OTHER MERCANTILE LAWS

(2024 EDITION)

SECURED TRANSACTIONS

b. ASSET-SPECIFIC RULES
1. PERSONAL PROPERTY SECURITY ACT (PPSA) (RA 11057)
i. FUTURE PROPERTY
Section 5. Creation of a Security Interest. - (b) A security
agreement may provide forthe creation of a security interest in a
a. DEFINITIONS AND SCOPE future property, but the security interest in that property is created
onlywhen the grantor acquires rights in it or the power to
Scope encumber it.
GR: The PPSA applies to ALL transactions that secure an obligation with
movable collateral. ii. RIGHTS TO PROCEEDS AND COMMINGLED FUNDS
When the collateral is disposed, the security interest extends to the proceeds from
XPNs such disposition, in the form of funds, even when they are credited to a deposit
1. Interests in aircrafts account or money are commingled with other funds or money(Sec. 8)
2. Interest in ships 1. Despite the fact that they are no longer identifiable
2. Only to the extent that they remain traceable
Security Agreement- The secured transaction under the PPSA is called the
security agreement. Rules on Commingled Funds(Sec. 8)
1. It is a consensual contract, perfected by the meeting of the minds of 1. The security interest in the commingled funds shall be limited to the
the grantor and the secured creditor. amount of the proceeds immediately BEFORE they were
a. The agreement must be contained in a written commingled.
contract(Sec.6, PPSA) 2. If at any time after the commingling, the balance credited to the
b. Writing, for the purposes of the PPSA, includes deposit account or the amount of the commingled money is
electronic records (Sec. 3(k), PPSA) LESS than the amount of the proceeds immediately before they
2. It is an accessory obligation entered into by a person who grants a were commingled:
property right to another person, in order to secure the payment or a. The security interest against the commingled funds or
performance of an obligation. money shall be limited to the lowest amount of the
commingled funds or money.
Security Interest(Sec. 3(j), PPSA)- A security interest is a property right in b. The reckoning period for such amount is between the
collateral that secures payment or other performance of an obligation, regardless time when the proceeds were commingled and the
of: time the security interest in the proceeds is claimed.
1. Whether the parties have denominated itas a security interest; and
2. The type of asset, the status of the grantoror secured creditor, or the iii. TANGIBLE ASSETS COMMINGLED IN A MASS
nature of the secured obligation The PPSA provides rules for the continuity of the security interest over tangible
a. Including the right of a buyer of accounts receivable assets (i.e. movable property) which has either:
and a lessor under an operating lease for not less than 1 1. Become a fixture,
year 2. Undergone accession or
Proceeds 3. Undergone commingling.
Under the PPSA, even when the collateral is disposed, the security interest extends
to its identifiable or traceable proceeds(Sec. 8). 4BLUE 95: According to the PPSA, the security interest over the said movable
Covers sales, leases, licenses, exchanges,other forms of disposition will continue, provided that it can still be reasonably traced. However, as to the
question of ownership over the said tangible assets, Book II of the Civil Code will
Proceeds are: govern(Sec. 25).
1. Any property received upon sale, lease, orother disposition of
collateral; or Otherwise, if the tangible asset did not become a fixture, or underwent accession,
2. Whatever is collected on or distributed with respect to collateral, or commingling, a party who obtains the asset in good faith will take it free
claims arising out of the loss or damage to the collateral, as well as a from any security interest. However, good faith will not exist if the movable
right to insurance payment or other compensation for loss or damage property was registered before being obtained(Sec. 21).
of thecollateral(Sec. 3(f)).
iv. ACCOUNTS RECEIVABLE
Under Sec. 10 of the PPSA, security interests in accounts receivable shall be
Parties effective notwithstanding any agreement between the grantor and the account
debtor or any secured creditor limiting in any way the grantor’s right to create a
The parties to a security agreement under the PPSA are the grantor and the security interest(Sec. 10(a)).
secured creditor(Sec. 3).
Grantor (Sec. 3(c)) Likewise, any stipulation limiting the grantor’s right to create a security interest
1. The person who grants a security interest in collateral to shall be void (Sec. 10(c)).
secure its own obligation or that of another person;
2. A buyer or other transferee of a collateral that acquires its However, the PPSA limits the application of these provisions to accounts
right subject to a security interest; receivable arising from:
3. A transferor in an outright transfer of anaccounts receivable; 1. A contract for the supply or lease of goodsor servicesother than
or financial services;
4. A lessee of goods. 2. A construction contract or a contract for thesale or lease of real
property; and
Secured Creditor(Sec. 3(i)) 3. A contract for the sale, lease, or license ofintellectual property(Sec.
A secured creditor is a person that has a security interest. 10(d)).

For the purposes of registration and priority only, “secured creditor” Sec. 10 also shall not affect any obligation or liability of the grantor for breach of
includes a (1) buyer of account receivable and a (2) lessor of goods the agreement in Sec. 10(a).
under an operating lease for not less than 1 year.

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c. PERFECTION OF SECURITY INTERESTS

Section 11. Perfection of Security Interest- A security interest
shall be perfected when it has been created and the secured
creditor has taken one of the actions in accordance with Section
12.
On perfection, a security interest becomes effective against third
parties.
It is NOT perfection that gives birth to the security agreement, since it is a
consensual contract.
Rather, perfection gives the security interest third-party effectiveness.
Section 12. Means of Perfection.— A security interest may be
perfected by:
Registrationof a notice with the Registry;
Possession of the collateral by the securedcreditor; and
Control of investment property and depositaccount.
A security interest in any tangible asset may be perfected by
registration or possession. A security interest in investment
property and deposit account may be perfected by registration or
control.
Perfection by Registration
A security interest in the ff. may be perfected by registration of a notice with the
Registry (Sec. 12(a)):
1. A tangible movable asset
2. Investment property
3. A deposit account
Three types of Control Agreements
1. Control agreement with respect to securities
1. An agreement in writing among the issuer or the
intermediary, the grantor, and the secured creditor.
2. The issuer or the intermediary agrees to follow instructions
from the secured creditor with respect to the security, without
the further consent of the grantor (Sec. 3 (b) (1)).
2. Control Agreement with Respect to Rights to a Deposit Account
1. An agreement in writing among thedeposit-taking institution,
the grantor, and the secured creditor.
2. The deposit-taking institution agrees to follow instructions
from the secured creditor with respect to the payment of funds
credited to the deposit account without further consent from
the grantor (Sec. 3(b)(2)).
3. Control Agreement with Respect to Commodity Contracts
1. An agreement in writing among thegrantor, secured creditor,
andintermediary.
2. The commodity intermediary will applyany value distributed
on account of the commodity contract as directed by the
secured creditor without further consent by the commodity
customer or grantor.

Notice – a statement of information that is registered in the Registry relating to a d. REGISTRATION

security interest or lien. The term includes an initial notice., amendment notice,
and termination notice (Sec. 3(e)).
Perfection by Possession
A security interest in a tangible movable asset may be perfected by possession of
the collateral by the secured creditor (Sec. 12(b)).
A security interest may be perfected by registration of a noticewith the Registry.
Section 26. Establishment of Electronic Registry.— The Registry
shall be established in and administered by the LRA.
The Registry shall provide electronic means for registration and
searching of notices.

Possession in Art. 523 of the Civil Code is defined as “the holding of a thing or the Procedure
enjoyment of a right.” 1. The grantor, or any person authorized by the grantor, submits the
notice to the Registry, andpays the prescribed fee. The notice is
Perfection by Control considered sufficient if it:
A security interest in the ff. may be perfected by control (Sec. 12(c)): a. Identifies the grantor by an identification number
1. Investment property b. Identifies the secured creditor by name
2. A deposit account c. Provides an address for the grantor and secured
creditor
A security interest in a deposit account or investment property may be perfected d. Describes the collateral(Sec. 28).
by control through:
1. The creation of the security interest in favor of the deposit-taking 2. The Registry either accepts or rejects the notice for registration.
institution or the intermediary; However, if the notice meets the minimum requirements and the fee
2. The conclusion of a control agreement; or is paid, it shall not be rejected(Sec. 28(a)).
3. For an investment property that is an electronic security not held a. The Registry DOES NOTdetermine the correctness,
with an intermediary, the notation of the security interest in the authenticity, or validity of the information contained in
books maintained by or on behalf of the issuer for the purpose of the notice.
recording the name of the holder of the securities(Sec. 13(a)). b. Thus, questions regarding the validity of the security
agreement are expected to be decided in a proper
litigation AFTER registration.

