were not.

i. Quorum
Is it permissible for the bylaws to provide quorum of stockholders’ meetings

which is less than a majority?
A corporation can state in its bylaws that a quorum shall be less than the majority or
greater than what was provided for in the RCC unless the RCC specifically provides
otherwise. This is clear under Section 51 of the RCC:
"Sec. 51. Quorum in meetings. — Unless otherwise provided for in this Code
or in the bylaws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock or a majority of the members in
the case of nonstock corporations."
The term "quorum" has been defined as "that number of members of the body which,
when legally assembled in their proper places, will enable the body to transact its
proper business, or, in other words, that number that makes a lawful body and gives
it power to pass a law or ordinance or do any other valid corporate act."
As a rule, a majority of members or stockholders is a quorum for the transaction of a

corporation's business and other corporate acts. A careful reading of the afore-quoted
provision would, however, show that corporations are authorized to define what
constitutes a quorum. It can be greater or less than the majority of the outstanding
capital stock or the majority of the members for a nonstock corporation.
Worthy of note, however, is that the bylaws provision on quorum will not apply in
instances where the RCC explicitly requires a specific number of stockholders or
members necessary to resolve or carry out a particular corporate proposal.84
The Infinity Condominium Corporation (TICC) is a non-stock, non-profit,

condominium corporation. TICC intends to amend its By-law provisions on
quorum meeting. From the quorum requirement of presence of members in
good standing representing at least a majority of the relevant number of
units entitled to be represented and vote to presence of members in good
standing representing at least thirty percent (30%) of the relevant number
of units entitled to be represented and vote. Can TICC amend its By-laws
and require a lower quorum requirement?
84Answered based on RCC and SEC-OGC Opinion No. 37-06, November 9, 2006.

Yes, TICC can amend its By-laws and require a lower quorum requirement.
Section 46 in relation to Section 51 of the Revised Corporation Code provides that any
corporation, whether stock or non-stock, is authorized to provide in its by-laws a
specific number of stockholders or members necessary to constitute a quorum for the
transaction of corporate business, except in those instances where the Corporation
Code or applicable special law explicitly prescribes the proportion of stockholders or
members necessary to resolve or carry out a particular corporate proposal. Some of
these instances are: 1. Amendment to the Articles of Incorporation;85 2. Removal of
directors or trustees;86 3. Extension or shortening of corporate term;87 and 4. Sale,
lease, exchange, mortgage, pledge or any disposition of all or substantially all of the
corporate assets.88 In such cases, a quorum shall consist of such ratio of stockholders
or members as may be declared by statutory provisions.
In this case, neither the Corporation code nor a special law prescribes a number
necessary to constitute a quorum. Thus, the corporation may define what constitutes
a quorum based on its by-laws. 89
Under the Bylaws of Corporation A, its Board of Trustees (Board) is

composed of five members, two of whom are nominated and appointed by
the three original members. Further, under Section 2, Article I of the
Bylaws, only a majority of the three original members of the Board shall be
necessary at all meetings to constitute a quorum. Is Section 2, Article I of
the Bylaws of Corporation A consistent with existing Corporation laws?
Section 2, Article I of the Bylaws is not consistent with the law for two reasons:
a. It is not in accord with Section 52 of the RCC.
As a general rule, the quorum in board meetings is the majority of the number of
directors or trustees. However, under Section 52 of the RCC, the articles of
incorporation or bylaws of the corporation may fix a greater number than the
majority of the number of board members to constitute the quorum necessary for
the valid transaction of business.
85 RCC, Section 15
86 RCC, Section 27
87 RCC, Section 36
88 RCC, Section 39
89 Re: Quorum in By-Laws, SEC-OGC Opinion No. 21-04, March 30, 2021

The formula in determining the "majority of the number of directors" as quorum
would be one-half plus one of the number of directors as fixed in the articles of
incorporation notwithstanding the existence of vacancies in the board at the time.
Thus, the SEC opined that the articles of incorporation or the bylaws cannot
provide for a lesser number than the majority provided in Section 52 of the RCC.
To provide that only a majority of the three original members would be necessary
to constitute a quorum would be repugnant to the directive of Section 52 of the
RCC.
Given the prevailing facts, if there are five members of the Board of Trustees as
fixed in the articles of incorporation, the majority should be one half plus one of
five, hence, at least three. If what was provided for in the bylaws would be
followed, the majority of the three original members of the board of trustees would
only be two, which is lesser than the majority of the whole number of the trustees,
as contemplated by law.
b. It is also conflicting with Section 91 of the RCC which allows nonstock

corporations to provide in their articles of incorporation or bylaws the term of
office of the board. While the term of directors or trustees of nonstock
corporations may vary under the articles of incorporation or bylaws, lifetime
or unlimited term of the board is not allowed. A lifetime or unlimited term of
the board absolutely deprives other stockholders or members of the
opportunity to participate in the management of the corporation. To provide
that only the majority of the original members of the board of trustees is
required to constitute a quorum for all board meetings implies that the original
members will be holding their office as members of the board for an unlimited
term.90
Note that while the articles of incorporation or bylaws cannot fix the quorum to less
than the majority of the board, or it may provide for a greater majority. The case of
Peña vs. Court of Appeals91 provides an example where the bylaws of a corporation
provided for a greater majority. The Supreme Court held that when only three out of
five members of the board of directors convened by virtue of a prior notice of a special
meeting, there was no quorum to validly transact business since, under Section 4 of
90Answered based on Section 91 of the RCC; Re: Quorum; Majority, SEC-OGC Opinion No. 07-16, April
4, 2016.
91G.R. No. 91478, February 7, 1991.

the amended bylaws of the corporation, at least four members must be present to
constitute a quorum in a special meeting of the board of directors.
7. Board of directors and trustees

a. Tenure, qualifications and disqualifications of directors
What is the distinction between term and tenure?
Term is the time during which the officer may claim to hold the office as a right and
fixes the interval after which the several incumbents shall succeed one another. The
term is fixed by statute and it does not change simply because the office may have
become vacant, nor because the incumbent holds over in office beyond the end of the
term due to the fact that a successor has not been elected and has failed to qualify.
Term is distinguished from tenure in that an officer's "tenure" represents his actual
incumbency. The tenure may be shorter (or, in case of holdover, longer) than the term
for reasons within or beyond the power of the incumbent.
The former is fixed while the latter extends until his successor is duly elected and
qualified.92
The election of the new members of the Board of Directors of the

Condominium Corporation (“CondoCor”) has been nullified due to a.) lack
of quorum and b.) disqualification of the nominee-directors of the developer
for the position. Consequently, it caused the nullification of the subsequent
organizational meeting and election of officers. Under the circumstances,
may the incumbent Board of Directors continuously function in a "hold-
over" capacity until a new set of members of the Board of Directors are
elected and qualified? If the answer is in the affirmative, is the authority of
the Board of Directors limited only to handle the corporation's daily
operations such as payment of utilities, salaries, the management of
personnel, and other issues/problems that requires immediate attention?
The old or incumbent Board of Directors can act as a legitimate managing body
pending the election of the successor directors. Pursuant to the hold-over principle as
provided in Section 22 of the RCC the incumbent Board of Directors shall serve as
92Valle Verde Country Club, Inc., et al, vs. Victor Africa, G.R. No.151969, September 4, 2009; Re-
Election of The Members of The Board of Directors, SEC-OGC Opinion No. 48-11, December 2, 2011.

directors until their successors are elected and qualified in accordance with the RCC
or the Bylaws. The principle is applicable provided that the failure to elect the new
set of directors/trustees was due to valid and justifiable reasons. Note that a hold-
over is not indefinite and that the corporation must still hold its election for directors
and officers. In case the non-holding of the annual meeting for the election of the
Board of Directors and Officers is without justifiable cause, the SEC may compel the
officers of any registered corporation or association to call the meetings of
stockholders or members thereof under its supervision. Any stockholder or member
may also petition the SEC to order the calling of a meeting by giving the proper notice
required by the RCC or by the bylaws.
On the other hand, the position that the hold-over Board's authority is limited only
to "handling the corporation's daily operation such as payment of utilities, salaries,
the management of personnel and other issues/problems that requires immediate
attention" is mistaken. The RCC expressly states that the "corporate powers of all
corporations formed under the Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or
trustees." Thus, the Board of Directors has the authority to: (1) exercise all powers
provided for under the RCC; (2) conduct all business of the corporation; and (3) control
and hold all property of the corporation. The hold-over principle does not diminish
the exercise of discretion and authority of the incumbent Board of Directors except as
provided by law. The principle still ensures that pending the selection of a new set of
directors, the incumbent directors will temporarily carry out the regular business and
protect the interest of the corporation and its members. Thus, the authority of the
incumbent Board of Directors is not limited to handling the corporation's daily
operations but may also exercise all powers and duties granted by the RCC, the
Condominium Act, and CondoCor's Bylaws.
XYZ Corporation was formed and incorporated under the old Corporation
Code. In order to comply with the requirements of Section 23 thereof, the
XYZ Corporation indicated in its bylaws that a majority of the directors
must be residents of the Philippines. This residency requirement was
subsequently removed under Section 22 of the RCC which took effect on 23
February 2019.
a. Whether or not the XYZ corporation may now be allowed to elect

directors, all of whom are non-residents of the Philippines, consistent with
the provisions of the RCC even if its bylaws still reflect the old and repealed
provision under the Corporation Code.
No. Section 23 of the old Corporation Code provides that "a majority of the directors
or trustees of all corporations must be residents of the Philippines. On the other hand,
Section 22 of the RCC provides for the qualifications and term of the board of directors

or trustees of a corporation which does not anymore include the residency
requirement.
However, Section 46(f) of the RCC allows private corporations to provide in their
bylaws the directors' qualifications such as residency requirement Thus, if a
corporation provides in its bylaws the requirement that majority of its directors must
be residents of the Philippines, then, it may do so. Such corporation may not elect
directors, all of whom are non-residents of the Philippines, if its bylaws still requires
that the majority of the elected directors must be residents of the Philippines.
In Forest Hills Golf and Country Club, Inc. vs. Gardpro, Inc.,93 the Supreme Court
held that “Until repealed, the by-laws were a continuing rule for the government of
Forest Hills and its officers, the proper function being to regulate the transaction of
the incidental business of Forest Hills.”
From the foregoing, XYZ Corporation must amend its bylaws to remove the residency
requirement pursuant to Section 46(f) of the RCC, notwithstanding the provisions
under Section 22 thereof.94
b. Should amendment of the bylaws be required, whether or not XYZ

Corporation may already elect directors who are not Philippine residents
pending the approval of their applications for amendment of its bylaws by
the Commission.
Yes. Section 47 of the RCC provides that the amended bylaws shall only be effective
upon the issuance by the Commission of a certification that the same is in accordance
with the RCC and other relevant laws.
If XYZ Corporation decides to amend its bylaws to remove the requirement that the
majority of its directors must be residents of the Philippines, such amendment will
only take effect upon the Commission's issuance of the Certificate of Filing of
Amended Bylaws. Prior to such issuance, the corporation is still required to make
sure that the majority of its elected directors are residents of the Philippines.
Hence, the stockholders of the XYZ Corporation may elect directors who are not
Philippine residents, pending the approval of its application for amendment of its
93G.R. No. 164686, October 22, 2014.

94SEC Opinion No. 22-07, Re: Board of Directors or Trustees of a Corporation; Residency Requirement,
26 May 2022.

bylaws by the Commission as long as majority of the directors are residents of the
Philippines.95
Trident Water Company Holdings, Inc. ("Trident Water") will be acquiring

51% voting shares in Manila Water Company, Inc. (MWC"). After the
Acquisition, Trident Water will be able to elect majority of the members of
the Board of Directors of MWC. Since MWC is involved in the business of
operating a public utility, its foreign equity is limited to 40%.
MWC has an 11-seat Board of Directors and Trident Water intends to

nominate Mr. Guillaume Lucci, an American, as a member of the Board,
because of the latter's credentials and work experience. Mr. Lucci would
only be a director of MWC and not an officer. Would the election of Mr. Lucci
as a director valid?
Yes, the election of Mr. Lucci as a director is valid. It has been previously held that
foreigners can be elected as directors in proportion to their allowable participation or
share in the capital of corporations engaged in activities that are reserved to
Filipinos, but are prohibited from being elected as officers of a corporation, such as
the President, Vice President, Treasurer and Secretary. It must be noted, however,
that in determining the "representation of alien stockholders in the board of directors
of corporations engaged in partially nationalized activities", the basis should be the
actual share of the alien stockholders in the capital of the corporation which share,
however, should not exceed the foreign equity ceiling, prescribed by law for a
particular corporation or association.
Based on the foregoing, Trident Water can elect Mr. Lucci as director provided that
the number of foreigners in the 11-member Board of MW does not exceed the
allowable seats (40% x 11) that may be filled up by a foreigner, subject to the above
discussion.96
a. Requirement of independent directors
What corporations are required to have independent directors in their

Boards?
Ibid.
95
96Opinion No. 21-08 Re: Appointment of a Foreign Director in a Corporation Engaged in a Partly
Nationalized Activity, 17 May 2021

Independent directors are now explicitly required by RCC to constitute at least
twenty percent (20%) of the Board of corporations vested with public interest.
Below are the corporations vested with public interest specified in the RCC:
a. Public companies as described under the Securities Regulation Code (“SRC”);

b. Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money
service business, pre-need, trust and insurance companies, and other financial
intermediaries; and
c. Other corporations engaged in businesses vested with public interest similar
to the above, as may be determined by the SEC.
A public company is any corporation with class of equity securities listed for trading
on an Exchange, or with assets in excess of Fifty Million Pesos (Php 50,000,000.00)
and has two hundred (200) or more holders, at least 200 of which hold at least one
hundred (100) shares each 97. This is also the definition of a public company for the
purpose of electing independent directors.98
CMCI is required by the Securities and Regulation Code (“SRC”) to have

two independent directors in its Board. Thus, the Bylaws of CMCI provides
for the segregation of casting of votes for the election of their regular and
independent directors, as follows:
"1. That the segregation of the votes for regular and independent
directors is acceptable, such that one vote cast per independent
director (since there are only two nominees for independent
director) would already be sufficient to elect them. On the other
hand, for the regular directors, the nominees with the highest votes
cast in their favor would be elected. Under this procedure, the
losing nominee for regular director, even if he/she gets a higher
number of votes than the independent directors, would still not be
elected.”
Is the segregate casting of votes for regular and independent directors

sanctioned by the Corporation Code?
The segregate casting of votes for regular and independent directors is not contrary
to the Corporation Code. The segregation of the voting for regular directors and
97Rule 3 (O) of the Revised Implementing Rules and Regulations of the Securities Regulation Code.
98Section 38 of the SRC.

independent ones is a practical device in order to ensure that at least two independent
directors are elected to the CMCI's member Board of Directors in accordance with
SRC Rule 38.99
a. Removal
May the SEC remove a director or trustee motu proprio?
The power to remove a director or trustee may be exercised by SEC motu proprio or
upon receiving a verified complaint. The removal, however, cannot be carried out
without due notice and hearing100, consistent with due process requirement.
The SEC decision removing a director should be deemed executory in order to give
teeth to the power of the SEC to remove a director who does not have the
qualifications of a director. However, even if the removal can be done prior to the
expiration of term of a director, considering that there are notice and hearing
requirements, the process may outlast the director’s term.
The removal of a disqualified director shall be without prejudice to other sanctions

that the SEC nevertheless may impose sanctions on the board of directors or trustees
who, with knowledge of the disqualification, failed to remove such director or
trustee.101
In other words, the removal is without prejudice to the imposition of sanctions against
the responsible directors or trustees.
Henry is a board director in XYZ Corporation. For being the "fiscalizer" in

the Board, the majority of the board directors want him removed and his
shares sold at auction, so he can no longer participate even in the
stockholders' meetings. Henry approaches you for advice on whether he can
be removed as a board director and stockholder even without cause. What
is your advice? Explain "amotion" and the procedure in removing a director.
Henry cannot be removed by his fellow directors. The power to remove belongs to the
stockholders. He can only be removed by the stockholders representing at least 2/3s
99Procedure for Election of Directors, SEC-OGC Opinion No. 19-11, March 23, 2011.
100Ibid.
101Ibid.

of the outstanding capital stock in a meeting called for that purpose. The removal
may be with or without cause except that in this case, the removal has to be with a
cause because it is intended to deprive minority stockholders of the right of
representation.
He cannot likewise be removed as a stockholder. Unlike in a nonstock corporation

where a member may be removed for causes specified in the bylaws, Philippine laws
do not allow the removal of a stockholder in a stock corporation.
Amotion is the premature ousting of a director or officer from his post in the
corporation.102
a. Filling of vacancies
Three (3) out of five (5) members of the Board of Trustees of The Padgett
Place Condominium Corp. (TPPC Corp) resigned. The By-Laws of TPPC
Corp. does not provide for the procedure in filling-up vacancies in the Board
of Trustees. Do the remaining two (2) trustees have the power and authority
to appoint the replacement of the members of the Board of Trustees who
resigned?
No, the remaining 2 members of the Board of Trustees of TPPC Corp. cannot fill up
the vacancies left by the 3 other members of the board who resigned.
Section 28 of the Revised Corporation Code provides that the remaining directors or
trustees can fill-up vacancies in the Board only when: (1) such vacancies were
occasioned by reasons other than removal by the stockholders or trustees or by
expiration of term; and (2) such remaining directors or trustees still constitute a
quorum of the Board. These conditions must concur, otherwise, the filling-up of the
vacancies must be done by the stockholders or members in a regular or special
meeting called for the purpose.
The vacancies were due to resignation. However, considering that the remaining 2
members of the Board of Trustees of TPPC Corp do not constitute a quorum, they do
not have the legal authority to fill-up the vacancies by majority vote. Hence, the
1022016 Bar Exam.

filling-up of the vacancies in the Board of Trustee must be done by general
membership of TPPC Corp. in a regular or special meeting called for the purpose. 103
Who should fill the vacancy due to the resignation of a hold-over director?
In the case of Valle Verde Country Club, Inc., et al. vs. Africa, 104the Supreme Court
ruled the resignation as a holdover director will not change the nature of the cause of
the vacancy which is due to the expiration of director’s term. The term of a hold-over
director has expired. The hold-over period is not part of his term. So, the cause of the
vacancy is not resignation but the expiration of term. As such, the vacancy must be
filled by the stockholders in a regular or special meeting called for the purpose
pursuant to Section 29 of OCC.105
What are the requisites to create an Emergency Board?
The requisites are:
a. The vacancy prevents the remaining directors from constituting a quorum;

b. Emergency action is required to prevent grave, substantial, and irreparable
loss or damage to the corporation;
c. The vacancy may be temporarily filled from among the officers of the
corporation;
d. The appointment must be made by the unanimous vote of the remaining
directors or trustees; and
e. The action by the designated director or trustee shall be limited to the
emergency action necessary, and the term shall cease within a reasonable time
from the termination of the emergency or upon the election of the replacement
director or trustee, whichever comes earlier.
The corporation must notify the SEC within three (3) days from the creation of the
emergency board, stating therein the reason for its creation.
b. Disloyalty
103 Re: Filling-up of Vacancies in the Board of Trustees, SEC-OGC Opinion No. 21-01, January 18,
2021
104Valle Verde Country Club, Inc., et al vs. Africa, G.R. No. 151969, September 4, 2009.
105Now, Section 28 of RCC.

What is the so-called “doctrine of corporate opportunity”? What is the
underlying philosophy upon which such doctrine rests?
The doctrine of corporate opportunity means that if the director acquired for himself
a business opportunity that should belong to the corporation, he must account to the
corporation for all the profits he obtained unless his act was ratified by the
stockholders representing at least 2/3s of the outstanding capital stock.
Under such doctrine, a director of the corporation is prohibited from competing with
the business in which the corporation is engaged in, as otherwise, he would be guilty
of disloyalty, where profits he may realize will have to go to the corporate funds except
if the disloyal act is ratified.106
This doctrine rests fundamentally on the unfairness, in particular circumstances, of

an officer or director taking advantage of an opportunity for his own personal benefit
when the interest of the corporation should have been more paramount.107
Under Section 33 of RCC, when a director seized an opportunity belonging to the

corporation, there is an obligation to account for and remit any profit he earned from
that venture or transaction. The obligation to account and remit is not excused even
if he risked his own funds unless the act was ratified by the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock.
Spouses Ramon and Yaona Ang Ty (Spouses Ty) established a corporation

to solely distribute Minolta plain paper copiers in the Philippines. John
Charles Chang (Chang) a former employee of the Ty family, was entrusted
with the duty to manage the new corporation. The Ty Family gave Chang
10% shares in the corporation with the assurance from Chang that he would
render competent, exclusive, and loyal service thereto.
Despite the success of TOPROS, no substantial cash dividends were

distributed because, according to Chang, the corporation was investing its
funds in several real properties.
Later, the Ty Family sensed irregularities in Chang’s dealings when their

friends and relatives began questioning the manner in which products and
106IENT vs. Tullett Prebon, G.R. No. 189158, January 11, 2017.
1071985 and 2005 Bar Exams.

services from TOPROS were issued receipts and vouchers from TOPGOLD,
Golden Exim, and Identic.
After an investigation, it was revealed that while still a Corporate Director

and an officer of TOPROS, Chang, together with the individual respondents,
incorporated the three respondent-corporations to siphon the assets, funds,
goodwill, equipment, and resources of TOPROS. According to TOPROS,
Chang used its properties in organizing the respondent-corporations and
obtained opportunities properly belonging to it and its stockholders to their
damage and prejudice. Chang was, thereafter, ousted as Corporate Director
and officer of TOPROS; and the instant case was filed against him.
In his defense, Chang alleged that the Ty Family knew that he organized the
three corporations during his incumbency as President and General
Manager of TOPROS. He explained that TOPROS was heavily in debt, and
he was compelled to seek other sources to pay off TOPROS’ indebtedness to
avoid being charged with estafa.
In the current petition, Chang argues that the doctrine of corporate

opportunity applies only if the corporation is financially able to undertake
its business, and that the doctrine does not apply in this case since he was
advised to allow the corporation to go under due to its indebtedness.
Is Chang is liable for violation of his fiduciary duties under the Corporation
Code?
YES. Chang committed several acts showing personal or pecuniary interest that were
in conflict with his duties as director and officer of TOPROS.
There is no dispute that Chang established Identic in 1989, Golden Exim in 1990,
and TOPGOLD in 1998 which were in the same line of business and while still an
officer and director of TOPROS. The Articles of Incorporation of Golden Exim and
TOPGOLD show that Chang owned 80% of the shares of Golden Exim; and Chang,
together with his son, owned 99.76% of the shares in TOPGOLD. The General
Information Sheet of Identic also showed that Chang owned 65% of Identic.
The fact that Chang risked his own funds in running TOPROS and paying off its
obligations will not absolve him of his duties as director and officer of TOPROS.
Even if admitted, the circumstances cited by Chang, which suggest of knowledge,

tolerance, or even acquiescence of TOPROS to his establishment of the respondent-
corporations which are in the same business as TOPROS, do not amount to the
compliance required of Section 34 to absolve a director of disloyalty. The law explicitly
requires that where a director, by virtue of his office, acquires for himself a business

opportunity which should belong to the corporation, he must account to the latter for
all profits by refunding them, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds of the outstanding capital
stock.
To determine the exact liability of Chang, however, the instant case should be
remanded to the trial court for the reception of additional evidence and the
reevaluation of evidence already submitted, guided by the parameters
aforementioned. That is, TOPROS as claimant bears the burden of proving the
specific business opportunities that gave rise to its claim of damages under Section
34 of the Corporation Code. In turn, Chang may present evidence to support his claim
that: (a) the corporation was already heavily in debt and that TOPROS' patriarch,
Ramon Ty, was no longer interested in corporate rehabilitation, so much so that he
was already letting Chang to allow TOPROS to go bankrupt; and (b) that the
corporation had already closed down prior to respondents' taking of certain corporate
opportunities, among others.
In the case of Guth v. Loft, Inc. (Guth), the Supreme Court of the State of Delaware
integrated these tests and elucidated as to when a corporate opportunity exists, when
a corporate director or officer breaches his/her fiduciary duty to the corporation that
he/she serves, and the consequences of such breach.
Thus, a claim of damages under Section 34 of the Corporation Code (now Section 33
of the RCC) arises when a corporate officer or director takes a business opportunity
for his own, provided that it is sufficiently shown by the claimant that:
(a) The corporation is financially able to exploit the opportunity;

(b) The opportunity is within the corporation's line of business;
(c) The corporation has an interest or expectancy in the opportunity; and
(d) By taking the opportunity for his own, the corporate fiduciary (i.e., corporate
director, trustee or officer) will thereby be placed in a position inimicable to his
duties to the corporation.
In determining paragraph (b), whether the opportunity is within the corporation's

line of business, the involved corporations must be shown to be in competition with
one another. They must be engaged in related areas of businesses, producing
the same products with overlapping markets.
Consequently, it is not enough to impute bare acts of transactions in which the

claimant subjectively perceives the duty of loyalty to be breached. Sufficient evidence
must be presented to show that the claim of damages is indeed premised on a concrete

corporate opportunity falling under the parameters above-stated. Only then may
actual damages relative to such lost opportunity be awarded.108
c. Business judgment rule
What is the business judgment rule?
Questions of policy and management are left to the sound discretion and honest
decision of the officers and directors of a corporation, and the courts are without
authority to substitute their judgment for the judgment of the board of directors. The
board is the business manager of the corporation, and so long as it acts in good faith,
its orders are not reviewable by the courts109. Courts are barred from intruding into
the business judgments of the corporation when the same are made in good faith110.
After a corporation faithfully complies with the requirements laid down in Section 38
(reduction of capital stock), the SEC has nothing more to do other than approve the
same. Pursuant to Section 38, the scope of the SEC's determination of the legality of
the decrease in authorized capital stock is confined only to the determination of
whether the corporation submitted the requisite authentic documents to support the
diminution. Simply, the SEC's function here is purely administrative in nature. The
SEC is not vested by law with any power to interpret contracts and interfere in the
determination of the rights between and among a corporation's stockholders. Neither
can the SEC adjudicate on the contractual relations among these same stockholders.
Also, for third persons or parties outside the corporation like the SEC to interfere to
the decrease of the capital stock without reasonable ground is a violation of the
"business judgment rule." 111
The business judgment rule is not absolute. Corporate acts cannot be justified under
the business judgment rule if they are contrary to law. For instance, the board cannot
invoke this rule to declare dividends when there is no surplus profit or declare
dividends out of re-appraisal surplus,112 or to pay compensation to directors, as this
power is lodged with the stockholders. It cannot be relied upon to support a request
108 Total Office Products and Services ( TOPROS), Inc. v. John Charles Wang, et al, G.R. Nos. 200070-
71, December 7, 2021
109Cua, Jr. vs. Tan, G.R. Nos. 181455-56 & 182008, December 4, 2009, Sales vs. Securities and
Exchange Commission, G.R. No. 54330, January 13, 1989.

110Balinghasay vs. Castillo, G.R. No. 185664, April 8, 2015.
111 Metroplex Berhard and Paxell Investment LImited v. Sinophil Corporation, et al) , G.R. No. 208281,
June 28, 2021

1121985 Bar exam.

for a new stock and transfer book on the pretext that the original is lost (when in fact
it is not) and declare entries in the supposed lost stock and transfer book as invalid.113
Can a foreigner be appointed as a member of the Executive Committee of a

corporation engaged in partly nationalized business activity?
Section 2-A of the Anti-Dummy Law disallows foreign nationals "to intervene in the
management, operation, administration or control thereof, whether as an officer,
employee or laborer therein" in business activities where there is a constitutional or
statutory provision imposing a specific nationality requirement as a requisite for the
exercise or enjoyment of a right, franchise or privilege. The ban prohibits foreigners
from being elected or appointed to management positions as president, vice-
president, treasurer, secretary, etc.
While "foreigners" are disqualified to be elected/appointed as "corporate officers" in

wholly or partially nationalized business activities, they are allowed representation
in the "Board of Directors" or "governing body" of said entities in proportion to their
shareholdings. The reason for the exception is that the Board of Directors/governing
body performs specific duties as a "body." Unlike corporate officers, each member of
the Board of Directors/governing body has no individual power or authority to
perform management functions. The powers delegated to the Board of
Directors/governing body can only be exercised by it acting as a body when a quorum
is present. Hence, there can be no intervention in the management, operation,
administration, and control of the corporation by the members thereof in their
individual capacity.
The logical conclusion is that the rule allowing foreigners to sit in the Board of
Directors extends to the "Executive Committee" which is authorized to act on such
specific matters within the competence of the Board of Directors. Section 34 of the
RCC clearly implies that the Executive Committee is a "governing body" which
functions as the Board itself, and thus membership therein shall be governed by the
same laws/rules applicable to the Board of Directors. Accordingly, a foreigner can be
a member of the Executive Committee without violating the Anti-Dummy Law,
provided, however, that foreign representation in the said governing body shall only
be in proportion to the foreign shareholdings in the corporation, and provided further,
that the foreigners shall not be given specific individual managerial responsibility.114
113Provident International Resources vs. Joaquin Venus, et al., G.R. No. 167041, June 17, 2008.
114Re: Anti-Dummy Law in Condominium Corporations, SEC-OGC Opinion No. 19-14, July 15, 2014.

d. Solidary liabilities for damages
e. Personal liabilities
On whether payment of bonuses to officers despite knowledge of substantial losses of

the company is a criminal offense under Section 144 of the Corporation Code ( now
Section 170 of the RCC ), it was held that the lack of specific language imposing
criminal liability in Sections 31 (gross negligence and bad faith in conducting the
affairs of the corporation) and 34 (doctrine of corporate opportunity ) shows legislative
intent to limit the consequences of their violation to the civil liabilities mentioned
therein. Had it been the intention of the drafters of the law to define Sections 31 and
34 as offenses, they could have easily included similar language as that found in
Section 74 (violation of right of inspection).
The Corporation Code was intended as a regulatory measure, not primarily as a penal
statute. Sections 31 and 34 in particular were intended to impose exacting standards
of fidelity on corporate officers and directors but without unduly impeding them in
the discharge of their work with concerns of litigation. Considering the object and
policy of the Corporation Code to encourage the use of the corporate entity as a vehicle
for economic growth, we cannot espouse a strict construction of Sections 31 and 34 as
penal offenses in relation to Section 144 in the absence of unambiguous statutory
language and legislative intent to that effect. 115
The liability of the erring director, trustee or officer under Section 31 of the
Corporation Code ( for gross negligence and bad faith in conducting the affairs of the
corporation) being purely civil, i.e., "all damages resulting [from its violation] suffered
by the corporation, its stockholders or members and other persons," the Civil Code is
the controlling law to determine prescription of action, particularly, Article 1146 of
the Civil Code which provides for a four year period for an action upon an injury to
the rights of the plaintiff, and quasi-delict. 116
10. Capital affairs
a. Certificate of stock
iii.Negotiability; requirements for valid transfer of stocks
115 United Coconut Planters Bank v. Secretary of Justice, et al., G.R. No. 209601, January 12, 2021 (
J. Caguioa )
116 United Coconut Planters Bank v. Secretary of Justice, ibid

The validity of the third-party claim would only be relevant if the person instituting
the same has established that he has a real interest in the levied property of the
corporation but the Court will not belabor the merits of the third-party claim in view
of the conclusive determination that the third party claimant has not adduced
evidence to prove that the shares of stock of the controlling stockholder were indeed
sold to him. The records further show that the purported transaction has never been
recorded in the corporate books. Thus, the transfer, not having been recorded in the
corporate books in accordance with law, is not valid or binding as to the corporation
or as to third persons.
Even assuming that there was a valid assignment of shares, at most the stockholder
merely has inchoate right to the levied property of the corporation, owing to its
separate legal personality.117
The failure of a selling stockholder to cause the issuance of stock certificate in favor
of the alleged buyer does not give rise to a presumption of conversion or
misappropriation to be liable for estafa particularly when the alleged buyer
acquiesced to having else stand for him as buyer of the shares.
In case of death of a shareholder, the executor or administrator duly appointed by

the court is vested with the legal title to the share and entitled to vote it. The shares
of stocks of the decedent are held by the administrator or executor until a settlement
and division of the estate is effected. 118 In this case, A, B, C, and D incorporated
XYZ corporation. C was the son of B. Years later, B died and A was appointed as
the administrator of B’s estate. Due to B’s demise, C claimed that the former’s share
was assigned to him by virtue of a deed of assignment executed by B before her
death. During the annual meeting, C represented the shares of B and as a result, a
quorum was attained and a new set of directors was elected. A assailed the validity
of the meeting asserting that C cannot represent the share of B. It was held C could
not represent the shares of B, since an administrator to the estate of B had already
been appointed.
A stockholder in a corporation subscribed to 59.99% of the total stocks of a

corporation, of which 46.12% thereof remained unpaid. A call for payment
was made by the corporation wherein the said stockholder failed to pay for
his subscription and said subscription was subsequently declared
117 Tee Ling Kiat v. Ayala Corporation, G.R. No. 192530, March 07, 2018
118 Mallare v. A&E Industrial Corporation, G.R. No. 233646, June 16, 2021

delinquent. Later on, the same was made the subject of an auction sale,
however, the same ended in failure for lack of a bidder.
a. Is a delinquent stockholder entitled to notices for the stockholders'

meeting?
Notice need be given only to each stockholder of record entitled to vote at the meeting,
or to those entitled to be present. Section 70 of the RCC is explicit that the moment a
stock becomes delinquent, the holder thereof loses his right to vote, and thus his right
to be represented at any stockholders' meeting.119
b. In the event that a delinquent subscription, which was previously a

subject of an auction sale with no bidder, was again put up for sale in
another auction sale, can the corporation enter into an agreement with the
bidder to subject the payment for the said sale to terms of payment, i.e., to
be paid in installment basis?
The payment must be made in full at the time of the sale, and not subject to terms,
or in installment basis. In the sale of delinquent stocks, the highest bidder is the
person who offers to pay or is willing to pay the full amount of the balance on the
subscription together with accrued interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction of a share. The stock so purchased
shall be transferred to such purchaser in the books of the corporation and a certificate
for such stock shall be issued in his favor. Because a certificate of stock shall be issued
in favor of the successful bidder, with more reason should the payment be made in
full, otherwise, the certificate of stock cannot be issued, as prescribed by Section 63
of the RCC.120
c. Assuming that the delinquency affects the whole subscription of the

delinquent stockholder, are the stockholders of the remaining paid-up
subscriptions (40.01% of the total stocks), which are not delinquent, the only
ones entitled to vote during the stockholders' meeting?
Because the corporation's major stockholder (59.99% of the total stocks) has been
declared delinquent, only 40.01% of the total stocks, fully paid and not delinquent,
are the only stocks entitled to vote during the stockholders' meeting, based on Section
70 of the RCC. Even if the subscriptions are not fully paid, as long as they are not
119Answered based on RCC; SEC-OGC Opinion No. 27-10, August 27, 2010.
120Ibid.

delinquent, the stockholders thereof are entitled to vote, based on Section 71 of
the RCC.
However, Section 51 of the RCC provides that unless otherwise provided for in the
RCC or in the bylaws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock.
Therefore, it appears that even if 40.01% of the total stocks, fully paid and not
delinquent, are entitled to vote, the corporation cannot muster a quorum unless the
59.99% of the total stocks are sold.121
d. Is there a limit to the number of times that unpaid subscriptions may

be auctioned?
Section 67 of the RCC provides for the sale in a public auction of delinquent shares.
Nothing therein provides any limit to the number of times that unpaid subscriptions
may be auctioned. The RCC allows two remedies for the enforcement of liability for
unpaid subscriptions: 1) to put up delinquent unpaid subscription for sale under
Section 67; and 2) to file an action in court under Section 69 of the RCC.122
e. Can the corporation sell portions of the delinquent shares ("in small
pieces") even while they are not treasury shares inasmuch as the
corporation cannot buy all the remaining shares of the delinquent
stockholder?
Again, because of the principle of the indivisibility of subscription under Section 63

of the RCC, the subscription cannot be divided into portions. The SEC has previously
opined that:
"Accordingly, if the stockholder has not paid the full amount of his
subscription, he cannot transfer part of it in view of the indivisible nature of
subscription contract. It is only upon full payment of the whole subscription
that a stockholder can transfer the same to several transferees. However, 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 the consent of the corporation
since the transfer of subscription right contemplates a novation of contract
121Answered based on RCC; Delinquent Stocks, Delinquency Sale, Effect of Delinquency, SEC-OGC
Opinion No. 15-10, April 23, 2010.
122Ibid.

which under Article 1293 of the Civil Code of the Philippines, cannot be made
without the consent of the creditor."123
i. Allowable restrictions on the sale of shares
Mr. A is a stockholder/founding member of Rural Bank of Maria Aurora

Incorporated, (RBMAI for brevity). Previously, he was able to sell shares of
stock of RBMAI.
However, at present, Mr. A could not sell his shares to outsiders since the
new manager/majority stockholder imposed a new policy that the shares
should be sold only to insiders, particularly, to the employees who are also
stockholders of RBMAI. Mr. A is now questioning the new policy since these
employees/stockholders buy at very low prices while there are third-party
buyers willing to buy his shares at a higher price.
Is the restriction on the transfer of shares to insiders a valid restriction?
The company policy restricting the transferability of shares is not valid.
In order to be valid and enforceable, any restriction on the transfer of shares of stock
must be explicitly provided for in the articles of incorporation and in the certificate of
stocks.
Restrictions on the transfer of shares are essentially contractual in nature between

the stockholders and the corporation. Hence, such restrictions must be embodied in
their contract, i.e. the articles of incorporation.
Considering further that shares of stock burdened with restrictions on transferability

may fall into the hands of innocent purchasers, the SEC, as a matter of policy, also
requires that the restrictions on the transfer of shares must be printed in the stock
certificates.124
11. Dissolution and liquidation
a. Modes of dissolution
123Ibid.
124 RE: Restrictions on Transferability of Shares, SEC Opinion No. 22-05, December 12, 2005.

