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REGULATORY FRAMEWORK
for BUSINESS
TRANSACTIONS
REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 1

CPA Board Exam Theories and Problems
TABLE OF CONTENTS
page
Law on Business Transactions
Obligations 3
Contracts 10
Sales 21
Credit Transactions 32
Bouncing Checks
Requisites to be liable under BP 22 46
Comparison with Estafa 47
Consumer Protection
Consumer Product Quality and Safety 47
Deceptive Sales Acts and Practices 50
Product Service and Warranty 51
Labelling and Packaging 53
Consumer Rights 58
Financial Rehabilitation and Insolvency
Definition of Terms 61
Suspension of payments; 63
Rehabilitation 64
Liquidation 69
Philippine Competition Act
Definitions and scope of application 71
Prohibited Acts 72
Covered transactions 74
Government Procurement Law
General principles; Scope and application; Definition of terms 75
Procurement procedures 77
Disclosure of relations 84
Alternative methods of procurement 85
Law on Business Organizations
Partnerships 87
Corporations 96
Insurance 137
Cooperatives 140
Law on Other Business Transactions
PDIC Law 151
Secrecy of Bank Deposits 152
Truth in Lending Act 153
AMLA Law 153
Intellectual Property Law 157
Data Privacy Act 159
Electronic Commerce Act 163
Ease of Doing Business and Efficient Delivery of Government Service Delivery Act 165
Labor Law 167
Social security Law 168
Multiple Choice Questions 171
References 183

1.0 LAW ON BUSINESS TRANSACTION
1.1 Obligations
1.1.1 Definition
● ARTICLE 1156 – An obligation is a juridical necessity to give, to do or not to do.
a. TO GIVE - consists in the delivery of a movable or an immovable thing, whether to
create a real right, or merely for some other form of possession.
b. TO DO – includes all kinds of work or services, whether mental or physical.
c. NOT TO DO - consists in abstaining from some act.
● Kinds of Obligation
a. From the viewpoint of “sanction”.
(a) CIVIL OBLIGATION – that defined in Article 1156; an obligation, if not fulfilled
when it becomes due and demandable, may be enforced in court through
action; based on law; the sanction is judicial due process.
(b) NATURAL OBLIGATION – defined in Article 1423; a special kind of obligation
which cannot be enforced in court but which authorizes the retention of the
voluntary payment or performance made by the debtor; based on equity and
natural law. (i.e. when there is prescription of duty to pay, still, the obligor
paid his dues to the obligee – the obligor cannot recover his payment even if
there is prescription) the sanction is the law, but only conscience had
originally motivated the payment.
(c) MORAL OBLIGATION – the sanction is conscience or morality, or the law of
the church. (Note: If a Catholic promises to hear mass for 10 consecutive
Sundays in order to receive P1,000, this obligation becomes a civil one.)From
the viewpoint of subject matter.
b. From the viewpoint of subject matter.
(a) REAL OBLIGATION – the obligation to give.
(b) PERSONAL OBLIGATION – the obligation to do or not to do. (e.g. the duty to
paint a house, or to refrain from committing a nuisance)
c. From the affirmativeness and negativeness of the obligation.
(a) POSITIVE OR AFFIRMATIVE OBLIGATION – the obligation to give or to do.
(b) NEGATIVE OBLIGATION – the obligation not to do (which naturally includes not
to give).
d. From the viewpoint of persons obliged "sanctions".
(a) UNILATERAL – where only one of the parties is bound. (e.g. Plato owes
Socrates P1,000. Plato must pay Socrates)
(b) BILATERAL – where both parties are bound. (e.g. In a contract of sale, the
buyer is obliged to deliver)
(i) reciprocal
(ii) non-reciprocal – where performance by one is non-dependent upon
performance by the other.
● Elements of obligation
a. ACTIVE SUBJECT – (Creditor / Obligee) the person who is demanding the performance
of the obligation.
b. PASSIVE SUBJECT – (Debtor / Obligor) the one bound to perform the prestation or to
fulfill the obligation or duty.
c. PRESTATION – (to give, to do, or not to do) object, subject matter of the obligation, and
conduct required to be observed by the ddebtor.
1. Object – To give, to do or not to do.
2. Requisites of Prestation / Object:

i. Licit (if illicit, it is void)
ii. Possible (if impossible, it is void)
iii. Determinate or determinable (or else, void)
iv. Pecuniary value
d. EFFICIENT CAUSE – the juridical tie which binds the parties to the obligation; source
of the obligation.
● Injury vs. Damage
a. INJURY – wrongful act or omission which causes loss or harm to another.
b. DAMAGE – result of injury. (loss, hurt, harm)
1.1.2 Sources of obligations and their concepts

● ARTICLE 1157 – Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.
1.1.2.1 Law (Obligation ex lege) – imposed by law itself; must be expressly or impliedly set forth and
cannot be presumed.
Examples: Obligation to pay taxes; obligation to support one’s family.
1.1.2.2 Contracts (Obligation ex contractu) – arise from stipulations of the parties: meeting of the minds
/ formal agreement.
– must be complied with in good faith because it is the “law” between parties; neither
party may unilaterally evade his obligation in the contract, unless:
a. contract authorizes it; or
b. other party assents.
Example: The obligation to repay a loan or indebtedness by virtue of an agreement.
NOTE: Parties may freely enter into any stipulations, provided they are not contrary to law,
morals, good customs, public order or public policy.
1.1.2.3 Quasi-contracts (Obligation ex quasi-contract) - arise from lawful, voluntary and unilateral acts
and which are enforceable to the end that no one shall be unjustly enriched or benefited at the expense
of another.
Example: The obligation to return money paid by mistake or which is not due.
Kinds of Quasi-contracts:
a. NEGOTIORUM GESTIO - unauthorized management. This takes place when a person
voluntarily takes charge of another’s abandoned business or property without the owner’s
authority.
b. SOLUTION INDEBITI - undue payment. This takes place when something is received when
there is no right to demand it, and it was unduly delivered thru mistake.
1.1.2.4 Delicts (Obligation ex maleficio or ex delicto) – arise from civil liability which is the consequence
of a criminal offense.
1.1.2.5 Quasi-delicts or torts (Obligation ex quasi-delicto or ex quasi-maleficio) – - arise from damage
caused to another through an act or omission, there being no fault or negligence, but no contractual
relation exists between the parties.
Example: The obligation of the owner of an animal to pay for the damage which it may have
caused.
Requisites of quasi-delict:
1. There must be an act or omission.
2. There must be fault of negligence.
3. There must be damage caused.
4. There must be a direct relation or connection of cause and effect between the act or
omission and the damage.
5. There is no pre-existing contractual relation between the parties.
1.1.3 Kinds of Obligations

1.1.3.1 Pure/Conditional/Obligation with a Term
a. PURE OBLIGATION – an obligation which does not contain any condition or term upon which
the fulfillment is made to depend.