The Intermediary’s Role in Control Agreements 3. If the Registry rejects the registration of a notice, it shall promptly
communicate the fact and reason for its rejection to the person who
Under Sec. 13(b), a deposit-taking institution or intermediarymust consent to submitted the notice(Sec. 28).
the entering of a control agreement. 4. If the Registry accepts the registration of a notice, it shall be
effective, from the time it is discoverable on the records of the
The PPSA does NOT require the intermediary to enter into such agreements, since Registry, until such time that the duration indicated on the notice
its obligation is limited to following the instructions of the grantor, who is its lapses(Sec. 30).
depositor. i.e. It has the right to refuse to follow the instructions of the secured a. Any person may search notices registered in the
creditor Registry(Sec. 27).
b. The electronic records of the Registry shall be the
4BLUE 95: Should the intermediary refuse to enter into a control agreement, the official records (Sec. 27).
remedy of the grantor and secured creditor is to register the security agreement
instead, in order to perfect the security interest. Effects of Registration

1. The security interest becomes binding on third parties (Sec. 11).

2. The registered notice is considered a public record(Sec. 27).
3. Subsequent purchasers of the collateral are charged with notice of
the security interest burdening the title of said collateral.
Such notice cannot be overcome by proof of good faith
(Legarda & Prieto v Saleeby, G.R. No. L-8936).
4. Establishes the basis of priority of security of interest according to
time of registration(Sec. 17).

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e. PRIORITY OF SECURITY INTERESTS
Priority – the right of a person to derive the economic benefit of its security
interest in preference to the right of a competing claimant.
The perfection of a security interest gives rights to the secured creditor against
other creditors asserting rights over the same collateral.
Priority Rules
The priority of security interests and liens on the same collateral shall be
determined according to the time of registration of a notice or perfection by other
means (Sec. 17).
GR: Such priority is without regard to the order of creation of the security interests
and liens, or to the mode of perfection(Sec. 17).
XPN: Except as provided in Sections 18- 25 of the PPSA or Sections 6.02-6.05 of
these Rules (Rule VI, Sec, 6.01. IRR of R.A. 11057).
1. PRIORITY RULES FOR INTANGIBLE ASSETS
Security Interests Over Deposit Accounts/Investment Properties
Section 18. Priority for Perfection by Control. —
-A security interest in a deposit account with respect to which the
secured creditor is the deposit-taking institution or the
intermediary shall have priority over a competing security interest
perfected by any method.
-A security interest in a deposit account or investment property
that is perfected by a control agreement shall have priority over a
competing security interest except a security interest of the deposit-
taking institution or the intermediary.
-The order of priority among competing security interests in a
deposit account or investment property that were perfected by the
conclusion of control agreements shall be determined on the basis
of the time of conclusion of the control agreements.
-Any rights to set-off that the deposit- taking institution may
have against a grantor’s right to payment of funds credited to a
deposit account shall have priority over a security interest in the
deposit account.
Priority* of Security Interests Over Deposit Accounts/Investment Property
*NOTE: With (1) having the highest priority
1. Right to set-off of the deposit-takinginstitution against a grantor’s
right to payment of funds credited to a deposit account (Highest
Priority)
2. Security interest in a deposit account with respect to which the
secured creditor is the deposit-taking institution
3. Security interest in a deposit account or investment property that is
perfected by a control agreement
a. The earlier the conclusion of the control agreement, the
higher in priority
b. Security interest in a deposit account or investment
property that is perfected by registration
Security Interests Over Electronic Securities
Section 18. Priority for Perfection by Control.—
a. A security interest in electronic securities NOT held
with an intermediary perfected by a notation of the
security interestsin the books maintained for that
purpose by or on behalf of the issuer shall have priority
over a security interest in the same securities perfected
by any other method.
b. A security interest in electronic securities NOT held
with an intermediary perfected by the conclusion of
a control agreement shall have priority over a
security interest in the same securities perfected by
registration of a notice in the Registry.
c. The order of priority among competing security
interests in electronic securities not held with an
intermediary perfected by the conclusion of control
agreements is determined on the basis of the time of
conclusion agreements.
Priority of Security Interests Over Non- Intermediated Electronic Securities
1. Security interest in non-intermediatedelectronic securities perfected
by a notation of such interest in the books of the issuer
2. Security interest in non-intermediated electronic securities perfected
by control
3. The earlier the conclusion of the controlagreement, the higher in
priority
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2. PRIORITY RULES FOR TANGIBLE ASSETS
Security Interests Over Security Certificates
Certificated non-intermediated securities are considered tangible property if the
mere possession of such instruments results in the ownership of the underlying
rights or propertyembodied by them(IRR of R.A. 11057, Section 1.05(kk)).
Section 18. Priority for Perfection by Control.
A security interest in a security certificate perfected by the secured
creditor’spossession of the certificate shall have priority over a
competing security interest perfected by registration of a notice in
the Registry.
Priority of Security Interests Over Security Certificates
1. Security interest in a security certificateperfected by possession of
said certificate
2. Security interest in a security certificate perfected by registration of a
notice in theRegistry.
Security Interests Over Instruments or Negotiable Documents
Section 19. Priority for Instruments and Negotiable Documents.
-A security interest in an instrument or negotiable document that is
perfected by possession of the instrument or the negotiable
document shall have priority over a security interest in the
instrument or negotiable document that is perfected by registration
of a notice in the Registry.
Priority of Security Interests Over Instruments or Negotiable Documents
1. A security interest in an instrument or negotiable document that is
perfected by possession
2. A security interest in an instrument or negotiable document that is
perfected by registration
Security Interests Over Livestock
Section 24. Livestock. -A perfected security interest in livestock
securing an obligation incurred to enable the grantor to obtain
food or medicine for the livestock shall have priority over any
other security interest in the livestock, except for a perfected
purchase money security interest in the livestock, if the secured
creditor providing credit for food or medicine gives written
notification to the holder of the conflicting perfected security interest
in the same livestock before the grantor receives possession of the
food or medicine.
Priority of Security Interests Over Livestock
1. A perfected purchase money security interest in the livestock
incurred to enable the grantor to obtain food or medicine for the
livestock, provided that –
a. The secured creditor providing credit for said food or
medicine gives written notification to the holder of the
conflicting perfected security interest in the same
livestock
b. Such notice must be given before the grantor receives
possession of the food or medicine
2. A perfected security interest in livestock securing an obligation
incurred to enable the grantor to obtain food or medicine for the
livestock
3. Any other security interest in the livestock, incurred for any other
purpose
4BLUE 95 NOTE: A purchase money security interest is a security in goods,
taken by:
1. The seller to secure the price; or
2. A person who gives valueto enable the grantor acquire the goods to
the extent that the credit is used for that purpose(Sec. 3(g)).
iii. Priority Rules for Specific Cases Priority of Interests Over Inventory, Intellectual Property or Livestock(Sec.
23)
Security Interests Over Goods that are Subject to the Right of Retention 1. A PMSI in inventory, intellectual property, or livestock shall have
Section 20. Priority and Right of Retention by Operation of Law. priority, provided that –
-A person who provides services or materials with respect to the a. The PMSI is perfected when the grantor receives
goods, in the ordinary course of business, and retains possession possession of the inventory or livestock, or acquires
of the goods shall have priority over a perfected security interest in rights to intellectual property;
the goods until payment thereof. b. The secured creditor gives a written notification to the
holder of the conflicting perfected security interest in
Priority of Security Interests Over Goods the same types of inventory, livestock, or intellectual
1. Lien over goods created by operation of law in favor of a person property
who provides services or materials with respect to the goods, in the i. Such notification must be given before
ordinary course of business the grantor receives possession of the
2. Any perfected security interest over the same goods. inventory or livestock, or acquires rights
in intellectual property; and
ii. The notification may cover multiple
transactions between the secured creditor
and the grantor, without the need to
Purchase Money Security Interests identify each transaction.

A Purchase Money Security Interest (PMSI) is a security in goods, taken by: 2. Any perfected security interest in the same inventory, intellectual
1. The seller to secure the price; or property or livestock.
2. A person who gives value to enable the grantor acquire the goods to
the extent that the credit is used for that purpose (Sec. 3(g)). Priority of Perfected Security Interest Prior to Insolvency Proceedings

Section 23. Purchase Money Security Interest.—
A purchase money security interest in equipment and its
proceeds shall have priority over a conflicting security interest, if a
notice relating to the purchase money security interest is registered
within 3 business days after the grantor receives possession of the
equipment.
Section 22. Effect of theInsolvency on the Priority of a Security
Interest. - Subject to the applicable insolvency law, a security
interest perfected prior to the commencement of insolvency
proceedings in respect of the grantor shall remain perfected and
retain the priority it had before the commencement of the insolvency
proceedings.

A purchase money security interest in consumer goods that is

perfected by registration of notice not later than 3 business days
after the grantor obtains possession of the consumer goods shall
have priority over a conflicting security interest.