.
Thus, a real estate mortgage executed by a corporation after its dissolution is void.
The redemption of the mortgaged property is likewise void for being inconsistent with
liquidation. A real estate mortgage is not part of the liquidation powers that could
have been extended to the corporation. It could not have been for the purpose of
prosecuting and defending suits by or against it and enabling it to settle and close its
affairs, to dispose of and convey its property and to distribute its assets.
Consequently, any redemption exercised by the Corporation pursuant to this void real
estate mortgage is likewise void, and could not be given any effect. If a real estate
mortgage agreement was entered prior to its dissolution, then the redemption of the
subject property, even if already after its dissolution (as long as it would not exceed
three years thereafter), would still be valid because of the liquidation/winding up
powers accorded by the Corporation Code.125
A corporation whose term has expired and, ipso facto, dissolved can no longer exercise
an option to lease a property because the same is tantamount to the continuation of
the business.126
Barn filed an action to enjoin SN Company's board of directors from selling

a parcel of land registered in the corporation's name, to compel the
corporation to recognize Barn as a stockholder with 50 shares, to allow him
to inspect the corporate books, and to claim damages against the
corporation and its officers. Subsequently, the corporation and the
individual defendants moved to dismiss the complaint since the
corporation's certificate of registration was revoked by the SEC during the
pendency of Barn's case on the ground of non-compliance with reportorial
requirements. The special commercial court granted the motion and
reasoned that only action for liquidation of assets can be maintained when
a corporation has been dissolved and Barn cannot seek reliefs which in
effect lead to the continuation of the corporation's business. The court also
ruled that it lost jurisdiction over the intra-corporate controversy upon the
dissolution of the corporation.
a. Was the court correct?
125Dr. Gil J. Rich vs. Guillermo Paloma III, GR No. 210538, March 7, 2018.
126Philippine National Bank vs. Court of First Instance of Rizal, et. al., GR No. 63201, May 27, 1992.

The court is not correct. An action to be recognized as a stockholder and to inspect
corporate documents is an intra-corporate dispute which does not constitute a
continuation of the business. The dissolution of the corporation simply prohibits it
from continuing its business. Moreover, under Section 145 of the OCC (now Section
184 of the RCC), no right or remedy in favor of or against any corporation, its
stockholders, members, directors and officers shall be removed or impaired by the
subsequent dissolution of the corporation.
The dissolution does not automatically convert the parties into strangers or change
their intra-corporate relationship. Neither does it terminate existing causes of action
which arose because of the corporate ties of the parties. The cause of action involving
an intra-corporate controversy remains and must be filed as an intra-corporate
dispute despite the subsequent dissolution of the corporation.127
b. Four years later, SN Company files an action against Barn to recover

corporate assets allegedly held by the latter for liquidation. Will this
action prosper?128
The action cannot prosper because the corporation has no more legal capacity to sue
after three years from its dissolution.129
In a relevant case, Alabang Development Corporation (“ADC”) was the developer of

Alabang Hills Village and claimed that it still owns certain parcels of land therein
that are yet to be sold, as well as those considered open spaces that have not yet been
donated to the local government of Muntinlupa City or the Homeowner's Association.
In September 2006, ADC learned that Alabang Hills Village Association Inc.
(“AHVAI”) started the construction of a multi-purpose hall and a swimming pool on
one of the parcels of land still owned by ADC without the latter's consent and
approval, and that despite demand, AHVAI failed to desist from constructing the said
improvements. ADC thus prayed that an injunction be issued enjoining AHVAI from
continuing with the construction. In its Answer, AHVAI claimed that the latter has
no legal capacity to sue since its existence as a registered corporate entity had been
revoked by the SEC.
127Aguirrevs, FQB +7, Inc., GR no. 170770, January 9, 2013.

1282015 Bar Exam.
129Alabang Development Corporation vs. Alabang Hills Village Association, GR no. 187456, June 2,
2014.

It was held that ADC filed its complaint not only after its corporate existence was
terminated but also beyond the three-year period allowed by Section 122 of the OCC
(now Section 139 of the RCC). Thus, it is clear that at the time of the filing of the
subject complaint, ADV lacks the capacity to sue as a corporation. To allow ADC to
initiate the complaint and pursue it until final judgment, on the ground that such
complaint was filed for the sole purpose of liquidating its assets, would be to
circumvent the provisions of the Corporation Code.
It would have been different if the complaint was filed during the three year
liquidation period for in such case, the action may be continued even thereafter.
a. Methods of liquidation
Ngo Lok Foundry, Inc. (NLFI) was incorporated on 22 February 1980 for the
purpose of maintaining and operating a general machine shop and foundry.
On 11 August 2003, the SEC revoked the corporate charter of the NLFI for
failure to comply with its reportorial requirements. NLFI does not have any
creditor and its lone asset is a parcel of land. Out of the nine (9) directors of
NLFI, only six (6) are still living.
May NLFI still liquidate and dispose its lone asset despite the lapse of more
than three (3) years since the revocation of its corporate charter?
Yes, while Section 139 of the RCC gives a dissolved corporation three (3) years to
continue as a body corporate for purposes of liquidation, the disposition of the
remaining undistributed assets must necessarily continue even after such period.
Section 139 should not be construed to prevent a corporation from pursuing activities
which would complete the final liquidation of a dissolved corporation. Accordingly, it
should be allowed to continue liquidating its remaining assets in order to complete
the process of dissolving the corporation. Likewise, it should be allowed to distribute
the proceeds from said disposition to its stockholders or creditors if any. A contrary
interpretation would have unjust and absurd results.130
May the Board of Directors of NLFI, or persons appointed by the Board in

a duly constituted meeting, may act as trustees by implication and
liquidate the lone asset of NLFI?
130 SEC-OGC Opinion No. 22-06, Re: Liquidation, 10 May 2022

Yes, if the three-year extended life has expired without a trustee or receiver having
been expressly designated by the corporation within that period, the board of
directors (or trustees) itself, following the rationale of the Supreme Court's decision
in Gelano vs. Court of Appeals (103 SCRA 90) may be permitted to so continue as
"trustees" by legal implication to complete the corporate liquidation.
In our jurisdiction, the statutes and jurisprudence are silent regarding the
consequences of the death of a director, acting as trustee in liquidation, during the
liquidation or winding up period. In some American jurisdictions, directors who
become trustees of the corporation on dissolution hold on as joint tenants with right
of survivorship incident to their tenancy. In other words, when one or more directors
die, the surviving trustees take the whole title subject to the trust, and the latter may
exercise the powers and duties of the deceased director-trustee. However, it is also
provided that in case of death, resignation, inability or refusal to act, of the directors
or trustees, or the survivors, the court may appoint trustees to fill the vacancy, upon
the application of any person interested.131
12. Other corporations
a. Close corporations
What is a close corporation?
Under Section 95 of the RCC, a close corporation is one whose articles of incorporation
provides that:
a. all the corporation’s issued stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a specified number of persons, not
exceeding 20;
b. all the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and
c. the corporation shall not list in any stock exchange or make any public offering
of its stocks of any class.
Notwithstanding the foregoing, a corporation shall not be deemed a close corporation

when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled
131 SEC-OGC Opinion No. 22-06, Re: Liquidation, 10 May 2022

by another corporation which is not a close corporation within the meaning of the
RCC.132
What is the main difference between a close corporation and other

corporations?
The main difference between a close corporation and other corporations is the identity
of stock ownership and active management, that is, all or most of the stockholders of
a close corporation are active in the corporate business either as directors, officers or
other key men in management. Where business associates belong to a small, closely-
knit group, they usually prefer to keep the organization exclusive and would not
welcome strangers. Since it is through their efforts and managerial skill that they
expect the business to grow and prosper, it is quite understandable why they would
not trust outsiders to come in and interfere with their management of the business,
and much less share whatever fortune, big or small, that the business may bring.
i. Characteristics of a close corporation
What are the principal characteristics of close corporations?
The principal characteristics of close corporations are the following:
a. The business of the corporation may be managed by the stockholders of the

corporation rather than by a board of directors.
Stockholders who are actively involved in the management of the corporation are
liable in the same manner as directors are liable. They are personally liable for
corporate torts unless the corporation has obtained reasonably adequate liability
insurance. An example of corporate tort is the non-payment of separation benefits
of employees who were terminated due to authorized cause.133
While Section 97 of the Corporation Code (now Section 96, RCC) only specifies
that "the stockholders of the corporation shall be subject to all liabilities of
directors," nowhere in that provision do we find any inference that stockholders of
a close corporation are automatically liable for corporate debts and obligations.
132Section 95, RCC.

133Sergio Naguiat and Clark Field taxi, Inc. vs. NLRC, G.R. No. 116123, March 13, 1997.

It is true that the stockholders who are actively engaged in the management or
operation of the business and affairs of a close corporation, shall be personally
liable for corporate torts unless the corporation has obtained reasonably
adequate liability insurance. But, as can be read in that provision, several
requisites must be present for its applicability.134
b. If a corporation is classified as a close corporation, a board resolution authorizing

the sale or mortgage of the corporate property is not necessary to bind the
corporation for the action of its president.135
c. Quorum may be greater than a mere majority.
d. Transfers of stocks to others which would increase the number of stockholders to

more than the maximum are invalid.
e. Corporate actions may be binding even without a formal board meeting, if the
director had knowledge or ratified the informal action of the others, unless after
having knowledge thereof, the director promptly files his written objection with
the secretary of the corporation.
f. Pre-emptive right extends to all stocks issued, including re-issuance of treasury

shares, whether for money or for property or personal services, or in payment of
corporate debts, unless the articles of incorporation provide otherwise.
g. Deadlocks in the board may be settled by the SEC, on written petition by any
stockholder.
h. A stockholder may withdraw for any reason and avail himself of his right of
appraisal when the corporation has sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock.136
In a close corporation, is a provision prohibiting the transfer, conveyance,

sale or assignment of shares to non-blood relatives allowed?
A close corporation's articles of incorporation may provide restrictions on the

transfers of shares, as long as the said restrictions are not more onerous than
134JoselitoHernand M. Bustos vs. Millians Shoe, Inc.; G.R. No. 185024, April 24, 2017.
135Manuel R. Dulay Enterprises, Inc. vs. Court of Appeals, G.R. No. 91889, August 27, 1993.
136Sections 96-104, RCC.

granting the existing stockholders or the corporation the option to purchase the
shares of the transferring stockholder with such reasonable terms, conditions or
period. If the existing stockholders or the corporation fail to exercise the option to
purchase, the Corporation Code expressly provides that the transferring stockholder
may sell his shares to any third person. Thus, the provision prohibiting the transfer,
conveyance, sale or assignment of shares to non-blood relatives is not allowed.137
a. Non-stock corporations
What are the most common characteristics of a nonstock corporation?
The following are the most common characteristics of a nonstock corporation:
a. Any profit derived by it from any authorized activity cannot be distributed as

dividends to its members;
b. It may not lawfully engage in any business activity for profit as it would run
counter to its very nature as a non-profit entity;
c. When incidental to the objects and purposes of the corporation and without the
end of making profits to be distributed to the members, it may engage in
certain economic activities stated in its articles of incorporation;
d. Do not issue stock and distribute dividends to their members; they are created
not for profit but for public good and welfare; and
e. The mere fact that a nonstock corporation may earn profit does not make it a
profit-making corporation where such profit or income is used to carry out the
purposes set forth in the articles of incorporation and is not distributed to its
incorporators, members, trustees or officers.138
i. Purposes
What are the allowable purposes for a nonstock corporation?
It may be formed or organized for charitable, religious, educational, professional,

cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like
Close Holding Corporation; Founder's Shares, SEC-OGC Opinion No. 02-10, January 15, 2010.
137
138NonstockCorporations; Use of Profits Derived by Nonstock Corporations. Special Corporations;
Nonstock Educational Corporations; Required Number of Members of the Board of Trustees of
Nonstock Educational Corporation., SEC-OGC Opinion No. 29-06, June 7, 2006.

trade, industry, agricultural and like chambers, or any combination thereof, subject
to the special provisions governing particular classes of nonstock corporations. 139
A nonstock corporation cannot be organized for profit since it is not engaged in

business. Neither can it be organized for political purpose or end, otherwise, it should
be registered as a party with the Commission on Elections.
ii. Treatment of profits
If profits cannot be distributed to the members, trustees and officers of the

corporation, how are the profits treated?
Since profits that a nonstock corporation earns cannot be distributed to the members,
trustees, or officers, such profits will form part of the income of the corporation. The
income can be used to invest in shares of stock, bonds and other securities provided
that such investment is allowed by the articles of incorporation and income from such
investments is used in furtherance of the purpose for which the nonstock corporation
was organized.
iii. Plan and distribution of assets upon dissolution
Are the members of the nonstock corporation entitled to the assets of the
corporation upon its dissolution?
The assets of a nonstock corporation cannot be distributed to the members, trustees,

or officers thereof unless their distributive rights upon dissolution are specified in the
articles of incorporation or are specified in a plan of distribution duly adopted by at
least majority of the board of trustees and approved by at least 2/3 of the members.140
Thus, during the lifetime of the corporation, there can be no distribution of assets of
the corporation, unlike in a stock corporation.
The By-Laws of De La Salle University-Parents of University Organization-

Manila, Inc. (DLSU-PUSO) provides that the number of trustees of the
corporation shall be twenty-five (25) trustees, and a majority of the total
139Section 87, RCC.

140Section 93, RCC.

membership of the voting trustees is needed in all meetings to constitute a
quorum. The members of DLSU-PUSO elected only six (6) members of the
Board of Trustees during its annual general assembly.
May the general membership validly elect only six (6) members in order to
constitute a Board of Trustees to validly conduct business?
While the members of DLSU-PUSO may opt to elect only six (6) members to sit in
the Board of Trustees, it may not validly act as a corporate body for the reason that
it failed to satisfy the required number of trustees to constitute a quorum.
The number of directors that a corporation can legally have is that which is fixed in
the articles of incorporation. Any decrease thereof can be effected only by amending
the articles of incorporation. However, an election of a less number of directors than
the number which the meeting was called to elect is valid as to those actually elected
and merely give rise to vacancy in the board, which may be filled up in a subsequent
special meeting duly called for the purpose. The failure of the stockholders to fill all
the directorship does not prevent those elected from legally representing the
corporation so long as they constitute a quorum.
The formula in determining what constitutes "majority of the directors/trustees" as

quorum would be one-half plus one of the number of directors/trustees as fixed in the
AOI notwithstanding the existence of vacancies in the board at the time.
In this regard, in order for the Board to validly act as a corporate body, it is required
to have at least fourteen (14) trustees to be able to constitute a quorum.141
May the currently elected six (6)-member Board validly elect additional
trustees and amend the organization's bylaws?
No. The currently elected six (6) member Board cannot act as a corporate body since
it failed to constitute a valid quorum. As such, it cannot validly transact business
for the organization. As a consequence, the Board is not authorized to fill in the
vacancies and to validly approve the amendment of the corporation’s bylaws.
In which case, the DLSU-PUSO may call a special meeting wherein members of the
organization have to nominate and elect new members to sit in the Board of Trustees
in order to fill in the required vacancies for the Board to be able to constitute
141Re: Quorum; Board of Trustees, SEC-OGC Opinion No. 22-02, March 2, 2022

Cyberone Condominium Corporation ("Cyberone") is a non-stock
corporation whose management is uncertain as to the legal requirements
on the valid conduct of an annual meeting through remote communication
considering that its bylaws do not contain any provision that recognizes
and/or allows remote communication as a valid means of conducting an
annual members' meeting.
Section 88 of the Revised Corporation Code ("RCC") provides that for non-
stock corporations, voting through remote communication and/ or in
absentia is only allowed as may be authorized under the bylaws.
Similarly, Sections 10 and 12 of SEC Memorandum Circular No. 6, series of

2020 ("MC No. 6, s.2020") provides for the guidelines on participation of
members in regular and special meetings through remote communication,
to wit:
"Sec. 10 Participation in Stockholders' or Members' Meetings Through

Remote Communication. When so provided in the bylaws or by
majority of the board of directors, stockholders or members who
cannot physically attend at stockholders' or members' meetings may
participate in such meetings through remote communications or
other alternative modes of communication. xxx" (Emphasis supplied)
"Section 12. Voting in the Election of Directors, Trustees and Officer

Through Remote Communication. The right to vote of stockholders or
members may be exercised in person, through a proxy, or when so
authorized in the bylaws, through remote communication or in
absentia.
The right to vote of stockholders or members may be exercised also

through remote communication or in absentia when authorized by a
resolution of the majority of the board of directors; Provided, That the
resolution shall only be applicable for a particular meeting. xxx"
(Emphasis supplied)
It is the position of Cyberone that a mere board resolution from the trustees
does not allow for participation by remote communication because the
phrase "when so provided in the bylaws or by a majority of the board of
directors" did not mention trustees.
Can members of a non-stock corporation exercise their right to vote via

remote communication only when so authorized in the bylaws?

No. In Sections 23 and 57 of the RCC, the stockholders or members of corporations
may also vote through remote communication or in absentia when so
authorized in the bylaws or by a majority of the board of directors.
Meanwhile, Section 88 provides that the bylaws of a non-stock corporation may
likewise authorize voting through remote communication and/or in
absentia.
The law would not have been intended to favor stock corporations, without any
substantial distinction, by allowing therein voting by remote communication/in
absentia in two (2) instances in the case of stock corporations, but only one (1)
instance in the case of non-stock corporations. Another rule in statutory construction
is 'Verba intentioni, non e contra, debent inservice" which means that words ought to
be more subservient to the intent and not the intent to the words.
More importantly, it should be emphasized that the right to vote of the members of a
non-stock corporation is exercised during a regular or special meeting under Section
49 of the RCC.
While Section 88 is indeed a provision specifically pertaining to non-stock

corporations, the same is not inconsistent with Sections 23 and 57. To reiterate,
Section 88 is a provision on the exercise of the "right to vote" of members of non-stock
corporations which may be defined in the by-laws, thus: "the bylaws may likewise
authorize voting through remote communication and/or in absentia". Absent any
limiting term or phrase therein such as "only" or "exclusively", Section 88 does not,
in any way, restrict or negate the applicability of the phrase "by a majority of the
board of directors" to non-stock corporations under Sections 23 and 57 of the RCC.
It is a principle in statutory construction that the seemingly conflicting provisions of
a law or of two laws must be harmonized to render each effective. It is only when
harmonization is impossible that resort must be made to choosing which law to apply.
Based on the foregoing, when the bylaws of the corporation does not have a provision
which allows voting through remote communication, as in the case of Cyber One, the
members may still validly vote through remote communication on the basis of a
resolution issued by the majority of the board of trustees of Cyber One authorizing
such mode of voting which is recognized and allowed by the above mentioned
provisions of the RCC. However, it should be noted that, in this case, voting
through remote communication is only applicable for the particular

meeting stated in the said resolution, as clarified by Section 12 of MC No. 6,
s.2020.142
e. One person corporations
What is a One Person Corporation (“OPC”)?
OPC is a corporation with a single stockholder: Provided, That only a natural person,
trust, or an estate may form a OPC.
May a foreign natural person organize an OPC?
In case of a natural person, the only requirement under the RCC is that he/she must
be of legal age. There is no provision on any nationality requirement. Thus, subject
to the applicable constitutional and statutory restrictions on foreign participation in
certain investment areas or activities, a foreign natural person may organize an
OPC.143
What is the “trust “referred to under the RCC which can organize an OPC?
The “trust” as used by the law does not refer to a trust entity, but to the subject being
managed by the trustee.144
What is the additional requirement for incorporation of an OPC if the single

stockholder is a trustee, administrator, executor, guardian, conservator,
custodian or any other person exercising fiduciary duties?
If the single stockholder is a trustee, administrator, executor, guardian, conservator,

custodian or any other person exercising fiduciary duties, proof of authority to act on
behalf of the trust or estate must be submitted at the time of incorporation.145
i. Excepted corporations
142 SEC Opinion No. 21-09, Re: Annual Meeting via Remote Communication in Non-stock
Corporations, 22 June 2021.
143Section 15, SEC MC No.7.
144 Section 1, SEC MC No. 7.
145SEC MC No. 7, ibid.

Which corporations are not allowed to incorporate as 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 OPC: 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.
What are the characteristics of OPC?
An OPC has the following characteristics:
a. It has a single stockholder.
b. It is not required to have a minimum authorized capital stock except as

otherwise provided by special law. Further, no portion of the authorized capital
is required to be paid up at the time of the incorporation, unless otherwise
required by applicable laws or regulations.146
c. It is not required to submit and file corporate bylaws.147
d. It is required to indicate the letters "OPC" either below or at the end of its
corporate name.148
e. The single stockholder shall be the sole director and president of the OPC.149
f. The single stockholder is required to designate a nominee and an alternate

nominee who shall, in the event of the single stockholder's death or incapacity,
take the place of the single stockholder as director and shall manage the
corporation's affairs.150
146Section 117 of the RCC and Section 8 of MC No. 7.

147Section 119, RCC.

g. The liability of the single stockholder shall be limited to his subscription to the
corporation unless there is ground to pierce to pierce the veil of corporate
fiction.151
ii. Corporate structure and officers
Who are the officers of a OPC?
OPC should appoint a treasurer, corporate secretary, and other officers as it may
deem necessary, within 15 days from the issuance of its certificate of incorporation
and should be reported to the SEC within five days from appointment.
The single stockholder may not be appointed as the corporate secretary.
A single stockholder who is likewise the self-appointed treasurer of the corporation

shall give a bond to the SEC in such a sum as may be required: Provided, That the
said stockholder/treasurer shall undertake in writing to faithfully administer the
OPC's funds to be received as treasurer, and to disburse and invest the same
according to the articles of incorporation as approved by the SEC. The bond shall be
renewed every two years or as often as may be required.152
How does an OPC approve a corporate act?
When action is needed on any matter, it shall be sufficient to prepare a written

resolution, signed and dated by the single stockholder, and recorded in the minutes
book of the OPC. The date of recording in the minutes book shall be deemed to be the
date of the meeting for all purposes under the RCC.153
An OPC shall maintain a minutes book which shall contain all actions, decisions, and
resolutions taken by the OPC.
iii. Liability


What are the requisites for the limited liability of the single stockholder of
OPC?
The liability of the sole stockholder shall be limited to his subscription to the
corporation if the following requisites are present:
a. The sole shareholder must show that the corporation was adequately financed;
b. He must prove that the property of the OPC is independent of the stockholder's
personal property; and,
c. There is no ground to pierce the veil of corporate fiction.
Otherwise, the sole stockholder shall be jointly and severally liable for the debts and
other liabilities of the OPC.154
f. Foreign corporations
A corporation, composed entirely of Filipino citizens, is formed, organized

and existing under the laws of the USA. Is this a foreign or domestic
corporation?
It is a foreign corporation. Whether the corporation is domestic or foreign is

determined by the country or State of incorporation. Thus, a corporation is foreign if
it is formed, organized or existing under the laws of a foreign country regardless of
the nationality of the stockholders.
i. Bases of authority over foreign corporations

(a) Consent
(b) Doctrine of "doing business"
Magna Ready Mix Concrete Corporation (MAGNA) is a corporation

organized and existing under the laws of the Philippines, while Andersen
Bjornstad Kane Jacobs, Inc. (ANDERSEN) is a corporation organized and
existing under the laws of the State of Washington, USA.
On April 20, 2004, ANDERSEN filed a complaint for a sum of money and
damages against MAGNA for an unpaid balance of US$60,786.59 based on a
purchase order and an agreement for professional services. MAGNA

ordered a form design and drawing development for a plant project, and
also asked ANDERSEN to prepare a preliminary design for its Ecocentrum
Garage Project.
During the trial, MAGNA filed a motion to dismiss claiming that it

discovered that ANDERSEN previously filed a case against another
Philippine corporation wherein ANDERSEN sought to collect a sum of
money for the design and development of certain projects. Due to the
discovery, MAGNA asserted that ANDERSEN was doing business in the
Philippines without the necessary license. As such, it alleged that
ANDERSEN has no legal capacity to sue.
Whether ANDERSEN has legal capacity to sue in the Philippines.
NO, but MAGNA is already estopped from challenging ANDERSEN’s legal capacity
to sue by entering a contract with it.
ANDERSEN has no legal capacity to sue for doing business in the Philippines without
procuring the necessary license. It is not suing on an isolated transaction on the basis
of the contract it entered into with MAGNA.
A foreign corporation that conducts business in the Philippines must first secure a
license for it to be allowed to initiate or intervene in any action in any court or
administrative agency in the Philippines. A corporation has legal status only in the
state that granted it personality. Hence, a foreign corporation has no personality in
the Philippines, much less legal capacity to file a case, unless it procures a license as
provided by law.
The case of Agilent Technologies v. Integrated Silicon, citing Mentholatum v.

Mangaliman, discusses the two tests to determine whether a foreign corporation is
doing business in the Philippines:
In Mentholatum, this Court discoursed on the two general tests

to determine whether or not a foreign corporation can be
considered as "doing business" in the Philippines. The first of
these is the substance test, thus:
The true test [for doing business], however, seems

to be whether the foreign corporation is continuing
the body of the business or enterprise for which it
was organized or whether it has substantially
retired from it and turned it over to another.
The second test is the continuity test, expressed thus:

The term [doing business] implies a continuity of
commercial dealings and arrangements, and
contemplates, to that extent, the performance of
acts or works or the exercise of some of the functions
normally incident to, and in the progressive
prosecution of, the purpose and object of its
organization.
The number of the transactions entered into is not determinative whether a

foreign corporation is doing business in the Philippines; the intention to continue
the body of its business prevails. The number or quantity is merely an evidence of
such intention. A single act or transaction may then be considered as doing business
when a corporation performs acts for which it was created or exercises some of the
functions for which it was organized.
As an exception, a foreign corporation may sue without a license on the basis of an

isolated transaction. A single act may be considered as either doing business or an
isolated transaction depending on its nature. It may be considered as doing business
if it implies a continuity of commercial dealings and contemplates the performance of
acts or the exercise of functions normally incidental to and in the progressive pursuit
of its purpose.
Contrarily, it may be considered as an isolated transaction if it is different from or

not related to the common business of the foreign corporation in the sense that there
is no objective to increasingly pursue its purpose or object. And as stated, a
license is not required if the foreign corporation is suing on an isolated transaction.
ANDERSEN's act of entering into a contract with MAGNA does not fall into the
category of isolated transactions. The contract clearly shows that ANDERSEN was
to render professional services to MAGNA for a fee. It is clear then that ANDERSEN,
in entering into that contract with MAGNA, was performing acts that were in
progressive pursuit of its business purpose, which, as found by the RTC, involved
consultation and design services.
Though it was a single transaction, ANDERSEN's act of entering into a contract with
MAGNA constitutes doing business in the Philippines. It cannot be considered as an
isolated transaction because the act is related to ANDERSEN's specific business
purpose. Thus, in doing business without a license, ANDERSEN had no legal capacity
to sue in the Philippines.
However, the Court agrees that MAGNA is already estopped from challenging
ANDERSEN's legal capacity to sue. The doctrine of estoppel states that the other
contracting party may no longer challenge the foreign corporation's

personality after acknowledging the same by entering into a contract with it.
This principle is applied in order to "prevent a person (or another corporation)
contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes, chiefly in cases where such person has received the
benefits of the contract."
By virtue of the doctrine of estoppel, a party cannot take undue advantage by

challenging the foreign corporation's personality or legal capacity to sue when the
former already acknowledged the same by entering into a contract with the latter and
derived benefits therefrom.
In this case, MAGNA is already estopped from challenging ANDERSEN's legal

capacity to sue due to its prior dealing with the latter, that is, entering into a contract
with it. MAGNA's allegation that it only discovered during the trial that
ANDERSEN was doing business in the Philippines without a license, is therefore
irrelevant. Moreover, MAGNA had already benefited from the contract because as
found by the lower and appellate courts, ANDERSEN indeed rendered services to
MAGNA pursuant to their contract and even prior thereto. MAGNA READY MIX
CONCRETE CORPORATION v. ANDERSEN BJORNSTAD KANE JACOBS,
INC. G.R. No. 196158, January 20, 2021, Third Division (Hernando, J.)
A foreign corporation is doing business in the Philippines but it only

obtained from the SEC a license to transact business as a representative
office and not a branch office. The Certificate issued by the SEC specified
the purpose/s of the representative office, that is "to deal directly with the
clients/customers of the applicant company in undertaking activities such
as but not limited to information dissemination and promotion of the
company's products as well as quality control of the products."
May the foreign corporation with a representative office maintain any suit
in the Philippines against its competitor for not complying with the laws
and rules governing the goods that the competitor is selling and other
causes of action that it may have against that competitor?
It does not matter for purposes of determining whether a foreign corporation may sue
or be sued before Philippine courts, if such corporation is "doing business" in the
Philippines through a "branch office" or a "representative office." Whether a foreign
corporation is doing business in the Philippines through a branch or representative
office would only determine the extent allowed by law as to what such foreign
corporation can do in the Philippines. Instead, the determinative factor for purposes
of determining whether a foreign corporation can sue or be sued before Philippine
courts is whether the foreign corporation is doing business in the Philippines and if
it is licensed to do so.