– immediately demanded by the creditors and the debtor cannot be excused from not
complying with his prestation.
b. CONDITIONAL OBLIGATION – an obligation which depends upon a future or uncertain event,
or upon a past event unknown to the contracting parties.
– An obligation subject to a condition.
1. Suspensive Obligation – its fulfillment gives rise to an obligation; the demandability of
the obligation or the effectiveness of the contract can take place only after the
condition has been fulfilled. (e.g. promise to give a car after graduating from law
school as cum laude)
2. Resolutory Obligation – its happening extinguishes the obligation which is already
existing. (e.g. donation by reason of marriage – the celebration of marriage is a
resolutory condition; if the marriage did not push through, the donation may be
revoked)
1.1.3.2 Solidary /Joint Obligations
● ARTICLE 1207 – The concurrence of two or more creditors or of two or more debtors in one
and the same obligation does not imply that each one of the former has a right to demand, or
that each one of the latter is bound to render, entire compliance with the prestation. There is
a solidarity liability only when the obligation expressly states, or when the law or the nature
of the obligation requires solidarity.
1. JOINT – entire obligation is to be paid or performed proportionately by the debtors.
2. SOLIDARY – each one of the debtors are obliged to pay the entire obligation, each one
of the creditors has the right to demand from any of the debtors for the fulfillment of
the entire obligation.
a. Passive Solidarity – full payment made by any of the solidary debtors
extinguishes the obligation. The one who paid can claim reimbursement from
his co-debtors as regards their corresponding shares in the obligation.
b. Active Solidarity – full payment to any of the creditors extinguishes the
obligation. The creditor who received the entire amount will be liable to pay
the corresponding shares of his co-creditors in accordance with their internal
agreement.
NOTE: SOLIDARITY SHOULD BE EXPRESSED – law, stipulation, nature of obligation. When the
obligation is ambiguous, it must be considered as a joint obligation.
1.1.3.3 Alternative/ Facultative Obligations
a. ALTERNATIVE OBLIGATION – an obligation where the debtor is required to fulfill ONLY ONE of
the several prestations to extinguish the obligation.
b. FACULTATIVE OBLIGATION – an obligation where the debtor is bound to perform only one
prestation, with a reserved right to choose another prestation as SUBSTITUTE for the principal.
1.1.3.4 Divisible/ Indivisible Obligations
a. DIVISIBLE OBLIGATION – is one the object of which, in its delivery or performance, is capable
of partial fulﬁllment.
b. INDIVISIBLE OBLIGATION – an obligation where the prestation or object to be delivered cannot
be performed by parts without altering its essence or substance.
1.1.3.5 Obligation with a Penal Clause
➢ Penal clause - may be defined as one to which an accessory undertaking is attached for the
purpose of ensuring its performance by virtue of which the obligor is bound to pay a stipulated
indemnity or perform a stipulated prestation in case of breach.
1.1.4 Specific circumstances affecting obligations in general

1.1.4.1 Fortuitous Events
“A fortuitous event is any extraordinary event which cannot be foreseen, or which, though foreseen,
is inevitable; absolutely independent of human intervention; an act of God.”
Kinds of fortuitous events:
1. Ordinary fortuitous events or those events which are common and which the
contracting parties could reasonably foresee. (e.g., rain)
2. Extraordinary fortuitous events or those events which are uncommon and which the
contracting parties could not have reasonably foreseen. (e.g., earthquake, fire, war,
pestilence, unusual flood)
Requisites of Fortuitous Event:

1. Independent of the human will (or at least of the obligor’s)
2. Unforeseen or unavoidable
3. Of such character as to render it impossible for the obligor to comply with his
obligation in a normal manner.
4. Obligor – free from any participation/aggravation of the injury to the obligee. (no
negligence or imprudence)
Exceptions:
1. When it is expressly stipulated that he shall be liable even if non-performance of the
obligation is due to fortuitous events.
2. When the nature of the obligation requires the assumption of risk.
3. When the obligor is in delay.
4. When the obligor has promised the same thing to two or more persons who do not
have the same interest.
5. When the possessor is in bad faith and the thing is lost or deteriorated due to
fortuitous event.
6. When the obligor contributed to the loss of the thing.
1.1.4.2 Fraud (deceit or dolo) — the deliberate or intentional evasion of the normal fulfillment of an
obligation.
Kinds of fraud:
a. INCIDENTAL FRAUD – committed in the performance of an obligation already existing because
of a contract.
b. CAUSAL FRAUD – employed in the execution of contract in order to secure consent; remedy
is annulment because of vitiation of consent.
1.1.4.3 Negligence (culpa or fault) – voluntary act or omission of diligence, there being no malice, which
prevents the normal.
1.1.4.4 Delay (mora) – default or tardiness in the performance of an obligation after it has been due and
demandable.
1.1.4.5 Breach of contract – failure without justifiable excuse to comply with the terms of a contract.
The breach may be willful or done unintentionally. It has been defined as the failure, without legal
excuse, to perform any promise which forms the whole or part of the contract.
1.1.5 Nature and Effects of Obligations