A purchase money security interest in inventory, intellectual

property, or livestock shall have priority over a conflicting
perfected security interest in the same inventory, intellectual
property or livestock if: f. TANGIBLE ASSETS; INTANGIBLE ASSETS(Sec. 12)
The purchase money security interest isperfected
when the grantor receives possession ofthe Tangible asset – any tangible movable asset, including:
inventory or livestock, or acquires rights to 1. Money
intellectual property; and 2. Negotiable instruments
3. Negotiable documents; and
Before the grantor receives possession of the 4. Certificated non-intermediated securities
inventory or livestock, or acquires rights in intellectual Only if the mere possession of such instruments results
property, the purchase money secured creditor gives in the ownership of the underlying rights or property
written notification to the holderof the conflicting embodied by them (IRR of R.A. 11057, Section
perfected security interest in the same types of 1.05(kk))
inventory, livestock, or intellectual property. The
notification sent to the holder of the conflicting Intangible asset – any movable property other than a tangible asset including, but
security interest may cover multiple transactions not limited to,
between the purchase money secured creditor and the 1. investment property,
grantor without the need to identify each transaction. 2. deposit accounts,
3. commodity contracts, and
The purchase money security interest in equipment or consumer 4. receivables (IRR of R.A. 11057, Section 1.05(m))
goods perfected timely in accordance with subsections (a) and (b),
shall have priority over the rights of a buyer, lessee, or lien holder
which arise between delivery of the equipment or consumer goods to
the grantor and the time the notice is registered.

Priority of Security Interests Over Equipment and its Proceeds(Sec. 23)

1. A PMSI in equipment and its proceedsshall have priority,
provided that –
a. A notice relating to the PMSI is registered within 3
business daysafter the grantor receives possession of
the equipment
2. Right over the same equipment in favor ofa buyer, lessee, or lien
holder which arise between delivery of the equipment to the grantor
and the time the notice is registered
3. Any perfected security interest in the same equipment.

Priority of Security Interests Consumer Goods(Sec. 23)

1. A PMSI in consumer goods shall have priority, provided that –
a. A notice relating to the PMSI is registered within 3
business days after the grantor receives possession of
the consumer goods
2. Right over the same goods in favor of a buyer, lessee, or lien holder
which arise between delivery of the consumer goods to the grantor
and the time the notice is registered
3. Any perfected security interest in the same goods.

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g. ENFORCEMENT OF SECURITY INTERESTS 3. DISPOSITION

The creditor with the security interest having the highest priority will be able to Right to Dispose of Collateral
enforce his/her interests via (1) recovery, (2) disposition, or (3) retention. After default, a secured creditor may:
1. Sell or otherwise dispose of the collateral, publicly or privately, in its
Section 46. Right of Higher-Ranking Secured Creditor to Take present condition or following any commercially reasonable
OverEnforcement.— preparation or processing;
Even if another secured creditor or a lien holder has commenced 2. Buy the collateral at any public disposition, or at a private
enforcement, a secured creditor whose security-interest has disposition but only if the collateral is of a kind that is customarily
priority over that of the enforcing secured creditor or lien holder sold on a recognized market or the subject of widely distributed
shall be entitled to take over the enforcement process. standard price quotations (Sec. 49)

The right referred to in subsection (a) of this section may be invoked Disposition is a method of enforcement similar to the general right of the creditor
at any time before the collateral is sold or otherwise disposed of, or to alienate the collateral upon default of the debtor under the Civil Code. The
retained by the secured creditor or until the conclusion of an difference in the PPSA is that, it requires commercial reasonableness of the
agreement by the secured creditor for that purpose. disposition.

The right of the higher-ranking secured creditor to take over the Procedure
enforcement process shall include the right to enforce the rights
by any method available to a secured creditor under this Act. Before disposition may be availed of, a creditor must:
1. Repossess the collateral, either: Extra–judicially (Sec. 47(a)(b)) or
Judicially (Sec. 47(c)), and
2. There must be compliance with notification requirements in Sec.
1. RECOVERY 51.
3. Let those entitled exercise the right of redemption under Sec. 45.
Recovery is an enforcement procedure that does not require judicial process. It
applies only to the special cases provided in Sec. 48.
1. Repossession of Collateral
Upon default, the secured creditor may without judicial process:
1. Instruct the account debtor to make payment to the secured creditor, Extra-judicial Repossession
and The secured creditor may:
2. Apply such payment to the satisfaction of the obligation secured by 1. Take possession of the collateral withoutjudicial process if the
the security interest after deducting the secured creditor’s reasonable security agreement so stipulates: Provided, That possession
collection expenses. can be taken without a breach of the peace.
2. Remove the collateral from the real property to which it is
4BLUE 95 NOTE: The account debtor may request the secured creditor to affixed, in case it is a fixture, without judicial process:
provide evidence of its security interest to the account debtor when it delivers the Provided That –
instruction to the account debtor(Sec. 48). a. The secured creditor has priority over all
owners and mortgagees
b. The secured creditor exercises due care in
removing the fixture(Sec. 47(a)(b)).

Judicial Repossession
If, upon default, the secured creditor CANNOT take possession of
2. RETENTION collateral without breachof the peace, the secured creditor shall:
1. Be entitled to an expedited hearing upon application for an
Retention of collateral is the result of an offer on the part of the secured creditor order granting the secured creditor possession of the
and the acceptance of the proposal by the parties entitled to receive the same. collateral. Such application shall include a statement by the
secured creditor, under oath:
After default, the secured creditor may propose to the debtor and grantor to take all a. Verifying the existence of the security
or part of the collateral in total or partial satisfaction of the secured obligation, and agreement attached to the application; and
shall send a proposal to: b. Identifying at least one event of default by the
1. The debtor and the grantor; debtor under the security agreement;
2. Any other secured creditor or lien holder who, 5 days before the 2. Provide the debtor, grantor, and, if the collateral is a fixture,
proposal is sent to the debtor and the grantor, perfected its security any real estate mortgagee, a copy of the application,
interest or lien by registration; and including:
3. Any other person with an interest in the collateral who has given a a. All supporting documents; and
written notification to the secured creditor before the proposal is sent b. Evidence for the order granting the secured
to the debtor and the grantor(Sec. 54). creditor possession of thecollateral; and
3. Be entitled to an order granting possession of the collateral
When Retention May Be Exercised(Sec. 54) a. Upon the court finding that:
The secured creditor may retain the collateral in the case of: i. A default has occurred under the
1. A proposal for the acquisition of the collateral in full satisfaction of security agreement; and
the secured obligation; or ii. The secured creditor has a right to
a. Unless the secured creditor receives an objection in take possession of the collateral.
writing from any person entitled to receive such a b. The court may direct the grantor to take such
proposal within 20 days after the proposal is sent to action as the court deems necessary and
that person appropriate so that the secured creditor may
2. A proposal for the acquisition of the collateral in partial satisfaction take possession of the collateral (Sec. 47).
of the secured obligation
a. Only if the secured creditor receives the affirmative
consent of each addressee of the proposal in writing 2. Notification of Disposition
within 20 days after the proposal is sent to that person.
Not later than 10 days before disposition of the collateral, the
secured creditor shall notify:
1. The grantor; (NOTE: The grantor may waive the right to be
notified.)
2. Any other secured creditor or lien holder who, 5 days
before the date notification is sent to the grantor, held a
security interest or lien in the collateral that was perfected by
registration; and
3. Any other person from whom the secured creditor
received notification of a claim of an interest in the
collateral if the notification was received before the secured
creditor gave notification of the proposed disposition to the
grantor (Sec. 51).