Thus, the foreign corporation that is registered with the SEC and is doing business
in the Philippines as a representative office may bring and defend suits before
Philippine courts and other government agencies in order to protect its rights and
interests.155
By virtue of a Petroleum Consortium Agreement, a foreign corporation will

hold a minority and non-controlling interest in an unincorporated joint
venture with a Philippine entity. Instead of shares of stock, the member
foreign corporation of a petroleum consortium would hold a participating
percentage interest, which pertains to the percentage that a member of the
consortium will contribute to the joint venture for exploration, drilling and
production costs. Such percentage interest is also the share that the
consortium member would be participating in profits from petroleum
production. If the member foreign corporation will not be the operator of
the consortium, can it be exempt from obtaining a license to do business in
the Philippines?
The foreign corporation needs to obtain a license to do business in the Philippines

under the Foreign Investment Act of 1991 (“FIA”) notwithstanding the fact that it
holds a minority and non-controlling interest in the consortium.
The subject foreign corporation will invest in a consortium or joint venture which is
a form of partnership. For a foreign corporation to be exempted from obtaining a
license to do business in the Philippines, it must prove that it merely invested as a
shareholder in a domestic corporation.
It is settled that exemptions from the general rule are strictly construed against those
invoking the exemption. Considering that the exemption from the doing business rule
pertains only to investment in a corporation, investment in any other business
organization, firm or entity (e.g., partnership) would not automatically constitute an
exemption. In this connection, "participating in the management, supervision or
control of any domestic business, firm, entity or corporation in the Philippines" is
considered doing business. Consequently, following the strict interpretation rule, the
only automatically exempt "management, supervision or control" is that of a
corporation (i.e., "having a nominee director or office to represent its interests in such
corporation") and not of any other entity, such as a partnership.
155Capacity to Sue or Be Sued by a Foreign Corporation, SEC-OGC Opinion No. 02-13, April 5, 2013.

The differing treatment of investment in a corporation and investment in a
partnership is based on a substantial distinction between the said two forms of
organization. In a corporate setting, the stockholders, save in specified rare instances
when their concurrence is necessary, do not manage the affairs of the corporation, a
function which belongs to the board of directors/trustees. In contrast, all the partners
in a partnership have an equal right in the management of the business, each of them
being considered as agent who could bind the partnership, except when the manner
of management has been set in the articles of partnership or in the case of a limited
partnership. Thus, investment in a partnership does not necessarily mean exemption
from doing business since being a partner generally entails management,
supervision, or control of the partnership.
Investment in a partnership will only be akin to an investment in a corporation that

is exempt from doing business rule only when the foreign corporation is exclusively a
limited partner and takes no part in the management and control of the business
operation of the limited partnership.156
Cite jurisprudence where the Supreme Court ruled that the activities of the
foreign corporation are not deemed as doing business.
a. The mere act of exporting from one’s own country, without doing any specific
commercial act within the territory of the importing country, cannot be deemed as
doing business in the importing country. The importing country does not acquire
jurisdiction over the foreign exporter who has not performed any specific
commercial acts within the territory of the importing country. Without
jurisdiction over the foreign exporter, the importing country cannot compel the
foreign exporter to secure a license to do business in the importing country.
Otherwise, Philippine exporters, by the mere act alone of exporting their products,
could be considered by the importing countries to be doing business in those
countries. This will require Philippine exporters to secure a business license in
every foreign country where they usually export their products, even if they do not
perform any specific commercial act within the territory of such importing
countries. Such a legal concept will have a deleterious effect not only on Philippine
exports, but also on global trade.157
156SEC-OGC Opinion No. 01-14, February 21, 2014.

157Van Zuiden Bros Ltd. vs. GTVL Manufacturing Industries, GR No. 147905, May 28, 2007; 2015 Bar.

b. A foreign company that merely imports goods from a Philippine exporter, without
opening an office or appointing an agent in the Philippines, is not doing business
in the Philippines.158
c. A foreign corporation may file a petition to enforce a foreign arbitral award even
though it is not licensed to do business in the Philippines. When a party enters
into a contract containing a foreign arbitration clause and submits itself to
arbitration, it becomes bound by the contract, by the arbitration and by the result
of arbitration, conceding thereby the capacity of the other party to enter into the
contract, participate in the arbitration and cause the implementation of the
result.159
d. A foreign corporation, if it is a holder in due course of a draft, can file a suit in the
Philippines to enforce the warranties of the drawer and endorser after the drawee
dishonored the instrument. The foreign corporation does not need a license to sue
because it sued upon a singular and isolated transaction 160
e. Subscribing to shares to stock of a domestic corporation, maintaining investments

therein and deriving dividend income therefrom does not qualify as “ doing
business “ contemplated under R.A. No. 7042. Hence, the foreign corporation is
not required to secure a license before it can file a claim for tax refund.161
i. Suability of foreign corporations
State the principles governing the right to sue and suability of foreign
corporations.
The following principles governing a foreign corporation’s right to sue in local courts
have long been settled, to wit:
a. if a foreign corporation does business in the Philippines without a license, it

cannot sue before the Philippine courts;
b. if a foreign corporation is not doing business in the Philippines, it needs no
license to sue before Philippine courts on an isolated transaction or on a cause
of action entirely independent of any business transaction; and
158Cargill,Inc., vs. Intra Strata Assurance Corporation, G.R. No. 168266, March 15, 2010.
159Tuna Processing, Inc. vs. Philippine Kingford, Inc., G.R. No. 185582, February 29, 2012
160Llorente vs. Star City Pty Limited GR Nos. 212050 & 212216, January 15, 2020.
161Commissioner of Internal Revenue v. Interpublic Group of Companies, G.R. No. 207039, August 14,
2019

c. if a foreign corporation does business in the Philippines with the required
license, it can sue before Philippine courts on any transaction.
It is not the absence of the prescribed license but the “doing (of) business” in the
Philippines without such license which debars the foreign corporation from access to
our courts.162
Tersely, the issue on whether a foreign corporation, which does not have a license to
engage in business in the Philippines can seek redress in Philippine courts depends
on whether it is doing business or it merely entered into an isolated transaction. A
foreign corporation that is not doing business in the Philippines must disclose such
fact if it desires to sue in Philippine courts under the isolated transaction rule
because, without such disclosure, the court may choose to deny it the right to sue.163
What is a merger?
A merger is a reorganization of two or more corporations that results in their

consolidating into a single corporation, which is one of the constituent corporations,
one disappearing or dissolving and the other surviving.
To put it another way, merger is the absorption of one or more corporations by another
existing corporation, which retains its identity and takes over the rights, privileges,
franchises, properties, claims, liabilities and obligations of the absorbed
corporation(s). The surviving corporation continues its existence while the life or lives
of the other corporation(s) is or are terminated.164
a. Limitations
In 2015, Total Bank (“Total”) proposed to sell to Royal Bank (“Royal”) its
banking business for P 10 billion consisting of specified assets and
liabilities. The parties reached an eventual agreement, which they termed
as "Purchase and Assumption Agreement" (“P&A”) in which Royal would
acquire Total's specified assets and liabilities, excluding contingent claims,
with the further stipulation that it should be approved by the Bangko
162MR Holdings, Ltd. vs. Sheriff Carlos P. Bajar, Sheriff Ferdinand M. Jandusay, Solidbank
Corporation, and Marcopper Mining Corporation, G.R. No. 138104, April 11, 2002.
163Llorente vs. Star City Pty Limited GR Nos. 212050 & 212216, January 15, 2020.
164Bank of Commerce vs. RPN, G.R. No. 195615, April 21, 2014.

Sentral ng Pilipinas (“BSP”). BSP imposed the condition that Total should
place in escrow Pl billion to cover for contingent claims against it. Total
complied. After securing the approval of the BSP, the two banks signed the
agreement. BSP thereafter issued a circular advising all bank and non-bank
intermediaries that effective January 1, 2016, "the banking activities of
Total Bank and Royal Bank have been consolidated and the latter has
carried out their operations since then."
a. Was there a merger and consolidation of the two banks in point of the
Corporation Code? Explain.
There was no merger or consolidation of the two banks in point of the Corporation
Code. The Supreme Court ruled in Bank of Commerce vs. Radio Philippine Network,
Inc.165 that there can be no merger if the requirements and procedure for merger were
not observed and no certificate of merger was issued by the SEC.
In the actual case, the Supreme Court said that all the requirements specified in the
law must be complied with in order for the merger to take effect. Here, Traders Royal
Bank (“TRB”) and Bank of Commerce (“BOC”) remained separate corporations with
distinct corporate personalities. What happened is that TRB sold to BOC identified
recorded assets in consideration of BOC’s assumption of TRB’s identified recorded
liabilities, including booked contingent accounts. There is no law that prohibits this
kind of transaction especially when it is done openly and with appropriate
government approval.
The transaction is basically a sale of all or substantially all of the assets. It is settled
if one corporation sells or otherwise transfers all its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor if it has acted in good
faith and has paid adequate consideration for the assets, except: (1) where the
purchaser expressly or impliedly agrees to assume such debts; (2) where the
transaction amounts to a consolidation or merger of the corporations; (3) where the
purchasing corporation is merely a continuation of the selling corporation; and (4)
where the transaction is entered into fraudulently in order to escape liability for such
debts.
The evidence fails to show that BOC was a mere continuation of TRB. TRB retained
its separate and distinct identity after the purchase. Although it subsequently
changed its name to Traders Royal Holding’s, Inc., such change did not result in its
dissolution. As such, BOC and TRB remained separate corporations.
165GR No. 195615, April 21, 2014.

b. What is meant by a de facto merger? Discuss.166
De facto merger means that a corporation called the Acquiring Corporation acquired
the assets and liabilities of another corporation in exchange for an equivalent value
of shares of stock of the Acquiring Corporation making the other corporation a
stockholder of the Acquiring corporation.167
In the present case, there is no de facto merger because the Acquiring Corporation
acquired the assets and liabilities of the other corporation but not in exchange for
stocks. The assets were acquired in exchange for the assumption of liabilities.
Cite jurisprudence where the surviving corporation was made to assume

the liabilities of the absorbed corporation.
a. The merger of a corporation with another does not operate to dismiss the
employees of the corporation absorbed by the surviving corporation. This is in
keeping with the nature and effects of a merger as provided under law and the
constitutional policy protecting the rights of labor. The employment of the
absorbed employees subsists. Necessarily, these absorbed employees are not
entitled to separation pay on account of such merger in the absence of any other
ground for its award.168 The surviving corporation, however, may terminate
employment for redundancies resulting from the merger.
b. Since BSA incurred delay in the performance of its obligations and subsequently
cancelled the omnibus line without the mortgagor’s consent, its successor BPI
cannot be permitted to foreclose the loan for the reason that its successor BSA
violated the terms of the contract even prior to the mortgagor’s justified refusal to
continue paying the amortizations. As such, BPI is liable for BSA, its predecessor.
BPI did not only acquire all the rights, privileges and assets of BSA but likewise
acquired the liabilities and obligations of the latter as if BPI itself incurred it.169
1662016 Bar Exam.

167Bank of Commerce vs. Radio Philippines Network, Inc., et. al; G.R. No. 195615, 21 April 2014.
168The Philippine Geothermal, Geothermal, Inc. vs. Unocal Philippines, Inc. (Now Known As Chevron
Geothermal Philippines Holdings, Inc.), GR. No. 190187, September 28, 2016.
169Spouses Ong vs. BPI Family Savings Bank, GR No. 208638, January 14, 2018.

2023 PRE-WEEK NOTES IN INSURANCE,
Dean Nilo T. Divina
I. INSURANCEs
Characteristics of Insurance Contracts
Ciriaco leased a commercial apartment from Supreme Building

Corporation (SBC). One of the provisions of the one-year lease contract
states:
"18. x x x The LESSEE shall not insure against fire the chattels,
merchandise, textiles, goods and effects placed at any stall or store or
space in the leased premises without first obtaining the written consent
of the LESSOR. If the LESSEE obtains fire insurance coverage without
the consent of the LESSOR, the insurance policy is deemed assigned
and transferred to the LESSOR for the latter’s benefit."
Notwithstanding the stipulation in the contract, without the consent of

SBC, Ciriaco insured the merchandise inside the leased premises against
loss by fire in the amount of P500,000.00 with First United Insurance
Corporation (FUIC).
A day before the lease contract expired, fire broke out inside the leased
premises, damaging Ciriaco’s merchandise. Having learned of the insurance
earlier procured by Ciriaco, SBC demanded from FUIC that the proceeds of
the insurance policy be paid directly to it, as provided in the lease contract.
Who is legally entitled to receive the insurance proceeds? Explain. (2009

Bar)
Ciriaco, not SBC, is entitled to receive the proceeds of the insurance policy. A contract
of insurance is personal in nature. In agreeing to be bound by the insurance contract,
each party has in mind the character, credit and conduct of the other. SBC is not
privy to the contract signed by Ciriaco and FUIC. FUIC approved the insurance
contract bearing in mind the personal qualifications of Ciriaco. The stipulation that
the policy is deemed assigned and transferred to SBC does not bind FUIC. Besides,
such stipulation is void because SBC has no insurable interest in the merchandise of
Ciriaco. (Spouses Cha vs Court of Appeals, GR No. 124520, August 18, 1997)
Insurable interest
“A” owns a house valued at P5,000,000.00 which he had insured against fire
for P7,500,000.00. He obtained a loan from “B” in the amount of

P3,500,000.00, and to secure payment thereof, he executed a deed of
mortgage on the house, but without assigning the insurance policy to
the latter. For “A’s” failure to pay the loan upon maturity, “B” initiated
foreclosure proceedings and in the ensuing public sale, the house was
sold by the sheriff to “B” as highest bidder. Immediately upon issuance
of the sheriff’s certificate of sale in his favor, “B” insured the house
against fire for P3,500,000.00 with another insurance company. In order
to redeem the house, “A” borrowed P3,500,000.00 from “C” and, as
security device, he assigned the insurance policy of P7,500,000.00 to “C”.
However, before “A” could pay “B” his obligation, the house was
accidentally and totally burned.
Do “A”, “B”, and “C” have any insurance interest in the house? May
“A”, “B”, and “C” recover under the policies? If so, how much?
As to A: He has insurable interest in his house, an existing interest, but only for
P5,000,000.00, the value of the said house. But, when he assigned it to C, said A had
no more interest in his insurance policy, and A cannot anymore recover on said
insurance policy.
As to B: He has insurable interest on A’s house, having an interest founded upon

an existing interest, for P3,500,000.00, the amount of mortgage debt.
As to C: He has no insurable interest on A’s house when the insurance took effect
and his interest is a mere contingent or expectant interest not founded on an actual
right or valid contract to A’s house. Hence, C cannot recover.1
On January 4, 2019, Mr. P joined Alpha Corporation (ALPHA) as President

of the company. ALPHA took out a life insurance policy on the life of Mr. P
with Mutual Insurance Company, designating ALPHA as the beneficiary.
ALPHA also carried fire insurance with Beta Insurance Co. on a house
owned by it, but temporarily occupied by Mr. P again with ALPHA as
beneficiary.
On September 1, 2019, Mr. P resigned from ALPHA and purchased the

company house he had been occupying. A few days later, a fire occurred
resulting in the death of Mr. P and the destruction of the house.
What are the rights of ALPHA (a) against Mutual Life Insurance Company
on the life insurance policy?
11982 modified BAR exam question.

ALPHA can recover against Mutual Life Insurance Co. in the life insurance
policy as its insurable interest in the life of the person insured, Mr. P, existed when
the insurance took effect. In life insurance, insurable interest need not exist
thereafter or when the loss occurred.2
Alpha, however, cannot recover on the fire insurance because at the time of the
loss, it had no more insurable interest having sold the property to Mr. P. In property
insurance, it is not enough that the insured must have insurable interest at the time
of the issuance of the policy but also at the time of loss.
Double insurance and over insurance
Where the insurance policy specifies as a condition the disclosure of existing co

insurers, non-disclosure thereof is a violation that entitles the insurer to avoid the
policy. This condition is common in fire insurance policies and is known as the "other
insurance clause".
The rationale behind the incorporation of "other insurance" clause in fire policies is
to prevent over-insurance and thus avert the perpetration of fraud. When a property
owner obtains insurance policies from two or more insurers in a total amount that
exceeds the property's value, the insured may have an inducement to destroy the
property for the purpose of collecting the insurance. The public as well as the insurer
is interested in preventing a situation in which a fire would be profitable to the
insured.3
If an insurance policy prohibits additional insurance on the property

insured without the insurer's consent, such provision being valid and
reasonable, a violation by the insured (2011 Bar)
A. reduces the value of the policy.

B. avoids the policy.
C. offsets the value of the policy with the additional insurances’ value.
D. forfeits premiums already paid.
Answer:
(B) avoids the policy.
2BAR 1984.
3 Multi-Ware Manufacturing Corporation v. Cibeles Corporation, G.R. No. 230528, February 1, 2021

Perfection of insurance contract
Jason is the proud owner of a newly-built house worth PS million. As a

protection against any possible loss or damage to his house, Jason applied
for a fire insurance policy thereon with Shure Insurance Corporation
(Shure) on October 11, 2016 and paid the premium in cash. It took the
company a week to approve Jason's application. On October 18, 2016, Shure
mailed the approved policy to Jason which the latter received five (5) days
later. However, Jason's house had been razed by fire which transpired a day
before his receipt of the approved policy. Jason filed a written claim with
Shure under the insurance policy. Shure prays for the denial of the claim
on the ground that the theory of cognition applies to contracts of insurance.
Decide Jason's claim with reasons. (2016 Bar)
No. What governs insurance contract is the cognition theory whereby the insurance
contract is perfected only from the time the applicant came to know of the acceptance
of the offer by the insurer. In this case, the loss occurred a day prior to Jason’s
knowledge of the acceptance by Shure of Jason’s application. There being not
perfected insurance contract, Jason is not entitled to recover from Shure.
Antarctica Life Assurance Corporation (ALAC) publicly offered a specially

designed insurance policy covering persons between the ages of 50 to 75
who may be afflicted with serious and debilitating illnesses. Quirico applied
for insurance coverage, stating that he was already 80 years old.
Nonetheless, ALAC approved his application.
Quirico then requested ALAC for the issuance of a cover note while he was
trying to raise funds to pay the insurance premium. ALAC granted the
request. Ten days after he received the cover note, Quirico had a heart
seizure and had to be hospitalized. He then filed a claim on the policy.
[a] Can ALAC validly deny the claim on the ground that the insurance
coverage, as publicly offered, was available only to persons 50 to 75 years
of age? Why or why not? (2009 Bar
No. By approving the application of Quirino who disclosed that he was already 80
years old, ALAC has waived its age requirement. Hence, ALAC is now precluded from
raising such defense of age of the insured.
[b] Did ALAC’s issuance of a cover note result in the perfection of an

insurance contract between Quirico and ALAC? Explain. (2009 Bar )

Yes. The issuance of a cover note resulted in the perfection of the contract of
insurance. Cover notes are issued to bind the insurer temporarily pending issuance
of the policy ( Section 52 of the Insurance Code, as amended ).They are valid for a
period of sixty days. No separate premium is to be paid on a cover note. Within sixty
days after issuance of the cover note, a policy shall be issued in lieu thereof, including
within its terms the identical insurance bond under the cover note and the premiums
therefor.
On September 27, 1996, Development Insurance and Surety Corporation

(insurance company) issued a comprehensive commercial vehicle policy to
Jaime Gaisano. His company, Noah’s Ark, immediately processed the
payments and issued a check, representing the payment of premium and
other charges, dated September 27, 1996 payable to the insurance
company’s agent, Trans-Pacific, on the same day. However, nobody from
Trans-Pacific picked up the check that day. Trans-Pacific informed Noah’s
Ark that its messenger would get the check the next day, September 28.
In the evening of September 27, 1996, while under the official custody of
Noah’s Ark, the vehicle was stolen. Oblivious of the incident, Trans-Pacific
picked up the check on September 28 and issued an official receipt dated
September 28, 1996.
Is there a binding insurance contract?
No, there is no dispute that the check was delivered to and was accepted by
insurance company’s agent, Trans-Pacific, only on September 28, 1996. No payment
of premium had thus been made at the time of the loss of the vehicle on September
27, 1996. While Jaime Gaisano claims that Trans-Pacific was informed that the check
was ready for pick-up on September 27, 1996, the notice of the availability of the
check, by itself, does not produce the effect of payment of the premium. At the time
of loss, there was no payment of premium yet to make the insurance policy effective.
Jaime Gaisano also failed to establish the fact of a grant by respondent of a credit
term in his favor, or that the grant has been consistent.4
2. Premium payment
4Jaime T. Gaisano v. Development Insurance and Surety Corporation, G.R. No. 190702, February
27, 2017.

Section 77 of Presidential Decree 612 or the Insurance Code of the Philippines
provides the general rule that no insurance contract issued by an insurance company
is valid and binding unless and until the premium has been paid.
The Makati Tuscany case provides that if the insurer has granted the insured a credit
term for the payment of the premium, it is an exception to the general rule that
premium must first be paid before the effectivity of an insurance contract.
In this case, the insured argued that the 90-day payment term is a credit extension.
However, the insurance policy is clear that failure to pay each installment on the due
date automatically voided the insurance policy. Here, the insured did not pay any
premium, which resulted in a void insurance policy.5
If the insured paid the premium, the insurer's liability attaches correspondingly.
There is a valid and binding policy or contract of insurance and the insured may
demand indemnification in case of loss. There is no credit on the premium to speak of
and, therefore, none which the insurer can demand because he has already been paid.
Second, if the insured did not pay the premium and the parties did not agree that the
insurer's liability has attached, then there is no valid or binding contract of insurance.
The insured cannot demand indemnification if loss occurs and neither can the insurer
demand payment of the premium. Third, if the insured did not actually pay the
premium but the parties have agreed that the insurer's liability has attached, then
the insured is considered to have extended credit on the premium. When the insured
accepts the terms of the credit, there is a valid and binding contract of insurance. The
insured must pay the premium before the end of the credit term; otherwise, he cannot
demand indemnification in case of loss. The insurer may demand the premium,
whether or not loss occurred.
The instant case falls under the third situation. The Court agrees with the RTC's
finding that the premiums were advanced on credit. The parties had agreed that
Chartis was already liable to indemnify CCTL if the contingencies occurred from
January 20, 2005 onward, even though CCTL had not actually paid the premium.
Chartis bore upon itself the costs of the policies in advance. CCTL was deemed to
have paid the premium on credit and was supposed to make actual payment within
a 90-day period.
When Chartis cancelled the policies on June 15, 2005, it had been at risk of
indemnifying for five months. CCTL cannot renege on its promise to pay the
premiums after enjoying that period of coverage. In Great Pacific Life Insurance Corp.
v. Court of Appeals, the Court held that the insurer must return the premium to the
insured because the former was never at risk. This case is the inverse: the insured
must pay the premium because the insurer was at risk. Similarly, in UCPB, the Court
5Philam Insurance v. Parc Chateau Condominium Unit Owners Association, G. R. No. 20116, March
4, 2019

said that it would be unjust and inequitable if the insured, after incurring loss, cannot
recover on a policy to which it had been consistently granted a credit term for the
payment of premiums. This case is the inverse: it would be unjust and equitable if
the insurer, after taking on the risk of indemnifying, cannot recover the premiums on
policies for which it had consistently granted credit terms.6
H. RESCISSION OF INSURANCE CONTRACTS
1. Concealment
X insured his life for P20 million. X, plays golf and regularly exercises
everyday, hence is considered in good health. He did not know, however,
that his frequent headache is really caused by his being hypertensive. In his
application form for a life insurance for himself, he did not put a check to
the question if he is suffering from hypertension, believing that because of
his active lifestyle, being hypertensive is a remote possibility. While playing
golf one day, X collapsed at the fairway and was declared dead on arrival at
the hospital. His death certificate stated that X suffered a massive heart
attack.
(A) Will the beneficiary of X be entitled to the proceeds of the life

insurance under the circumstances, despite the non-disclosure that he is
hypertensive at the time of application? (Bar 2016)
(B) If X died in an accident instead of a heart attack, would the fact of X's
failure to disclose that he is hypertensive be considered as material
information?
Answer:
(A) No, the beneficiary of X is not entitled to the proceeds of the life insurance. The
hypertension of X is a material fact that should have been disclosed to the
insurer. The concealment of such material fact entitles the insurer to rescind
the insurance policy.
(B) It is still a material information. It is settled that the insured cannot recover
even though the material fact not disclosed is not the cause of the loss.
6 Chartis Philippines Insurance, Inc. v. Cyber City Teleservices, Ltd, G.R. No. 234299, March
03, 2021

The Insurance Code dispensed with proof of fraudulent intent in case of
rescission due to concealment but not so in case of rescission due to false
representation.7
This is neither because intent to defraud is intrinsically irrelevant in

concealment, nor because concealment has nothing to do with fraud. To the contrary,
it is because in insurance contracts, concealing material facts is inherently
fraudulent: “if a material fact is actually known to the [insured], its concealment must
of itself necessarily be a fraud. When one knows a material fact and conceals it, “it is
difficult to see how the inference of a fraudulent intent or intentional concealment
can be avoided.” Thus, a concealment, regardless of actual intent to defraud, “is
equivalent to a false representation.” 8
I. CLAIMS SETTLEMENT AND SUBROGATION
1. Notice and proof of loss
Insurable interest in property is not limited to property ownership in the

subject matter of the insurance. Where the interest of the insured in, or his relation
to, the property is such that he will be benefitted by its continued existence, or will
suffer a direct pecuniary loss by its destruction, his contract of insurance will be
upheld, although he has no legal or equitable title. When Milestone removed its parts
and machines, Milestone still had an actual and real interest in the preservation of
the corrugating machines while the Toll Manufacturing Agreement (TMA ) is not
effectively terminated. Non-preservation will render Milestone liable for breach of
contract as no corrugated carton boxes would be manufactured in favor of Asgard
under the TMA.
Since the damage or loss caused by Milestone to Asgard's corrugating machines was
willful or intentional, UCPB Insurance is not liable under the Policy. To permit
Asgard to recover from the Policy for a loss caused by the willful act of the insured is
contrary to public policy, i.e., denying liability for willful wrongs.9
In Industrial Personnel and Management Services, Inc. v. Country Bankers

Insurance Corporation,10 the Supreme Court reiterated the rule that substantial
compliance with the requirements under the policy suffices.
7Insular Life Assurance Co., Ltd. v. Heirs of Alvarez, G.R. Nos. 207526 and 210156, October 3,
2018; Manulife v. Ibanez, November 28, 2016.
8Insular Life, ibid.
9UCPB General, Insurance Co., Inc. v. Asgard Corrugated Box Manufacturing Corporation, G.R.
No. 244407, January 26, 2021,

10G.R. No. 194126, October 17, 2018.

The facts are as follows:
Industrial Personnel and Management Services, Inc. (IPAMS) began recruiting

registered nurses for work deployment in the United States of America (U.S.). By
reason of the advances made to the nurse applicants, the latter were required to post
surety bond. The purpose of the bond is to guarantee the following during its validity
period: (a) that they will comply with the entire immigration process, (b) that they
will complete the documents required, and (c) that they will pass all the qualifying
examinations for the issuance of immigration visa. The Country Bankers Insurance
Corporation (Country Bankers) and IPAMS agreed to provide bonds for the said
nurses. The surety bonds issued specifically state that the liability of the Country
Bankers, shall be limited only to actual damages arising from Breach of Contract by
the applicant. A Memorandum of Agreement (MOA) was executed by the said parties
which stipulated the various requirements for collecting claims from Country
Bankers. On the basis of the MOA, IPAMS submitted its claims under the surety
bonds issued by Country Bankers. For its part, Country Bankers, upon receipt of the
documents enumerated under the MOA, paid the claims to IPAMS. According to
IPAMS, starting 2004, some of its claims were not anymore settled by Country
Bankers as it insisted on the production of official receipts of IPAMS on the expenses
it incurred for the application of nurses.
It was held that the statement of accounts, in lieu of official receipts, sufficed to
allow the insured to recover.11
MALAYAN INSURANCE COMPANY, INC., petitioner, vs. STRONGHOLD

INSURANCE COMPANY, INC., and RICO J. PABLO, respondents.
G.R. No. 203060. June 28, 2021, THIRD DIVISION (Hernando, J.)
FACTS
Petitioner Malayan Insurance Company, Inc. is a corporation organized and

existing under Philippine laws, and is engaged in the business of motor vehicle
insurance, among others. Respondent Stronghold Insurance Company, Inc. is also a
corporation organized and existing under Philippine laws, and is engaged in the
business of non-life insurance.
Pablo obtained a Compulsory Third Party Liability (CTPL) insurance for his
newly-acquired vehicle from Stronghold. The policy is under a Certificate of Cover,
effective from January 16, 2007 to January 16, 2010. The limit of the CTPL insurance
coverage is P100,000.00. The policy also contained a schedule of indemnities. IMC No.
11Industrial Personnel and Management Services, Inc. v. Country Bankers Insurance

Corporation, G.R. No. 194126, October 17, 2018.

4-2006 is the most recent issuance at that time that sets the limits for third party
liability and indemnities in settlement of claims under compulsory motor vehicle
liability insurance (CMVLI) policies.
Pablo also obtained an Excess Cover for Third Party Bodily and Death Liability
from Malayan for the same vehicle, as indicated in the Private Vehicle Policy. The
amount of the excess coverage is P200,000.00.
In 2008, during the effectivity of the two policies, Pablo, while driving the
insured vehicle, sideswiped a six-year-old pedestrian who sustained bodily injuries
and was brought to the hospital for treatment. Pablo claimed that he incurred
hospital and medical expenses in the amount of P100,318.08 for the treatment of the
pedestrian. As a result, he filed third party liability claims for reimbursement with
both Stronghold and Malayan.
Stronghold computed its liability based on the schedule of indemnities

provided in the CTPL insurance policy, and arrived at the amount of P29,000.00. The
excess of P71,318.08 (out of the total amount of P100,318.08) was not covered or in
excess of the limits in the schedule of indemnities, and should be shouldered by
Malayan pursuant to the excess coverage.
Malayan, however, would not agree to pay this excess. To resolve the dispute,
Pablo sought the assistance of the IC through a letter.
Insurance Commission: The IC ruled in favor of Malayan. It ordered Stronghold to
pay Pablo the amount of P100,000.00, and Malayan to pay the amount of only
P318.08. The IC applied the case of Western Guaranty Corporation v. Court of
Appeals, and ruled that "the enumerations of bodily injuries provided for in the
Schedule of Indemnities in the policy and the corresponding amount of
reimbursement provided therein would not serve as a limitation on the amount to be
recovered as long as the amount claimed would not exceed the amount of insurance
coverage and the expenses were incurred for the hospitalization and medication of
the victim[']s injury." It further ruled that the schedule of indemnities in Stronghold's
policy is contrary to Western Guaranty.
ISSUE
What is the extent of liability of Stronghold pursuant to the insurance policy it

issued? (Resulting from this would be the amount of Malayan's liability, which is the
excess not covered by Stronghold's policy.)
RULING:
The Court affirms the findings of the CA, with the modification that the amounts
payable to Pablo shall be subject to legal interest.