1.1.5.1 Concurrent Obligations in obligations to give a specific/determinate thing
1. Preserve or take care of the things due.
a. DILIGENCE OF A GOOD FATHER – a good father does not abandon his family, he is always
ready to provide and protect his family; ordinary care which an average and reasonably
prudent man would do.
b. ANOTHER STANDARD OF CARE – extraordinary diligence provided in the stipulation of parties.
c. FACTORS TO BE CONSIDERED – diligence depends on the nature of obligation and
corresponds with the circumstances of the person, time, and place.
➢ Debtor is not liable if his failure to deliver the thing is due to fortuitous events or force
majeure, without negligence or fault on his part.
2. Deliver the fruits of a thing
3. Deliver the accessions/accessories
4. Deliver the thing itself
5. Answer for damages in case of non-fulfillment or breach
Kinds of Fruits:
1. NATURAL – spontaneous products of the soil, the young and other products of animals.
2. INDUSTRIAL – produced by lands of any cultivation or labor.
3. CIVIL – those derived by virtue of juridical relation.
Accessories vs. Accessions

a. ACCESSIONS – fruits of the thing or additions to or improvements upon the principal and those
which are naturally or artificially attached to the thing.
b. ACCESSORIES – things included with the principal for the latter’s embellishment, better use,
or completion.
➢ When does the right to fruits arise? – from the time the obligation to deliver arises

○ Conditional – from the moment the condition happens.
○ With a term/period – upon the expiration of the term/period.
○ Simple – from the perfection of the contract.
Period/Term – consists in a space or length of time upon the arrival of which, the demandability or
the extinguishment of an obligation is determined. It may be definite (exact date or time is known) or
indefinite (arrival of date is unknown but sure to come).
General classifications:
a. EX DIE / SUSPENSIVE PERIOD – from a day certain give rise to the obligation; suspensive
effect.
b. IN DIEM / RESOLUTORY PERIOD – arrival of a term certain terminated the obligation;
resolutory effect.
Term vs. Condition:
a. TERM – length of time sure to come.
b. CONDITION – fact or event uncertain to come
1.1.5.2 Obligations to do or not to do

● ARTICLE 1167 – If a person obliged to do something fails to do it, the same shall be executed
at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has been poorly done be undone.
● ARTICLE 1168 – When the obligation consists in not doing, and the obligor does what has been
forbidden him, it shall also be undone at his expense.
Duties of the obligor in an obligation to do:
1. To do it
2. To shoulder the cost if someone does it
3. To undo what has been poorly done
4. To pay damages
Duties of the obligor in an obligation to do (Negative Obligation):
1. Not to do what should not be done
2. To shoulder the cost to undo what should not have been done
3. To pay damages
1.1.5.3 Remedies in case of non-performance
1. To Give Determinate Thing
a. To compel specific performance
b. To recover damages
2. To Give Indeterminate Thing
a. To ask for performance of the obligation
b. To ask that obligation be complied with by another at expense of debtor
c. To recover damages
3. To Do
a. To have the obligation performed at debtor's expense
4. Not to Do
a. Undone at his expense
1.1.5.4 Damages – It is a monetary compensation given in satisfaction of loss suffered by a person.
Simply put, they are awarded to redress sufferings of a plaintiff that is duly proved.
Kinds of Damages:
1. Actual or compensatory damages - are those awarded in satisfaction of, or in recompense
for, loss or injury sustained. They simply make good or replace the loss caused by the wrong.
2. Moral damages - are awarded to enable the injured party to obtain means, diversions or
amusements that will serve to alleviate the moral suffering he has undergone, by reason of
the defendant’s culpable action.
3. Exemplary or corrective damages - are imposed, by way of example or correction for the
public good, in addition to moral, temperate, liquidated or compensatory damages.

4. Liquidated damages - are those agreed upon by the parties to a contract, to be paid in case of
breach thereof. the parties to a contract are allowed to stipulate liquidated damages to be paid
in case of breach.
5. Nominal damages - may be awarded in order that the plaintiff’s right, which has been violated
or invaded by the defendant, may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered.
6. Temperate damages - may be recovered when pecuniary loss has been suffered but the
amount cannot, from the nature of the case, be proven with certainty. In such cases, the
amount of the award is left to the discretion of the courts, according to the circumstances of
each case, but the same should be reasonable, bearing in mind that temperate damages
should be more than nominal but less than compensatory.
1.1.6 Extinguishment of obligation with special emphasis on
1.1.6.1 Payment of debts of money
● ARTICLE 1249 – The payment of debts in money shall be made in the currency stipulated, and
if it is not possible to deliver such currency, then in the currency which is legal tender in the
Philippines. The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been cashed,
or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in the abeyance.
Legal Tender - means such currency which in a given jurisdiction can be used for the payment
of debts, public and private, and which cannot be refused by the creditor.
- That which a debtor may compel a creditor to accept in payment of debt.

- So long as the notes were legal tender at the time they were paid or delivered, the
person accepting them must suffer the loss if thereafter they became valueless.
- Payments of all monetary obligations should now be made in currency which is legal
tender in the Phils. A stipulation providing payment in a foreign currency is null and
void but it does not invalidate the entire contract.
- A check, whether a manager’s check or an ordinary check is not legal tender and an
offer of the check in payment of debt is not a valid tender of payment
1.1.6.2 Mercantile documents as means of payment – The delivery of promissory notes payable to order,
or bills of exchange or other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have been impaired.
1.1.6.3 Special forms or mode of payment

1.1.6.3.1 Dation in payment
● ARTICLE 1245 – Dation in payment, whereby property is alienated to the creditor in

satisfaction of a debt in money, shall be governed by the law of sales.
- This is the delivery and transmission of ownership of a thing by the debtor to
the creditor as an accepted equivalent of the performance of the obligation.
- The property given may consist not only of a thing but also of a real right.
(such as a usufruct)
- Considered as a novation by change of the object.
- Where the debt is money, the law on sale shall govern; in this case, the act is
deemed to be a sale with the amount of the obligation to the extent that it is
extinguished being considered as price.
- Difference between Dation and Cession (see Art. 1255)
1.1.6.3.2 Application of payments

Requisites:
1. 1 debtor and 1 creditor only.