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 Sufficiency of Notification
A notification of disposition is sufficient if it:
1. Identifies the grantor and the secured creditor;
2. Describes the collateral;
3. States the method of intended disposition; and
4. States the time and place of a public disposition or the time
after which other disposition is to be made (Sec. 51).
Exceptions to the Notification Requirement
The requirement to send a notification under this section shall not
apply if the collateral is: a. Perishable; or
b. Threatens to decline speedily in value;
c. Of a type customarily sold on a recognized market (Sec. 51).
3. Right of Redemption
GR: A party who is entitled to a notification is also entitled to
redeem the property(Sec. 45(a)).
XPNs: The right of redemption may be exercised, unless:
1. The person entitled to redeem has not,after the default,
waived in writing the right to redeem;
2. The collateral is sold or otherwise disposed of, acquired,
or collected by the secured creditor or until the conclusion
of an agreement by the secured creditor for that purpose; and
3. The secured creditor has retained the collateral(Sec. 45(a)).
How Exercised
The right to redeem is exercised by paying or otherwise performing
the secured obligation in full, including the reasonable cost of
enforcement(Sec. 45(a)).
Disposition and Application of Proceeds
If there is no redeemer, the secured creditor may dispose of the
property, and the proceeds will be applied according to Section 52,
in the following order:
1. The reasonable expenses of taking, holding, preparing for
disposition, and disposing of the collateral, including
reasonable attorneys’ fees and legal expenses incurred by the
secured creditor;
2. The satisfaction of the obligation secured by the security
interest of the enforcing secured creditor; and
3. The satisfaction of obligations secured by any subordinate
security interest or lien in the collateral if a written demand
and proof of the interest are received before distribution of the
proceeds is completed.
The secured creditor shall account to the grantor for any surplus,
and, unless otherwise agreed, the debtor is liable for any
deficiency(Sec. 52).
Commercial Reasonableness Requirement
After repossession and notice, the collateral may be disposed of
provided that the creditor acts in a ―commercially reasonable
manner‖(Sec. 50(a)).
Under Sec. 50, a creditor acts in such manner if he/she “disposes of the
collateral in conformity with commercial practices among dealers in
that type of property.” (Sec. 50(b))
1. A disposition is presumed commercially reasonable when
approved in any legal proceeding(Sec. 50(d)).
2. A disposition will still be treated as commercially reasonable
even if “a better price could have been obtained by disposition at
a different time or by a different method from the time and
method selected by the secured creditor”(Sec. 50(c)).
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h. PRIOR INTERESTS AND THE TRANSITIONAL PERIOD
1. Prior Interests
A security interest that was:
1. Created or provided for by an agreement or other transaction that was
made or entered into before the effectivity of this Act; and
2. Had not been terminated before the effectivity of this Act (Sec. 55(b)).
However, a security interest that is renewed or extended by a security agreement or other
transaction made or entered into on or after the effectivity of this Act is NOT considered
a prior interest (Sec. 55(b)).
Creation of Prior Interest
Creation of prior interest shall be determined by prior laws, which are laws that existed or
in force before the effectivity of this Act (Sec. 56)
Effectivity of Prior Interest
A prior interest remains effective between the parties, notwithstanding its creation did not
comply with the creation requirements of this Act (Sec. 56).
Perfection of Prior Interest(Sec. 58)
1. A prior interest that was perfected under prior law continues to be
perfected under this Act until the earlier of:
a. The time the prior interest would cease to be perfected
under prior law; and
b. The expiration of the transitional period.
2. If the perfection requirements of the PPSA are satisfied before the
perfection of a prior interest ceases in accordance with (a):
a. The prior interest continues to be perfected under this Act
from the time when it was perfected under the prior law.
3. If the prior interest was perfected by the registration of a notice under prior
law, the time of registration under the prior law shall be the time to be
used for purposes of applying the priority rules of this Act.
4. If the perfection requirements of the PPSA are NOT satisfied before the
perfection of a prior interest ceases in accordance with (a):
a. The prior interest is perfected only from the time it is
perfected under this Act.
5. A written agreement between a grantor and a secured creditor creating a
prior interest is sufficient to constitute authorization by the grantor of the
registration of a notice covering assets described in that agreement under
this Act.
When a Prior Law Over a Prior Interest Applies
GR: The priority of a prior interest as against the rights of a competing claimant is
determined by the prior law if:
1. The security interest and the rights of all competing claimant arose before
the effectivity of this Act; and
2. The priority status of these rights has not changed since the effectivity of
this Act(Sec. 58(a)).
XPNs: The priority status of a prior interest has changed (refer to the 2nd instance under
the general rule, i.e. Sec. 58(a)(2)) only if:
1. It was perfected when this Act took effect, but ceased to be perfected; or
2. It was not perfected under prior law when this Act took effect, and was
only perfected under this Act (Sec. 58(b)).
Enforcement of Prior Interest (Sec. 59)
If any step or action has been taken to enforce a prior interest before the effectivity of this
Act, enforcement may continue under prior law or may proceed under this Act.
NOTE: Prior law shall apply to a matter that is the subject of proceedings before a court
before the effectivity of this Act.
2. Transitional Period
The period from the date of effectivity of this Act until the date when the Registry has
been established and operational(Sec. 55 (d))
Thus, the transitional period is from September 7, 2018 until the date when the Registry
has been established and operational
1. All pledges and mortgages created pursuant to the Civil Code and the
Chattel Mortgage Law remain effective between the parties
2. But upon expiration of the transitional period, the binding effect as against
third parties of chattel mortgages is lost, UNLESS the requirements of the
PPSA are complied with.
Establishment of Electronic Registry
Section 68. Implementation. —
Notwithstanding the entry into force of this Act under Section 67, the
implementation of the Act shall be conditioned upon the Registry being
established and operational under Section 26.
Section 26. Establishment of Electronic Registry.
The Registry shall be established in and administered by the LRA.
The Registry shall provide electronic means for registration and searching
of notices.
GUARANTY
a. NATURE AND EXTENT OF GUARANTY
Art. 2047. By a guaranty a person, called the guarantor, binds
himself to the creditor tofulfill the obligation of the principal debtor
in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Sec. 4, Ch. 3, Title 1 of this Book shall be observed. In
such case the contract is called a suretyship
GR: Guaranty is gratuitous
XPN: When there is a stipulation to the contrary (Art. 2048, NCC)
i. OBLIGATION SECURED BY GUARANTY
1. The guaranty must be founded on a valid principal obligation(Art.
2052 (1), NCC)
2. A guaranty may secure the performance of a voidable,
unenforceable, and natural obligation(Art. 2052(2), NCC). This
implies that a guaranty may secure the performance of a:
a. Voidable contract – such contract is binding, unless it
is annulled by a proper court action.
b. Unenforceable contract – because such contract is not
void.
c. Natural obligation – the creditor may proceed against
the guarantor although he has no right of action against
the principal debtor for the reason that the latter’s
obligation is not civilly enforceable. When the debtor
himself offers a guaranty for his natural obligation, he
impliedly recognizes his liability, thereby transforming
the obligation from a natural into a civil one.
3. A guaranty may secure a future debt(Art. 2053, NCC); Continuing
Guaranty
a. Not limited to a single transaction but which
contemplates a future course of dealings, covering a
series of transactions generally for an indefinite time or
until revoked.
b. It is prospective in its operation and is generally
intended to provide security with respect to future
transactions.
c. Future debts, even if the amount is not yet known, may
be guaranteed but there can be no claim against the
guarantor until the amount of the debt is ascertained or
fixed and demandable.
iv. RIGHT TO PROTECTION
Art. 2071 provides a protective remedy in favor of the guarantor, which is
available BEFORE he has paid, but after he is made liable for the debt, and when
any of the ff. grounds is applicable:
1. When he is sued for the payment;
2. In case of insolvency of the principal debtor or if he is in imminent
danger of becoming insolvent;
3. When the debtor has bound himself to relieve him from the guaranty
within a specified period, and this period has expired;
4. When the period for payment has expired;
5. After the lapse of 10 years, when the principal obligation has no
fixed period for its maturity, unless it be of such nature that it cannot
be extinguished except within a period longer than 10 years;
6. If there are reasonable grounds to fear that the principal debtor
intends to abscond.
To protect his interest, a guarantor can proceed against the principal debtor by:
1. Obtaining release from the guaranty; OR
2. Demanding a security that shall protect him from any proceedings by
the creditor and from the danger of insolvency of the debtor (Art.
2071, NCC).
v. RIGHT TO INDEMNIFICATION
The guarantor who pays for a debtor must be indemnified by the latter,
The indemnity comprises:
1. The total amount of the debt
2. The legal interests thereon from the timethe payment was made
known to the debtor, even though it did not earn interest for the
creditor
3. The expenses incurred by the guarantor after having notified the
debtor that payment had been demanded of him.
4. Damages if they are due (Art. 2066, NCC)
vi. RIGHT TO SUBROGATION
The guarantor who pays is subrogated by virtue thereof to all the rights which the
creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the
debtor more than what he has really paid(Art. 2067, NCC).