The purpose of CMVLI is to provide compensation for the death or bodily injuries
suffered by innocent third parties or passengers as a result of the negligent operation
and use of motor vehicles. The victims or their dependents are assured of immediate
financial assistance, regardless of the financial capacity of motor vehicle owners.
With the different interpretations of Western Guaranty, it is necessary to revisit the

case. Both the appellate court and IC used the case as basis in their respective
rulings. The parties have likewise argued on its applicability.
In Western Guaranty, a pedestrian was hit by a passenger bus that was insured with
Western Guaranty Corporation. The policy provided that the company's liability in
cases of death, injury, or damage to property of any party shall not exceed the limits
of liability set forth, and that the payment per victim in any one accident shall not
exceed the limits indicated in the Schedule of Indemnities provided for excluding
additional medical or burial expenses that might have been incurred. The pedestrian
filed a complaint for damages against the bus company, which in turn filed a third-
party complaint against petitioner therein. The Regional Trial Court ruled in favor
of the pedestrian and ordered the payment of actual damages, compensation for loss
of earning capacity, moral damages, and attorney's fees. On appeal, the CA affirmed
the trial court's ruling in its entirety. Petitioner therein further appealed to this Court
and contended that as the schedule therein limits the amount payable for certain
kinds of expenses, that schedule should be read as excluding liability for any other
type of expense or damage or loss even though actually sustained or incurred by the
third-party victim.
The Court ruled against petitioner insurance provider. The Court ruled that the
schedule does not restrict the kinds of damages that petitioner therein may be made
to pay as long as liability is shown to have arisen and the requisites for each kind of
damages are present. The schedule is not an enumeration of the specific kinds of
damages that may be awarded. Its purpose was to set limits to the amounts the
insurance company would be liable for in cases of "claims for death, bodily injuries of,
professional services and hospital charges, for services rendered to traffic accident
victims"; it does not limit or exclude claims for other kinds of damages. The Court
added that petitioner therein should have used a more specific and precise language
to reflect its intentions as presented in its arguments.
In other words, Western Guaranty clarifies the applicability of the limits provided in
the Schedule of Indemnities to injuries listed therein and allows claims for other
kinds of damages not otherwise indicated in the schedule against CMVLI policy
providers, as long as liability is established and the requisites for the kind of
damages claimed are present.
In the instant case, the CA did not err in applying Western Guaranty. Upon
examination of Stronghold's policy in the instant case, the Court finds that the

appellate court is correct in finding that the subject policy is similar — and in fact
identical — with the policy in Western Guaranty.
It is clear that Stronghold's policy is identical with the assailed policy in Western
Guaranty. It must be noted, however, that the issues in Western Guaranty and in the
instant case are at variance. But, this Court nonetheless upholds the CA's finding on
the applicability of limits in CTPL policies. As the appellate court have held, the
limit of liability with regard to the items listed in the Schedule of
Indemnities is the amount provided therein; the limit of liability with
regard to other kinds of damages not listed in the same Schedule of
Indemnities is the total amount of insurance coverage. It then follows that the
amounts in excess of the limits of liability in the schedule for items listed therein are
not covered by the total coverage. Such excess is already for the personal account of
the insured or an excess coverage provider. This interpretation upholds the purpose
of indicating limits of liability on the specific injuries listed in the schedule.
Therefore, Stronghold's liability with regard to injuries provided in its policy's

Schedule of Indemnities is subject to the limits provided therein. Any excess will not
be for its account, and will be for the account of the excess coverage provider —
Malayan in this case. As found by the CA, Stronghold is liable in the amount of
P42,714.83; Malayan, on the other hand, is liable in the amount of P57,603.25
The Court, however, imposes legal interest on the amounts to be paid by the
insurance companies to Pablo. Pursuant to Nacar v. Gallery Frames, legal interest
should be imposed as follows: (a) 12% per annum from October 3, 2008, the date of
extrajudicial demand, until June 30, 2013; and (b) 6% per annum from July 1, 2013
until full payment thereof.
As to Stronghold's contention that GSIS is the applicable case, the Court agrees with
the CA that it is not the applicable case. The insurance policy therein is different from
the policy in Western Guaranty (and Stronghold's policy in the instant case). There
was no determination that the policy in GSIS contained the same wording and all-
encompassing clause embodied in the policy assailed in Western Guaranty. Moreover,
the issues in GSIS are different from Western Guaranty and the instant case;
in GSIS, the issues pertained to the insurer's solidary liability with the insured, and
the prescription of an action to file an insurance claim.
2. Guidelines on claims settlement
Prescription of action
The condition contained in an insurance policy that claims must be presented

within one year after rejection is not merely a procedural requirement but an
important matter essential to a prompt settlement of claims against insurance

companies as it demands that insurance suits be brought by the insured while the
evidence as to the origin and cause of destruction have not yet disappeared.
Case law teaches that the prescriptive period for the insured's action for
indemnity should be reckoned from the "final rejection" of the claim. The "final
rejection" simply means denial by the insurer of the claims of the insured and not the
rejection or denial by the insurer of the insured's motion or request for
reconsideration. The rejection referred to should be construed as the rejection in the
first instance.
The contention of the insured that its action has not yet prescribed and that
the suit is deemed to have been commenced on the date that the original complaint
was filed is untenable. An amended complaint supersedes an original one. As a
consequence, the original complaint is deemed withdrawn and no longer considered
part of the record.
The settled rule is that the filing of an amended pleading does not retroact to
the date of the filing of the original pleading; hence, the statute of limitation runs
until the submission of the amendment. It is true that as an exception, this Court has
held that an amendment which merely supplements and amplifies facts originally
alleged in the complaint relates back to the date of the commencement of the action
and is not barred by the statute of limitations which expired after the service of the
original complaint. Thus, when the amended complaint does not introduce new
issues, cause of action, or demands, the suit is deemed to have commenced on the
date the original complaint was filed.
In the present case, the Court finds that the exception does not apply to
insured’s case as to allow the period of prescription to run and for prescription to
ultimately set in. As the Amended Complaint superseded the original complaint, the
suit of the latter is deemed to have been commenced on the date of filing of the
Amended Complaint, during which time, prescription had already set in as insured
had only until January 24, 2010 within which to file its insurance claim.12
c. Subrogation
The Court deemed it necessary to abandon the ruling in Vector that an insurer may
file an action against the tortfeasor within ten (10) year from the time the insurer
indemnifies the insured. Following the principles of subrogation, the insurer only
steps into the shoes of the insured. No new obligation was created between the
insurer and the wrongdoer. The rights of a subrogee cannot be superior to the rights
possessed by a subrogor. Therefore, for purposes of prescription, the insurer inherits
only the remaining period within which the insured may file an action against the
12Alpha Plus International Enterprises Corp. v. Philippine Charter Insurance Corp, G.R. No. 203756,
February 10, 2021,

wrongdoer. The indemnification of the insured by the insurer only allows it to be
subrogated to the former' s rights, and does not create a new reckoning point for the
cause of action that the insured originally has against the wrongdoer.
However, Vector is still applicable in this case because the Court's abandonment of
the Vector doctrine should be prospective in application for the reason that judicial
decisions applying or interpreting the laws or the Constitution, until reversed, shall
form part of the legal system of the Philippines. Hence, as the amended complaint
impleading Henson was filed on within ten (10) years from the time respondent
indemnified Copylandia for its injury/loss, i.e., the case cannot be said to have
prescribed13
Since the insurance claim for the loss sustained by the insured shipment was paid by
Tokio Marine as proven by the Subrogation Receipt — showing the amount paid and
the acceptance made by Honda Trading, it is inevitable that it is entitled, as a matter
of course, to exercise its legal right to subrogation as provided under Article 2207 of
the Civil Code as follows:
Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by the insurance
company does not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss or injury.
The payment by the insurer to the insured operates as an equitable

assignment to the insurer of all the remedies which the insured may have
against the third party whose negligence or wrongful act caused the loss. The
right of subrogation is not dependent upon, nor does it grow out of any privity
of contract or upon payment by the insurance company of the insurance
claim. It accrues simply upon payment by the insurance company of the
insurance claim.
Indeed, the right of subrogation has its roots in equity. It is designed to promote and
to accomplish justice and is the mode which equity adopts to compel the ultimate
payment of a debt by one who, in justice and good conscience, ought to pay.
Consequently, the payment made by Tokio Marine to Honda Trading operates as an
equitable assignment to the former of all the remedies which the latter may have
against Keihin-Everett.14
13Vicente Henson, Jr v. UCPB General Insurance Co., G.R. No. 223134, August 14, 2019
Keihin-Everett Forwarding Co., Inc., Petitioner – Versus- Tokio Marine Malayan Insurance Co., Inc.
14
And Sunfreight Forwarders & Customs Brokerage, Inc., Respondents. G.R. No. 212107, SECOND
DIVISION, October 28, 2019

Where the insurer was made to pay the insured for a loss covered by the
insurance contract, such insurer can run after the third person who caused
the loss through subrogation. What is the basis for conferring the right of
subrogation to the insurer? (2011 Bar)
(A) Their express stipulation in the contract of insurance.

(B) The equitable assignment that results from the insurer’s
payment of the insured.
(C) The insured’s formal assignment of his right to indemnification
to the insurer.
(D) The insured’s endorsement of its claim to the insurer.
Answer:
(B) The equitable assignment that results from the insurer’s payment of the insured.
ELP Insurance, Inc. issued Marine Policy No. 888 in favor of FCL Corp. to
insure the shipment of 132 bundles of electric copper cathodes against all
risks. Subsequently, the cargoes were shipped on board the vessel "M/V
Menchu" from Leyte to Pier 10, North Harbor, Manila.

III. TRANSPORTATION LAW
A. COMMON CARRIERS
Article 1732 of the Civil Code defines common carriers as "persons,

corporations, firms or associations engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air, for compensation, offering their
services to the public." Article 1732 does not make any distinction between one whose
principal business activity is the carrying of persons or goods or both, and one who
does the carrying only an ancillary activity; between a person or enterprise offering
transportation service on a regular or scheduled basis, and one offering the service
on an occasional, episodic or unscheduled basis; and a carrier offering its services to
the general public, and one who offers services or solicits business only from a narrow
segment of the general population.
The barge operator is a common carrier within the definition under Article
1732 of the Civil Code because it is one of the four barges commissioned to transport
23,842 bags of fishmeal from the Port of Manila to the consignee’s warehouse. As a
common carrier, it is bound to observe extraordinary diligence in the vigilance over
the goods transported by it. It bears to be reminded that common carriers are
presumed to have been at fault or to have acted negligently if the goods are lost,
destroyed, or deteriorated. To overcome this presumption, common carriers must
prove that it exercised extraordinary diligence in the transportation of the goods.
Thus, the customs broker engaged by the consignee and the owner of the barge are
jointly and severally liable. The damage was attributable to the negligence of the
customs broker, a common carrier, in utilizing an unseaworthy barge, and the
negligence of the barge operator in supplying the unseaworthy barge that suffered a
hole at the bottom of its plating, through which the water gained entry and damaged
the cargo. 15
Are the following persons common carriers?
a) Freight forwarder; b) Shipowner; c) arrastre operator; d) customs broker; and

e) trucking company.
a. Freight forwarder - A freight forwarder is not a common carrier. It merely

chooses or selects the common carrier. A freight forwarder’s liability is limited
to damages arising from its own negligence in choosing the carrier; however,
where the forwarder contracts to deliver goods to their destination instead of
merely arranging for their transportation, it becomes liable as a common
carrier for loss or damage to goods. A freight forwarder assumes the
15C.V. Gaspar Salvage & Lighterage v. LGU Insurance Company Ltd., G.R. Nos. 206892 and 207035,
February 3, 2021

responsibility of a carrier, which actually executes the transport, even though
the forwarder does not carry the merchandise itself.16
b. Shipowner - A shipowner is a common carrier. He is engaged in the business

of transporting goods for compensation and offers his services to the public.
c. Arrastre operator - An arrastre operator is not a common carrier. The

functions of an arrastre operator involve the handling of cargo deposited on the
wharf or between the establishment of the consignee or shipper and the ship’s
tackle. Being the custodian of the goods discharged from a vessel, an arrastre
operator’s duty is to take good care of the goods and to turn them over to the
party entitled to their possession.17
d. Customs Broker - Although its principal function is to prepare the correct

customs declaration and proper shipping documents as required by law, the
transportation of goods is, nevertheless, an integral part of a customs broker,
thus, the customs broker is also a common carrier. For to declare otherwise
would be to deprive those with whom it contracts the protection which the law
affords them notwithstanding the fact that the obligation to carry goods for its
customers, is part and parcel of its business.18
e. Trucking company - A person is a common carrier if he is engaged in the

business of transporting goods by land, through his trucking service. In this
case, a customs broker contracted with a trucking company. The
transportation services are not exclusive to the customs broker. Even though
it has few clients, the trucking company was considered a common carrier. If
the trucking company caters only to the customs broker, then, it is a private
carrier.19
Cite other examples of common carriers.
a. Barge operator20
b. Passenger jeepney, bus company, or a taxi company21
16 Unsworth Transport International (Phils.), Inc. v. Court of Appeals and Pioneer Insurance and
Surety Corporation, G.R. No. 166250, July 26, 2010.
17 Westwind Shipping Corporation v. UCPB General Insurance Co., G.R. No. 2002289, November 25,
2013; Asian Terminals v. Daehan Fire and Marine Insurance, G.R. No. 171194, February 4, 2010.
18 Westwind Shipping Corporation v. UCPB General Insurance Co., G.R. No. 2002289, November 25,
2013; A.F Sanchez Brokerage v. Court of Appeals, G.R. No. 147079, December 21, 2004
19 Loadmasters Customs Services v. Glodel Brokerage Corporation, G.R. No. 179446, January 10, 2011.
20 Asia Lighterage and Shipping, Inc. v. Court of Appeals, G.R. No. 147246, August 9, 2003, 409 SCRA
340.; C.V. Gaspar Salvage & Lighterage v. LG Insurance Company Ltd., G.R. Nos. 206892 & 207035,
February 3, 2021
21 Batangas Transportation v. Orlanes, 52 Phil 455, cited in Perez, p. 9.

c. Vessels engaged in inter-island shipping22
d. Cargo truck to transport anybody’s goods for a fee.23
Is a travel agency a common carrier?
A travel agency is not a common carrier. It only arranges for the transportation of its
clients for air carriage. As such, it is not bound to exercise extraordinary diligence in
the performance of its obligations.24
1. Diligence required of common carriers
Jurisprudence where the Supreme Court ruled that the common carrier
breached its obligation to exercise extraordinary diligence.
a. Petitioners failed to prove that they did exercise the degree of diligence required
by law over the goods they transported. Aside from their persistent disavowal of
liability by conveniently posing an excuse that their extraordinary responsibility
is terminated upon release of the goods to the Ports Authority, petitioners failed
to adduce sufficient evidence they exercised extraordinary care to prevent
unauthorized withdrawal of the shipments.25
b. Part of the extraordinary responsibility of common carriers is the duty to ensure
that shipments are received by none but the person who has a right to receive
them. Common carriers must ascertain the identity of the recipient. Failing to
deliver the shipment to the designated recipient amounts to a failure to deliver.
The shipment shall then be considered lost, and liability for this loss ensues. 26
c. At the time the customs broker turned over the custody of the cargoes to a
common carrier for inland transportation, it is still required to observe
extraordinary diligence in the vigilance of the goods. Failure to successfully
establish this carries with it the presumption of fault or negligence, thus,
rendering the customs broker liable to the shipper it contracted with, subject to
right of reimbursement against the carrier in whose possession, the goods where
hijacked.27
d. When the loss of the goods was not attended by grave or irresistible threat,
violence, or force but was brought about by the carrier’s failure to exercise
extraordinary diligence when she neglected vetting her driver (who absconded
22 De Villola v. Stanley, 32 Phil. 541, cited in Perez, ibid.

23 Benedicto v. IAC, 187 SCRA 547, cited in Perez, ibid.
24 Crisostomo v. Court of Appeals, infra.
25 Nedlloyd Lijnen B.V. Rotterdam v. Glow Laks Enterprises, G.R. No. 156330, November 19, 2014.
26 Federal Express Corporation v. Luwalhati Antonino, G.R. No. 199455, June 27, 2018.
27 Keihin-Everett Forwarding Co. v. Marine Malayan, et al., G.R. No. 212107, January 28, 2019.

with the goods) or providing security for the cargo and failing to take out
insurance on the shipment’s value.28
e. Petitioner was extremely remiss before and during the time of the vessel’s
sinking. Petitioner did not endeavor to dispute the Court of Appeal’s finding that
the vessel's captain erroneously navigated the ship, and failed to reduce its
speed considering the ship’s size and the weather conditions. The crew members
were also negligent when they did not make any stability calculations, and
prepare a detailed report of the vessel’s cargo stowage plan. The radio officer
failed to send an SOS message in the internationally accepted communication
network but instead used the Single Side Band informing the company about
the emergency situation.29
f. When a hole on the bottom plating of a barge was found that caused the seepage
or ingress of water into one of its hatches, which resulted in the goods loaded on
the barge to get wet, rendering it inedible or useless for the purpose intended by
the owner.30
2. Liabilities of common carriers
KLM breached its contract with the passenger when it failed to deliver his checked-
in suitcase at the designated place and time. The suitcase contained his clothing for
the conference where he was a guest speaker, a copy of his speech, and his resource
materials. Worse, the passenger suitcase was never returned to him even after he
arrived in Manila from the foreign trip. Thus, KLM's liability for the lost suitcase was
sufficiently established as it failed to overcome the presumption of negligence.31
A common carrier is presumed to have been negligent if it fails to prove that it

exercised extraordinary vigilance over the goods it transported. When the goods
shipped are either lost or arrived in damaged condition, a presumption arises against
the carrier of its failure to observe that diligence, and there need not be an express
finding of negligence to hold it liable. To overcome the presumption of negligence, the
common carrier must establish by adequate proof that it exercised extraordinary
diligence over the goods. It must do more than merely show that some other party could
be responsible for the damage.
In the instant case, considering that it is undisputed that the subject goods were
severely damaged, the presumption of negligence on the part of the common carrier,
i.e., Unitrans, arose. Hence, it cannot escape liability.32
28 Annie Tan v. Great Harvest, supra.

29 Sulpicio Lines v. Major Victorio Karaan, G.R. No. 208590, October 3, 2018.
30 C.V Gaspar Salvage & Lighterage Corporation v. LG Insurance Company Ltd., GR. Nos. 206892 &
207035, February 3, 2021

31 Klm Royal Dutch Airlines V. Dr. Jose M. Tiongco G.R. No. 212136. October 4, 2021
32 Unitrans International Forwarders, Inc. V.
Insurance Company Of North America G.R. No. 203865, March 13, 2019.

A complaint for breach of a contract of carriage is dismissible as against the
employee who was driving the bus because the parties to the contract of carriage are
only the passenger, the bus owner, and the operator.
Since the cause of action is based on a breach of a contract of carriage, the

liability of Sanico is direct as the contract is between him and Colipano. Castro, being
merely the driver of Sanico's jeepney, cannot be made liable as he is not a party to the
contract of carriage. Although he was driving the jeepney, he was a mere employee of
Sanico, who was the operator and owner of the jeepney. The obligation to carry
Colipano safely to her destination was with Sanico. In fact, the elements of a contract
of carriage existed between Colipano and Sanico: consent, as shown when Castro, as
employee of Sanico, accepted Colipano as a passenger when he allowed Colipano to
board the jeepney, and as to Colipano, when she boarded the jeepney; cause or
consideration, when Colipano, for her part, paid her fare; and, object, the
transportation of Colipano from the place of departure to the place of destination. 33
A shipment of electronic goods arrived at the Port of Manila for Sony

Philippines, Inc. (Sony). Previous to the arrival, Sony had engaged the
services of TMBI to facilitate, process, withdraw, and deliver the shipment
from the port to its warehouse in Biñan. TMBI – who did not own any
delivery trucks – subcontracted the services of BMT Trucking Services
(BMT), to transport the shipment from the port to the Biñan warehouse.
Four (4) BMT trucks picked up the shipment from the port. However, only
three (3) trucks arrived at Sony’s Biñan warehouse. The fourth truck driven
by Rufo Reynaldo Lapesura was found abandoned.
Mitsui, the insurer, paid the claims and ran after TMBI. TMBI, however,
denied being a common carrier because it does not own a single truck to
transport its shipment and it does not offer transport services to the public
for compensation and hence, it is not bound to observe extraordinary
diligence. Furthermore, TMBI insists that the hijacking of the truck was a
fortuitous event which should exonerate its liability.
a. Is TMBI is a common carrier?
Yes, TMBI is a common carrier. The delivery of the goods is an integral, albeit
ancillary, part of its brokerage services. TMBI admitted that it was contracted to
facilitate, process, and clear the shipments from the customs authorities, withdraw
them from the pier, then transport and deliver them to Sony’s warehouse in Laguna.
33 Jose Sanico v. Werhelina P. Colipano, G.R. No. 209969, September 27, 2017.

That TMBI does not own trucks and has to subcontract the delivery of its clients’
goods, is immaterial. As long as an entity holds itself to the public for the transport
of goods as a business, it is considered a common carrier regardless of whether it owns
the vehicle used or has to actually hire one. Lastly, TMBI’s customs brokerage
services – including the transport/delivery of the cargo – are available to anyone
willing to pay its fees.
b. Should TMBI be held liable for the hijacking of the truck?
TMBI is liable for the hijacking of the truck. Theft or the robbery of the goods is not
considered a fortuitous event or a force majeure. Nevertheless, a common carrier may
absolve itself of liability for a resulting loss: (1) if it proves that it exercised
extraordinary diligence in transporting and safekeeping the goods; or (2) if it
stipulated with the shipper/owner of the goods to limit its liability for the loss,
destruction, or deterioration of the goods to a degree less than extraordinary
diligence.
Instead of showing that it had acted with extraordinary diligence, TMBI simply
argued that it was not a common carrier bound to observe extraordinary diligence.
Its failure to successfully establish this premise carries with it the presumption of
fault or negligence, thus rendering it liable to Sony/Mitsui for breach of contract.
c. Is BMT liable solidarily with TMBI to Mitsui?
No, BMT and TMBI are not solidarily liable to Mitsui. While the responsibility of two
or more persons who are liable for quasi-delict is solidary under Article 2194 of the
Civil Code, TMBI's liability to Mitsui does not stem from a quasi-delict but from its
breach of contract. The tie that binds TMBI with Mitsui is contractual, albeit one that
passed on to Mitsui as a result of TMBI's contract of carriage with Sony to which
Mitsui had been subrogated as an insurer who had paid Sony's insurance claim.
BMT is not directly liable to Sony/Mitsui for the loss of the cargo. While it is
undisputed that the cargo was lost under the actual custody of BMT (whose employee
is the primary suspect in the hijacking or robbery of the shipment), no direct
contractual relationship existed between Sony/Mitsui and BMT. If at all,
Sony/Mitsui's cause of action against BMT could only arise from quasi-delict, as a
third party suffering damage from the action of another due to the latter's fault or
negligence.
However, TMBI must not absorb the loss. By subcontracting the cargo delivery to
BMT, TMBI entered into its own contract of carriage with a fellow common carrier.

Since BMT failed to prove that it observed extraordinary diligence in the performance
of its obligation to TMBI, it is liable to TMBI for breach of their contract of carriage.34
In sum, TMBI is liable to Sony (subrogated by Mitsui) for breaching the contract of
carriage. In turn, TMBI is entitled to reimbursement from BMT due to the latter's
own breach of its contract of carriage with TMBI. The proverbial buck stops with
BMT who may either: (a) absorb the loss, or (b) proceed after its missing driver, the
suspected culprit.
One of the passenger buses owned by Continental Transit Corporation

(CTC), plying its usual route, figured in a collision with another bus owned
by Universal Transport, Inc. (UTI). Among those injured inside the CTC bus
were: Romeo, a stow away; Samuel, a pickpocket then in the act of robbing
his seatmate when the collision occurred; Teresita, the bus driver’s mistress
who usually accompanied the driver on his trips for free; and Uriel, holder
of a free riding pass he won in a raffle held by CTC.
[a] Will a suit for breach of contract of carriage filed by Romeo, Samuel,
Teresita, and Uriel against CTC prosper? Explain. (3%) (2009 Bar)
Romeo cannot sue for breach of contract of carriage for the simple reason that there
was no valid contract of carriage between a stowaway, who secures passage through
fraud, and the carrier.
Samuel and Teresita cannot sue for breach of contract of carriage. They were never
accepted by the carrier as passengers. Samuel did not board the bus to be transported
but to commit robbery. Teresita did not board the bus to be transported but to
accompany the driver while he was performing his work
Uriel can sue for breach of contract of carriage. He was a passenger although he was
being transported gratuitously (Article 1758 of the Civil Code)
[b] What, if any, are the valid defenses that CTC and UTI can raise in the
respective actions against them? Explain. (2009 Bar)
With respect to Romeo, Samuel and Teresita, since there was no pre-existing
contractual relationship between them and CTC, CTC can raise the defense that it
exercised the due diligence of a good father of a family in the selection and supervision
of its driver.
34Torres-Madrid Brokerage, Inc. v. Feb Mitsui Marine Insurance Co., Inc. and Benjamin P.
Manalastas, doing business under the Name of BMT Trucking Services, G.R. No. 194121, July 11,
2016.

It can raise the same defense against Uriel if there is a stipulation that exempts it
from liability for simple negligence, but not for willful acts or gross negligence (Article
1758 of the Civil Code)
CTC can also raise against all the plaintiffs the defense that the collision was due
exclusively to the negligence of the driver of UTI which constitutes a fortuitous event,
because it was unforeseen and there was no concurrent or contributory negligence on
the part of its own driver.
CTC can also raise against Samuel the defense that he was engaged in an illegal act
at the time of the collision, for which he can be held liable for damages based on quasi-
delict.
Since UTI had no pre-existing contractual relationship with any of the plaintiffs, it
can raise the defense that it exercised due diligence in the selection and supervision
of its driver, that the collision was due to force majeure, and that Samuel was
committing an illegal act at the time of the collision.
3. Classification of transport network vehicle services and transport

network companies
What are transportation network companies (TNCs)?
These are persons or entities which use online-enabled platfroms to connect

passengers with drivers using their personal and non-commercial vehicles. TNCs in
the Philippines include Grab and Uber.35 Compared to taxicabs, TNCs offer
advantages to riders including the ability to request service via mobile map or
website, track the location of driver, and get a receipt via email.36
In other words, it provides pre-arranged transportation services for compensation

using an internet-based technology application or digital platform technology to
connect passengers with drivers using their personal vehicles.37
Are TNCs considered common carriers?
The legal status of TNCs is not yet clearly defined. They are currently being regulated
by the Land Transportation Franchise Regulatory Board.
35 Grab subsequently acquired Uber operations in the Philippines.

36 See explanatory note to House Bill 1260 of the 18th Congress by Honorable Luis Raymund
Villafuerte.
37 Department Order no. 2018-012 of the Department of Transportation

It is submitted though that they are not common carriers. TNCs are technology
companies that do not provide transportation services and they are not
transportation providers. They merely link customers with third party drivers and
are not parties to the transportation contract.38
Also, TNC drivers can go “offline” if desired and can decide to accept or reject a ride
request according to their personal travel itinerary as opposed to common carriers
which engage in a continuous offer.39
It is further submitted that they are akin to a freight forwarder. They only arrange
the vehicles/vessels for the passengers and as such, should not be treated as common
carriers. They should be held liable for damage though if there is negligence in vetting
and choosing the vehicle owners whom the TNCs accredited as part of their system.40
What is a transportation Network Vehicle Service (TNVS)?
It refers to a TNC-accredited private vehicle owner, which is a common carrier, using

the internet-based technology application or digital platform technology transporting
passengers from one point to another, for compensation. The TNVS can not operate
as a common carrier outside or independent from the use of the internet-based
technology of the TNCS to which they are accredited.41
B. VIGILANCE OVER GOODS
S delivered 10 boxes of cellphones to Trek Bus Liner, for transport from

Manila to Ilocos Sur on the following day, for which S paid the freightage.
Meanwhile, the boxes were stored in the bus liner’s bodega. That night,
however, a robber broke into the bodega and stole S’s boxes. S sues Trek
Bus Liner for contractual breach but the latter argues that S has no cause
of action based on such breach since the loss occurred while the goods
awaited transport. Who is correct? (2011 Bar)
a. The bus liner since the goods were not lost while being transported.
b. S since the goods were unconditionally placed with T for
transportation.
c. S since the freightage for the goods had been paid.
38 Ibid.
39 Ibid.
40 The House Bill, citing Crisostomo v. Court of Appeals (G.R. No. 138334, August 25, 2003), applied
by analogy TNC with a travel agency which merely arranges the booking of a person but the actual
act of transporting the customer is done by an airline..
41 Department Order No. 2018-12 of the Department of Transportation

d. The bus liner since the loss was due to a fortuitous event.
Answer:
(B) S since the goods were unconditionally placed with T for transportation.
Limit of liability
Sylvex Purchasing Corporation delivered to Unsworth Transport

International (UTI) a shipment of 27 drums of various raw materials for
pharmaceutical manufacturing. UTI issued a Bill of Lading covering the
aforesaid shipment. The shipment arrived at the port of Manila wherein it
was later found to be damaged.
The rejected UTI’s claim that its liability should be limited to $500.00 per
package pursuant to the Carriage of Goods by Sea Act (COGSA) considering
that the value of the shipment was declared pursuant to the letter of credit
and the pro forma invoice.
Is UTI liable for the value of the goods not stated in the bill of lading?
No, UTI is liable only for $500.00 per package. Sylvex did not declare a higher
valuation of the goods to be shipped. The insertion of an invoice number in the bill of
lading does not in itself sufficiently and convincingly show that the common carrier
had knowledge of the value of the cargo.42
In a similar case, it was held that the insertion of the words “L/C No. 90/02447”,
cannot be the basis for the carriers’ liability. First, a notation in the Bill of Lading
which indicated the amount of the Letter of Credit obtained by the shipper for the
importation of steel sheets did not effect a declaration of the value of the goods as
required by the bill.43
However, in another case, it was ruled that the declaration requirement does not
require that all the details must be written down on the very bill of lading itself.
Compliance can be attained by incorporating the invoice, by way of reference, to the
bill of lading provided that the former containing the description of the nature, value
and/or payment of freight charges is duly admitted as evidence.44
To summarize, the insertion of an invoice number or reference to a letter of credit
42 Unsworth Transport International v. Court of Appeals, G.R. No. 166250, July 26, 2010.
43 Philam Insurance Company vs. Heung Ah Shipping Corporation and Wallem Shipping Inc., G.R.
No. 1877l and G.R. No. 187812, July 23, 2014
44 Eastern Shipping Lines, Inc. v. BPI/MS Insurance Corp., & Mitsui Sumitomo Insurance Co., Ltd.,
G.R. No. 182864, January 12, 2015

does not in itself sufficiently and convincingly show that the common carrier had
knowledge of the value of the cargo, the same interpretation does not squarely apply
if the carrier had been advised of the value of the goods as evidenced by the invoice
and payment of corresponding freight charges.45
C. SAFETY OF PASSENGERS
An hour after the passengers and Viana had disembarked the vessel, the
crane operator began its unloading operation. While the crane was being
operated, Viana who had already disembarked the vessel remembered that
some of his cargoes were still loaded there. He went back and while he was
pointing to the crew where his cargoes were, the crane hit him resulting in
his death. A complaint for damages was filed against Aboitiz Shipping Lines
(Aboitiz) for breach of contract of carriage. Aboitiz contends that Viana
ceased to be a passenger when he disembarked the vessel and that
consequently his presence there was no longer reasonable. Is Aboitiz still
liable as a common carrier?
Yes. The rule is that the relation of carrier and passenger continues until the
passenger has been landed at the port of destination and has left the vessel owner’s
dock or premises. Once created, the relationship will not ordinarily terminate until
the passenger has, after reaching his destination, safely alighted from the carrier’s
conveyance or had a reasonable opportunity to leave the carrier’s premises. All
persons who remain on the premises within a reasonable time after leaving the
conveyance are to be deemed passengers, and what is a reasonable time or a
reasonable delay within this rule is to be determined from all the circumstances, and
includes a reasonable time to see after his baggage and prepare for his departure. It
is of common knowledge that, by the very nature of the business of a shipper, the
passengers of vessels are allotted a longer period of time to disembark from the ship
than the passengers of other common carriers considering the bulk of cargoes and the
number of passengers it can load. Consequently, such passenger will need at least an
hour to disembark from the vessel and claim his baggage. In the case at bar, when
the accident occurred, the victim was in the act of unloading his cargoes which he had
every right to do. As such, even if he had already disembarked an hour earlier, his
presence in the carrier’s premises was not without cause.
While the victim was admittedly contributorily negligent, still Aboitiz’s aforesaid
failure to exercise extraordinary diligence was the proximate and direct cause of,
because it could definitely have prevented, the former's death.46
.
46 Aboitiz Shipping Corporation v. Court of Appeals, G.R. No. 84458, November 6, 1989.

a. Liability for acts of others
a. Employees
Is a common carrier liable for the death of or injuries to passengers through

the acts of its employees?
Yes, common carriers are liable for the death of or injuries to passengers through the
negligence or willful acts of the former’s employees, although such employees may
have acted beyond the scope of their authority or in violation of the orders of the
common carriers.47
In a contract of carriage, the common carrier is liable for the injury or death
of a passenger resulting from its employee’s fault although the latter acted
beyond the scope of his authority. This is based on the (2011 Bar)
a. rule that the carrier has an implied duty to transport the passenger
safely.
b. rule that the carrier has an express duty to transport the passenger
safely
c. Doctrine of Respondeat Superior.
d. rule in culpa aquiliana.
Answer:
(A) rule that the carrier has an implied duty to transport the passenger safely.
47 Article 1759, NCC.

VII. INTELLECTUAL PROPERTY
A. INTELLECTUAL PROPERTY RIGHTS IN GENERAL

1. Intellectual property rights
MS Brewery Corporation (MS) is a manufacturer and distributor of the

popular beer "MS Lite." It faces stiff competition from BA Brewery
Corporation (BA) whose sales of its own beer product, "BA Lighter," has
soared to new heights. Meanwhile, sales of the "MS Lite" decreased
considerably. The distribution and marketing personnel of MS later
discovered that BA has stored thousands of empty bottles of "MS Lite"
manufactured by MS in one of its warehouses. MS filed a suit for unfair
competition against BA before the Regional Trial Court (RTC). Finding a
connection between the dwindling sales of MS and the increased sales of
BA, the RTC ruled that BA resorted to acts of unfair competition to the
detriment of MS. Is the RTC correct? Explain. (2016 Bar)
The RTC is not correct. Hoarding, or the act of accumulating empty bottles to impede
circulation of the bottled product, does not amount to unfair competition. BA did not
fraudulently “pass off “ its product as that of MS Lite. There was no representation
or misrepresentation on the part of BA that would confuse or tend to confuse its goods
with those of MS Lite. (Coca Cola Bottlers Philippines v Gomez, GR No. 154491,
November 14, 2008)
Under the Intellectual Property Code, lectures, sermons, addresses or

dissertations prepared for oral delivery, whether or not reduced in writing
or other material forms, are regarded as
(A) non-original works.