2. 2 or more debts of the same kind.
3. All debts must be due.

4. Amount paid by the debtor must not be sufficient to cover the total amount of
all the debts.
If the debtor makes a proper application of payment but the creditor refuses to accept it because he
wants to apply it to another debt, such creditor will incur in delay.
Right of Debtor to make application – If at the time of payment, the debtor does not exercise
his right to apply it to any of his debts, the application shall be understood as provided by law,
unless the creditor makes the application and his decision is accepted by the debtor. This
application of payment can be made by the creditor only in the receipt issued at the time of
payment. (although the application made by creditor may be contested by the debtor if the
latter’s assent to such application was vitiated by such causes as mistake, violence,
intimidation, fraud, etc)
The debtor and the creditor by agreement, can validly change the application of payment
already made without prejudice to the rights of third persons acquired before such agreement.
1.1.6.3.3 Payment by cession – A special form of payment whereby the debtor abandons or
assigns all of his property for the benefit of his creditors so that the latter may obtain payment
of their credits from the proceeds of the property.
Requisites:
1. Plurality of debts
2. Partial or relative insolvency of the debtor
3. Acceptance of cession by the creditors
1.1.6.3.4 Tender of payment and consignation

➢ Tender of payment - manifestation made by the debtor to the creditor of his desire to comply
with his obligation; The act of the debtor of offering to the creditor the thing or amount due.
➢ Consignation - Deposit of the object or the amount due with the proper court after refusal or
inability of the creditor to accept the tender of payment.
Special Requisites of consignation:

1. There was a debt due.
2. The consignation of the obligation was made because of some legal cause provided in
the present article.
3. That previous notice of the consignation has been given to persons interested in the
performance of the obligation.
4. The amount or thing due was placed at the disposal of the court.
5. After the consignation had been made the persons interested had been notified
thereof.
1.1.6.4 Loss of the thing due, remission or condonation, confusion, compensation and novation
a. Loss of the thing due
a. Determinate and Generic Thing
i. Determinate thing
General Rule: An obligation which consists in the delivery of a determinate thing shall
be extinguished if it should be lost or destroyed without the fault of the debtor, and
before he has incurred in delay.
Exceptions:
1. By law
2. By stipulation
3. Assumption of risk
When by law or stipulation, the obligor is liable even for fortuitous events, the loss of
the thing does not extinguish the obligation, and he shall be responsible for damages.

The same rule applies when the nature of the obligation requires the assumption of
risk.
ii. Generic thing – In an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation. The court shall determine
whether, under the circumstances, the partial loss of the object of the obligation is so
important.
b. Remission or Condonation
i. Gratuitous - Remission or comdonation is essentially gratuitous, and requires the
acceptance of the obligor. It may be expressly or implied
ii. Acceptance by obligor, required
One and the other kind shall be subject to the rules which govern inofficious donations.
Express condonation shall, furthermore, comply with the forms of donation.
c. Confusion
1. Extinguishes obligation – The obligation is extinguished from the time the characters of
creditor and debtor are merged in the same person.
2. As between principal or creditor – Merger which takes place in the person of the principal
debtor or creditor benefits the guarantors.
3. As against guarantors – Confusion which takes place in the person of any of the guarantors
does not extinguish the obligation.
4. Joint obligation – Confusion does not extinguish a joint obligation except as regards the
share corresponding to the creditor or debtor in whom the two characters concur.
d. Compensation – shall take place when two persons, in their own right, are creditors and
debtors of each other.
Requisites – General rule: In order that compensation may be proper, it is necessary:
1. That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
2. The both debts consists in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
3. That the two debts be due;
4. That they be liquidated and demandable;
5. That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
Exceptions:
1. The guarantor may set up compensation as regards what the creditor may owe the
principal debtor.
2. The parties may agree upon the compensation of debts which are not yet due.
e. Novation – consists in substituting a new debtor in the place of the original once, may be made
even without the knowledge or against the will of the latter, but not without the consent of the
creditor.
Kinds of Novation:
Obligations may be modified by:
1. Changing their object or principal conditions;

2. Substituting the person of the debtor; or
3. Subrogating a third person in the rights of the creditor
➢ In order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be declared in unequivocal terms, or that the old and the
new obligations be on every point incompatible with each other.

➢ When the principal obligation is extinguished in consequence of a novation, accessory
obligations may subsist only insofar as they may benefit third persons who did not
give their consent.
➢ If the new obligation is void, the original one shall subsist, unless the parties intended
that the former relation should be extinguished in any event.
General rule: The novation is void if the original obligation was void.
Exception: When annulment may be claimed only by the debtor or when ratification validates
acts which are voidable. If the original obligation was subject to a suspensive or resolutory
condition, the new obligation shall be under the same condition, unless it is otherwise
stipulated.
1.2 Contracts
1.2.1 General Provisions

1.2.1.1 Definition
● ARTICLE 1305 – A contract is a meeting of the minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some service.
● Contract - a juridical convention manifested in legal form, by virtue of which one or more
persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a
prestation to give, to do or not to do.
1.2.1.2 Classification
1. According to name or designation
a. NOMINATE - that which has a specific name or designation in law.