ii. PARTIES TO A GUARANTY

1. Creditor
2. Debtor of the Principal Obligation
3. Guarantor vii. RIGHTS OF CO-GUARANTORS
1. Right of excussion against the principal guarantor and the principal
Qualifications of a Guarantor(Art. 2056, NCC) debtor (Art. 2064, NCC);
1. He possesses integrity; 2. Benefit of division (Art. 2065);
2. He has capacity to bind himself; However, the benefit of division will cease if
3. He has sufficient property to answer for the obligation which he a. Solidary liability has been stipulated(Art. 2065, NCC);
guarantees. or
b. If any of the exceptions to the benefit ofexcussion are
GR: Creditor has the right to demand another guarantor with the qualifications in present (Art.2059, NCC);
Art. 2056 if the previous guarantor has: 3. Right to reimbursement, i.e. to demand payment from the other co-
1. Been convicted in first instance of a crime involving dishonesty; or guarantors their proportional share owed to him/her. This is available
2. Become insolvent (Art. 2057, NCC) to the co-guarantor who paid the debt(Art. 2073, par. 1, NCC).
4. Right of an insolvent guarantor to have his share bore by the others,
XPN: Creditor has no right to demand a replacement guarantor if he himself including the payor, in the same proportion (Art. 2073, par. 2, NCC).
required and stipulated that the specified person should be the guarantor. 5. Right to set-up defenses against the paying co-guarantor those
available to the principal debtor against the creditor.
Excussion a. XPN: Defenses personal to thedebtor are not available
The guarantor cannot be compelled to pay the creditor unless the latter has(Art. to the guarantor, hence not available as well to the co–
2058, NCC]): guarantor(Art. 2081, NCC).
1. Exhausted all of the property of the debtor;and 6. Right to benefit from the release of one guarantor (Art. 2078. NCC).
2. Resorted to all the legal remedies againstthe debtor.
Requisites for the applicability of Art. 2073, NCC
To avail of the benefit of excussion, the guarantor must (Art. 2060, NCC): 1. There are two or more guarantors of the same debtor for the same
1. Set it up against the creditor upon demand for payment; and debt;
2. Point out to the creditor available property of the debtor within PH 2. Payment has been made by one guarantor;
territory sufficient to cover the amount of the debt. 3. The payment was made:
a. Because of the insolvency of the debtor, or
GR: The guarantor has the right to benefit from excussion/exhaustion b. By judicial demand
XPN: The excussion shall not take place: (ESIAP) 4. The paying guarantor seeks to be indemnified only to the extent of
1. If the guarantor has expressly renounced it; his proportionate share in the total obligation.
2. If he has bound himself solidarily with the debtor;
3. In case of insolvency of the debtor; 4BLUE 95: For purposes of proportionate reimbursement, the other guarantors
4. When he has absconded, or cannot be sued within the Philippines may interpose such defenses against the paying guarantor as are available to the
unless he has left a manager or a representative. debtor against the creditor, except those that are personal to the debtor (Art. 2074,
5. If it may be presumed that an execution on the property of the NCC).
principal debtor would not result in the satisfaction of the obligation
(Art. 2059, NCC)

7
b. EFFECTS OF GUARANTY c. EXTINGUISHMENT OF GUARANTY

1. The guarantor has the right to benefit from excussion/exhaustion
(Art. 2058, NCC)
2. The creditor has the right to secure a judgment against the
guarantor prior to the excussion
GR: An ordinary personal guarantor (NOT a pledgor/mortgagor),
may demand exhaustion of all the property of the debtor before he
can be compelled to pay.
XPN: The creditor may, prior thereto, secure a judgment against the
guarantor, who shall be entitled, however, to a deferment of the
execution of said judgment against him, until after the properties of
the principal debtor shall have been exhausted, to satisfy the latter’s
obligation.
3. The creditor has the duty to make prior demand for payment
from the guarantor (Art. 2060, NCC)
The demand is to be made only after judgment on the debt.
4. The guarantor has the duty to set up the benefit of excussion(Art.
2060, NCC)
As soon as he is required to pay, the guarantor must also point out to
the creditor available property (not in litigation or encumbered) of
the debtor within the Philippines.
GR: The obligation of the guarantor is extinguished at the same time as that of the
debtor and for the same causes as all other obligations (Art. 2076, NCC).
Specific Instances that Extinguish the Guaranty
1. Creditor Voluntary Accepts the Immovable for Payment
The guarantor is released if the creditor voluntarily accepts immovable or
other property in payment of the debt, even if he should afterwards lose the
same through eviction (Art. 2077, NCC)
2. When an Extension is Granted to the Debtor without the
Consent of Guarantor
An extension granted to the debtor by the creditor without the consent of
guarantor extinguishes the guaranty (Art. 2079, NCC)
However, the mere failure on the part of the creditor to demand payment
after the debt has become due does not, of itself, constitute any extension of
time.
3. When Subrogation is Not Feasible
The guarantors, even though they may be solidary, are released from their
obligation, whenever by some act of the creditor they cannot be subrogated
to the rights, mortgages, and preference of the latter(Art. 2080, NCC)

5. The creditor has the duty to resort to all legal remedies(Arts.

2058 and 2061, NCC)
After the guarantor has fulfilled the conditions required for making
use of the benefit of excussion, it becomes the duty of the creditor to:
1. Exhaust all the property of the debtor pointed
out by the guarantor;
2. If he fails to do so, he shall suffer the loss for
the insolvency of the debtor, but only to the
extent of the value of the said property
6. The creditor has the duty to notify the guarantor in the action
against the debtor(Art. 2062, NCC)
Notice to the guarantor is mandatory in the action against the
principal debtor. The guarantor, however, is not duty bound to
appear in the case, and his non-appearance shall not constitute
default, with its consequential effects.
Rationale: To give the guarantor the opportunity to allege and
substantiate whatever defenses he may have against the principal
obligation, and chances to set up such defenses as are afforded him
by law.
7. A compromise shall not prejudice a person not party to it(Art.
2063, NCC)
A compromise between creditor and principal debtor benefits the
guarantor but does not prejudice him.
A compromise between guarantor and the creditor benefits but does
not prejudice the principal debtor.
8. Effects of Guaranty between the Debtor and the Guarantor
a. The guarantor has the duty to notify the debtor
before paying the creditor(Art. 2068; see also Arts.
1236 and 1237, NCC)
Should payment be made without notification or against the
debtor’s will, and supposing the debtor has already made a
prior payment, the debtor would be justified in setting up the
defense that the obligation has already been extinguished by
the time the guarantor made the payment. The guarantor will
then lose the right of reimbursement and consequently the
right of subrogation.
b. The guarantor cannot demand reimbursement for
payment made by him before the obligation has
become due(Art. 2069, NCC)
d. LEGAL AND JUDICIAL BONDS
Art. 2051, par. 1 – A guaranty may be conventional, legal, or
judicial, or gratuitous or by onerous title.
It may be constituted, not only in favor of the principal debtor, but
also in favor of the other guarantor, with the latter’s consent, or
without his knowledge, or even over his objection.
Bond
An undertaking that is sufficiently secured, and not cash or currency.
Bondsman
A surety offered in virtue of a provision of law or a judicial order.
Qualifications of personal bondsman(Art. 2082 in relation to Art. 2056, NCC)
1. He possesses integrity;
2. He has capacity to bind himself;
3. He has sufficient property to answer for the obligation which he
guarantees.
Pledge or mortgage in lieu of bond(Art. 2083, NCC)
Guaranty or suretyship is a personal security.
Pledge or mortgage is a property or real security. If the person required to give a
legal or judicial bond should not be able to do so, a pledge or mortgage sufficient
to cover the obligation shall be admitted in lieu thereof.
Bondsman not entitled to excussion(Art. 2084, NCC)
A judicial bondsman and the sub-surety are NOT entitled to the benefit of
excussion.
Reason: They are not mere guarantors, but sureties whose liability is primary and
solidary.
Effect of negligence of creditor
Mere negligence on the part of the creditor in collecting from the debtor will not
relieve the surety from liability.

GR: Since a contract of guaranty is only subsidiary, the

guarantor cannot be liable for the obligation before the period
on which the debtor’s liability will accrue. Any payment
made by the guarantor before the obligation is due cannot be
indemnified by the debtor. The guarantor can only demand
reimbursement upon expiration of the period.
XPN: Prior consent or subsequent ratification by the debtor

c. The guarantor may proceed against the debtor even

before payment has been made(Art. 2071, NCC)