(B) original works.
(C) derivative works.
(D) not subject to protection (2009 Bar)
Answer:
(B) original works.
TRUE or FALSE.
The Denicola Test in intellectual property law states that if design elements
of an article reflect a merger of aesthetic and functional considerations, the
artistic aspects of the work cannot be conceptually separable from the
utilitarian aspects; thus, the article cannot be copyrighted. (2009 Bar)

True. Applying the Denicola Test in Brandir International, Inc. v. Cascade Pacific
Lumber Co. (834 F.2d 1142, 1988 Copr.L.Dec. P26), the United State Court of Appeals
for the Second Circuit held that the aesthetic or artistic aspects of a work may be
copyrighted only if they can be separated from the utilitarian element.
Are trade secrets protected under the IPC?
The IPC protects trade secrets in the sense that the law covers protection of
undisclosed information. In Air Philippines v. Pennswell,48 the Supreme Court ruled
that trade and industrial secrets (pursuant to the IPC and other related laws) are
exempted from compulsory disclosure.
In this case, Pennswell, a corporation engaged in the business of manufacturing

and selling industrial chemicals, solvents and special lubricants, filed an action for
collection against Air Philippines. In its Answer, Air Philippines contended that its
refusal to pay was due to the fraud that Pennswell committed on its previous sale of
certain items which were accordingly misrepresented as belonging to a new line, but
were in truth and in fact, identical with products Air Philippines had previously
purchased from Pennswell, and that the latter merely altered the names and labels
of such goods. During the pendency of the trial, Air Philippines filed a motion to
compel Pennswell to give a detailed list of the ingredients and chemical components
of its products for comparison. The RTC initially granted the motion but reconsidered
itself. The Court of Appeals affirmed the RTC. The Supreme Court eventually held
that a trade secret is defined as a plan or process, tool, mechanism or compound
known only to its owner and those of his employees to whom it is necessary to confide
it. The definition also extends to a secret formula or process not patented, but known
only to certain individuals using it in compounding some article of trade having a
commercial value. A trade secret may consist of any formula, pattern, device, or
compilation of information that: (1) is used in one’s business; and (2) gives the
employer an opportunity to obtain an advantage over competitors who do not possess
the information. Generally, a trade secret is a process or device intended for
continuous use in the operation of the business, for example, a machine or formula,
but can be a price list or catalogue or specialized customer list. It is indubitable that
trade secrets constitute proprietary rights. The inventor, discoverer, or possessor of
a trade secret or similar innovation has rights therein which may be treated as
property, and ordinarily an injunction will be granted to prevent the disclosure of the
trade secret by one who obtained the information “in confidence” or through a
“confidential relationship.”
48G.R. No. 172835, December 13, 2007.

The chemical composition, formulation, and ingredients of Pennswell’s special
lubricants are trade secrets within the contemplation of the law. In the creation of its
lubricants, Pennswell expended efforts, skills, research, and resources. What it had
achieved by virtue of its investments may not be wrested on the mere pretext that it
is necessary for Air Philippines’ defense against a collection for a sum of money. To
compel its disclosure is to cripple its business, and to place it at an undue
disadvantage. If the chemical composition of its lubricants is opened to public
scrutiny, it will stand to lose the backbone on which its business is founded.
B. PATENTS
X invented a device which, through the use of noise, can recharge a

cellphone battery. He applied for and was granted a patent on his device,
effective within the Philippines. As it turns out, a year before the grant of
X's patent, Y, also an inventor, invented a similar device which he used in
his cellphone business in Manila. But X files an injunctive suit against Y to
stop him from using the device on the ground of patent infringement. Will
the suit prosper? (2011 Bar)
a. No, since the correct remedy for X is a civil action for damages.
b. No, since Y is a prior user in good faith.
c. Yes, since X is the first to register his device for patent registration.
d. Yes, since Y unwittingly used X’s patented invention.
Answer:
(B) No, since Y is a prior user in good faith.
What is the “Right of Priority”?
An application for patent filed by any person who has previously applied for the
same invention in another country which by treaty, convention or law affords similar
privileges to Filipino citizens, shall be considered as filed as of the date of the filing
of the foreign application; provided, that: a) the local application expressly claims
priority; b) it is filed within 12 months from the date of the earliest foreign application
was filed; and c) certified copy of the foreign application together with an English
translation is filed within six (6) months from the date of filing in the Philippines.49
A patent applicant with the right of priority is given preference in the grant of a
patent when there are two or more applicants for the same invention. Since both the
49Section 31, IPC, as amended.

United States and the Philippines are signatories to the Paris Convention for the
Protection of Industrial Property, an applicant who has filed a patent application in
the United States may have a right of priority over the same invention in a patent
application in the Philippines. However, this right of priority does not immediately
entitle a patent applicant the grant of a patent. A right of priority is not equivalent
to a patent. Otherwise, a patent holder of any member-state of the Paris Convention
need not apply for patents in other countries where it wishes to exercise its patent. It
was, therefore, inaccurate for petitioner to argue that its prior patent application in
the United States removed the invention from the public domain in the Philippines.
It should have complied with the other requirements of the actual grant of the patent.
In this case, the applicant for patent was declared abandoned by the Intellectual
Property Office for failure to comply with strict procedural rules. The right of priority
of the patent applicant was therefore lost.50
C. TRADEMARKS
Acquisition of ownership of mark
The only mode of acquiring ownership of a trademark is through registration (and

not use). The language of the IP Code provisions clearly conveys the rule that
ownership of a mark is acquired through registration; the intention of the lawmakers
was to abandon the rule that ownership of a mark is acquired through use; and (iii)
the rule on ownership used in Berris and E.Y. Industrial Sales, Inc. [cases] is
inconsistent with the IP Code regime of acquiring ownership though registration.51
Thus, the Supreme Court abandoned its previous rulings52 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.
The rule now is the first filer in good faith defeats the right of the first user who did
not register the mark. The prior user in good faith, however, may continue to use its
mark even after the registration of the mark by the first- to- file registrant in good
faith.
50E.I.Dupont De Nemours and Co. v. Director Emma C. Francisco, et al., G.R. No. 174379, August 31,
2016.
51 Zuneca Pharmaceutical v. Natrapharm, Inc. G.R. No. 211850, September 08, 2020 J. Caguioa
52 These are the cases of: Mattel, Inc. v. Emma Francisco, et al., G.R. No. 166886, July 30, 2008; E.Y.
Industrial Sales v. Shien Dar Electricity and Machinery Co., G.R. No. 184850, October 20, 2010; Berris
Agricultural Co. Inc v. Norvy Abyadang, G.R. No. 183404, October 13, 2010; Birkenstock Orthopaedia
GMBH v. Philippine Shoe Expo Marketing Corporation, GR No. 194307, November 20, 2013; Ecole de
Cuisine Manille v. Renaud Cointreau, GR No. 185830, June 5, 2013.

While Natrapharm is the owner of the “ZYNAPSE” mark, this does not, however,
automatically mean that its complaint against Zuneca should be granted. This is
because Sec. 159.1 of the IP Code clearly contemplates that a prior user in good
faith may continue to use its mark even after the registration of the mark
by the first-to-file registrant in good faith, subject to the condition that any
transfer or assignment of the mark by the prior user in good faith should be made
together with the enterprise or business or with that part of his enterprise or business
in which the mark is used. The mark cannot be transferred independently of the
enterprise and business using it.
From the provision itself, it can be gleaned that while the law recognizes the right of
the prior user in good faith to the continuous use of its mark for its enterprise or
business, it also respects the rights of the registered owner of the mark by preventing
any future use by the transferee or assignee that is not in conformity with Section
159.1 of the IP Code.
In any event, the application of Section 159.1 of the IP Code necessarily results in at
least two entities — the unregistered prior user in good faith or their assignee or
transferee, on one hand; and the first-to-file registrant in good faith on the other —
concurrently using identical or confusingly similar marks in the market, even if there
is likelihood of confusion. While this situation may not be ideal, the Court is
constrained to apply Section 159.1 of the IP Code as written.
A certificate of registration accords the registrant a prima facie presumption of their

ownership of the mark. However, this presumption may be rebutted by proof that the
registration was obtained fraudulently or contrary to the provisions of the
Intellectual Property Code.
In cancelling the first registrant’s ( petitioner) certificate of registration, the BLA-

IPO concluded that it copied the first user’s ( respondent) mark. It compared the two
and found that petitioner's mark is identical with respondent's. It noted that the word
"Mr. Gulaman" in both of their marks are "exactly the same in all aspects" This
conclusion was bolstered by its finding that in petitioner's Declaration of Actual Use,
she submitted photographs of a packaging showing respondent's "Mr. Gulaman" and
its logo design.
Whether petitioner is guilty of bad faith or fraud requires a factual determination.

Its resolution necessitates a review of documentary exhibits which cannot be
undertaken through a Petition for Review under Rule 45 of the Rules of Court.
Furthermore, by reason of its special knowledge and expertise over matters falling
within its jurisdiction, the Intellectual Property Office is in a better position to
determine whether there was bad faith. Its finding on this matter "are generally

accorded great respect, if not finality by the courts, as long as they are supported by
substantial evidence, even if such evidence might not be overwhelming or even
preponderant."
While the rule admits of exceptions, the Supreme Court did not find any reason to
depart and overturn the factual determination of the BLA-IPO as affirmed by both
the Office of the Director General and the Court of Appeals.53
Non-registrable marks
The certificate of registration entitles the registrant to use the trademark only
for the goods specified in the certificate or goods related thereto. Therefore, the
registrant cannot preclude others from adopting and registering the trademark for
totally unrelated goods.
It was also held that the prohibition under Section 123 of the Intellectual
Property Code extends to goods that are related to the registered goods, not to goods
that the registrant may produce in the future. To allow the expansion of coverage is
to prevent future registrants of goods from securing a trademark on the basis of mere
possibilities and conjectures that may or may not occur at all. Surely, the right to a
trademark should not be made to depend on mere possibilities and conjectures.54
Tests to determine confusing similarity between marks
Petitioner's marks "ELARZ LECHON” and "ELAR LECHON” bear an

indubitable likeness with respondent's "ELARS LECHON." As can easily be seen,
both marks use the essential and dominant word "ELAR". The only difference
between the petitioner's mark from that of respondent's are the last letters Z and S,
respectively. However, the letters Z and S sound similar when pronounced. Thus,
both marks are not only visually similar, but are phonetically and aurally similar as
well. To top it all off, both marks are used in selling lechon products. Verily, there
exists a high likelihood that the consumers may conclude an association or relation
between the products. Likewise, the uncanny resemblance between the marks may
even lead purchasers to believe that the petitioner and respondent are the same
entity55.
53 Ma Shairmaine Medina/Rackey Crystal Top Corporation v. Global Quest Ventures, G.R. No. 213815,
February 8, 2021
54Kensonic, Inc. v. Uni-Line Multi Resources, Inc., G.R. Nos. 211820-21 and 211834-35, June 6, 2018.
55 Emzee Foods, Inc. v. Elarfoods, Inc., G.R. No. 220558, February 17, 2021

Holistic test abandoned
Only the dominancy test is incorporated in the IP Code in determining the semblance
of similar marks. This is found in Section 155.1 of the IPC which defines trademark
infringement as the colorable imitation of a registered mark or a dominant feature
thereof. Based on the legislative deliberations leading to the enactment of the IPC,
the exclusion of the Holistic test was intentional and the dominancy test should be
adopted.56
The Holistic Test in determining trademark resemblance has been abandoned hence
the Dominancy Test must be used in determining the existence of confusing similarity
between the "LEVI'S" and “LIVE’S” marks. This test relies not only on the visual but
also on the aural and connotative comparisons and overall impressions between the
two trademarks. Here, respondents' “LIVE’S” mark is but a mere anagram of
petitioner's "LEVI'S" marks. It would not be farfetched to imagine that a buyer, when
confronted with such striking similarity would be led to confuse one over the other.
Thus, by simply applying the Dominancy Test, it can already be concluded that there
is a likelihood of confusion between petitioner's "LEVI'S" marks and respondents'
“LIVE’S” mark.57
Rights conferred by registration
The owner of a registered trademark, absent any legal obstacle or compelling

reason to the contrary, should be allowed to register, in its favor, a domain
name containing its registered trademark as a dominant feature. KECI's
application to register and use the mark "www.kolin.ph," presumably as its domain
name and platform to sell its products in the internet, is merely in exercise of and
consistent with its exclusive right to use "KOLIN" on the business of manufacturing,
importing, assembling or selling electronic equipment or apparatus. KECI's exclusive
right to use the "KOLIN" mark for the business of manufacturing, importing,
assembling, or selling electronic equipment or apparatus is entitled to protection,
whether such use is exercised online or through a physical market — and whether
the mark is printed on product packaging or included in the domain name of its
website. 58
56 Kolin Electronics Co. INC. V. Kolin Philippines International, Inc., G.R. No. 228165, Febrayry 9,
2021 J. Caguioa
57 Levi Strauss & Co. v. Sevilla, G.R. No. 219744, March 1, 2021
58 Kolin Electronics Co. v. Taiwan Kolin Corp. Ltd, G.R. No. 221347, December 1, 2021

Infringement and remedies
a. Trademark infringement
After disposing of his last opponent in only two rounds in Las Vegas, the
renowned Filipino boxer Sonny Bachao arrived at the Ninoy Aquino
International Airport met by thousands of hero-worshipping fans and
hundreds of media photographers. The following day, a colored photograph
of Sonny wearing a black polo shirt embroidered with the 2-inch Lacoste
crocodile logo appeared on the front page of every Philippine newspaper.
Lacoste International, the French firm that manufactures Lacoste apparel

and owns the Lacoste trademark, decided to cash in on the universal
popularity of the boxing icon. It reprinted the photographs, with the
permission of the newspaper publishers, and went on a world-wide blitz of
print commercials in which Sonny is shown wearing a Lacoste shirt
alongside the phrase "Sonny Bachao just loves Lacoste."
When Sonny sees the Lacoste advertisements, he hires you as lawyer and
asks you to sue Lacoste International before a Philippine court.
For trademark infringement in the Philippines because Lacoste

International used his image without his permission; (2009 Bar)
Sonny Bachao cannot sue for infringement of trademark. An action for trademark
infringement will not lie unless the trademark is registered with the Intellectual
Property Office. The photographs showing Bachao wearing a Lacoste shirt were not
registered as a trademark.
In what ways would a case for infringement of trademark be different from

a case for unfair competition? (2015 Bar)
The distinctions between infringement and unfair competition are the following:
1. Infringement of trademark is the unauthorized use of a trademark, whereas

unfair competition is the passing off of one's goods as those of another.
2. In infringement of trademark fraudulent intent is unnecessary whereas in
unfair competition fraudulent intent is essential.
3. In infringement of trademark the prior registration of the trademark is a
prerequisite to the action, whereas in unfair competition registration is not
necessary (Del Monte Corp. vs. CA, G.R. No. L-78325, January 25, 1990).

Unfair competition
The essential elements of an action for unfair competition are: (1) confusing similarity
in the general appearance of the goods, and (2) intent to deceive the public and
defraud a competitor. The confusing similarity may or may not result from similarity
in the marks but may result from other external factors in the packaging or
presentation of the goods. Likelihood of confusion of goods or business is a relative
concept, to be determined only according to peculiar circumstances of each case. The
element of intent to deceive and to defraud may be inferred from the similarity of the
appearance of the goods as offered for sale to the public.
Here, Elidad and Violeta's product which is a medicated facial cream sold to the
public is contained in the same pink oval-shaped container which had the mark "Chin
Chun Su," as that of respondent. While they indicated in their product the
manufacturer's name, the same does not change the fact that it is confusingly similar
to respondent's product in the eyes of the public. An ordinary purchaser would not
normally inquire about the manufacturer of the product. Their product and that
solely distributed by Summerville are similar in the following respects "1. both are
medicated facial creams; 2. both are contained in pink, oval-shaped containers; and
3. both contain the trademark "Chin Chun Su". The similarities far outweigh the
differences. The general appearance of Elidad’s product is confusingly similar to
Summerville’s. Verily, the acts complained of against Elidad and Violeta constituted
the offense of Unfair Competition.59
MS Brewery Corporation (MS) is a manufacturer and distributor of the

popular beer "MS Lite." It faces stiff competition from BA Brewery
Corporation (BA) whose sales of its own beer product, "BA Lighter," has
soared to new heights. Meanwhile, sales of the "MS Lite" decreased
considerably. The distribution and marketing personnel of MS later
discovered that BA has stored thousands of empty bottles of "MS Lite"
manufactured by MS in one of its warehouses. MS filed a suit for unfair
competition against BA before the Regional Trial Court (RTC). Finding a
connection between the dwindling sales of MS and the increased sales of
BA, the RTC ruled that BA resorted to acts of unfair competition to the
detriment of MS. Is the RTC correct? Explain. (5%) (2016 Bar)
The RTC is not correct. Hoarding, or the act of accumulating empty bottles to impede
circulation of the bottled product, does not amount to unfair competition. BA did not
fraudulently “pass off” its product as that of MS Lite. There was no representation or
misrepresentation on the part of BA that would confuse or tend to confuse its goods
59Elidad Kho and Violate Kho V. Summerville General Merchandising & Co., Inc., G.R. No. 213400,
August 04, 2021

with those of MS Lite. (Coca Cola Bottlers Philippines v Gomez, GR No. 154491,
November 14, 2008)
D. COPYRIGHT
2. Copyrightable works
a. Original works
T, an associate attorney in XYZ Law Office, wrote a newspaper publisher a

letter disputing a columnist’s claim about an incident in the attorney’s
family. T used the law firm’s letterhead and its computer in preparing the
letter. T also requested the firm’s messenger to deliver the letter to the
publisher. Who owns the copyright to the letter? (2011 Bar)
a. T, since he is the original creator of the contents of the letter.

b. Both T and the publisher, one wrote the letter to the other who has
possession of it.
c. The law office since T was an employee and he wrote it on the firm’s
letterhead.
d. The publisher to whom the letter was sent.
Answer:
(A) T, since he is the original creator of the contents of the letter.
Under the Intellectual Property Code, lectures, sermons, addresses or

dissertations prepared for oral delivery, whether or not reduced in writing
or other material forms, are regarded as: (2011 Bar)
a. non-original works.
b. original works.
c. derivative works.
d. not subject to protection
Answer:
(B) original works.
b. Derivative works
Non-copyrightable works

X came up with a new way of presenting a telephone directory in a mobile
phone, which he dubbed as the "iTel" and which uses lesser time for locating
names andtelephone numbers. May X have his "iTel" copyrighted in his
name? (2011 Bar)
a. No, because it is a mere system or method.

b. Yes, because it is an original creation.
c. Yes, because it entailed the application of X's intellect.
d. No, because it did not entail any application of X's intellect.
Answer:
(A) No, because it is a mere system or method.
X, an amateur astronomer, stumbled upon what appeared to be a massive

volcanic eruption in Jupiter while peering at the planet through his
telescope. The following week, X, without notes, presented a lecture on his
findings before the Association of Astronomers of the Philippines. To his
dismay, he later read an article in a science journal written by Y, a
professional astronomer, repeating exactly what X discovered without any
attribution to him. Has Y infringed on X's copyright, if any? (2011 Bar)
a. No, since X did not reduce his lecture in writing or other material
form.
b. Yes, since the lecture is considered X’s original work.
c. No, since no protection extends to any discovery, even if expressed,
explained, illustrated, or embodied in a work.
d. Yes, since Y’s article failed to make any attribution to X.
Answer:
(C) No, since no protection extends to any discovery, even if expressed, explained,
illustrated, or embodied in a work.
Apart from economic rights, the author of a copyright also has moral rights
which he may transfer by way of assignment. The term of these moral rights
shall last: (2011 Bar)
a. during the author's lifetime and for 50 years after his death.
b. forever.
c. 50 years from the time the author created his work.
d. during the author's lifetime.

Answer:
(D) during the author's lifetime.
Copyright infringement
a. Remedies
After disposing of his last opponent in only two rounds in Las Vegas, the
renowned Filipino boxer Sonny Bachao arrived at the Ninoy Aquino
International Airport met by thousands of hero-worshipping fans and
hundreds of media photographers. The following day, a colored photograph
of Sonny wearing a black polo shirt embroidered with the 2-inch Lacoste
crocodile logo appeared on the front page of every Philippine newspaper.
Lacoste International, the French firm that manufactures Lacoste apparel

and owns the Lacoste trademark, decided to cash in on the universal
popularity of the boxing icon. It reprinted the photographs, with the
permission of the newspaper publishers, and went on a world-wide blitz of
print commercials in which Sonny is shown wearing a Lacoste shirt
alongside the phrase "Sonny Bachao just loves Lacoste."
When Sonny sees the Lacoste advertisements, he hires you as lawyer and
asks you to sue Lacoste International before a Philippine court:
[a] For copyright infringement because of the unauthorized use of the

published photographs; (2009 Bar)
[c] For injunction in order to stop Lacoste International from featuring

him in their commercials. (2009 Bar)
Will these actions prosper? Explain.
a. Sonny Bachao cannot sue for infringement of copyright for the unauthorized
use of the photographs. The copyright to the photographs belongs to the
photographer or to the newspaper company which published them if the
photographers are employees of the former.
b. The complaint for injunction to stop Lacoste International from featuring him
in its advertisements will prosper. A contrary rule amounts to violation of
Bachao’s right to privacy.

PARTNERSHIP
CARLOS J. VALDES, GABRIEL A.S. VALDES, FATIMA DELA

CONCEPTION AND ASUNCION V. MERCADO v.
LA COLINA DEVELOPMENT CORPORATION (LCDC), PHILIPPINE
COMMUNICATION SATELLITE, INC. (PHILCOMSAT),
LA COLINA RESORTS CORPORATION (LCRC), MONTEMAR RESORTS
AND DEVELOPMENT CORPORATION (MRDC), JOSE MARI CACHO,
HONORIO A. POBLADOR III, AND ALFREDO L. AFRICA
G.R. No. 208140, July 12, 2021, Third Division (Hernando, J.)
FACTS
Carlos Valdes (Carlos, Sr.) and his children, herein petitioners (Valdeses), are
the stockholders of Bataan Resorts Corporation (BARECO), which owned a large
tract of land in Bagac, Bataan. Carlos, Sr. invited Francisco Cacho and his son, Jose
Mari Cacho, to assess the property's suitability for a beach resort project (Montemar
Project). Having received a favorable response from Francisco, both Carlos, Sr. and
Francisco proceeded to carry out the Montemar Project, which included the
development of the beach basin as a beach resort (Montemar Beach Club), and the
conversion of the remaining land area into a residential subdivision (Montemar
Villas).
To implement the project, the Valdeses transferred and conveyed their shares
of stock in BARECO in favor of La Colina Development Corporation (LCDC), a fully-
owned corporation of the Cacho family, through a Deed of Sale dated May 24, 1975,
for a consideration of P20 Million. LCDC then made a partial payment thereof in the
amount of P2.5 Million while the remaining balance amounting to P17.5 Million was
covered by promissory notes. The P17.5 Million was to be paid by way of an
Assignment of Rights wherein LCDC: (1) assigned to the Valdeses three million worth
of shares in La Colina Resorts Corporation (LCRC), the corporation established by
LCDC to market and sell the shares of the beach resort; and (2) undertook to pay the
Valdeses (50%) of the net proceeds (later reduced 40%) from the sale of the Montemar
Villas lots inside BARECO, as previously acquired by LCDC.
Thereafter, Montemar Beach Club, Inc. (MBCI), a non-stock, non-profit club,

was organized to develop the Montemar Project. Meanwhile, LCDC obtained loans to
finance the construction and development of the Montemar Villas, including the
building and facilities in the Montemar Beach Club. The loans were obtained from
the Development Bank of the Philippines (DBP) – subsequently the Asset
Privatization Trust (APT), Metrobank, and General Credit Corporation (GCC),
formerly the Commercial Credit Corporation.

Sales of the MBCI proprietary shares and the lots in the Montemar Villas,
including the patronage in the Montemar Beach Club were bringing adequate income
for some time. The loans obtained by LCDC were serviced and the remittances of the
agreed share of the Valdeses in the sale of the Montemar Villas lots were made on a
regular basis. The Montemar Beach Club, on the other hand, was able to sustain
regular operations. However, during the years 1981 up to 1985, there was a delay in
the remittances of the shares to the Valdeses in the net proceeds from the sale of the
Montemar Villas lots. The records, however, would bear that a portion of the purchase
price of P20 Million, or P16,125,717.31, was eventually paid to the Valdeses.
Meanwhile, as the loans obtained by LCDC from DBP/APT remained unpaid,

the mortgaged properties of LCDC, LCRC, and MBCI were eventually foreclosed by
DBP/ATP.
Sometime in 1992, LCDC and LCRC initiated negotiations with Philippine

Communication Satellite, Inc. (Philcomsat), a prospective investor of the Montemar
Project. In this regard, Philcomsat presented a Memorandum of Intent dated August
18, 1992, which embodied the terms and conditions agreed upon by LCDC, LCRC,
MBCI, and Philcomsat. This was with a view toward the latter investing on the
project, and, concurrently, bailing out LCDC, LCRC and MBCI from their loan
obligations with APT, GCC, and Philcomsat.
Meanwhile, to obtain from APT an extension of the period to pay the

outstanding obligation of LCDC and LCRC, Philcomsat paid APT the amount of P4
Million. During the extension period, Philcomsat eventually decided to invest in the
new project, subject to conditions, particularly, that the Valdeses: (1) give their
conformity to the new project that would transform and develop the unsold Montemar
Villas lots into a golf course and sports complex; and (2) forego their claim to the
proceeds of the sale of the Montemar Villas lots.
After further discussion between Rafael Cacho, the brother of Francisco, and
Gabriel, acting attorney-in-fact of Carlos, Sr., a letter-conformity dated August 27,
1992 was eventually finalized.
Thereafter, pursuant to the Memorandum of Intent dated August 18, 1992 and
the letter-conformity dated August 27, 1992, Philcomsat, together with LCDC, LCRC,
and MBCI executed a Memorandum of Agreement dated September 3, 1992
essentially identical to the Memorandum of Intent dated August 18, 1992.
Meanwhile, on August 31, 1992, LCRC and LCDC, through a Consolidated Deed of
Absolute Sale, conveyed and sold to MRDC all their real and personal properties
situated in Bagac, Bataan.
Notably, after executing the letter-conformity dated August 27, 1992, Gabriel
appointed Jose Mari and Rafael on August 28, 1992 to sell the shareholdings of Carlo,

Sr. in LCRC and other real properties of the Valdeses. Thereafter, on November 18,
1992, Rafael informed Gabriel that Philcomsat offered to purchase Carlo, Sr.'s
shareholdings in LCRC and the Valdeses' other real properties for a consideration of
P24,771,800.00, which petitioners rebuffed. Gabriel then visited Poblador to request
for a higher offer, but nothing materialized from their negotiations.
On April 6, 1993, the Valdeses filed before the RTC a Complaint for
Reconveyance, Annulment and/or Rescission of Contract, Specific Performance and
Damages with Prayer for Temporary Restraining Order and Writ of Preliminary
Injunction against the respondents. The trial court rendered a Decision declaring the
Memorandum of Agreement dated September 3, 1992 and the Consolidated Deed of
Absolute Sale dated August 31, 1992 null and void. The RTC found that the Valdeses
and LCDC entered into a joint venture agreement, whereby the former would
contribute to the joint venture the BARECO properties in Bagac, Bataan, and in
return, LCDC would develop and improve them into a residential subdivision or the
Montemar Villas. The proceeds of the sale of the Montemar Villas lots would then be
divided between them in the following manner: 60% to LCDC, and 40% to the
Valdeses. The trial court further found that despite the Valdeses' refusal to allow
Philcomsat to take part in the joint venture agreement, LCDC, LCRC, MBCI, and
Philcomsat, unknowingly to the Valdeses, executed the September 3, 1992
Memorandum of Agreement, an agreement that effectively disregarded the rights
and interests of the Valdeses, particularly, their forty percent (40%) share in the
proceeds of the sale of the Montemar Villas lots. Moreover, the agreement, without
the conformity of the Valdeses, set aside the original intent of the joint venture
agreement only to be replaced by respondents' plan to convert the Montemar Villas
lots into a golf course and sports complex.
Considering the foregoing, the RTC held that the two (2) agreements are null
and void. It considered the lack of consent on the part of the Valdeses to the said
contracts and the evident bad faith, which attended their execution.
The CA rendered its assailed Decision, which reversed and set aside the
aforesaid RTC ruling. The CA found that the Deed of Sale dated May 24, 1975,
promissory notes executed by LCDC, and the Assignment of Rights dated October 30,
1975, negated the existence of a joint venture agreement between the Valdeses and
LCDC. In this regard, the CA held that the relationship between the Valdeses and
LCDC was, instead, one of vendor-vendee. As explained by the appellate court, "there
was no contract to contribute properties to a common fund so as to share the profits
between themselves. There is even no common fund to speak of LCDC's obligation to
pay persists as long as it is able to sell the subdivision lots even if the corporation
itself is experiencing losses."
Petitioners contend that the original agreement between the Valdeses and
LCDC required the Valdeses to contribute the BARECO properties to the Montemar

Project. In consideration thereof, LCDC shall form LCRC to develop and improve the
said properties. Meanwhile, both the Valdeses and LCRC shall sell the properties and
share proportionately in the profits realized. This scenario, petitioners insist, is the
very joint venture agreement executed by and between the Valdeses and LCRC.
From the foregoing, petitioners argue that LCDC cannot, without violating the
existing fiduciary relationship between it and the Valdeses, encumber or mortgage
the properties subject of the joint venture agreement without their consent and
approval. They further claim that any act committed by LCDC, as co-venturer,
without the express authority of the Valdeses, is not binding upon the latter.
In this connection, the entrance of Philcomsat as a new investor in the

Montemar Project and the execution of the September 3, 1992 Memorandum of
Agreement between LCRC, LCDC, MBCI and Philcomsat, including the execution of
the August 31, 1992 Consolidated Deed of Sale by LCRC and LCDC in favor MRDC,
are acts in violation of the true intent and purpose of the joint venture i.e., that LCDC
and the Valdeses shall share in the proceeds of the sale of the Montemar Villas lots,
in proportion of sixty percent (60%) and forty percent (40%), respectively. Petitioners
insist that these acts cannot bind the Valdeses since they are in violation of their
rights under the joint venture agreement, and in disregard of their forty percent
(40%) share in the sale of the Montemar Villas lots.
ISSUE
Whether the Valdeses and LCDC entered into a joint venture agreement.
RULING
NO. The agreement entered into by the parties is a contract of sale. As

discussed above, petitioners contend that while Carlos, Sr. and LCDC appeared to
have entered into a contract of sale i.e., Deed of Sale dated May 24, 1975, the parties
intended to enter into a joint venture agreement to develop the BARECO properties
into a beach resort and residential subdivision. In particular, the determination of
whether both parties entered into such agreement is necessary to address the side of
issue of whether LCDC wrongfully mortgaged the subject properties to various
financial institutions without the authority and consent of its co-venturers or
partners, and the main issue of whether the September 3, 1992 Memorandum of
Agreement and the August 31, 1992 Consolidated Deed of Sale were entered into in
violation of the terms of the joint venture agreement.
In interpreting the agreement between the Valdeses and LCDC, the inquiry is
not what contract the parties intended to enter into, but what contract did they enter
into. Notably, the Deed of Sale, if read in conjunction with the promissory notes
issued to the Valdeses and the Assignment of Rights dated October 30, 1975, leaves

no room for interpretation as to the exact intention of the parties – they entered into
a contract of sale. The elements of a contract of sale are: (a) consent or meeting of the
minds, that is, consent to transfer ownership in exchange for the price; (b)
determinate subject matter; and (c) price certain in money or its equivalent.
The Deed of Sale executed by Carlos, Sr. and LCDC resulted in a perfected
contract of sale, all its elements being present. There was a mutual agreement
between them, wherein 4,000 shares of stock of the Valdeses in BARECO were sold
to LCDC for a consideration of P20 Million. To be clear, the foregoing amount was
paid in cash and the balance covered by promissory notes to be paid by way of an
Assignment of Rights. Specifically, P2.5 Million of the P20 Million purchase price was
paid in cash, while the balance of P17.5 Million was covered by promissory notes and
settled through the Assignment of Rights.
Notably, a perusal of the Assignment of Rights would show that the same
constituted full payment of the BARECO shares of stock, thus: "That the ASSIGNEE
hereby accepts this assignment in full payment of the aforementioned promissory
note." There is, therefore, in this case, an absolute transfer of ownership of the
BARECO shares to LCDC for a consideration of P20 Million.
Significantly, there is nothing in the abovementioned documents, nor in any of

the subsequent contracts between the parties that indicates that the transaction
entered by and between them was a joint venture. The transaction between the
parties was clearly a sale of property.
In contrast, a joint venture has been defined by this Court as follows:
The legal concept of a joint venture is of common law origin. It has no

precise legal definition, but it has been generally understood to mean an
organization formed for some temporary purpose. x x x It is in fact
hardly distinguishable from the partnership, since their elements are
similar – community of interest in the business, sharing of profits
and losses, and a mutual right of control. x x x The main distinction
cited by most opinions in common law jurisdictions is that the
partnership contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. x x x This observation is
not entirely accurate in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking. x x x It would
seem therefore that under Philippine law, a joint venture is a form of
partnership and should be governed by the law of partnerships. The
Supreme Court has however recognized a distinction between these two
business forms, and has held that although a corporation cannot enter

into a partnership contract, it may however engage in a joint venture
with others. x x x
A joint venture, therefore, is akin to a partnership, the essential elements of

which are as follows: (1) an agreement to contribute money, property, or industry to
a common fund; and (2) an intent to divide the profits among the contracting parties.
On account thereof, petitioners insist that the parties had all along entered into a
joint venture agreement. This can be gleaned from fact that LCDC undertook to
divide the net proceeds from the sale of the Montemar Villas lots between LCDC and
the Valdeses, in proportion to 60% and 40%, respectively. This fact was later affirmed
by the February 21, 1990 letter agreement between the parties.
We disagree. A perusal of the Assignment of Rights and the February 21, 1990
letter agreement clearly shows that the Valdeses' share in the sale of the subdivision
lots was the manner of paying, or mode of payment of the P20 Million consideration
for the 4,000 BARECO shares. While we understand that this type of provision may
be peculiar to a contract of sale, this profit-sharing scheme, as explained by LCDC,
was a means for the latter to acquire the necessary funds to develop and improve the
said lots.
Notably, LCDC was contractually obliged to remit to the Valdeses' their 40%
share in the sale of the Montemar Villas lots despite the fact that LCDC may be
experiencing losses. This runs counter to a partnership or joint venture relationship.
The essence of a true partnership is that the partners share in the profits and losses
of the business. This is clearly not the case here. As correctly found by the CA:
There was no contract to contribute properties to a common fund so as

to share the profits between themselves. There is even no common fund
to speak of. LCDC's obligation to pay persists as long as it is able to sell
subdivision lots even if the corporation itself is experiencing losses, as
what happened. x x x x Hence, there is nothing here that may be said to
be akin to a joint venture in its legal definition.
Thus, as the sole stockholder of BARECO pursuant to the Deed of Sale dated
May 24, 1975, LCDC, had full disposal of the BARECO properties in Bataan,
including the right to encumber and mortgage the same as attributes of ownership.
Along the same lines, considering that some of properties of LCDC were transferred
and conveyed to LCRC, the latter likewise had every right to mortgage these
properties. The rights and interests of the Valdeses, lie only on the proceeds of the
sale of the Montemar Villas lots. They could not also question the mortgages
constituted on the properties after the titles have already passed to LCDC and LCRC.
Given the foregoing recitals, this Court cannot nullify the September 3, 1992
Memorandum of Agreement and the August 31, 1992 Consolidated Deed of Sale on

the sole ground that they were supposedly entered into in violation of the joint
venture between the Valdeses and LCDC, where, from the outset, such relationship
is clearly non-existent between the parties. Failing to substantiate their claim of a
joint venture or partnership, petitioners' argument has no leg to stand on.