b. INNOMINATE - that which has no specific name or designation in law.
2. According to perfection
a. CONSENSUAL - perfected by mere consent.
b. REAL - perfected by the delivery of the thing subject matter of the contract.
c. SOLEMN - that which requires compliance with certain formalities prescribed by law.
3. According to cause
a. Onerous
b. Remuneratory or remunerative
c. Gratuitous
4. According to form
a. Informal, common, or simple
b. Formal or solemn
5. According to obligatory force
a. Valid
b. Rescissible
c. Voidable
d. Unenforceable
e. Void or inexistent
6. According to person obliged

a. Unilateral
b. Bilateral
7. According to risks

a. COMMUTATIVE - when the undertaking of one party is considered the equivalent of
that of the other. (sale, lease)
b. ALEATORY - when it depends upon an uncertain event or contingency both as to
benefit or loss. (insurance, sale of hope)
8. According to liability
a. UNILATERAL - when it creates an obligation on the part of only one of the parties.
(commodatum, gratuitous deposit)
b. BILATERAL - when it gives rise to reciprocal obligations for both parties. (sale, lease)
9. According to status
a. EXECUTORY - when it has not yet been completely performed by both parties.
b. EXECUTED - when it has been fully and satisfactorily carried out by both parties.
10. According to dependence to another contract
a. PREPARATORY - when it is entered into as a means to an end. (agency, partnership)

b. ACCESSORY - when it is dependent upon another contract it secures or guarantees
for its existence or validity. (mortgage, guaranty)
c. PRINCIPAL - when it does not depend for its existence and validity upon another
contract but is an indispensable condition for the other existence for an accessory
contract. (sales, lease)
11. According to dependence of part of contract to other parts

a. INDIVISIBLE - when each part of the contract is dependent upon the other parts for
satisfactory performance.
b. DIVISIBLE - when one part of the contract may be satisfactorily performed
independently of the other parts.
1.2.1.3 Stages of contract

1. Preparation or negotiation - This includes all the steps taken by the parties leading to the
perfection of the contract. At this stage, the parties have not yet arrived at any definite
agreement.
2. Perfection or birth - This is when the parties have come to a definite agreement or meeting of
the minds of the parties regarding the subject matter and cause of the contract.
3. Consummation or termination - the fulfillment or performance of the terms agreed upon in
any contract.
1.2.1.4 Freedom to contract (establish stipulations) and limitation – Any person has the liberty to enter
into a contract so long as they are not contrary to law, morals, good customs, public order or public
policy. The legislature, under the constitution, is prohibited from enacting laws to prescribe the terms
of a legal contract.
● Validity of Stipulations – Any and all stipulations not contrary to law, morals, good customs, public
order or public policy is valid
LIMITATIONS
➢ Contrary to law: Freedom of contract is restricted by law for the good of the public. It is
fundamental postulate that however broad the freedom of the contracting parties may be, it does
not go so far as to countenance disrespect for or failure to observe a legal prescription. The
Statute takes precedence.
Examples:
● A promissory note which represents a gambling debt is unenforceable in the hands of the
assignee.
● Stipulations to pay usurious interests are void.

● A contract between two public service companies to divide the territory is void because it
impairs the control of the Public Service Commission.
● Agreement to declare valid a law or ordinance is void.
➢ Contrary to Morals: Morals mean those generally accepted principles of morality which have
received some kind of social and practical confirmation.
Examples:
● A promise to marry or nor to marry, to secure legal separation, or to adopt a child
● A promise to change citizenship, profession, religion or domicile
● A promise not to hold public office or which limits the performance of official duties
● A promise to enter a particular political party or separate from it contracts which limit in
an excessive manner the personal or economic freedom of a person to make an act
dependent on money or some pecuniary value, when it is of such a nature that it should
not depend thereon; payment to kill another.
➢ Contrary to Public Order: Public order means the public weal or public policy. It represents the
public, social, and legal interest in private law that is permanent and essential in institutions,
which, even if favoring some individual to whom the right pertains, cannot be left to his own will.
A contract is said to be against public order if the court finds that the contract as to the
consideration or the thing to be done, contravenes some established interest of society, or is
inconsistent with sound policy and good morals, or tends clearly to undermine the security of
individual rights.
Examples:
● Common carriers cannot stipulate for exemption for liability unless such exemption is
justifiable and reasonable and the contract is freely and fairly made.
● Payment to intermediaries in securing import licenses or quota allocations.
● Contract of scholarship stipulating that the student must remain in the same school and
that he waives his right to transfer to another school without refunding the school.
1.2.1.5 Persons bound

1. General rule - As a general, a party’s right and obligations derived from a contract are
transmissible to the successors. Contracts take effect only between the parties, their assigns,
and heirs. This means that only the parties, their assigns and heirs can have rights and
obligations under contract.
2. Exceptions - The cases when a contract are effective only between the parties are when
the rights and obligations arising from the contract are not transmissible:
a. By their nature (like a contract involving personal qualifications such as painting,

singing, etc.
b. By stipulation (in accordance with the principle of freedom to contract)
c. By provision of law (as in agency, partnership, and commodatum, when death
extinguishes the legal relationship)
1.2.2 Essential requisites

1.2.2.1 Consent
1.2.2.1.1 Requisites
● ARTICLE 1318 – There is no contract unless the following requisites concur:
1. Consent of the contracting parties;
2. Object certain which is the subject matter of the contract; and
3. Cause of the obligation which is established.
1.2.2.1.2 Capacitated Person

● ARTICLE 1327 – The following cannot give consent to a contract:
1. Unemancipated person
2. Insane or demented person, and deaf-mutes who do not know to write

1.2.2.1.3 Vices of Contracts
● ARTICLE 1330 – A contract is voidable if the consent is given through mistake,
violence, intimidation, undue influence, or fraud.
● Mistake (ARTICLES 1331 - 1334)
○ In order that mistake may invalidate consent, it should refer to the
substance of the thing which is the object of the contract, or to those
conditions which have principally moved one or both parties to enter
into the contract.
○ When one of the parties is unable to read, or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the
person enforcing the contract must show that the terms thereof have
been fully explained to the former.
○ There is no mistake if the party alleging it knew the doubt, contingency
or risk affecting the object of the contract.
○ Mutual error as to the legal effect of an agreement when the real
purpose of the parties is frustrated, may vitiate consent.
● Intimidation and Violence (ARTICLES 1335 - 1336)
○ There is violence when in order to wrest consent, serious or
irresistible force is employed.
○ There is intimidation when one of the contracting parties is compelled
by a reasonable and well-grounded fear of an imminent and grave
evil upon his person or property, or upon the person or property of
his spouse, descendants or ascendants, to give his consent.
○ Violence or intimidation shall annul the obligation, although it may
have been employed by a third person who did not take part in the
contract.
● Undue Influence (ARTICLE 1337)
○ There is undue influence when a person takes improper advantage of
his power over the will of another, depriving the latter of a reasonable
freedom of choice.
○ The following circumstances shall be considered as undue influence:
1. The confidential, family, spiritual and other relations between
the parties.
2. The fact that the person alleged to have been unduly
influenced was suffering from mental weakness, or was
ignorant or in financial distress.
● Fraud (ARTICLES 1338 - 1344)
○ There is fraud when, through insidious words or machinations of one
of the contracting parties, the other is induced to enter into a contract
which, without them, he would not have agreed to.
○ Failure to disclose facts, when there is a duty to reveal them, as when
the parties are bound by confidential relations, constitutes fraud.
○ The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent.
○ A mere expression of an opinion does not signify fraud, unless made
by an expert and the other party has relied on the former's special
knowledge.
○ Misrepresentation by a third person does not vitiate consent, unless
such misrepresentation has created substantial mistake and the
same is mutual.
○ Misrepresentation made in good faith is not fraudulent but may
constitute error.
○ In order that fraud may make a contract voidable, it should be serious
and should not have been employed by both contracting parties.
1.2.2.2 Objects of Contracts (ARTICLES 1347 - 1349)