8
SURETY
a. CONCEPT d. SURETY DISTINGUISHED FROM STANDBY LETTER OF CREDIT
Art. 2047, NCC. By a guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal debtor Surety Standby Letters of Credit
in case the latter should fail to do so. Upon debtor’s default, the creditor Upon default, the creditor-beneficiary
expects that the surety will perform expects that it will promptly receive
If a person binds himself solidarilywith the principal debtor, the cash before any litigation
provisions of Sec. 4, Ch. 3, Title 1 of this Book shall be observed. In There is no duty to indemnify the There is a duty to pay the creditor-
such case the contract is called a suretyship. creditor until the creditor establishes beneficiary upon presentation of the
the fact of the debtor’s non- required documents
Suretyship performance
No need to prove non-performance in
A relation which exists where one person (surety) binds himself solidarily with litigation.
the principal debtor, such that the former undertakes a direct and primary
obligation or other duty to a third person (creditor), who is entitled to but one e. SURETY DISTINGUISHED FROM GUARANTY
performance, and as between the two who are bound, the latter rather than the
former should perform. Surety Guaranty
Anaccessory promise by which aperson A collateral undertaking to pay the
A suretyship is also an agreement whereby a surety guarantees the performance or binds himself for another already debt of another in case the latter is
undertakes to answer, under specified terms and conditions, for the debt, default or bound, and agrees with the creditor to unable to pay the
miscarriage of the principal or obligor, such as failure to perform, or breach of satisfy the obligation if the debtor does debt
trust, negligence and the like, in favor of a third party. not
A surety is usually bound with his The contract of guaranty is the
It shall be deemed as insurance contract if the surety’s main business is that of principal by the same instrument, guarantor's own separate undertaking,
suretyship, and not where the contract is merely incidentalto any other legitimate executed at the same time, and on the in which the principal does not join. It
business or activity of the surety. same consideration. He is an original is usually entered into before or after
promissor and debtor from the that of the principal, and is often
b. FORM OF SURETY beginning, and is held, ordinarily, to supported on a separate consideration
know every default of his principal. from that supporting the contract of the
Generally principal. The original contract of his
The contract of a surety is evidenced by a document called surety bond which is principal is not his contract, and he is
essentially a promise to guarantee the obligation of the obligor. In turn, the obligor not bound to take notice of its non-
executes an indemnity agreement in favor of the insurer. performance.
A surety will NOT be discharged, A guarantor is often discharged by the
It is an accessory contractunlike a contract of insurance which is the principal either by the mere indulgence of the mere indulgence of the creditor to the
contract itself. creditor to the principal, or by want of principal, and is usually not liable
notice of the default of the principal, no unless notified of the default of the
A suretyship is covered by the Statute of Frauds since it constitutes a special matter how much he may be injured principal
promise to answer for the debt, default, or miscarriage of another(Art. 1403, NCC). thereby
A surety is the insurer of the debt, and A guarantor is the insurer of the
Therefore, a suretyship is unenforceable unless: he obligates himself to pay if the solvency of the debtor and thus binds
1. The suretyship or some note ormemorandum thereof, is in writing; principal does not pay himself to pay if the principal is unable
and to pay
2. The suretyship is subscribed by the party or by his agent(Art.
1403, NCC).

f. SURETY DISTINGUISHED FROM JOINT AND SOLIDARY

OBLIGATIONS
c. OBLIGATIONS SECURED
Nature of Liability
A suretyship is valid despite the absence of any direct consideration received by
the surety, either from the principal debtor or from the creditor. Although contractual (limited by the terms of the contract) and accessory (arises
only if principal debtor is held liable), a surety’s liability is direct, primary, and
The consideration necessary to support a surety’s obligation need not pass directly absolute.
to the surety. A consideration moving the principal debtor alone is sufficient.
Surety Joint and Solidary Obligations
Strictissimi juris rule Surety has the right to indemnification Joint and solidary debtor has only a
The obligation of the surety cannot be extended by implication beyond the terms
and subrogation as against the principal right to reimbursement as against his
of the contract.
debtor (Art. 2066- 2067, NCC) co- debtors (Art. 1217, NCC).
Accessory, ancillary, and collateral Not dependent on, or not an incident to
Comprehensive or Continuing Surety
obligation a principal obligation
Art. 2053 applies to suretyships as well, such that a surety may also
be given as security for future debts.

It contemplates a prospective or future course of dealing, covering a

series of transactions within the stipulations of the contract, until the
expiration or termination of the suretyship.