2023 PRE-WEEK NOTES IN BANKING LAW
Dean Nilo T. Divina
A. The New Central Bank Act
h. Monetary Board; powers and functions
i. How the Bangko Sentral ng Pilipinas handles banks in distress

a. Conservatorship
May a conservator revoke a valid contract of the bank?
The vast and far-reaching powers of the conservator of a bank must be related to the
preservation of the assets of the bank, the reorganization of the management thereof,
and the restoration of its viability. Such powers cannot extend to the post-facto
repudiation of perfected transactions, otherwise they would infringe against the non-
impairment clause of the Constitution. The law merely gives the conservator power
to revoke contracts that are, under existing law, deemed to be defective. Hence, the
conservator merely takes the place of a bank’s board of directors, so what the board
cannot do, the conservator cannot do either.1
When may the Monetary Board of the BSP appoint a receiver?
Whenever, upon report of the head of the supervising or examining department, the
Monetary Board finds that a bank or quasi-bank:
(a) Has notified the Bangko Sentral or publicly announced a unilateral closure,
or has been dormant for at least sixty (60) days or in any manner has
suspended the payment of its deposit/deposit substitute liabilities, or is
unable to pay its liabilities as they become due in the ordinary course of
business: Provided, that this shall not include inability to pay caused by
extraordinary demands induced by financial panic in the banking
community;
(b) Has insufficient realizable assets, as determined by the Bangko Sentral, to
meet its liabilities; or
(c) Cannot continue in business without involving probable losses to its
depositors or creditors; or
(d) Has willfully violated a cease and desist order under Section 37 of the
Central Bank Act that has become final, involving acts or transactions which
amount to fraud or a dissipation of the assets of the institution; in which
cases, the Monetary Board may summarily and without need for prior
1First Philippine International Bank v. Court of Appeals, G.R. No. 115849, January 24, 1996.

hearing forbid the institution from doing business in the Philippines and
designate the Philippine Deposit Insurance Corporation (PDIC) as receiver
in the case of banks and direct the PDIC to proceed with the liquidation of
the closed bank pursuant to this section and the relevant provisions of R.A.
No. 3591, as amended. The Monetary Board shall notify in writing, through
the receiver, the board of directors of the closed bank of its decision.2
Note that unilateral closure, dormancy for at least six (6) months and suspension in
the payment of deposit and deposit substitute liabilities are new grounds under the
amendatory law.
Note further that determination of the sufficiency of the realizable assets is lodged
with the BSP. BSP is not required to consult with the bank or secure its approval, as
previously required under the old law, and held in the Banco Filipino case.3
The authority of the Monetary Board to summarily and without need for prior
hearing forbid the bank or quasi-bank from doing business in the Philippines as
provided above may also be exercised over non-stock savings and loan associations,
based on the same applicable grounds. For quasi-banks and non-stock savings and
loan associations, any person of recognized competence in banking, credit or finance
may be designated by the Bangko Sentral as a receiver.4
What is the nature of power of the receiver?
Section 30 of the New Central Bank Act expressly provides that “[t]he receiver shall
immediately gather and take charge of all the assets and liabilities of the institution,
administer the same for the benefit of its creditors, and exercise the general powers
of a receiver under the Revised Rules of Court but shall not, with the exception of
administrative expenditures, pay or commit any act that will involve the transfer or
disposition of any asset of the institution.” This means that a bank receiver only has
powers of administration. It cannot exercise acts of strict ownership. The properties
of the bank may be sold only to pay its debts.
What are the legal effects when a bank is placed under receivership?
a. The appointment of a receiver operates to suspend the authority of the bank

and of its directors and officers over its property and effects, such authority
being reposed in the receiver, and in this respect, the receivership is
equivalent to an injunction to restrain the bank officers from intermeddling
2Section 30, ibid.

3Supra.
4Section 30, ibid.

with the property of the bank in any way. Since the bank officers were no
longer authorized to transact business in connection with the bank’s assets
and property, the exclusive option to purchase granted by the President of
the Bank is unenforceable against the bank.5
b. The bank shall be forbidden to do business. As such, it is not liable to pay
interest on deposits. It is however liable for obligations that accrued before
the order forbidding it to do business.6 It was also held that the period during
which the bank cannot do business due to insolvency is not a fortuitous
event, unless it is shown that the government’s action to place a bank under
receivership or liquidation proceedings is tainted with arbitrariness, or that
the regulatory body has acted without jurisdiction.7
c. A criminal case for violation of BP 22 against a bank placed under
receivership by the Monetary Board may be dismissed for the demandability
of the obligation to be performed has been suspended. The filing of a petition
for assistance in liquidation by PDIC as receiver as a result of the Monetary
Board’s order for closure made it legally impossible for the officer who signed
the check to comply with his obligation with the payee.8
Can a bank under receivership be rehabilitated?
Under Section 30 of R.A. No. 7653, the receiver has 90 days from appointment to
rehabilitate the bank. If it fails, it shall recommend to BSP the bank’s closure and
liquidation. If it succeeds, it shall recommend to BSP the resumption of bank’s
business.
However, R.A. No. 11211, which became effective on March 1, 2019, removed the
authority of the receiver to rehabilitate the closed bank. Upon its appointment for
any of the statutory grounds, the receiver must proceed with the liquidation of the
closed bank.9
Who is the statutory receiver for closed banks?
The PDIC under the charter that created it is considered the receiver of closed
banks.
5Abacus Real Estate Development v. Manila Banking Corporation, G.R. No. 162270, April 6,
2005.
6Overseas Bank of Manila v. Court of Appeals, et al., G.R. No. L-45866, April 19, 1989.
7Spouses Jaime and Matilde Poon v. Prime Savings Bank, represented by the Philippine Deposit
Insurance Corporation as Statutory Liquidator, G.R. No. 183794, June 13, 2016.
8Cu v. Small Business Guarantee and Finance Corporation, G.R. No. 211222, August 7, 2017.
9Section 30(d), R.A. No. 11211.

May a closed bank under receivership sue or be sued?
A closed bank under receivership can only sue or be sued through its receiver,
the PDIC. Hence, the petition filed by the petitioner bank which has been placed
under receivership is dismissible if it did not join PDIC as a party to the case.10
Banco Filipino filed a Petition for Certiorari and Mandamus with prayer
for issuance of temporary restraining order (TRO) and writ of preliminary
injunction ( WPI ) against Bangko Sentral ng Pilipinas (BSP) and the
Monetary Board ( MB ). The RTC granted the application which was
subsequently assailed by the BSP through a Petition for Certiorari with the
Court of Appeals ( CA ).
Meanwhile, the Monetary Board issued MB Resolution 372.A, placing Banco

Filipino under receivership and designating the PDIC as its receiver. Banco
Filipino thereafter assailed the MB Resolution via a petition
for certiorari and mandamus with the CA.
The CA reversed and set aside the RTC's grant of the TRO and WPI. Banco
Filipino moved for reconsideration but was denied. Hence, Banco Filipino
filed a Petition for Review on Certiorari before the SC.
Can Banco Filipino file the said Petition for Review without securing an
authorization from the PDIC?
NO. The PDIC, as the fiduciary of the properties of a closed bank, may prosecute
or defend the case by or against the said bank as a representative party while the
bank will remain as the real party in interest, and that actions should be brought for
or against the closed bank through the statutory receiver. The mandatory inclusion
of the PDIC as a representative party is grounded on its statutory role as the fiduciary
of the closed bank which, under the New Central Bank Act, is authorized to conserve
the latter's property for the benefit of its creditors.
A closed bank under receivership can only sue or be sued through its
receiver, the PDIC.11
10Banco Filipino Savings and Mortgage Bank v. Bangko Sentral ng Pilipinas, G.R. No. 200678,
June 4, 2018.
11Banco Filipino Savings and Mortgage Bank v. Bangko Sentral ng Pilipinas, G.R. No. 200642,
April 26, 2021.

Distinguish conservator from receiver.
A conservator is appointed if the bank is in a continuing state of lack of liquidity

adequate to protect the interest of the bank’s creditors and depositors (meaning, its
assets are more than liabilities but are not in cash or readily convertible to cash),
whereas a receiver is generally appointed if the bank is insolvent.
A conservator takes charge of the assets, liabilities and management of the bank
in distress, whereas a receiver shall immediately gather and take charge of all the
assets and liabilities of the institution, administer the same for the benefit of its
creditors, and exercise the general powers of the receiver under the Rules of Court.
The bank is allowed to do business if it is only under conservatorship but cannot

do business if it is placed under receivership.
A conservator has one (1) year from appointment to restore the bank’s financial
viability, whereas the receiver, upon its appointment based on any of the statutory
grounds, must proceed with the liquidation of the closed bank.12
Is BSP required to conduct an audit of the bank before ordering its closure?
It is not required to conduct a thorough audit of the bank before ordering its
closure. Under R.A. No. 7653, only a report of the head of the supervising or
examining department is necessary. Needless to say, the decision of the MB and BSP,
like any other administrative body, must have something to support itself and its
findings of fact must be supported by substantial evidence. But it is clear under R.A.
No. 7653 that the basis need not arise from an examination as required in the old
law.13
It was likewise held that the bank is not entitled to a copy of the report of
examination that the Supervision and Examination Department of BSP has prepared
nor can the bank be validly entitled to injunction to restrain BSP from adopting such
report.14
The Supreme Court likewise ruled that the Monetary Board is not required to
make its own independent finding that the bank could no longer be rehabilitated but
may rely on the findings of the PDIC as statutory receiver, in ordering the liquidation
of a bank. Once the receiver determines that rehabilitation is no longer feasible, the
Monetary Board is simply obligated to: (a) notify in writing the bank›s board of
12BAR 2015 as revised to conform with Section 30, R.A. No. 7693, as amended by R.A. No. 11211.
13Rural Bank of San Miguel v. Monetary Board, G.R. No. 150886, February 16, 2007.
14Ibid.

directors of the same; and (b) direct the PDIC to proceed with liquidationThis case 15.
should now be construed in relation to R.A. No. 11211 which, as previously stated,
removed the option of rehabilitation once a bank is placed under receivership.
What is clear under R.A. No. 11211 is that the receiver does not have the 90-day
period under R.A. No. 7653 to rehabilitate the bank. After its appointment, PDIC, as
the statutory receiver, must proceed to liquidation but there is nothing in the law
that precludes rehabilitation in the course of the liquidation.
Maharlikang Pilipino Banking Corporation (MPBC) operates several

branches of Maharlikang Pilipino Rural Bank in Eastern Visayas. Almost all
the branch managers are close relatives of the members of the Board of
Directors of the corporation. Many undeserving relatives of the branch
managers were granted loans. In time, the branches could not settle their
obligations to depositors and creditors.
Receiving reports of these irregularities, the Supervising and

Examining Department (SED) of the Monetary Board prepared a detailed
report (SED Report) specifying the facts and the chronology of events
relative to the problems that beset MPBC rural bank branches. The report
concluded that the bank branches were unable to pay their liabilities as
they fell due, and could not possibly continue in business without incurring
substantial losses to its depositors and creditors.
[a] May the Monetary Board order the closure of the MPBC rural banks
relying only on the SED Report, without need of an examination?
Explain. (2009 Bar)
Yes. Under Republic Act No. 7653, otherwise known as the New Central Bank Act,
prior notice and hearing are no longer required and a report made by the head of he
SED suffices for a bank to be closed. The purpose of the law is to make the closure of
the bank summary and expeditious for the protection of the public interest (Rural
Bank of San Miguel vs Monetary Board, GR No. 150886, February 16, 2007)
[b] If MPBC hires you as lawyer because the Monetary Board has
forbidden it from carrying on its business due to its imminent insolvency,
what action will you institute to question the Monetary Board’s order?
Explain.
15Apex Bancrights Holdings, Inc. v. Bangko Sentral ng Pilipinas, G.R. No. 214866, October 2,
2017.

The order of the Monetary Board may be questioned on a petition for certiorari with
the Court of Appeals on the ground that the action was arbitrary and made in bad
faith tantamount to grave abuse of discretion amounting to lack or excess of
jurisdiction. The petition for certiorari may only be filed by the stockholders of record
representing at least majority of the outstanding capital stock within 10 days from
receipt by the board of directors of the MPBC of the order directing the closure of the
bank or the appointment of a conservator or receiver. (Central Bank of the
Philippines vs Court of Appeals, 208 SCRA 652 )
What is the remedy available to the bank to set aside the order of BSP
designating a conservator, appointing a receiver, or directing the closure
and liquidation of the bank?
The remedy available to the bank is to file a petition for certiorari with the Court
of Appeals on the ground that the action taken by BSP was in excess of jurisdiction
or with such grave abuse of discretion as to amount to lack or excess of jurisdiction.
The petition for certiorari may only be filed by the stockholders of record representing
the majority of the capital stock within 10 days from receipt by the board of directors
of the institution of the order directing receivership, closure/liquidation or
conservatorship16.
There must be convincing proof, after hearing, that the resolution of BSP is
plainly arbitrary and made in bad faith.17
The Board of Directors of a bank may also question the validity of the
conservator’s (or receiver’s) fraudulent acts and abuses and the arbitrary action of
the Monetary Board but subject to the same requisites above-mentioned.18
In a recent case, the Supreme Court ruled that the RTC, acting as a liquidation
court, has no power to overrule the findings of the Monetary Board. In fact, the
liquidation court’s authority is limited to adjudicating disputed claims against the
institution, assisting the enforcement of individual liabilities of the stockholders,
directors and officers and deciding on other issues to implement the liquidation plan.
The exclusivity of the Monetary Board’s power is highlighted by the absence of appeal
from its actions under Section 30 of R.A. No. 7653. The MB’s actions are final and
executory and can only be set aside by filing a petition for certiorari within 10 days
from receipt by the BSP resolution.
B
16Section30, ibid.; Yuseco v. PDIC, as the statutory liquidator of the Unitrust Development Bank,
G.R. No. 217899, September 28, 2016.
17Central Bank v. Court of Appeals, supra.
18Ibid.

Development Bank of the Philippines (DBP) obtained a loan from NEDA
through the Industrial Guarantee and Loan Fund (IGLF). DBP made the
IGLF proceeds available to participating financial institutions by way of
subsidiary loans. Hermosa Bank applied for and was accredited by DBP as
a participating financial institution. Hermosa Bank, executed Subsidiary
Loan Agreements in favor of DBP. DBP filed a complaint before Branch 136,
RTC, Makati City against Hermosa Bank as the latter failed to remit the
amortizations due on its IGLF loans despite demand. DBP discovered that
there were several fraudulent, deceitful, and unlawful acts in the
preparation and execution of the loans and their collateral documents. RTC
Branch 136 issued a Writ of Preliminary Attachment upon DBP's posting of
a bond. The Monetary Board of the BSP closed Hermosa Bank and placed it
under receivership with PDIC as the appointed receiver. PDIC filed a
petition for assistance in the liquidation of Hermosa Bank which was raffled
to Branch 5, RTC, Dinalupihan, Bataan (Liquidation Court).
Did RTC Branch 136 retain jurisdiction over the complaint despite the
pendency of the petition for assistance in the liquidation of Hermosa Bank
before the Liquidation Court?
No. The rule on adherence of jurisdiction is not absolute. One of the exceptions
to this rule is when the change in jurisdiction is curative in character. Section 30 of
RA 7653 "is curative in character when it declared that the liquidation court shall
have jurisdiction in the same proceedings to assist in the adjudication of the disputed
claims against the Bank ." The rationale for consolidating all claims against the bank
with the liquidation court is "to prevent multiplicity of actions against the insolvent
bank and x x x to establish due process and orderliness in the liquidation of the bank,
to obviate the proliferation of litigations and to avoid injustice and arbitrariness . "
The Court stated that it was the intention of the lawmaking body "that for
convenience only one court, if possible, should pass upon the claims against the
insolvent bank and that the liquidation court should assist the Superintendent of
Banks and regulate his operations .19
It was similarly held that Pursuant to R.A. No. 7653, if there is a judicial
liquidation of an insolvent bank, all claims against the bank should be lodged in a
liquidation proceeding. This is true whether or not the claim is first contested in a
court or agency before being submitted with the liquidation court. Thus, it is
established that the claim for the payment of the checks is, for all intents and
purposes, a claim within the scope of R.A. 7653. Holding otherwise would give
19Hermosa Savings and Loan Bank v. Development Bank of the Philippines, G.R. No. 222972,
February 10, 2021.

preferential treatment to creditors whose debts are secured by checks and who may
have to resort to criminal action to collect the money due.
Hence, as a result of the resolution issued by the BSP placing G7 Bank under
receivership, the obligation to pay the amounts covered by the checks is suspended.
Thus, there could be no criminal liability because the petitioners were unable to fulfill
their commitment to fund the checks due to a supervening fact beyond their control.20
Law on Secrecy of Philippine Currency Deposits
X, a government official, has a number of bank accounts in T Bank

containing millions of pesos. He also opened several trust accounts in the
same bank which specifically covered the placement and/or investment of
funds. X was later charged with graft and corruption before the
Sandiganbayan (SB) by the Ombudsman. The Special Prosecutor filed a
motion praying for a court order authorizing it to look into the savings and
trust accounts of X in T Bank. X opposed the motion arguing that the trust
accounts are not "deposits" under the Law on Secrecy of Bank Deposits (Rep.
Act No. 1405). Is the contention of X correct? Explain. (2016 Bar)
The contention of X is not correct. Deposits in the context of the Secrecy of Philippine
currency deposits include deposits of whatever nature and kind. They include funds
deposited in the bank giving rise to creditor-debtor relationship, as well as funds
invested in the bank like trust accounts. (Ejercito v Sandiganbayan, GR No.
157294-95, November 30, 2006)
In what cases may information on Philippine currency bank deposits, as

well as investment in government securities, be disclosed, examined or
looked into without violating the law?
a. Written permission of the depositor;21

b. In case of impeachment;22
c. In case of order of a competent court in any of the following cases:
i. In case of bribery or dereliction of duty of public officials;23
ii. Where the subject matter of litigation is the money deposited;24
20 Allan S. Cu v. Small Business Guarantee and Finance Corporation, G.R. No. 218381, July 14,
2021.
21Section 2, R.A. No. 1405.
22Ibid.
23Ibid.
24Ibid.

iii. Prosecution for unexplained wealth (plunder is akin to unexplained
wealth);25
iv. Prosecution for violation of the anti-graft and corrupt practices act;
v. In case of violation of the anti-money laundering law; and,
vi. Garnishment of bank deposits.
NB. Under R.A. No. 1405, the issuance of court order is limited to bribery or
dereliction of duty of public officials and where the subject matter of litigation is the
money deposited. The rest of the enumeration is based on jurisprudence and the other
laws.
d. The BIR may inquire into the deposit and other related information to
determine the gross estate of the deceased taxpayer for computation of estate
tax;26
e. The BIR may also inquire into bank deposits if there is an offer of
compromise of tax liability on account of financial incapacity to pay his tax
liability;27
f. Disclosure by the bank to the National Treasurer of information concerning
dormant deposits under the Unclaimed Balances law;28
g. PDIC and/or BSP may inquire into or examine deposit accounts and all
information related thereto in case there is a finding of unsafe and unsound
banking practice;29
h. BSP may, the course of a periodic or special examination, check the
compliance of a covered institution with the requirements of AMLA and its
implementing rules and regulations;30
i. In case of amendment or repeal of the law.
Written permission of the depositor
Debtor filed a petition for voluntary insolvency. The appointed receiver

filed a motion for the parties to enter into compromise agreement. Two of
the creditors of the insolvent debtor filed a joint motion to approve
agreement which contains their authority to have access to the bank
account of the insolvent debtor. The court approved the joint motion.
25PNB v. Gancayco but see discussion on effects of the Marques v. Desierto ruling, infra.
26Section 6(F)(1) of the Tax Code, as amended.
27Section 6(F)(2), Tax Code, as amended.
28Act No. 3936, as amended.
29Section 8, R.A. No. 3591, as amended.

Was the approval by the court of the joint motion sufficient to allow the
creditors access to the bank account of the insolvent debtor?
No, the Joint Motion to Approve Agreement executed by the parties on waiver of
confidentiality of the insolvent debtor’s deposits does not bind the latter who was not
a party and signatory to the said agreement.31
Order of a competent court
Elizabeth, through her daughter Ruby, charged Norlina of unauthorized

deduction of her ABC Savings Account, as well as for failure to post certain
check deposits to the said account, with the Office of Special Investigation
of the Bangko Sentral ng Pilipinas (OSI-BSP). During the investigation,
Norlina filed a Motion for Production of Documents praying that the she be
allowed to inspect and copy the Statement of Account of other depositors
with two others, claiming that resort to discovery process is part of her right
to due process and Ruby signed a document allowing Norlina and ABC
access to these deposit accounts. The OSI-BSP denied the motion ruling that
the action is an administrative proceeding aimed at determining
respondent’s liability, if any, for violation of banking laws and that a deposit
account may only be examined or looked into if it is the subject matter of a
pending litigation.
Did the OSI-BSP abuse its discretion in denying the motion?
No, other than OSI-BSP is not a competent court, records show that the account
holders or depositors of the two other banks are different from the complainant.
Perforce, the documents executed by Ruby purportedly granting ABC access to the
foregoing accounts do not equate to their permissions to allow access to their bank
account. 32
Bribery or dereliction of duty of public officials; prosecution for unexplained wealth;

prosecution for violation of the Anti-Graft and Corrupt Practices Act
TRUE or FALSE. If the Ombudsman is convinced that there is a violation of

law after investigating a complaint alleging illicit bank deposits of a public
31Doña Adela Export International, Inc. v. Trade and Investment Development Corporation, G.R.
No. 201931, February 11, 2015.
32Sibayan v. Alda, G.R. No. 233395, January 17, 2018.

officer, the Ombudsman may order the bank concerned to allow in camera
inspection of bank records and documents.33
False. In the case of Marquez v. Desierto,34 the Supreme Court held that the
Ombudsman can only examine bank deposit accounts upon compliance with the
following requisites:
a. There is a case pending before a court of competent jurisdiction;

b. The account holder and the bank official must be informed of the
examination;
c. The account to be examined must be clearly identified; and,
d. The examination must be limited to the account specified.
If there is no pending case yet, but only an investigation by the Ombudsman, any
order for the examination of the bank account is premature.
“D” issued a check drawn against ABC Bank payable to the order of “P” for
P1,000,000.00 who, in turn, deposited the check in his account with XYZ
Bank. XYZ sent the check for clearing through the Philippine Clearing
House Corporation (PCHC) but XYZ’s clearing staff committed a clearing
discrepancy when he erroneously under-encoded the charge slip to
P1,000.00. While XYZ credited the account of “P” for P1,000,000.00, it only
recovered P1,000.00 from ABC. After discovery of the under-encoding, XYZ
notified ABC of the discrepancy, by way of a charge slip of P999,000.00 for
automatic debiting of ABC’s clearing account with PCHC. ABC refused to
accept the charge slip. XYZ filed a complaint against ABC with the PCHC
Arbitration Committee. It also filed with the court a petition for the
examination of the account of “D.” Should the court grant the petition?
The petition should be denied. It does not seek recovery of the very money
contained in the deposit. The subject matter of the dispute may be the amount of
P999,000.00 that XYZ seeks from ABC as a result of the discrepancy; but it is not the
P999,000.00 deposited in the drawer’s account. By the terms of R.A. No. 1405, the
“money deposited” itself should be the subject matter of the litigation.
That XYZ feels a need for such information in order to establish its case against
ABC does not, by itself, warrant the examination of the bank deposits. The necessity
of the inquiry, or the lack thereof, is immaterial since the case does not come under
any of the exceptions allowed by the Bank Deposits Secrecy Act.35
33BAR 2009.
34G.R.No. 135882, June 27, 2001.
35Union Bank of the Philippines v. Court of Appeals, G.R. No. 134699, December 23, 1999.

Violation of the anti-money laundering law
Does AMLC need a court order to be able to inquire into such deposits, funds
or investments?
Yes, AMLC needs to obtain a bank inquiry order from the Court of Appeals. The
application can be done ex-parte.36 However, AMLC must establish probable cause
that the deposits, funds or investments relate to unlawful activity under AMLA and
the Court of Appeals, independently of AMLC, must make itself a finding that such
probable cause exists before the bank inquiry order may be issued. 37
Court order shall not be necessary in the following cases:
a. Kidnapping for ransom under Article 267 of Act No. 3815 (RPC);
b. Violations of Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of R.A. No. 9165
(Comprehensive Dangerous Drugs Act of 2002);
c. Hijacking and other violations under R.A. No. 6235; destructive arson and
murder, as defined under the RPC, as amended, including those perpetrated
by terrorists against non-combatant persons and similar targets;
d. Felonies and offenses similar to the foregoing which are punishable under
the penal laws of other countries;
e. Terrorism and conspiracy to commit terrorism as defined under R.A. No.
9372, as amended.38
Through various acts of graft and bribery, Mayor Ycasiano accumulated a

large amount of wealth which he converted into U.S. dollars and deposited
in a Foreign Currency Deposit Unit (FCDU) account with the Yuen Bank
(YB). On a tip given by the secretary of the mayor, the Anti-Money
Laundering Council (AMLC) sent an order to YB to confirm the amount of
U.S. dollars that Mayor Ycasiano had in his FCDU account. YB claims that,
under the Foreign Currency Deposit Act (R.A. No. 6426, as amended), a
written permission from the depositor is the only instance allowed for the
examination of FCDU accounts. YB alleges that AMLC on its own cannot
order a banking institution to reveal matters relating to bank accounts.
Is the legal position of YB, in requiring written permission from the

depositor, correct?39
36Section 11, ibid.

37Subido Pagente Certez Mendoza and Binay Law Offices v. Court of Appeals, G.R. No. 216914,
December 6, 2016.
39BAR 2018.

Yes, the legal position of YB in requiring written permission from the depositor
is correct. The AMLC cannot order the bank to inquire into the bank account of any
depositor on mere suspicions of acts of graft and bribery without his written consent
or a bank inquiry order issued by the competent
Garnishment of bank deposits
May the bank disclose information about Philippine currency bank deposits
pursuant to a writ of garnishment?
The Bank may disclose information about Philippine currency bank deposits
pursuant to a writ of garnishment. The disclosure in this case is only incidental to
the execution process. There is nothing in the records of Congress that would show
the intention of legislature to place Philippine currency bank deposits beyond the
reach of judgment creditor.40
Is the rule allowing garnishment of Philippine currency bank deposit

similar to foreign currency deposits?
No, the rule is different. Foreign currency deposits are exempt from attachment,
garnishment or any other order or process of any court, legislative body, government
agency or any administrative
C. General Banking Law (R.A. No. 8791)
a. Definition and classification of banks
What is a bank?
A bank is an entity engaged in the lending of funds obtained from the public in
the form of deposits.41 It has three elements: a) it is engaged in the lending of funds;
b) the funds are obtained from the public, which means, 20 or more lenders; and c)
the funds are obtained from the public in the form of deposits. Note that unlike the
old law, these activities need not be performed with habituality.
40ChinaBank v. Ortega, G.R. No. L-34964, January 31, 1973; PCIB v. Court of Appeals, G.R. No.
84526, January 28, 1991.
41Section 3.1, R.A. No. 8791, otherwise known as the General Banking Law (GBL).

d. Diligence required of banks in view of the fiduciary nature of
banking
What is the kind of diligence required of banks?
The diligence required of banks is more than that of a good father of a family
where the fiduciary nature of their relationship with their depositors is concerned.
The highest degree of diligence is based on the General Banking Law which requires
of banks the highest standards of integrity and performance. A banking institution
owes it to its clients to observe the high standards of integrity and performance in all
its transactions because its business is imbued with public interest. The high
standards are also necessary to ensure public confidence in the banking system, for
the stability of banks largely depends on the confidence of the people in the honesty
and efficiency of banks.42
It was held that the bank failed in its duty to exercise the highest degree of
diligence by prematurely foreclosing the mortgages and unwarrantedly causing the
foreclosure sale of the mortgaged properties despite the mortgagor not being yet in
default.43
Cruz and Tay obtained various loans from Metrobank. To determine their
total outstanding obligation, they requested from the Bank their statement
of account. They subsequently hired an accountant, who after checking the
records, determined certain unaccounted payments. Thereafter, Cruz and
Tay filed a complaint for accounting before the competent Regional Trial
Court praying for the production of all pertinent loan records. Metrobank
averred that the production of all loan documents, especially those
executed as early as 1994 is impossible. Pursuant to its five-year retention
policy, it only keeps ledgers for active accounts, and disposes of the ledgers
and documents of closed accounts.
Should Metrobank should be ordered to (i) render a full and detailed

accounting of the r44espondents' payments; and (ii) furnish the respondents
all pertinent loan documents?
42Philippine National Bank v. Spouses Eduardo and Ma. Rosario Tajonera, G.R. No. 195889,
September 24, 2014; Comsavings Bank v. Sps. Capistrano, G.R. No. 170942, August 28, 2013.
43Development Bank of the Philippines v. Guarina Agricultural and Realty Development

Corporation, G.R. No. 160758, January 15, 2014.