● All things which are not outside the commerce of men, including future things, may
be the object of a contract. All rights which are not intransmissible may also be the
object of contracts.
● All services which are not contrary to law, morals, good customs, public order or
public policy may likewise be the object of a contract.
● No contract may be entered into upon future inheritance except in cases expressly
authorized by law.
● Impossible things or services cannot be the object of contracts.
● The object of every contract must be determinate as to its kind.
1.2.2.3 Cause of Consideration of Contracts (ARTICLE 1350)

“In onerous contracts the cause is understood to be, for each contracting party, the
prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit
which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor.”
● Motive vs Consideration (ARTICLE 1531) – “The particular motives of the parties in entering into
a contract are different from the cause thereof."
● Unlawful vs False Cause (ARTICLES 1532 - 1533) – “Contracts without cause, or with unlawful
cause, produce no effect whatsoever. The cause is unlawful if it is contrary to law, morals,
good customs, public order or public policy."
“The statement of a false cause in contracts shall render them void, if it should not
be proved that they were founded upon another cause which is true and lawful.”
● Lesion (ARTICLE 1535) – “Except in cases specified by law, lesion or inadequacy of

cause shall not invalidate a contract, unless there has been fraud, mistake or undue
influence."
1.2.3 Forms of Contracts (ARTICLES 1356 - 1358)
“Contracts shall be obligatory, in whatever form they may have been entered into, provided all
the essential requisites for their validity are present. However, when the law requires that a contract
be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain
way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in
the following article cannot be exercised.”
“If the law requires a document or other special form, as in the acts and contracts enumerated
in the following article, the contracting parties may compel each other to observe that form, once the
contract has been perfected. This right may be exercised simultaneously with the action upon the
contract.”
“All other contracts where the amount involved exceeds five hundred pesos must appear in
writing, even a private one.”
The following must appear in the public document:

1. Acts and contracts;
2. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal
partnership of gains;
3. The power to administer property, or any other power which has for its object an act appearing
or which should appear in a public document, or should prejudice a third person; and
4. The cession of actions or rights proceeding from an act appearing in a public document.
1.2.4 Reformation of Instrument/Contracts
Meaning of Reformation (ARTICLE 1359) – Remedy allowed by law by means of a written instrument is
amended or rectified so as to express or conform to the real agreement or intention of the parties
when by reason of mistake, fraud, inequitable conduct, or accident, the instrument fails to express
such agreement or intention.

Requisites of Reformation – In order that reformation may be availed or as remedy, the following
requisites must be present:
1. Meeting of the minds of the parties to the contract;

2. Written instrument does not express the true agreement or intention of the parties;
3. Failure to express the true intention is due to mistake, fraud, inequitable conduct (i.e., any act
or omission which is unjust or unfair), or accident;
4. Facts upon which relief by way of reformation of the instrument is sought are put in issue by
the pleadings; and
5. Clear and convincing evidence (which is more than mere preponderance of evidence) of the
mistake, fraud, inequitable conduct, or accident.
Reformation is thus not available as a remedy where no writing exists, or even when a writing
exists, there is no showing of any defect of consent thereon.
NOTE: Reformation of contracts, what is reform is not the contract itself, but the written
instrument embodying the contract.
Reformation distinguished from annulment

In reformation, there has been a meeting of the minds of the parties; hence, a contract exists
but the written instrument purporting to embody the contract does not express the true
intention of the parties by reason of mistake, fraud, inequitable conduct, or accident.
In annulment, there has been no meeting of the minds, the consent of one of the parties being
vitiated by mistake, etc.
Principles of the general law on reformation (ARTICLE 1360)

In case of conflict between the provision of the new civil code and the principles of the general
law on reformation, the former prevails. The latter will have only a supplementary effect.
Mutual mistake as basis for reformation (ARTICLE 1361) – Mutual mistake is a mistake of fact that is
common to both parties of the instrument which causes the failure of the instrument to express their
true intention.
To justify your formation under this article, the following requisites must concur:
1. The mistake must be of fact;
2. Such mistakes be proved by clear and convincing evidence;
3. The mystique must be mutual, that is, common to both parties to the instrument; and
4. The mistakes must cause the failure of the instrument to express their true intention.
NOTE: If the mutual mistake is of law, the remedy is annulment.
Mistake on one side, fraud, or inequitable conduct on the other – The right to ask for reformation is
granted only to the party who was mistaken in good faith. Here, the mistake is not mutual.
Concealment of mistake by the other party (ARTICLE 1362) – The remedy of reformation may be availed
of the party who acted in good faith. The concealment mistake by the other party constitutes fraud.
Ignorance, etc. on the part of the third person (ARTICLE 1364) – If neither party is responsible for the
mistake. Hence, either party may ask for reformation.
Mortgage or Pledge stated as a sale (ARTICLE 1365) – The reformation of the instrument is proper;
otherwise, the true intention of the parties would be frustrated. Such true intention must prevail for
the contract must be complied with in good faith.
Cases when reformation is not allowed (ARTICLE 1366)