9
REAL ESTATE MORTGAGE
(Act No. 3135 as amended by Act No. 4118)
a. DEFINITION AND CHARACTERISTICS
Real Mortgage
A contract whereby the debtor secures to the creditor the fulfillment of a principal
obligation (real security transaction), immediately making immovable property or
real rights answerable to the principal obligation in case it is not complied with at
the time stipulated.
A registered real estate mortgage is a right in rem, a lien that a creditor has on the
property; therefore, it is inseparable from the collateral and until discharged, it
follows the property.
i. OBLIGATIONS SECURED BY REAL ESTATE MORTGAGE
GR: A real estate mortgage is limited to the principal obligations mentioned in the
contract (within its four corners).
XPN: A real estate mortgage may contain a dragnet or blanket mortgage clause
which subsumes all debts, whether past or future.
2023 NOTE: This clause will be strictly construed and its inclusion makes the
mortgage a continuing security, not to be discharged by repayment of the amount
named, but by payment of the full amount of the principal obligation.
Reliance on Security Test: When the mortgagor takes another loan for which
another security was given, it could not be inferred that such loan was made in
reliance solely on the original security with the dragnet clause, but rather, on the
new security given.
ii. OBJECT OF REAL ESTATE MORTGAGE(Art. 2124, NCC)
1. Immovables
2. Alienable real rights over immovables.
NOTE: Article 2127 is modified by the PPSA with regard to property included in a
Real Estate Mortgage. Under Art. 2127, a REM “extends to natural accessions, to
the improvements, growing fruits and the rents or income not yet received when
the (principal) obligation becomes due.” These personal properties are NO
LONGER covered by Art. 2127.
Future property CANNOT be an object of mortgage; however:
1. A stipulation subjecting to the mortgageimprovements which the
mortgagor may subsequently acquire, install, or use in connection
with real property already mortgaged belonging to the mortgagor is
valid.
2. A stipulation in a registered (or recorded) real estate mortgage that
all property taken in exchange or replacement by the mortgagor
(after-acquired property) shall become subject to the mortgage is
binding.
iii. RIGHT TO ALIENATE MORTGAGE CREDIT
Article 2128. The mortgage credit may be alienated or assigned to a
third person, in whole or in part, with the formalities required by
law.
The right to alienate the real estate mortgage credit is the right of the mortgagee to
assign its rights under the principal obligation secured. Although the mortgagee
does not become the owner of the collateral, it owns the real estate mortgage credit
and may alienate the same to a third person(Art. 2128, NCC)
iv. RIGHT TO ALIENATE COLLATERAL
The mortgagor may still sell the mortgaged property, and any stipulation to the
contrary is void(Art. 2130, NCC).
Pactum de non alienando (Sp. pacto de non alienando) is prohibited by Art.
2130
1. Stipulations forbidding the mortgagor fromselling the collateral
2. Stipulations forbidding the mortgagor fromselling the collateral
without the consent of the mortgagee
b. ESSENTIAL REQUISITES
1. The mortgage must be constituted to secure the fulfillment of a
principal obligation (Art. 2085);
2. The mortgagor must be the absolute owner of the immovable or
alienable real rights(Art. 2085);
3. The mortgagor must have free disposal of the property or is legally
authorized for the purpose (Art. 2085);
4. The mortgage must be subjected to the condition that when the
principal obligation becomes due, the collateral may be alienated for
payment to the creditor(Art. 2087);
5. Must be recorded in the Registry of Property(Art. 2125).
4BLUE 95: , if the instrument is not recorded, the mortgage is nevertheless
binding between the parties(Art. 2125).
10
TRUTH IN LENDING ACT
1. PURPOSE
To protect its citizens from a lack of awareness of the true cost of credit to the user by
assuring a full disclosure of such cost with a view of preventing the uninformed use of
credit to the detriment of the national economy(Sec. 2.).
2. OBLIGATION OF CREDITORS TO PERSONS TO WHOM CREDIT IS
EXTENDED
A creditor shall furnish to each person to whom credit is extended, prior to the
consummation of the transaction, a clear statement in writing setting forth, to the extent
applicable and in accordance with rules and regulations prescribed by the Board, the
following information:
1. The cash price or delivered price of the property or service to be acquired;
2. The amounts, if any, to be credited as down payment and/or trade in;
3. The difference between the amounts set forth under clauses (1) and (2);
4. The charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit; The total amount to be financed;
5. The finance charge expressed in terms of pesos and centavos;
6. The percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation(Sec. 4).
The rationale of this provision is to protect users of credit from a lack of awareness of the
true cost thereof, proceeding from the experience that banks are able to conceal such true
cost by hidden charges, uncertainty of rates, deduction of interests from the loans amount,
and the like. The law thereby seeks to protect debtors by permitting them to fully
appreciate the true cost of their loan, to enable them to give full consent to contract, and
the properly evaluate their options in arriving at business decisions (UCPB v Sps.
Beluso.,G.R. 159912 (2007)).
In addition, the contract or document shall specify additional charges, if any, which will
be collected in case certain stipulations in the contract are not met by the debtor(BSP
Memo No. M-2008-020).
3. COVERED AND EXCLUDED TRANSACTIONS
1. Any loan, mortgage, deed of trust, advance, or discount;
2. Any conditional sales contract;
3. Any contract to sell, or sale or contract of sale of property or services,
either for present or future delivery, under which part or all of the price is
payable subsequent to the making of such saleor contract;
4. Any rental-purchase contract;
5. Any contract or arrangement for the hire, bailment, or leasing of property;
6. Any option, demand, lien, pledge, or other claim against, or for the
delivery of, property or money;
7. Any purchase, or other acquisition of, or any credit upon the security of,
any obligation of claim arising out of any of the foregoing; and
8. Any transaction or series of transactions having a similar purpose or
effect(Sec. 3(2)).
4. CONSEQUENCES OF NON-COMPLIANCE WITH OBLIGATIONS
1. Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any
regulation issued thereunder shall be liable to such person in the amount of
P100 or in an amount equal to twice the finance charged required by such
creditor in connection with such transaction, whichever is the greater,
except that such liability shall not exceed P2,000 on any credit
transaction.
a. Action to recover such penalty may be brought by such
person within 1 year from the date of the occurrence of the
violation, in any court of competent jurisdiction.
b. In any action under this subsection in which any person is
entitled to a recovery, the creditor shall be liable for
reasonable attorney's fees and court costs as determined by
the court.
2. Except as specified in subsection (a) of this section, nothing contained in
this Act or any regulation contained in this Act or any regulation
thereunder shall affect the validity or enforceability of any contract or
transactions.
3. Any person who willfully violates any provision of this Act or any
regulation issued thereunder shall be fined by not less than P1,00 or more
than P5,000 or imprisonment for not less than 6 months, nor more than 1
year or both.
4. No punishment or penalty provided by this Act shall apply to the
Philippine Government or any agency or any political subdivision thereof.
5. A final judgment hereafter rendered in any criminal proceeding under this
Act to the effect that a defendant has willfully violated this Act shall be
prima facie evidence against such defendant in an action or proceeding
brought by any other party against such defendant under this Act as to all
matters respecting which said judgment would be an estoppel as between
the parties thereto (Sec. 6).
PHILIPPINE COMPETITION ACT
(RA No. 10667)
It is based on the premise that efficient market competition is an effective
mechanism for allocating goods and services, and that safeguards are needed to
maintain competitive conditions.
1. DEFINITION AND SCOPE OF APPLICATION
Agreement – Any type or form of contract, arrangement, understanding,
collective recommendation, or concerted action, whether formal or informal,
explicit or tacit, written or oral. (Sec. 4(b)).
Confidential business information – Information which concerns or relates to the
operations, production, sales, shipments, purchases, transfers, identification of
customers, inventories, or amount or source of any income, profits, losses,
expenditures (Sec. 4(e)).
Control – The ability to substantially influence or direct the actions or decisions
of an entity, whether by contract, agency, or otherwise (Sec. 4(f)).
Dominant position – A position of economic strength that an entity or entities
hold which makes it capable of controlling the relevant market independently from
any or a combination of the following: competitors, customers, suppliers, or
consumers(Sec. 4(g)).
Market – The group of goods or services that are sufficiently interchangeable or
substitutable and the object of competition, and the geographic area where said
goods or services are offered. (Sec. 4(i)).
Scope
This Act shall:
1. Be enforceable against any person or entity engaged in any
trade,industry, and commerce in the Republic of the Philippines.
2. Be applicable to international trade havingdirect, substantial, and
reasonably foreseeable effects in trade, industry, or commerce in the
Republic of the Philippines, including those that result from acts
done outside the Republic of the Philippines.
This Act shall NOT apply to:
1. Thecombinationsoractivitiesofworkersoremployees;
2. Agreements or arrangements with theiremployers
When such combinations, activities, agreements, or arrangements are designed
solely to facilitate collective bargaining in respect of conditions of
employment(Sec. 3).
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2. POWERS AND FUNCTIONS OF THE PHILIPPINE COMPETITION
COMMISSION
The Commission shall have original and primary jurisdiction over the enforcement
and implementation of PCA. The Commission shall exercise the following powers
and functions:
1. Conduct inquiry, investigate, and hear and decide on cases involving
any violation of this Act and other existing competition laws motu
proprio or upon receipt of a verified complaint
2. Review proposed mergers and acquisitions, and upon exercise of its
powers to review, prohibit mergers and acquisitions that will
substantially prevent, restrict, or lessen competition in the relevant
market;
3. Monitor and undertake consultation with stakeholders and affected
agencies
4. Stop or redress any anti-competitive agreement
5. Conduct administrative proceedings,impose sanctions, fines or
penalties for any noncompliance with or breach of this Act and its
implementing rules and regulations (IRR) and punish for contempt;
6. Issue subpoena duces tecum and subpoena ad testificandum to
require the production of books, records, or other documents or data
which relate to any matter relevant to the investigation
7. Upon order of the court, undertake inspections of business premises
and other offices, land and vehicles, as used by the entity
8. Issue adjustment or divestiture orders including orders for corporate
reorganization or divestment which are structural remedies, should
only be imposed:
a. Where there is no equally effective behavioral remedy;
or
b. Where any equally effective behavioral remedy would
be more burdensome for the enterprise concerned than
the structural remedy;
9. Deputize any and all enforcement agencies of the government or
enlist the aid and support of any private institution, corporation,
entity or association, in the implementation of its powers and
functions;
10. Monitor compliance by the person or entities concerned with the
cease and desist order or consent judgment;
11. Issue advisory opinions and guidelines on competition matters and
submit annual and special reports to Congress, including proposed
legislation;
12. Monitor and analyze the practice of competition in markets that
affect the Philippine economy;
13. Conduct, publish, and disseminate studies and reports on anti-
competitive conduct and agreements to inform and guide the
industry and consumers;
14. Intervene or participate in administrative and regulatory proceedings
requiring consideration of the provisions of this Act that are initiated
by government agencies;
15. Assist the National Economic and Development Authority, in
consultation with relevant agencies and sectors, in the preparation
and formulation of a national competition policy;
16. Act as the official representative of the Philippine government in
international competition matters;
17. Promote capacity building and the sharing of best practices with
other competition- related bodies;
18. Advocate pro-competitive policies of the government by:
a. Reviewing economic and administrative regulations,
motu proprio or upon request; and
b. Advising the Executive Branch on the competitive
implications of government actions, policies and
programs; and
19. Charging reasonable fees to defray the administrative cost of the
services rendered. (Sec.12).
3. PROHIBITIVE ACTS
a. ANTI-COMPETITIVE AGREEMENTS(P R L)
Those that substantiallyprevent, restrict, or lessencompetition.
It is illegal for business rivals to act together in ways that can limit competition,
lead to higher prices, or hinder other businesses from entering the market.
NOTE: Agreements between or among competitors are also called horizontal
agreements.
i. PER SE VIOLATIONS
The following agreements, between or among competitors, are per seprohibited:
1. Restricting competition as to price, or components, or other terms
of trade;
2. Fixing price at an auction or in any form of bidding including cover
bidding, bid suppression, bid rotation and market allocation and
other analogous practices.
ii. NOT PER SE VIOLATIONS
The following agreements, between or among competitors which have the object
or effect of substantiallypreventing, restricting or lessening competition shall be
prohibited:
1. Setting, limiting, or controlling production, markets, technical
development, or investment;
2. Dividing or sharing the market, whether by volume of sales or
purchases, territory, type of goods or services, buyers or sellers or
any other means.
Agreements other than those specified in (1) and (2) which have the object or
effect of substantially preventing, restricting or lessening competition shall also be
prohibited(Sec. 14).
b. ABUSE OF DOMINANT POSITION
Markets that are dominated by a single or handful of large companies are
particularly vulnerable to anticompetitive practices.
In the conduct of their business, dominant companies (considering their size,
scope, and position of economic strength) may have a disproportionately severe
effect on the market and its companies.
Prohibited Acts
1. Predatory Pricing - selling goods or services below cost with
the object of driving competition out of the relevant market;
2. Imposing barriers to entry or committing acts that prevent
competitors from growing within the market in an anti-
competitive manner;
XPN: Those that develop in the market as a result of or
arising from a superior product or process, business acumen,
or legal rights or laws.
3. Making a transaction subject to acceptance by the other
parties of other obligations which have no connection with
the transaction;
4. Discriminatory behavior - Setting prices or other terms or
conditions that discriminate unreasonably between customers
or sellers of the same goods or services, where the effect may
be to lessen competition substantially:
XPN: That the following shall be considered permissible
price differentials:
a. Socialized pricing for the less fortunatesector of the
economy;
b. Price differential which reasonably orapproximately
reflect differences in the cost of manufacture, sale, or
delivery resulting from differing methods, technical
conditions, or quantities in which the goods or services
are sold or delivered to the buyers or sellers;
c. Price differential or terms of sale offered in response to
the competitive price of payments, services or changes
in the facilities furnished by a competitor; and
d. Price changes in response to changing market
conditions, marketability of goods or services, or
volume;
5. Imposing restrictions on the lease or contract for sale or
trade of goods or services, such as fixing prices, giving
preferential discounts or rebate upon such price, or imposing
conditions not to deal with competing entities, the object or
effect of the restrictions is to prevent, restrict or lessen
competition substantially:
XPN:
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a. Permissible franchising, licensing,exclusive
merchandising, or exclusivedistributorship agreements;
or
b. Agreements protecting intellectual property rights,
confidentialinformation, or trade secrets;
6. Making supply of particular goods or services dependent
upon the purchase of other goods or services from the
supplier which have no direct connection with the main goods
or services to be supplied;
7. Directly or indirectly imposing unfairly low purchase prices
for the goods or services of, among others, marginalized
agricultural producers, fisherfolk, micro-, small-, medium-
scale enterprises, and other marginalized service providers
and producers;
8. Exploitative behavior towards consumers, customers, and/or
competitors - Directly or indirectly imposing unfair purchase
or selling price on their competitors, customers, suppliers or
consumers;
XPN: Prices that develop in the market as a result of or due to
a superior product or process, business acumen, or legal
rights or laws
9. Limiting production, markets or technical development, to the
detriment of consumers
XPN: Prices that develop in the market as a result of or due to
a superior product or process, business acumen or legal rights
or laws
c. PROHIBITED MERGERS AND ACQUISITIONS
Mergers and acquisitions that substantially prevent, restrict, or lessen competition
in the relevant market or in the market for goods or services are prohibited (Sec.
20).
If the PCC determines that the agreement results in a prohibited merger or
acquisition, it may
1. Prohibit the implementation of the agreement;
2. Prohibit the implementation of the agreement unless and until it is
modified by changes specified by the Commission;
3. Prohibit the implementation of the agreement unless and until the
pertinent party or parties enter into legally enforceable agreements
specified by the Commission (Sec. 18).
d. EXCEPTIONS
Anti-Competitive Agreements
Prohibited agreements that contribute to improving the production or
distribution of goods and services or to promoting technical or economic
progress, while allowing consumers a fair share of the resulting benefits, may not
necessarily be deemed a violation (Sec. 14).
Abuse of Dominant Position
The ff. may not necessarily be considered an abuse of dominant position:
1. Having a dominant position in a relevant market that does NOT
substantially prevent, restrict or lessen competition; or
2. Any conduct which contributes to improving production or
distribution of goods or services within the relevant market, or
promoting technical and economic progress while allowing
consumers a fair share of the resulting benefit. [Sec. 15]
Prohibited Mergers and Acquisitions
Prohibited mergers and acquisitions may, nonetheless, be exempt from prohibition
by the Commission when the parties establish either of the following:
1. The concentration has brought about or is likely to bring about gains
in efficiencies that are greater than the effects of any limitation on
competition that result or likely to result from the merger or
acquisition agreement; or
2. A party to the merger or acquisition agreement is faced with actual
or imminent financial failure, and the agreement represents the least
anti-competitive arrangement among the known alternative uses for
the failing entity’s assets:
3. Provided, That an entity shall not be prohibited from continuing to
own and hold the stock or other share capital or assets of another
corporation which it acquired prior to the approval of this Act or
acquiring or maintaining its market share in a relevant market
through such means without violating the provisions of this Act
4. Provided further that the acquisition of the stock or other share
capital of one or more corporations solely for investment and not
used for voting or exercising control and not to otherwise bring
about, or attempt to bring about the prevention, restriction, or
lessening of competition in the relevant market shall not be
prohibited(Sec. 21).
4. COVERED TRANSACTIONS 7. DETERMINING EXISTENCE OF ANTI-COMPETITIVE CONDUCT