In view of the fiduciary nature of the banking business, banks are mandated to
comply with two essential and fundamental obligations- to treat their clients'
accounts with utmost fidelity and meticulous care, and to record all transactions
accurately and promptly.
It bears emphasis that the documents respondents requested are not simply
general records, but documents that are essential to their existing loan with
Metrobank. Although the loans have been restructured, the accuracy of the
outstanding obligation depends on a full and complete computation of the previous
loans. Metrobank cannot hide behind its five-year policy to renege on its obligation to
render an accurate accounting of the respondents' payments. As between its five-year
holding policy versus its legal and jurisprudential fiduciary duty to exercise the
highest degree of care in conducting its affairs, the latter consideration certainly
prevails.45
Antonio and Remedios were husband and wife. Remedios discovered that
her husband, using her forged signature executed in favor of Equitable
Bank a Deed of Real Estate Mortgage over real properties under their
names. The real estate mortgage secured the loan which was supposedly
extended to them by the bank. Remedios initiated a Complaint for
Annulment of Deed of Real Estate Mortgage with Damages before the RTC
which eventually declared the mortgage as null and void in view of the
Remedios’ forged signature therein.
Can the Bank be held jointly and severally liable with Antonio despite the
absence of showing that it is guilty of bad faith?
Yes, it is required and expected of banks to exercise the highest degree of

diligence, along with high standards of integrity and performance in view of its
significant role in commercial transactions, not to mention its contribution, to the
economy in general.
The Bank's failure to observe the degree of diligence expected of it clearly

constitutes negligence. Verily, the Bank was not able to prove that Remedios
participated in the loan application or in the execution of the documents relative to
it. There was no showing that any of the Bank's employees had dealt with her
regarding the loan or the mortgage despite her being one of the registered owners of
the mortgaged properties. More importantly, the Bank had not demonstrated how it
took steps or what safety measures were adopted and actually practiced to ascertain
the authenticity of the signature of Remedios in the "Amendment to Real Estate
Mortgage." 46
45Metrobank v. Cruz and Tay, G.R. No. 221220, January 19, 2021.
46 Remedios Banta v. Equitable Bank, Inc., G.R. No. 223694, February 10, 2021.

In another case, it was held that a bank cannot obliquely repudiate the
resulting banking relationship with the account holders and the fiduciary nature
thereof when it accepted the deposit. It cannot belatedly claim ignorance of its
performance of a core banking function, i.e., accepting or creating demand deposits.
It is presumed that the money deposited in a bank account belongs to the person in
whose name the deposit account is opened. With its acceptance of the deposit and the
opening of an account, the bank explicitly recognized the depositor’s ownership and
title over the funds deposited. Notably, the bank repeatedly acknowledged the
creditor-debtor relationship and its obligation to pay the depositors on demand when
the latter withdrew money from the said account on three separate occasions.47
e. Nature of bank funds and bank deposits
iii. Restrictions on bank exposure to directors, officers,

stockholders and their related interest
What are the restrictions on a bank’s exposure to directors, officers,

stockholders and their related interests?
No director or officer of any bank shall, directly or indirectly, for himself or as

the representative or agent of others, borrow from such bank nor shall he become a
guarantor, endorser or surety for loans from such bank to others, or in any manner
be an obligor or incur any contractual liability to the bank except with the written
approval of the majority of all the directors of the bank, excluding the director
concerned: Provided, that such written approval shall not be required for loans, other
credit accommodations and advances granted to officers under a fringe benefit plan
approved by the Bangko Sentral. The required approval shall be entered upon the
records of the bank and a copy of such entry shall be transmitted forthwith to the
appropriate supervising and examining department of the Bangko Sentral.48
The outstanding loans, credit accommodations and guarantees which a bank may
extend to each of its stockholders, directors, or officers and their related interests,
shall be limited to an amount equivalent to their respective unencumbered deposits
and book value of their paid-in capital contribution in the bank: Provided, however,
that loans, credit accommodations and guarantees secured by assets considered as
non-risk by the Monetary Board shall be excluded from such limit: Provided, further,
that loans, credit accommodations and advances to officers in the form of fringe
47 Allied Banking Corporation v. Spouses Mario and Rose Macam, G.R. No. 200635, February
1, 2021.
48Section 36, GBL.

benefits granted in accordance with rules as may be prescribed by the Monetary
Board shall not be subject to the individual limit.
The Monetary Board shall define the term “related interests.”
The limit on loans, credit accommodations and guarantees prescribed herein

shall not apply to loans, credit accommodations and guarantees extended by a
cooperative bank to its cooperative shareholders.49
The rule on DOSRI transaction covers loan obtained or guaranteed by the

director, officer, stockholder or their related interest and not to loans both obtained
and guaranteed by them. The rule in fact covers any transaction where the DOSRI
may incur contractual obligations with their bank. Thus, it is not limited to loan
transactions. It may include the purchase by the DOSRI of a bank property. In this
case, though, only the approval and reportorial requirements should be observed.
In other words, DOSRI transactions are subject to the following

rules/restrictions:
1. The transactions must be approved by at least majority of the entire board

excluding the director concerned (“approval requirement”);
2. The required approval shall be entered upon the records of the bank and
copy of such entry shall be submitted to the BSP (“reportorial requirement”);
and
3. Unless the loan is non-risk, the loan must not exceed the book value of the
paid-up shares of the borrowing DOSRI and the amount of unencumbered
deposits (“ceiling requirement”).50
However, if there is no loan component to the transaction, as when a director,

officer or stockholder buys a property of the bank, only the first two restrictions shall
apply.
How many criminal offenses are committed by the failure to observe the
approval, reporting and ceiling requirements?
DOSRI transactions are subject to approval, reportorial and ceiling

requirements. Approval requirement means that the DOSRI transaction must be
approved by at least majority of the directors excluding the director concerned.
Reportorial requirement means that the transaction must be recorded in the books of
the bank and reported to BSP. Ceiling requirement means that the amount of the
49Ibid.
50Section 36, R.A. No. 8791.

loan shall not exceed the book value of the paid-in contribution and the amount of
unencumbered deposits. Three different offenses are committed by those who fail to
observe the board approval, reporting and ceiling requirements.51
A criminal information alleged that spouses Enrico and Amalia appeared to

have an outstanding loan of P8 million with the RBSM Bank, but had never
applied for nor received such loan; that it was HS, who was then president
of RBSM, who had ordered, facilitated, and received the proceeds of the
loan; and that the P8 million loan had never been authorized by RBSM’s
Board of Directors and no report thereof had ever been submitted to the
Department of Rural Banks, Supervision and Examination Sector of the
BSP.
HS moved to quash the information contending that the commission of

estafa is inherently incompatible with the violation of DOSRI law, hence a
person cannot be charged for both offenses. He argued that a violation of
DOSRI law requires the offender to obtain a loan from his bank, without
complying with procedural, reportorial, or ceiling requirements. On the
other hand, estafa requires the offender to misappropriate or convert
something that he holds in trust, or on commission, or for administration,
or under any other obligation involving the duty to return the same.
He theorized that the characterization of possession is different in the two

offenses. If HS acquired the loan as DOSRI, he owned the loaned money and
therefore, cannot misappropriate or convert it as contemplated in the
offense of estafa. Conversely, if he committed estafa, then he merely held
the money in trust for someone else and therefore, did not acquire a loan in
violation of DOSRI rules.
Discuss whether the loan transaction within the ambit of the DOSRI law
could also be the subject of estafa under Article 315(1)(b) of the Revised
Penal Code.
The information filed against HS for estafa and violation of DOSRI law do not
negate each other.
The bank money which came to the possession of HS was money held in trust or
administration by him for the bank, in his fiduciary capacity as the President of said
bank. It is not accurate to say that he became the owner of the P8 million because it
was the proceeds of a loan. That would have been correct if the bank knowingly
extended the loan to him. But that is not the case here. Through fraudulent device,
51Go v. BSP, October 23, 2009.

he made it appear that other persons were the borrowers but he obtained the loan
proceeds and converted the same. Under these circumstances, it cannot be said that
he became the legal owner of the P8 million. Thus, he remained the bank’s fiduciary
with respect to that money, which makes it capable of misappropriation or conversion
in his hands.
The prohibition under the DOSRI law is broad enough to cover various modes of
borrowing. It covers loans by a bank director or officer (like herein HS) which are
made either: (1) directly, (2) indirectly, (3) for himself, (4) or as the representative or
agent of others. It applies even if the director or officer is a mere guarantor, indorser
or surety for someone else’s loan or is in any manner an obligor for money borrowed
from the bank or loaned by it. Directors, officers, stockholders, and their related
interests cannot be allowed to interpose the fraudulent nature of the loan as a defense
to escape culpability for their circumvention of the law.52
What are the legal effects of non-compliance with the DOSRI rules and
regulations?
After due notice to the board of directors of the bank, the office of any bank
director or officer who violates the DOSRI rules and regulations may be declared
vacant and the director or officer shall be subject to the penal provisions of the New
Central Bank Act.53
What is the nature of the loan that does not comply with the rules on DOSRI
and/or Single Borrower’s limit?
Loans, assuming that they were of a DOSRI nature or without the benefit of the
required approvals or in excess of the Single Borrower’s Limit, would not be void for
those reasons. Instead, the banks or the officers responsible for the approval and
grant of DOSRI loan would be subject only to the sanctions under the law.54
In other words, the loan transaction is valid but without prejudice to criminal
prosecution against the erring DOSRI.
v. Floating interest rate and escalation clause
What is an escalation clause in a loan agreement? Is it a valid stipulation?
52Soriano v. People of the Philippines, et al., G.R. No. 162336, February 1, 2010.
53Ibid.
54Republic v. Sandiganbayan, G.R. No. 166859, April 12, 2011.

An escalation clause refers to the stipulation allowing increases in the interest
rates agreed upon by the contracting parties. Such stipulation shall be valid provide
that there should be a corresponding de-escalation clause that authorizes a reduction
in the interest rates corresponding to downward changes made by law or by the
Monetary Board. The escalation clause should specifically provide: (1) that there can
be an increase in interest rates if allowed by law or by the Monetary Board; and (2)
that there must be a stipulation for the reduction of the stipulated interest rates in
the event that the applicable maximum rates of interest are reduced by law or by the
Monetary Board. The latter stipulation ensures the mutuality of contracts.
The purpose of the law in mandating the inclusion of a de-escalation clause is to

prevent one-sidedness in favor of the lender which is considered repugnant to the
principle of mutuality of contracts. A de-escalation clause is an indispensable
requisite to the validity and enforceability of an escalation clause in the contract. In
other words, in the absence of a corresponding de-escalation clause, the escalation
clause shall be considered null and void.
However, the absence of a de-escalation clause in the loan agreement would not
invalidate the repricing of the interest rates, if in actuality, the lender did reduce the
interest on certain repricing dates. Such actual reduction or downward adjustment
by the lender bank eliminated any one-sidedness of its contracts with the borrower.55
What interest rate should be imposed on a loan transaction if the stipulated

interest rate is judicially determined to be excessive or unconscionable?
The legal rate of interest shall be applied if the stipulated interest in a loan
transaction is judicially determined to be excessive or unconscionable. Under BSP
Circular 799, dated July 1, 2013, such legal rate of interest is 6% per annum.
Petitioner sued respondents Spouses Leoncio Ho and Judy Cham Ho for

sum money and damages. She alleged that respondents obtained a
P700,000.00 loan from her for three percent (3%) monthly interest. After
several demands, Respondent Judy Hoy issued two (2) crossed checks from
her joint account. Before the maturity dates, respondents pleaded not to
deposit the checks as they planned to redeem them in cash.
Respondents denied the allegation that they obtained a loan from

petitioner. They further countered that petitioner requested Judy to issue
the subject checks for discounting by financiers known to petitioner.
55Villa
Crista Monte Realty & Development Corp. v. Equitable PCI Bank, G.R. No. 208336,
November 21, 2018.

Failing to find one, petitioner returned and requested that Judy write
petitioner's name in the checks.
Was petitioner able to establish her cause of action for sum of money
against the respondents?
Yes. The Negotiable Instrument Law provides for a presumption n that when
negotiable instruments such as checks are delivered to their intended payees, such
instruments have been issued for value. The same law recognizes a pre-existing debt
as valid consideration to support the issuance of a negotiable instrument like a check.
Respondents admitted the genuineness and due execution of the crossed checks they
issued in petitioner's name. Notably, respondents failed to rebut this presumption.
All they offered was a bare denial that they incurred the loans in exchange for their
checks. Surely, bare denial, without more, is not sufficient to overthrow the
presumption.
The fact that the subject checks are crossed checks in the name of petitioner, by
itself, negates respondents' theory of a rediscounting arrangement. It is not possible
to rediscount a crossed check in the name of a particular payee. For check
rediscounting requires the re-indorsement of the negotiable instrument; an act
precluded by the crossing of a check.
However, the Supreme Court denied the claim of petitioner for the stipulated interest of 3% per
annum. Article 1956 ordains that no interest shall be due unless it has been expressly stipulated in
writing. Thus, in the absence of any written proof of the supposed stipulation, petitioner's claim of
interest has no factual basis. At any rate, even if proved, it would be struck down for being
unconscionable. Instead, the legal interest rates were imposed in accordance with pertinent
jurisprudence. Consequently, legal interest of twelve percent (12%) per annum was imposed from extra
judicial demand on September 21, 2001 until June 30, 2013. Thereafter, the legal interest rate is
reduced to six percent ( 6%) per , annum from July 1, 2013 until finality of the decision.56
ANTI-MONEY LAUNDERING LAW (R.A. No. 9160, as amended)

b. Covered institutions/persons and their obligations
Who are the covered institutions/persons under the Anti-Money Laundering

law?
“Covered institutions” refer to:

(1) Banks, non-banks, quasi-banks, trust entities, and all other institutions and
their subsidiaries and affiliates supervised or regulated by the Bangko
Sentral ng Pilipinas (BSP);
56 Sally Go-Bangayan v. Spouses Leoncio and Judy Cham Ho, G.R. No., 203020, June 28, 2021.

(2) Insurance companies and all other institutions supervised or regulated by
the Insurance Commission; and
(3) (i) Securities dealers, brokers, salesmen, investment houses and other
similar entities managing securities or rendering services as investment
agent, advisor, or consultant; (ii) mutual funds, closed-end investment
companies, common trust funds, pre-need companies and other similar
entities; (iii) foreign exchange corporations, money changers, money
payment, remittance, and transfer companies and other similar entities; and
(iv) other entities administering or otherwise dealing in currency,
commodities or financial derivatives based thereon, valuable objects, cash
substitutes and other similar monetary instruments or property supervised
or regulated by Securities and Exchange Commission.
(4) Jewelry dealers in precious metals, who, as a business, trade in precious
metals, for transactions in excess of one million pesos (P1,000,000.00);
(5) Jewelry dealers in precious stones, who, as a business, trade in precious
stones, for transactions in excess of one million pesos (P1,000,000.00);
(6) Company service providers which, as a business, provide any of the following
services to third parties: (i) acting as a formation agent of juridical persons;
(ii) acting as (or arranging for another person to act as) a director or
corporate secretary of a company, a partner of a partnership, or a similar
position in relation to other juridical persons; (iii) providing a registered
office, business address or accommodation, correspondence or
administrative address for a company, a partnership or any other legal
person or arrangement; and (iv) acting as (or arranging for another person
to act as) a nominee shareholder for another person; and
(7) Persons who provide any of the following services:
(i) managing of client money, securities or other assets;
(ii) management of bank, savings or securities accounts;
(iii) organization of contributions for the creation, operation or management
of companies; and
(iv) creation, operation or management of juridical persons or
arrangements, and buying and selling business entities.57
Notwithstanding the foregoing, the term ‘covered persons’ shall exclude lawyers
and accountants acting as independent legal professionals in relation to information
concerning their clients or where disclosure of information would compromise client
confidences or the attorney-client relationship: Provided, that these lawyers and
accountants are authorized to practice in the Philippines and shall continue to be
subject to the provisions of their respective codes of conduct and/or professional
responsibility or any of its amendments.58
57Section 3(a), R.A. No. 9160, as amended.
58Supra.

(8) Casinos, including internet and ship-based casinos, with respect to their
casino cash transactions related to their gaming operations;59
(9) Real estate developers and brokers;
(10) Offshore gaming operators, as well as their: service providers, supervised,
accredited or regulated by the Philippine Amusement and Gaming
Corporation (PAGCOR) or any government agency.60
What are the obligations of covered institutions/persons?
The obligations of covered institutions/persons under AMLA are as follows:
a. Customer identification
Covered institutions shall establish and record the true identity of its clients
based on official documents. They shall maintain a system of verifying the true
identity of their clients and, in case of corporate clients, require a system of verifying
their legal existence and organizational structure, as well as the authority and
identification of all persons purporting to act on their behalf.
The provisions of existing laws to the contrary notwithstanding, anonymous

accounts, accounts under fictitious names, and all other similar accounts shall be
absolutely prohibited. Peso and foreign currency non-checking numbered accounts
shall be allowed.61
b. Record keeping
All records of all transactions of covered institutions shall be maintained and

safely stored for five (5) years from the dates of transactions. With respect to closed
accounts, the records on customer identification, account files and business
correspondence, shall be preserved and safely stored for at least five (5) years from
the dates when they were closed.62
c. Reporting of covered and suspicious transactions

Covered institutions shall report to the AMLC all covered transactions within
five (5) working days from occurrence thereof, unless the Supervising Authority
concerned prescribes a longer period not exceeding ten (10) working days.63
59Section 1(a)(8), R.A. No. 9160, as amended by R.A. No. 10927.

60Section 3(a), R.A. No. 9160, as further amended by R.A. No. 11521.
61Section 9(a), R.A. No. 9160.
62Section 9(b), ibid.
63Section 9(c), ibid.

Lionair, Inc sold the helicopters as brand new to the Philippine National
Police even if they were already used. Lionair’s president, however,
testified that Arroyo the real owner of the helicopters Lionair imported
the helicopters from the United States and sold them to Arroyo, who, in
turn, deposited partial payment to Lionair’s account with the Union Bank.
The Office of the Special Prosecutor (OSP) presented the Manager of the
Union Bank branch where the account was maintained to verify the source
of deposits. The manager further testified that the account was closed and
as five years had lapsed since, the bank had already disposed the account
records. She suggested that the Bangko Sentral ng Pilipinas or the AMLC
may have reports on the transaction. Thus, the Sandiganbayan, upon the
request of the Office of the Special Prosecutor, issued a subpoena duces
tecum and ad testificandum directing the Secretariat of the AMLC, to testify
and to produce Lionair’s bank records. The AMLC moved to quash the
subpoena, arguing that whatever information it has on Lionair’s bank
account is confidential under RA 9160. AMLC argues that the prohibition
under RA 9160 extends to it. It claims that as a covered institution, it cannot
be forced to disclose such prohibited information. Is the AMLC’s argument
tenable?
A: NO. According to the wording of RA 9160, the AMLC "is not one of the covered
institutions prohibited from disclosing information on covered and suspicious
transactions," and that the rationale for the prohibition does not extend and apply to
the AMLC. Unlike covered institutions, the AMLC is mandated to investigate and
file a case against violators based on the information it obtains. Furthermore, the
prohibition and confidentiality provisions cannot apply to the AMLC; otherwise, it
would contravene its direct mandate under Section 7 of RA 9160.
AMLC is not merely a repository of reports and information on covered and

suspicious transactions. It is created precisely to investigate and institute charges
against the offenders. Section 7 clearly states that it is tasked to institute civil
forfeiture proceedings and other remedial proceedings, and to file complaints with
the Department of Justice or the Office of the Ombudsman for anti-money laundering
offenses. The criminal prosecution of such offenses would be unduly hampered if it
were to be prohibited from disclosing such information. For the Anti-Money
Laundering Council to refuse disclosing the information required of it would be to go
against its own functions under the law.64
d. Money laundering-how committed and unlawful activities
When is money laundering committed?
64Republic of the Philippines v. Sandiganbayan, G.R. No. 232724-27, February 15, 2021

Money laundering is a crime whereby the proceeds of an unlawful activity are
transacted thereby making them appear to have originated from legitimate sources.
It is committed by the following:
Money laundering is committed by any person who, knowing that any monetary
instrument or property represents, involves, or relates to the proceeds of any
unlawful activity:
a. Transacts said monetary instrument or property;

b. Converts, transfers, disposes of, moves, acquires, possesses or uses said
monetary instrument or property;
c. Conceals or disguises the true nature, source, location, disposition,
movement or ownership of or rights with respect to said monetary
instrument or property;
d. Attempts or conspires to commit money laundering offenses referred to in
paragraphs (a), (b) or (c);
e. Aids, abets, assists in or counsels the commission of the money laundering
offenses referred to in paragraphs (a), (b) or (c) above; and
f. Performs or fails to perform any act as a result of which he facilitates the
offense of money laundering referred to in paragraphs (a), (b) or (c) above.
Money laundering is also committed by any covered person who, knowing that a
covered or suspicious transaction is required under this Act to be reported to the Anti-
Money Laundering Council (AMLC), fails to do so.65
What are the predicate crimes under the Anti-Money Laundering law?
Save for the omission to report covered and suspicious transactions, a money
laundering offense, by definition, assumes the commission of an unlawful activity.
For instance, kidnapping is an unlawful activity. If the kidnapper deposits the
ransom money with a bank, another offense is committed—money laundering. There
is money laundering because the proceeds of the unlawful activity were transacted to
make it appear that they originated from lawful sources. To constitute money
laundering, however, the predicate crime must be based on any of the unlawful
activities enumerated by law.
Unlawful activity, as defined by AMLA, refers to any act or omission or series or
combination thereof involving or having direct relation to the following:
1. Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known
as the Revised Penal Code, as amended;
65Section 4, R.A. No. 9160, as amended by R.A. No. 10365.

2. Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15, and 16 of R.A. No. 9165, otherwise
known as the Comprehensive Dangerous Drugs Act of 2002;
3. Section 3 paragraphs B, C, E, G, H and I of R.A. No. 3019, as amended,
otherwise known as the Anti-Graft and Corrupt Practices Act;
4. Plunder under R.A. No. 7080, as amended;
5. Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of
the Revised Penal Code, as amended;
6. Jueteng and masiao punished as illegal gambling under P.D. No. 1602;
7. Piracy on the high seas under the Revised Penal Code, as amended and P.D.
No. 532;
8. Qualified theft under Article 310 of the Revised Penal Code, as amended;
9. Swindling under Article 315 and Other Forms of Swindling under Article
316 of the Revised Penal Code, as amended;
10. Smuggling under R.A. Nos. 455 and 1937;
11. Violations of R.A. No. 8792, otherwise known as the Electronic Commerce
Act of 2000;
12. Hijacking and other violations under R.A. No. 6235; destructive arson and
murder, as defined under the Revised Penal Code, as amended;
13. Terrorism and conspiracy to commit terrorism as defined and penalized
under Sections 3 and 4 of R.A. No. 9372;
14. Financing of terrorism under Section 4 and offenses punishable under
Sections 5, 6, 7 and 8 of R.A. No. 10168, otherwise known as the Terrorism
Financing Prevention and Suppression Act of 2012;
15. Bribery under Articles 210, 211 and 211-A of the Revised Penal Code, as
amended, and Corruption of Public Officers under Article 212 of the Revised
Penal Code, as amended;
16. Frauds and Illegal Exactions and Transactions under Articles 213, 214, 215
and 216 of the Revised Penal Code, as amended;
17. Malversation of Public Funds and Property under Articles 217 and 222 of
the Revised Penal Code, as amended;
18. Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169 and 176
of the Revised Penal Code, as amended;
19. Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise known as
the Anti-Trafficking in Persons Act of 2003;
20. Violations of Sections 78 to 79 of Chapter IV, of P.D. No. 705, otherwise
known as the Revised Forestry Code of the Philippines, as amended;
21. Violations of Sections 86 to 106 of Chapter VI, of R.A. No. 8550, otherwise
known as the Philippine Fisheries Code of 1998;
22. Violations of Sections 101 to 107, and 110 of R.A. No. 7942, otherwise known
as the Philippine Mining Act of 1995;
23. Violations of Section 27(c), (e), (f), (g) and (i), of R.A. No. 9147, otherwise
known as the Wildlife Resources Conservation and Protection Act;
24. Violation of Section 7(b) of R.A. No. 9072, otherwise known as the National
Caves and Cave Resources Management Protection Act;

25. Violation of R.A. No. 6539, otherwise known as the Anti-Carnapping Act of
2002, as amended;
26. Violations of Sections 1, 3 and 5 of P.D. No. 1866, as amended, otherwise
known as the decree Codifying the Laws on Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or Disposition of Firearms,
Ammunition or Explosives;
27. Violation of P.D. No. 1612, otherwise known as the Anti-Fencing Law;
28. Violation of Section 6 of R.A. No. 8042, otherwise known as the Migrant
Workers and Overseas Filipinos Act of 1995, as amended by R.A. No. 10022;
29. Violation of R.A. No. 8293, otherwise known as the Intellectual Property
Code of the Philippines;
30. Violation of Section 4 of R.A. No. 9995, otherwise known as the Anti-Photo
and Video Voyeurism Act of 2009;
31. Violation of Section 4 of R.A. No. 9775, otherwise known as the Anti-Child
Pornography Act of 2009;
32. Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of R.A. No.
7610, otherwise known as the Special Protection of Children Against Abuse,
Exploitation and Discrimination;
33. Fraudulent practices and other violations under R.A. No. 8799, otherwise
known as ‘The Securities Regulation Code of 2000’;
34. Violation of Section 19 (a)(3) of R.A. No. 10697, otherwise known as the
‘Strategic Trade Management Act’, in relation to the proliferation of weapons
of mass destruction and its financing pursuant to United Nations Security
Council Resolution Numbers 1718 of 2006 and 2231 of 2015”;
35. Violations of Section 254 of Chapter II, Title X of the National
Internal Revenue Code of 1997, as amended, where the deficiency
basic tax due in the final assessment is in excess of twenty-five
million pesos (P25,000,000.00) per taxable year, for each tax type
covered and there has been a finding of probable cause by the
competent authority: Provided, further, that there must be a finding
of fraud, willful misrepresentation or malicious intent on the part
of the taxpayer: Provided, finally, that in no case shall the AMLC
institute forfeiture proceedings to recover monetary instruments,
property or proceeds representing, involving, or relating to a tax
crime, if the same has already been recovered or collected by the
Bureau of Internal Revenue (BIR) in a separate proceeding; and
36. Felonies and offenses of a similar nature that are punishable under
the penal laws of other countries.66
f. Application for a freeze order
What is a freeze order? Distinguish it from a bank inquiry order?
66Section 7(I), R.A. No. 9160, as amended by R.A. No. 10365 and R.A. No. 11521.

A freeze order is an extraordinary and interim relief issued by the CA to prevent
the dissipation, removal, or disposal of properties that are suspected to be the
proceeds of, or related to, unlawful activities as defined in Section 3 (i) of RA No. 9160,
as amended. The primary objective of a freeze order is to temporarily preserve
monetary instruments or property that are in any way related to an unlawful activity
or money laundering, by preventing the owner from utilizing them during the
duration of the freeze order. The relief is pre-emptive in character, meant to prevent
the owner from disposing his property and thwarting the State's effort in building its
case and eventually filing civil forfeiture proceedings and /or prosecuting the owner.
A freeze order is meant to have a temporary effect; it was never intended to

supplant or replace the actual forfeiture cases where the provisional remedy - which
means, the remedy is an adjunct of or an incident to the main action - of asking for
the issuance of an asset preservation order from the court where the petition is filed
is precisely available. For emphasis, a freeze order is both a preservatory and
preemptive remedy.67
A bank inquiry order, on the other hand, is an order which authorizes the
examination of particular deposits or investments in banking institutions or non-
bank financial institutions." Its function is to allow the Anti-Money Laundering
Council to acquire information on the movement of funds into and from a bank
account, but it does not prevent further deposits or withdrawals from the account. A
freeze order is needed precisely to freeze, that is, to prevent movement of funds from
and into the account. It keeps a bank account intact to allow forfeiture should it be
found related to any of the predicate crimes under the Anti-Money Laundering Act.
Further, it is possible that a freeze order is first filed before an application for
bank inquiry is availed of. Nowhere in Republic Act No. 9160, as amended by
Republic Act No. 10167, does it state that a petition for freeze order may be filed only
after an application for bank inquiry has been previously availed of. In other words,
the Anti-Money Laundering Council may file a petition for freeze order without the
benefit of a bank inquiry if it is confident that the information it has at hand is
sufficient to justify a finding of probable cause. In the end, it is a matter of strategy
on what it should file first. 68
67Edgardo Yambao v. Republic of the Philippines, represented by the Anti-Money Laundering

Council, G.R. No. 171054, January 26, 2021.
68Republic of the Philippines, represented by the Anti-Money Laundering Council v. Roberto V.

Ongpin, et. al, G.R. No. 207078, June 20, 2022.

Does the Anti-Money Laundering Council have the authority to freeze
deposits? Explain.69
No. The authority to freeze deposits is lodged with and based upon the order of
the Court of Appeals.70
Similarly, the bank does not have the unilateral right to freeze the accounts of
its clients on mere suspicion that the depositor does not have a right over them.71
However, a bank has the authority to temporarily freeze the bank account of a
deceased depositor under Section 97, R.A. No. 8424 or the Tax Reform Act of 1997.
The second paragraph of Section 97 provides that, “If a bank has knowledge of the
death of a person, who maintained a bank deposit account alone, or jointly with
another, it shall not allow any withdrawal from the said deposit account.”
Under what conditions may a freeze order be issued?
Upon a verified ex parte petition by the AMLC and after determination that
probable cause exists that any monetary instrument or property is in any way related
to an unlawful activity as defined in Section 3(i) of the AMLA, the Court of Appeals
may issue a freeze order.
What is the period of effectivity of the freeze order?
The freeze order shall be effective immediately for a period of 20 days. Within
the 20-day period, the Court of Appeals shall conduct a summary hearing, with notice
to the parties, to determine whether or not to modify or lift the freeze order, or extend
its effectivity. The total period of the freeze order issued by the Court of Appeals
under this provision shall not exceed six (6) months. This is without prejudice to an
asset preservation order that the Regional Trial Court having jurisdiction over the
appropriate anti-money laundering case or civil forfeiture case may issue on the same
account depending upon the circumstances of the case, where the Court of Appeals
will remand the case and its records: Provided, that if there is no case filed against a
person whose account has been frozen within the period determined by the Court of
Appeals, not exceeding six (6) months, the freeze order shall be deemed ipso facto
lifted; Provided further, that this new rule shai1 not apply to pending cases in the
courts. In any case, the court should act on the petition to freeze within 24 hours from
69BAR 2015.
71Philippine Commercial Bank v. Balmaceda, September 12, 2011.

filing of the petition. If the application is filed a day before a non-working day, the
computation of the 24-hour period shall exclude the non-working days.
The freeze order or asset preservation order issued under the law shall be limited
only to the amount of cash or monetary instrument or value of property that the court
finds there is probable cause to be considered as proceeds of a predicate offense and
the freeze order or asset preservation order shall not apply to amounts in the same
account in excess of the amount or value of the proceeds of the predicate offense.72
As a rule, the effectivity of a freeze order may be extended by the CA for a period
not exceeding six months. Before or upon the lapse of this period, ideally, the Republic
should have already filed a case for civil forfeiture against the property owner with
the proper courts and accordingly secure an asset preservation order or it should have
filed the necessary information. Otherwise, the property owner should already be able
to fully enjoy his property without any legal process affecting it.
A freeze order cannot be issued for an indefinite period. In fact the continued
extension of the freeze order beyond the six-month period will violate the account
holder’s right to due process.73
Is the authority of the AMLC to undertake an inquiry into certain bank

accounts or deposits arbitrary and as such, unconstitutional?
Taking into account Section 11 of the AMLA, the Court found nothing arbitrary
in the allowance and authorization to AMLC to undertake an inquiry into certain
bank accounts or deposits. Instead, the Court found that it provides safeguards before
a bank inquiry order is issued, ensuring adherence to the general state policy of
preserving the absolutely confidential nature of Philippine bank accounts:
a. The AMLC is required to establish probable cause as basis for its ex-parte
application for bank inquiry order;
b. The CA, independent of the AMLC’s demonstration of probable cause, itself
makes a finding of probable cause that the deposits or investments are
related to an unlawful activity under Section 3(i) or a money laundering
offense under Section 4 of the AMLA;
c. A bank inquiry court order ex-parte for related accounts is preceded by a
bank inquiry court order ex-parte for the principal account which court order
ex-parte for related accounts is separately based on probable cause that such
related account is materially linked to the principal account inquired into;
and the authority to inquire into or examine the main or principal account
72Section 10, R.A. No. 9160, as amended by R.A. No. 10927.

73Edgardo Yambao, v. Republic of the Philippines, represented by the Anti-Money Laundering
Council, G.R. No. 171054, January 26, 2021.

and the related accounts shall comply with the requirements of Article III,
Sections 2 and 3 of the Constitution.74
Deltaventure Resources, Inc. (Deltaventure) is a stock corporation engaged

in real estate. It applied for various credit lines with the Development Bank
of the Philippines, including a P510 million line to acquire from DBP 50
million shares of Philex Mininc Corporation (Philex). The shares were
registered in the name of Goldenmedia Corporation (Goldenmedia) and
were pledged back to DBP. Deltaventure and Goldenmedia are beneficially
owned by Roberto Ongpin, a former member of the DBP Board of Directors.
DBP, through its board, later sold 50 million of its Philex shares to
Deltaventure at P12.75 per share, totaling P637,500,000.00. Later, DBP sold
all of its 59,339,000 Philex shares to Two Rivers Pacific Holdings
Corporation (Two Rivers), while Goldenmedia similarly sold to Two Rivers
123,221,372 of its Philex shares on the same day.
As a result of the transactions, DBP Chair Jose Nuñez and President

Francisco F. Del Rosario filed a Complaint-Affidavit before the Office of the
Ombudsman, contending that the approval of the loans to Deltaventure
violated R.A. No. 8791 on ascertaining the creditworthiness of credit
applicants, and Secs. 3(e), (g), and (h) of R.A. No. 3019.
Later, the Anti-Money Laundering Council (AMLC) found in a resolution

that the loans to Deltaventure were anomalous, as DBP did not conduct
credit investigations and loaned substantial amounts to a corporation with
an unstable financial standing such as Deltaventure. It then authorized its
Secretariat to file actions under the Anti-Money Laundering Act to recover
the purportedly illegally tainted money and prosecute those involved in
deriving it.
Accordingly, the Republic, through the AMLC, filed an Urgent Ex Parte

Petition seeking for a freeze order to be issued against 179 bank accounts
probably related to the grant of the loans to Deltaventure. Finding a well-
founded belief that the bank accounts were indeed involved in an unlawful
activity as defined in Republic Act No. 9160, the Court of Appeals granted
the Petition for Freeze Order effective for 20 days.
74Subido Pagente Certeza Mendoza and Binay Law Offices v. The Court of Appeals, G.R. No.
216914, En Banc, December 6, 2016.

The AMLC then filed an ex parte application for bank inquiry before the
CA. The application was docketed under the same docket number for the
petition for freeze order.
A day after, the Anti-Money Laundering Council moved to have the

Freeze Order extended for six months. It said that it was conducting further
investigation on the frozen bank accounts for the possible filing of other
appropriate legal actions, including forfeiture of funds.
The CA granted the application for bank inquiry and later extended the
effectivity of the freeze order for six months after hearing the motions to lift
freeze order by the parties. However, it added a colatilla such that it was
“constrained to extend the freeze order for a period of six (6) months,
without prejudice to the Court's action/s on the individual motion[/s] to lift
as soon as it considers the motion/s submitted for resolution.”
In the meantime, during post-issuance hearings, the AMLC prayed that

the proceedings on the petition for freeze order be severed from the
proceedings on the application for bank inquiry, arguing that these
remedies are "separate and distinct" and "with different objectives."
Further, it argued that the proceedings on the motions to lift the freeze
order are already moot since the freeze order was already extended. It
contended that by extending the Freeze Order, the Court of Appeals
effectively denied the Motions.
The AMLC also argued that the burden of proof that the accounts
involved are not linked to unlawful activity has now shifted to the account
holders, the CA having found probable cause by issuing the freeze order.
The CA denied the motion for severance and later lifted the freeze order
over the bank accounts except for one. Aggrieved, the Republic, through the
AMLC, filed a petition for review on certiorari before the Supreme Court.
Did the extension of the freeze order result in the denial of the
motions to lift the same?
YES. By extending the effectivity of the Freeze Order, the Court of Appeals is
deemed to have denied the Motions to lift it. When the Court of Appeals extends a
freeze order's effectivity, it necessarily resolves the motions to lift it — that is, the
Court of Appeals denies them. Extending the freeze order could not have meant
automatic lifting; on the contrary, its extension assumes its existence.

By placing the colatilla, what the Court of Appeals truly meant was that the
Freeze Order's extension could be reconsidered. In other words, the December 26,
2012 Resolution was without prejudice to the filing of motions for reconsideration by
respondents, and the effectivity of the extended Freeze Order may be shortened or
modified based on the substantial arguments respondents may raise should they
move to have the Resolution reconsidered.
This interpretation is consistent with the Rules of Court, which applies

suppletorily in proceedings involving the freezing of monetary instruments, property,
or proceeds representing, involving, or relating to an unlawful activity or money
laundering. Under Rule 37 of the Rules of Court, a motion for reconsideration
may be filed if the findings or conclusions in the assailed order are not supported by
the evidence or are contrary to law.
Furthermore, allowing the filing of a motion for reconsideration in freeze order

proceedings is consistent with the policy of generally allowing motions for
reconsideration, the exception being when expressly prohibited either by law or the
rules. A.M. No. 05-11-04-SC does not expressly prohibit the filing of motions for
reconsideration, unlike, for instance, the 1991 Revised Rules on Summary Procedure,
which expressly does so.
Specifically, on freeze orders, giving a party the opportunity to move for

reconsideration allows the Court of Appeals to correct any errors it may have made
in issuing the freeze order. Besides, considering that a freeze order is effective
immediately, moving for reconsideration will not result in delay. The Court of
Appeals may also lift the freeze order should it realize that the action for the freeze
order was maliciously filed.
(1) May the proceedings for a bank inquiry and freeze order be joined?
YES. Nothing in the law provides that the purely ex parte bank inquiry
proceedings cannot be conducted jointly, albeit subsequently, with the proceedings
for the freeze order.
To recall, a bank inquiry authorizes the examination of particular deposits or

investments in banking institutions or non-bank financial institutions." Its function
is to allow the Anti-Money Laundering Council to acquire information on the
movement of funds into and from a bank account, but it does not prevent further
deposits or withdrawals from the account. A freeze order is needed precisely to freeze,
that is, to prevent movement of funds from and into the account. It keeps a bank
account intact to allow forfeiture should it be found related to any of the predicate
crimes under the Anti-Money Laundering Act.

Further, it is possible that a freeze order is first filed before an application for
bank inquiry is availed of. Nowhere in Republic Act No. 9160, as amended by
Republic Act No. 10167, does it state that a petition for freeze order may be filed only
after an application for bank inquiry has been previously availed of. In other words,
the Anti-Money Laundering Council may file a petition for freeze order without the
benefit of a bank inquiry if it is confident that the information it has at hand is
sufficient to justify a finding of probable cause. In the end, it is a matter of strategy
on what it should file first.
What happened here was an error in strategy. Because the application for
bank inquiry was filed after the Freeze Order had been issued, notably with notice to
the parties, the ex parte nature of the bank inquiry proceedings was rendered useless.
Through the Freeze Order, respondents were notified of the ongoing money
laundering investigation involving their accounts. As expected, and as will be
discussed more fully later, the bank inquiry done after the Freeze Order had been
issued revealed that most of the frozen accounts were already closed.
(2) Was the burden of proof shifted to the account holders following a
finding of probable cause by the Court of Appeals?
NO. The burden of proof never shifted to respondents. In actions for the issuance
of a freeze order, the burden of proving probable cause always rests with the Anti-
Money Laundering Council.
Once it has established a prima facie case against the owner of the accounts
sought to be frozen, the "burden of evidence" shifts to the owner to present
counterevidence and prove that their accounts are funded by legitimate sources. If
the counterevidence balances the evidence of probable cause, the burden of evidence
shifts back to the Anti-Money Laundering Council to justify the continued freezing of
the accounts." Unfortunately, here, petitioner miserably failed to do so.
(4) Did the Court of Appeals correctly lift the freeze order?
YES. Most of the frozen accounts were either closed or had minimal deposits.
There were few accounts found to have been involved in covered or suspicious
transactions under the Anti-Money Laundering Act.
The accounts involved covered or suspicious transactions, and petitioner was

required under the law to present evidence of probable cause that these accounts are
related to the alleged unlawful activity. Unfortunately, petitioner miserably failed to
show that these accounts were related to the allegedly irregular loan transactions
between Deltaventure and DBP, the predicate crime for which petitioner was
authorized to commence freeze order and bank inquiry proceedings against
respondents.

For these reasons, the Supreme Coirt found no error on the Court of Appeals'
part in unfreezing the accounts except for Boerstar Corporation's Bank of Commerce
Account No. 900000028241, the only account proved to be probably related to the loan
transactions between Deltaventure and DBP. This account served as the depository
account of the balance of the sale proceeds between Goldenmedia, among others, and
Two Rivers.75
g. Safe harbor provision
What is the meaning of the safe harbor provision under AMLA?
No administrative, criminal, or civil proceedings shall lie against any person for
having made a covered transaction or suspicious transaction report in the regular
performance of his duties and in good faith, whether or not such reporting results in
any criminal prosecution under the AMLA or any other Philippine law.76
75Republic of the Philippines, represented by the Anti-Money Laundering Council, v. Roberto V.

Ongpin, et; al, G.R. No. 207078, JUNE 20, 2022,
76Section 9(c), R.A. No. 9160.

2023 PRE-WEEK NOTES IN PUBLIC SERVICE ACT
Dean Nilo T. Divina
What is a public utility?
Public utility refers to a public service that operates, manages or controls for public
use any of the following:
1) Distribution of Electricity;
2) Transmission of Electricity;
3) Petroleum and Petroleum Products Pipeline Transmission Systems;
4) Water Pipeline Distribution Systems and Wastewater Pipeline Systems,
including sewerage pipeline systems;
5) Seaports; and
6) Public Utility Vehicles.
All concessionaires, joint ventures and other similar entities that wholly operate,
manage or control for public use the sectors above are public utilities.
Nothing in this Act shall be interpreted as a requirement for legislative franchise

where the law does not require any.
While the concepts of public service and public utility are related, they do not have
the same legal meaning.2 Thus, it can be said that all public utilities are public
services, but not all public services are public utilities.
Prior to R.A No. 11659, there was no statutory definition for public utility.
The Supreme Court defined public utility as a business or service engaged in
regularly supplying the public with some commodity or service of public
consequence such as electricity, gas, water, transportation, telephone, or
telegraph service. The term implies public use and service.”3
This definition no longer holds in view of the statutory definition of public

utility under the amendatory law.
2
J. Tinga, Separate Opinion, J.G. Summit Holding, Inc. v. Court of Appeals, G.R. No. 124293, September 24,
2003.
3
NAPOCOR v. Court of Appeals, G.R. No. 112702, September 26, 1997.

Is this an exclusive list of public utilities?
Yes. No other person shall be deemed a public utility unless otherwise subsequently
provided by law.4
May the President reclassify a public service as a public utility?
No. Upon the recommendation of the National Economic and Development Authority
(NEDA), the President may recommend to Congress the classification of a public
service as a public utility on the basis of the following criteria:
(1) The person or juridical entity regularly supplies and transmits and
distributes to the public through a network a commodity or service of public
consequence;
(2) The commodity or service is a natural monopoly that needs to be regulated
when the common good so requires. For this purpose, natural monopoly exists
when the market demand for a commodity or service can be supplied by a single
entity at a lower cost than by two or more entities;
(3) The commodity or service is necessary for the maintenance of life and
occupation of the public; and
(4) The commodity or service is obligated to provide adequate service to the
public on demand.11
What constitutional provision governs the citizenship requirement for

public utilities?
Section 11, Article XII of the 1987 Constitution governs the citizenship requirement
for public utilities. It provides:
No franchise, certificate, or any other form of authorization for the

operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of
the Philippines at least sixty per centum of whose capital is owned by such
citizens, nor shall such franchise, certificate, or authorization be exclusive
in character or for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation
in public utilities by the general public. The participation of foreign
investors in the governing body of any public utility enterprise shall be
4
Id.
11
Section 13(e) of CA No. 146, as amended by Section 4 of RA No. 11659.

limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the
Philippines.
NOTES- it can not be granted to foreign corporations, but philippine

national ( foregn corporation ) is part of the 60 and not the 40% limit.
To what does “capital” in Section 11, Article XII of the 1987 Constitution
refer?
The term “capital” refers to shares with voting rights, as well as with full beneficial
ownership. This is precisely because the right to vote in the election of directors,
coupled with full beneficial ownership of stocks, translates to effective control of a
corporation.
Consequently, what the Constitution requires is full and legal beneficial ownership
of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting
rights which must rest in the hands of Filipino nationals.12
Can a foreign corporation own the facilities by which a public utility may
operate?
Yes. In law, there is a clear distinction between the “operation” of a public utility and
the “ownership” of the facilities and equipment used to serve the public. The exercise
of the rights encompassed in ownership is limited by law so that a property cannot
be operated and used to serve the public as a public utility unless the operator has a
franchise.
The right to operate a public utility may exist independently and separately from the
ownership of the facilities thereof. One can own said facilities without operating them
as a public utility, or conversely, one may operate a public utility without owning the
facilities used to serve the public.13
May the President suspend or prohibit a merger or acquisition transaction,

or any investment in a public service?
Yes. In the interest of national security, the President, after review, evaluation and
recommendation of the relevant government department or Administrative Agency,
12
Roy III v. Herbosa, G.R. No. 207246, November 22, 2016.
13
Tatad v. Garcia, Jr., G.R. No. 114222, April 6, 1995.

may, within sixty (60) days from the receipt of such recommendation, suspend or
prohibit any proposed merger or acquisition transaction, or any investment in a
public service that effectively results in the grant of control, whether direct or
indirect, to a foreigner or a foreign corporation.15
National security refers to the requirements and conditions necessary to ensure the
territorial integrity of the country and the safety, security, and well-being of Filipino
citizens.16
May nationality requirements be imposed on any public service?
No. Notwithstanding any law to the contrary, nationality requirements shall not be
imposed by the relevant Administrative Agencies on any public service not classified
as a public utility.17
What is a public service classified as critical infrastructure?
Critical infrastructure refers to any public service which owns, uses, or operates
systems and assets, whether physical or virtual, so vital to the Republic of the
Philippines that the incapacity or destruction of such systems or assets would have a
detrimental impact on national security, including telecommunications and other
such vital services as may be declared by the President of the Philippines.18
What is a Foreign State-owned Enterprise?
Foreign State-owned Enterprise refers to an entity in which a foreign State:
(i) directly or indirectly owns more than fifty percent (50%) of the capital
taking into account both the voting rights and beneficial ownership;
(ii) controls, through ownership interests, the exercise of more than fifty
percent (50%) of the voting rights; or
(iii) holds the power to appoint a majority of members of the board of directors
or any other equivalent management body.19
15
Section 23 of RA No. 11659.
16
Section 2(h) of RA No. 11659.
17
Section 13(e) of CA No. 146, as amended by Section 4 of RA No. 11659.
18
Section 2(e) of RA No. 11659.
19
Section 2(g) of RA No. 11659.

Can a Foreign State-owned Enterprise own capital in a public utility or
critical infrastructure?
No. An entity controlled by or acting on behalf of the foreign government or foreign

state-owned enterprises shall be prohibited from owning capital in any public service
classified as public utility or critical infrastructure:
Provided, That the prohibition shall apply only to investments made after the
effectivity of this Act:
Provided, further, That foreign state-owned enterprises which own capital prior to
the effectivity of this law are prohibited from investing in additional capital upon the
effectivity of this Act:
Provided, finally, That notwithstanding the immediately preceding clause, the

sovereign wealth funds and independent pension funds of each state may collectively
own up to thirty percent (30%) of the capital of such public services.
In the interest of national security, an entity controlled by or acting on behalf of the

foreign government or foreign-owned enterprises shall not make any data or
information disclosure, nor extend assistance, support or cooperation to any foreign
government, instrumentalities or agents.20
What is the effect of the Reciprocity Clause of RA No. 11659?
Foreign nationals shall not be allowed to own more than fifty percent (50%) of the
capital of entities engaged in the operation and management of critical infrastructure
unless the country of such foreign national accords reciprocity to Philippine Nationals
as may be provided by foreign law, treaty or international agreement. Reciprocity
may be satisfied by according rights of similar value in other economic sectors. The
NEDA shall promulgate rules and regulations for this purpose.21
20
21

2023 PRE-WEEK NOTES IN FOREIGN SERVICE ACT
Dean Nilo T. Divina
Foreign Investment Act of 1991

Republic Act No. 7042, As Amended byRepublic Act No. 8179
Who qualifies as Philippine nationals?
The term Philippine national shall mean:
a. a citizen of the Philippines; or
NOTES- natural born or naturalized citizen since the law makes no

distinction
b. a domestic partnership or association wholly owned by citizens of the

Philippines; or
c. a corporation organized under the laws of the Philippines of which at least
sixty percent (60%) of the capital stock outstanding and entitled to vote
is owned and held by citizens of the Philippines; or
d. a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent
(100%) of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos; or
e. a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the benefit of Philippine nationals.
Provided, That where a corporation and its non-Filipino stockholders own stocks
in a Securities and Exchange Commission (SEC) registered enterprise, at least
sixty percent (60%) of the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the Philippines and at
least sixty percent (60%) of the members of the Board of Directors, in order that
the corporation shall be considered a Philippine national.2
Define “export enterprise”.
The term “export enterprise” shall mean an enterprise wherein a manufacturer,

processor, or service (including tourism) enterprise exports 60% or more of its
output, or wherein a trader purchases product domestically and exports 60% or
more of such purchases.28
2Amending the Foreign Investment Act of 1991 (R.A. No. 7042), R.A. No. 8179, March 28,
1996.
28Section 3(e), R.A. No. 7042.

Define “domestic market enterprise”.
The term “domestic market enterprise” shall mean an enterprise which produces
goods for sale, or renders services to the domestic market entirely or if exporting
a portion of its output fails to consistency export at least 60% thereof.29
A Philippine Corporation is fully owned by a foreign company. It has for

its primary purpose: “To own shares of stock of companies registered
outside the Philippines; provided that, the corporation shall neither
produce goods nor render services for the domestic market.”
Can the Philippine Corporation be considered a domestic market

enterprise subject to the minimum paid-up capital requirement of the
Philippine Peso equivalent of USD200,000.00?
The Implementing Rules and Regulations of the Foreign Investments Act of 1991, Section 1(k)
provides that “Domestic market enterprise” shall mean an enterprise which produces goods for
sale, or renders service, or otherwise engages in any business in the Philippines.
Under E.O. No. 584,30 domestic market enterprises, with paid-in equity capital of less than the
equivalent of USD200,000.00, are restricted to a maximum of 40% foreign equity.
The dominant character of a holding company is the ownership of securities by which it is

possible to control or substantially influence the policies and management of one or more
operating companies in a particular field of enterprise.
The fact that the proposed Philippine-registered holding company will own shares of stock of
foreign-registered corporations only, does not exclude it from being a domestic market
enterprise since it still engages in business in the Philippines.
In view of the foregoing, a 100% foreign-owned Philippine-registered corporation,

whose sole purpose is to own shares of stock of companies registered outside the
Philippines, and shall neither produce goods nor render services for the domestic
market, is still deemed as a domestic market enterprise as defined under R.A. No.
7402, and is subject to the minimum paid-up capital requirement of the equivalent
of USD200,000.00.31
Foreign Investment Negative List
What is the “Foreign Investments Negative List”?
29Section 3(f), R.A. No. 7042.

30Replaced By E.O. No. 65 (Promulgating The Eleventh Regular Foreign Investment Negative
List).
31Exemptionof 100% Foreign Owned Holding Company from Minimum Paid-Up Capital
Requirement, SEC-OGC Opinion No. 30-09, November 23, 2009.
©2023 Dean Nilo T. Divina, All Rights Reserved.| 2

The “Foreign Investments Negative List” or “Negative List” refers to the list
of areas of economic activity whose foreign ownership is limited to a maximum of
40% of the equity capital of the enterprises engaged therein.36
The latest Negative List is 12th Foreign Investment Negative List

promulgated under Executive Order (EO) No. 175 issued on June 12, 2022.
What are the highlights of the 12 Foreign Investment Negative List?
The 12th regular foreign investment negative list, which replaces the 11 th
regular foreign investment negative list approved in 2018, reflects the changes to
the list pursuant to existing laws and upon recommendation of concerned
government agencies.
The highlights of the List are as follows :
First, the list is aligned with the recently passed amendments to the Public
Service Act (PSA), Retail Trade Liberalization Act (RTLA), and Foreign
Investments Act (FIA).
Notably, these recently enacted three (3) key legislative measures – PSA,
RTLA, and FIA, aim to attract foreign investors by easing the barriers to inbound
foreign investments. Moreover, these measures were enacted to push economic
recovery by welcoming new capital, ideas, and technology that come along with
foreign investments.
Second, it reflects the full foreign ownership liberalization in the areas of

telecommunications, domestic shipping, railways and subways, and air transport
as provided under the amendments to the Public Service Act.
It may be recalled that the amendments to the PSA limited the sectors
considered as public utility to (i) distribution of electricity, (ii) transmission of
electricity, (iii) petroleum and petroleum products pipeline transmission systems;
(iv) water pipeline distribution systems and wastewater pipeline systems,
including sewerage pipeline systems; (v) seaports; and (vi) public utility vehicles.
These public utilities are subject to forty percent (40%) foreign equity restriction
under the Philippine Constitution. With the amendment, full foreign ownership
on other entities traditionally considered as public utility, such as subways,
airports, airlines, railways, expressways, tollways, tollways, and even transport
network vehicles services are now allowed.
Second, the revised negative list also incorporates the amendments to the
RTLA that provides for a uniform minimum paid-up capital from USD2.5 Million
to only PHP25 Million (or about USD 500,000). The amendments to the RTLA
36Section 3(g), R.A. No. 7042.

liberalized restrictions on foreign direct investments by significantly lowering the
minimum capitalization requirement of USD 2,500,000,000 under the old retail
trade law.
Fourth, the list also takes into account the amendments to the FIA that allow
for a lower minimum paid-up capital of USD100,000 for non-Philippine nationals
if (a) the enterprise involves advanced technology as determined by the
Department of Science and Technology, (b) endorsed as a start-up by the lead host
agencies pursuant to the Innovative Startup Act, or (c) employs no fewer than
fifteen (15) Filipino employees. The amendments to the FIA lowered the
mandatory Filipino direct hires from fifty (50) to just a majority of the enterprise’s
employees, provided that the number of Filipinos shall not be less than 15.
Fifth, the list removed the manufacture and distribution of products requiring
clearance from the Department of National Defense (DND), as compared to the
11th foreign investment negative list, where these products including guns and
ammunition for warfare, military ordinance, guided missiles, tactical aircraft,
space vehicles and military communication equipment were limited to 40% foreign
equity. Upon effectivity of EO 175, full foreign participation is allowed for
activities and products requiring DND clearance.
What are the component lists of the 12th Foreign Investment Negative
List?
The Foreign Investment Negative List is divided into two (2) component lists:
(a) List A - which enumerates the areas of activities reserved to Philippine
nationals by mandate of the Constitution and specific laws; and (b) List B - which
contains the areas of activities and enterprises regulated pursuant to law for
reasons of security, defense, risk to health and morals, and protection to small and
medium-scale enterprises.
List A
Foreign ownership is limited by mandate of the
Constitution and specific laws
100% 1. Mass media, except recording and internet

Filipino; business;37
No Foreign
Equity 2. Practice of professions, including radiologic and x-
ray technology, criminology, law, and marine deck
37Internet Business, which refers to internet access providers that merely serve as carriers for
transmitting messages, rather than being the creator of the message/information.; Under the 11 th
Negative List, it was carved out as an exception to mass media, which is strictly restricted to
Filipino nationals.

officers and marine engine officers, subject to the Annex
on Professions indicating the professions where (a)
foreigners are allowed to practice in the Philippines
subject to reciprocity;38 and (b) where corporate practice
is allowed. Foreigners may teach at higher education
levels, provided the subject being taught is not a
professional subject (i.e., included in a government board
or bar examination);39
3. Retail trade enterprises with paid-up capital

of less than Php25 million.40
4. Cooperatives unless investments of former natural-

born citizens of the Philippines;
5. Organization and operation of private detective,

watchmen or security guards agencies;
6. Small-scale mining;
7. Utilization of marine resources in archipelagic

waters, territorial sea and exclusive economic zone;
8. Ownership, operation, and management of

cockpits;
9. Manufacture, repair, stockpiling, and distribution

of nuclear weapons;
38Professions where foreigners are not allowed to practice in the Philippines, except if subject to
reciprocity, as provided in pertinent laws, and corporate practice of professions with foreign equity
restrictions under pertinent laws, are the following: Accountancy, Aeronautical engineering,
Agricultural and biosystems engineering, Agriculture, Architecture, Chemical engineering,
Chemistry, Civil engineering, Criminology, Customs brokers, Dentistry, Electrical engineering,
Electronics technician, Environmental planning, Fisheries, Food technology, Forestry, Geodetic
engineering, Geology, Guidance and counselling, Interior design, Landscape architecture,
Librarianship, Marine deck and engineering, Master plumbing, Mechanical engineering, Medical
technology, Medicine, Metallurgical engineering, Midwifery. Naval architecture, Nursing,
Nutrition and dietetics, Optometry, Pharmacy, Physical and occupational therapy, Professional
teaching, Psychology, Radiologic and x-ray technology, Real estate service, Respiratory therapy,
Sanitary engineering, Social work, Speech language pathology, Veterinary medicine, and other
professions as may be provided by law or treaty where the Philippines is a party.
39 Under the 11th Negative List, it was carved out as an exception to practice of professions, which
is strictly restricted to Filipino nationals.
40The 12th Negative List incorporates the amendments to the Retail Trade Liberalization Act that
provides for a uniform minimum paid-up capital of USD 500,000 (PHP 25 million) from as much
as USD 2.5 to 7.5 million for non-luxury foreign retailers.

10. Manufacture, repair, stockpiling, and/or
distribution of biological, chemical, and radiological
weapons, and anti-personnel mines; and
11. Manufacture of firecrackers and other

pyrotechnic devices.
1. Private recruitment, whether for local or overseas

Up to
employment; and
Twenty-Five
Percent (25%)
2. Contracts for the construction of defense-related
Foreign Equity
structures.
Up to Thirty
Percent (30%) Advertising
Foreign Equity
Up to Forty 1. Procurement of infrastructure and development of

Percent (40%) natural resources;
Foreign Equity
2. Exploration, development, and utilization of
natural resources;
3. Ownership of private lands, except for natural-

born citizens who have lost their Philippine citizenship
and who have the legal capacity to enter into a contract
under Philippine laws;
4. Operation of public utilities;41
5. Educational institutions other than those

established by religious groups and mission boards,
foreign diplomatic personnel and their dependents, and
other foreign temporary residents or for short-term high-
41 The amendment to the Public Service Act (PSA) redefined public utility as public service that
operates, manages or controls for public use any of the following services: 1) distribution of
electricity; 2) transmission of electricity; 3) petroleum and petroleum products pipeline
transmission systems, 4) water pipelines distribution systems and wastewater pipeline systems,
5) seaports, and 6) public utility vehicles. Limiting the definition of a public utility is significant
because the 1987 Philippine Constitution provides that foreign ownership of public utilities shall
be limited to 40 % of the shares of a company. Thus, full foreign ownership is allowed in public
utilities not included in the list provided in the PSA.

level skills development that do not form part of the
formal education system;
6. Culture, production, milling, processing, trading

except retailing, of rice and corn and acquiring, by barter,
purchase or otherwise, rice and corn and the by-products
thereof;
7. Contracts for the supply of materials, goods and

commodities to government-owned or controlled
corporation, company, agency or municipal corporation.
8. Operation of deep sea commercial fishing vessels;
9. Ownership of condominium units; and
10. Private radio communications network.
List B
Foreign Ownership is Limited by Reasons of Security, Defense,
Risk to Health and Morals, and Protection of Small and Medium Scale
Enterprises
1. Manufacture, repair, storage, and/or

distribution of products and/or ingredients requiring
Philippine National Police clearance;
2. Manufacture and distribution of dangerous

drugs;
Up to Forty
Percent (40%)
3. Sauna and steam bathhouses, massage
Foreign Equity42
clinics and other like activities regulated by law because
of risks posed to public health and morals, except
wellness centers;
4. All forms of gambling except those covered by

investment agreements with the state-run Philippine
Amusement and Gaming Corp;
42The 12th Negative List removed the manufacture, repair, storage and/or distribution of products
requiring clearance from the Department of National Defense (DND). Thus, full foreign
participation is now allowed for activities and products requiring DND clearance.

5. Micro and small domestic market enterprises
with paid in equity capital of less than the equivalent of
USD200,000.
6. Micro and small domestic market

enterprises:
i. that involve advanced technology; or

ii. are endorsed as startup or startup enablers
by state agencies; or
iii. those whose majority of direct employees
were Filipinos provided that their
employees should not be less than fifteen
(15), and with a paid equity capital of less
than the equivalent of USD100,000.43
It should also be pointed that the Supreme Court has likewise issued a decision
supporting foreign investment, particularly in construction. In the case of
Philippine Contractors Accreditation Board (“PCAB”) v. Manila Water Company,
Inc., the Supreme Court invalidated the foreign equity restriction for those foreign
corporations seeking to obtain a regular license to engage in construction business
in the Philippines. This effectively lifted the foreign ownership restrictions on
engaging in construction projects in the Philippines, save only for those that
remain under certain special laws. 44
It is also relevant to state that on 15 November 2022, the Department of Energy

(DOE) issued Department Circular No. 2022-11-0034 to amend Section 19 of the
Implementing Rules and Regulations of Republic Act No. 9513, otherwise known
as the Renewable Energy Act of 2008 (“RE Act IRR”). The amendments removed
the Filipino ownership requirements previously imposed on the exploration,
development and utilization of solar, wind, hydro and ocean or tidal energy
resources. Thus, the Philippine renewable energy sector is now open to full foreign
ownership. The DOE Circular was issued after the Department of Justice released
an opinion stating that the Filipino ownership requirements under the
Constitution relating to the EDU of natural resources does not apply to the EDU
of solar, wind, hydro and ocean or tidal energy resources which are not susceptible
to appropriation and are inexhaustible.
43 The 12th Negative List Ttook into account the amendments to the Foreign Investments Act
which allows for a lower minimum paid-up capital of USD 100,000 for non-Philippine nationals if
the enterprise i) involves advanced technology as determined by the Department of Science and
Technology, ii) endorsed as a startup by the lead host agencies pursuant to the Innovative Startup
Act, or iii) employs no less than 15 Filipino employees. Previously, micro and small domestic
market enterprises must involve advanced technology or employ at least 50 direct employees only
44 Philippine Contractors Accreditation Board v. Manila Water Company, Inc., G.R. No. 217590,
March 10, 2020

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2023 PRE-WEEK NOTES IN COMMERCIAL LAW

Dean Nilo T. Divina

What are the classes of corporations?

Corporations may be classified as follows:

a. As to the Existence of Shares of Stock

ii. Nonstock Corporation: has no capital stock and/or not authorized to

b. As to Relationship of Management and Control:

i. Holding corporation: A corporation that holds stocks in other companies

A "holding company" is organized and is basically conducting its business by

©2023 Dean Nilo T. Divina, All Rights Reserved. | 1

ii. Subsidiary corporation: A company that is owned or controlled by another

The law creating the Bases Conversion and Development Authority

It is created, among others, to own, hold and/or administer military

Is it a stock or nonstock corporation?

It is neither a stock nor a nonstock corporation but a governmental authority vested

BCDA is a government instrumentality vested with corporate powers. As such, it is

©2023 Dean Nilo T. Divina, All Rights Reserved. | 2

What is a de facto corporation?

What are the elements of a de facto corporation?

The requisites of a de facto corporation are as follows:

a. Existence of a valid law under which it may be incorporated;

The filing of articles of incorporation and the issuance of the certificate of

What is a corporation by estoppel?

©2023 Dean Nilo T. Divina, All Rights Reserved. | 3

All persons who assume to act as a corporation knowing it to be without authority to

To summarize then, an ostensible corporation when sued on any transaction entered

8Section 20, RCC.

©2023 Dean Nilo T. Divina, All Rights Reserved. | 4

What is the prevailing mode of determining the nationality of corporations

The "control test" is the prevailing mode of determining the nationality of

195580, January 28, 2015.

©2023 Dean Nilo T. Divina, All Rights Reserved. | 5

When is the grandfather rule applied?

The grandfather rule is applied in the following cases:

a. Under the Grandfather Rule Proper, if the percentage of Filipino ownership in

In 2015, R Corp., a domestic company that is wholly owned by Filipinos, filed

The Summary of Significant Accounting Policies statement of B Corp.

©2023 Dean Nilo T. Divina, All Rights Reserved. | 6

The Proposed Corporation will be engaging in the acquisition and

a. May the Chinese Father of the minor be validly appointed/ designated

©2023 Dean Nilo T. Divina, All Rights Reserved. | 7

b. Can the Chinese trustee qualify as nominee/representative of the

Yes, subject to the allowable proportion under the Anti-Dummy Law.

Minor C will be an incorporator of the Proposed Corporation. However, Section 10

c. Does the Grandfather rule apply in this case?

2. Corporate juridical personality

©2023 Dean Nilo T. Divina, All Rights Reserved. | 8

a. As a general rule, directors, officers, or agents of a corporation cannot be held

b. The cause of action available to the corporation cannot be generally enforced by

©2023 Dean Nilo T. Divina, All Rights Reserved. | 9

Linden Suites demanded payment of the cost of demolition from Meridien

The officers claimed that their examination is a violation of the doctrine of

©2023 Dean Nilo T. Divina, All Rights Reserved. | 10

©2023 Dean Nilo T. Divina, All Rights Reserved. | 11

©2023 Dean Nilo T. Divina, All Rights Reserved. | 12

What is the doctrine of reverse piercing of the corporate veil?

In a traditional veil-piercing action, the court disregards the existence of the

In International Academy of Management and Economics (I/AME) Litton and

No. 191525, December 13, 2017.

©2023 Dean Nilo T. Divina, All Rights Reserved. | 13

With the enactment of RCC, is the corporate term of a corporation now

The corporate term of a corporation is deemed extended and amended to perpetual

“Section 11. Corporate Term. — A corporation shall have perpetual

©2023 Dean Nilo T. Divina, All Rights Reserved. | 14