The Commission shall have the power to review mergers and acquisitions based
on factors deemed relevant by the Commission(Sec. 16).
a. THRESHOLD FOR COMPULSORY NOTIFICATION
Parties to a merger or acquisition are required to provide notification when:
1. SIZE OF PARTY THRESHOLD: The aggregate annual gross
revenues in, into or from the Philippines, or value of the assets in
the Philippines of the ultimate parent entity of at least one of the
acquiring or acquired entities, including that of all entities that the
ultimate parent entity controls, directly or indirectly, exceeds
PhP5,600,000,000.00 (P5.6B); AND
2. SIZE OF TRANSACTION THRESHOLD: The value of the
transaction exceeds PhP2,200,000,000.00 (P2.2B).
b. NOTIFYING ENTITY
Parties to the merger or acquisition agreement wherein the value of the
transaction exceeds P2,200,000,000.00 (P2.2B) are prohibited from
consummating their agreement until 30 daysafter providing notification to the
Commission in the form and containing the information specified in the
regulations issued by the Commission (Sec. 17).
If notice to the Commission is required for a merger or acquisition, then either of
the ff. must each submit a Notification Form and comply with the procedure set
forth:
1. All acquiring and acquired pre-acquisition ultimate parent entities; or
2. Any entity authorized by the ultimate parent entity to file notification
on its behalf.
In determining whether anti-competitive agreement or conduct has been
committed, the Commission shall:
1. Define the relevant market allegedly affected by the anti-competitive
agreement or conduct
2. Determine if there is actual or potential adverse impact on
competition in the relevant market caused by the alleged agreement
or conduct, and if such impact is substantial and outweighs the actual
or potential efficiency gains that result from the agreement or
conduct;
3. Adopt a broad and forward-looking perspective, recognizing future
market developments, any overriding need to make the goods or
services available to consumers, the requirements of large
investments in infrastructure, the requirements of law, and the need
of our economy to respond to international competition, but also
taking account of past behavior of the parties involved and
prevailing market conditions;
4. Balance the need to ensure that competition is not prevented or
substantially restricted and the risk that competition efficiency,
productivity, innovation, or development of priority areas or
industries in the general interest of the country may be deterred by
overzealous or undue intervention; and
5. Assess the totality of evidence on whether it is more likely than not
that the entity has engaged in anti-competitive agreement or conduct
including whether the entity’s conduct was done with a reasonable
commercial purpose such as but not limited to phasing out of a
product or closure of a business, or as a reasonable commercial
response to the market entry or conduct of a competitor.

The parties shall not consummate the transaction before the expiration of the
relevant periods provided in this Rule (Rule 4, Sec.2(b), IRR). 8. FORBEARANCE BY THE PHILIPPINE COMPETITION
COMMISSION
c. EXCEPTIONS
The Commission shall, from time to time, adopt and publish regulations The Commission may forbear from applying the provisions of this Act, for a
stipulating exceptions or exemptions from the notification requirement (Sec. 19). limited time, in whole or in part, in all or specific cases, on an entity or group of
entities, if in its determination:
An internal restructuring within a group of companies is exempt from 1. Enforcement is not necessary to the attainment of the policy
notification if the acquiring and acquired entities have the same ultimate parent objectives of this Act;
entity. 2. Forbearance will neither impede competition in the market where the
entity or group of entities seeking exemption operates nor in related
Mergers or acquisitions are not considered purely internal and, therefore, do not markets; and
qualify for the exemption, if the restructuring leads to a change in control. 3. Forbearance is consistent with public interest and the benefit and
welfare of the consumers (Sec.28).
Such exemption shall not prevent the Commission from commencing a motu
proprio review of mergers and acquisitions under the IRR. A public hearing shall be held to assist the Commission in making this
determination.

In the event that the basis for the issuance of the exemption order ceases to be
5. DETERMINING THE RELEVANT MARKET valid, the order may be withdrawn by the Commission(Sec. 28).

The Relevant Market refers to the market in which a particular good or service is
sold and which is a combination of the relevant product market and the relevant
geographic market, defined as follows:
1. A relevant product market comprises all those goods and/or
services which are regarded as interchangeable or substitutable by
the consumer or the customer, by reason of the goods and/or
services’ characteristics, their prices and their intended use; and
2. The relevant geographic market comprises the area in which the
entity concerned is involved in the supply and demand of goods and
services, in which the conditions of competition are sufficiently
homogenous and which can be distinguished from neighboring areas
because the conditions of competition are different in those areas.

6. DETERMINING THE CONTROL OR DOMINANCE OF MARKET

In determining whether an entity has market dominant position, the Commission

shall consider the following:
1. The share of the entity in the relevant market and whether it is
able to fix prices unilaterally or to restrict supply in the relevant
market;
2. The existence of barriers to entry and the elements which could
foreseeably alter both said barriers and the supply from competitors;
3. The existence and power of its competitors;
4. The possibility of access by its competitors or other entities to its
sources of inputs;
5. The power of its customers to switch to other goods or services;
6. Its recent conducts; and
7. Other criteria established by the regulations (Sec. 27).

Presumption
Presumption of market dominant position if the market share of an entity in the
relevant market is at least 50%, unless a new market share threshold is
determined by the Commission for that particular sector (Sec. 27).

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