1. Simpleion inter vivos where no condition is imposed.
2. Wills

3. When the real agreement is void.
4. When one party has brought an action to enforce the instrument.
Party entitled to reformation (ARTICLE 1368) – Persons who can bring an action to reform an
instrument:
1. Either of the parties if the mistake is mutual under Articles 1361, 1364, and 1365;
2. In all other cases, the injured party, under Articles 1362, 1363, 1364, and 1365; and
3. The heirs or successors in interest, in lieu of the party entitled.
The burden of proof is a panda party who insists the contract should be reformed because of its failure
to express the true intention of the parties. The presumption is that an instrument sets out the true
agreement of the parties. The effect of reformation is retroactive from the time of the execution of the
original contract.
Procedure for deformation – The rules of court govern procedure. However, the supreme court has
not yet promulgated the procedure for the reformation of the instrument.
1.2.5 Interpretation of Contracts (ARTICLE 1370) – Interpretation of contract is the determination of the meaning
of the terms or words used by the parties in a written contract. It is the process of ascertaining the intention
of the parties from the written words contained in the contract.
Literal meaning controls when language is clear – Contracts, which are the private laws of the
contracting parties, should be fulfilled according to the literal sense of their stipulations, if the terms
of a contract are clear and unequivocal. The parties are bound by such terms. In this case The question
is not what existed in the mind of the parties but what intention is expressed in the language used.
Evident intention of parties prevails over terms of legal contract - We're the words and clauses of a
written contract are in conflict with the manifest intention of the parties, the latter shall prevail over
the former. It is a cardinal rule in the interpretation of contracts that the intention of the contracting
parties should always prevail because they will have the force of law between them.
Contemporaneous and subsequent acts relevant in the determination of intention – Where the parties
to a contract have placed an interpretation to the terms thereof by their contemporaneous and/or
subsequent conduct, aspire in partial performance, such interpretation may be considered by the court
in determining its meaning and ascertaining the intention of the parties when such intention cannot
clearly be ascertained from the words used in their contract.
Special intent prevails over a general intent (ARTICLE 1372) – As a rule, where in a contract there are
general and special provisions covering the same subject matter, the latter control over the former
when the two cannot stand together.
The reason for this rule is that when the parties express themselves in reference to a particular
matter, the attention is directed to that, and it must be assumed that it expresses their intent; whereas,
a reference to some good general matter, within which the particular matter may be included, does
not necessarily indicate that the parties had that particular matter in mind.
Interpretation of stipulation with several meanings (ARTICLE 1373) – When an agreement is

susceptible to several meanings, one of which would render it effectual, it should be given that
interpretation. Thus, if one interpretation makes a contract valid and the other makes it illegal, the
former interpretation is one which is warranted by the rule.
Interpretation of various stipulations of a contract (ARTICLE 1374) – A contract must be interpreted as

a whole and the interpretation of the parties is to be gathered from the entire instrument and not from
particular words, phrases, or clauses. All provisions should, if possible, be so interpreted as to
harmonize with each other.
Interpretation of words with different significations (ARTICLE 1375) – If a word is susceptible to two or
more meanings, it is to be understood in that sense which is most in keeping with the nature and
object of the contract in line with the cardinal rule that the intention of the parties must prevail.

Resort to usage or custom as aid in interpretation (ARTICLE 1376) – The usage or custom of the place
where the contract was entered into may be received to explain what is doubtful or ambiguous in a
contract on the theory that the parties entered into their contract with reference to such usage or
custom.
It is, however, necessary to prove the existence of usage or custom, the burden of proof being upon
the party alleging it. But usage or custom is not admissible to supersede or vary the plain terms of a
contract.
Interpretation of obscure words – A written agreement should, in case of doubt, be interpreted against
the party who has drawn it, or be given an interpretation which will be favorable to the other who,
upon the faith of which, has incurred an obligation.
The reason for the rule in Article 1377 is that the party. who drafts the contract (e.g., insurance contract
the terms of which are prescribed by the insurance company in printed form), more easily than the
other, could have prevented mistakes or ambiguity in meaning by careful choice of words; and
generally, the party who causes the obscurity acts with ulterior motives.
The rule is generally applied to what are called contracts of adhesion, that is to say, contracts most of
the terms of which do not result from mutual negotiation between the parties as they are usually
prescribed in printed forms prepared by one party to which the other may “adhere" if he chooses but
which he cannot change. Aside from insurance contracts, the rule also applies to bill of ladings for
goods, plane tickets, and contracts between lawyer and client, and to all other contracts where their
provisions have been drafted only by one party.
Rules in case doubts impossible to settle – When, despite the application of the preceding rules,
certain doubts still exist, such doubts shall be resolved in accordance with the supplementary rules
stated in the present article.
1. Gratuitous contract. If the doubts refer to incidental circumstances of a gratuitous contract,

such interpretation should be made which would result in the least transmission of rights and
interests.
2. Onerous contract. If the contract in question is onerous, the doubts should be settled in favor
of the greatest reciprocity of interests. A contract of sale is essentially onerous. Thus, whether
the parties intended a suspensive condition or a suspensive period for the payment of the
agreed price, the doubt shall be resolved in favor of the latter, that is, the buyer's obligation is
deemed to be actually subsisting, with only its maturity postponed or deferred.
3. Principal object of the contract. If the doubt refers to the principal object of the contract and
such doubt cannot be resolved thereby leaving the intention of the parties unknown, the
contract shall be null and void.
● Principles of interpretation in the rules of court applicable. The rules in the Rules of Court on
the interpretation of documents are now contained.
1.2.6 Defective Contracts – arranged, presented, and regulated in ascending order of defectiveness. The
classification has been done with a not inconsiderable amount of effort and an attempt at thoroughness. Thus,
each of these defective contracts has its own requisites and consequences. Ideally, one would suppose,
the distinctions should serve as water-tight compartments. For the most part—but not always—they have
functioned well in the jurisprudence that has been laid down in the six-and-a-half decades since the effectivity
of the Code.
1.2.6.1 Resistible – Contracts validly agreed upon may be rescinded in the cases established by law.
The following contracts are rescissible:

1. Those which are entered into by guardians whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of the things which are the object thereof;
2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;

3. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the
claims due them;
4. Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority; and
5. All other contracts specially declared by law to be subject to rescission.
Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be
compelled at the time they were affected, are also rescissible.
The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage
has no other legal means to obtain reparation for the same.
Rescission shall be only to the extent necessary to cover the damages caused.
Rescission creates the obligation to return the things which were the object of the contract, together
with their fruits, and the price with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore. Neither shall rescission take
place when the things which are the object of the contract are legally in the possession of third
persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the
person causing the loss.
Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts
approved by the courts.
All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have
been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all
debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when
made by persons against whom some judgment has been issued. The decision or attachment need not
refer to the property alienated, and need not have been obtained by the party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may be proved in any other manner
recognized by the law of evidence.
Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for
damages suffered by them on account of the alienation, whenever, due to any cause, it should be
impossible for him to return them. If there are two or more alienations, the first acquirer shall be
liable first, and so on successively.
The action to claim rescission must be commenced within four years. For persons under guardianship
and for absentees, the period of four years shall not begin until the termination of the former's
incapacity, or until the domicile of the latter is known.
1.2.6.2 Voidable
Contracts that are voidable or annullable:
1. When either party is incapable of giving consent to a contract.
2. When consent is vitiated by mistake, violence, intimidation, undue influence, fraud.
3. Binding, unless annulled by a proper court action.
Prescription for action of annulment: 4 years to begin: when vice is due to intimidation,
violence or undue influence:
1. From the time the defect of consent ceases by mistake or fraud.
2. From the time of discovery entered into by minors or those incapable of giving
consent.
3. The moment guardianship ceases.
Ratification extinguishes action for annulment may be express or tacit.
➢ Tacit Ratification, the execution of an act which necessarily implies an intention to

waive his right by the party, who, knowing of the reason which renders the contract
voidable, has a right to invoke annulment. May be affected by the guardian of the
incapacitated person does not require the conformity of the person who does not have

a right to bring an action for annulment, cleanses the contract from all its defects
from the moment it was constituted Annulment.
Who May Institute?

1. By all who are obliged principally or subsidiarily
2. Exceptions: Persons capable cannot allege the incapacity of those with whom they
contracted
3. Persons who exerted violence, undue influence, who employed fraud or caused
mistake
Action for annulment cannot be based on thee flaws:
● Gives rise to the responsibility of restoring to each other things subject matter of the
contract, with fruits, price with its interest, except in cases provided by law.
● Service, value thereof will serve as the basis for damages. Incapacitated persons not
obliged to make restitutions except insofar as he has been benefited by the thing or
price received by him. If objects cannot be returned because these were lost through
his fault, he shall return the fruits received and the value of the thing at the time of
the loss, with interests from the same date. As long as one of the contracting parties
does not restore what in virtue of the annulment decree he is bound to return, the
other cannot be compelled to comply with what is incumbent upon him.
Extinguishment of Action – If an object is lost through the fault or fraud of a person who has
the right to institute the proceedings if action based on incapacity of any one of contracting
parties, loss of thing shall not be an obstacle to the success of action, unless loss or fraud
took place throughArt. 1403. The following contracts are unenforceable, unless they are
ratified:
A. Those entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers; and
B. Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum, thereof, be in writing, and subscribed
by the party charged, or by his agent; evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence of its contents:
a. An agreement that by its terms is not to be performed within a year from the
making thereof;
b. A special promise to answer for the debt, default, or miscarriage of another;
c. An agreement made in consideration of marriage, other than a mutual
promise to marry;
d. An agreement for the sale of goods, chattels or things in action, at a price not
less than five hundred pesos, unless the buyer accept and receive part of such
goods and chattels, or the evidences, or some of them, of such things in action
or pay at the time some part of the purchase money; but when a sale is made
by auction and entry is made by the auctioneer in his sales book, at the time
of the sale, of the amount and kind of property sold, terms of sale, price,
names of the purchasers and person on whose account the sale is made, it is
a sufficient memorandum;
e. An agreement of the leasing for a longer period than one year, or for the sale
of real property or of an interest therein; and
f. A representation as to the credit of a third person.
Those where both parties are incapable of giving consent to a contract.
Unenforceable contracts cannot be enforced unless it is first ratified in the manner provided
by law. An unenforceable contract does not produce any effect unless it is ratified.
Unenforceable contracts cannot be sued upon unless ratified (Paras, 2003).

As to defectiveness, an unenforceable contract is nearer to absolute nullity than voidable or
rescissible contracts.
There are 3 kinds of unenforceable contracts:

■ Unauthorized contracts
■ Those that fail to comply with the Statute of Frauds
■ Those where both parties are incapable of giving consent to a contract
1.2.6.3 Unenforceable
ARTICLE 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the
following cases an agreement hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum, thereof, be in writing, and subscribed
by the party charged, or by his agent; evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence of its contents:
(a) An agreement that by its terms is not to be performed within a year from the
making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of another;
(c) An agreement made in consideration of marriage, other than a mutual
promise to marry;
(d) An agreement for the sale of goods, chattels or things in action, at a price not
less than five hundred pesos, unless the buyer accept and receive part of such
goods and chattels, or the evidences, or some of them, of such things in action
or pay at the time some part of the purchase money; but when a sale is made
by auction and entry is made by the auctioneer in his sales book, at the time
of the sale, of the amount and kind of property sold, terms of sale, price,
names of the purchasers and person on whose account the sale is made, it is
a sufficient memorandum;
(e) An agreement for the leasing for a longer period than one year, or for the sale
of real property or of an interest therein; and
(f) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a contract.
● ARTICLE 1408 – Unenforceable contracts cannot be assailed by third persons.
1.2.6.4 Void and Inexistence

The following contracts are void or inexistent from the beginning:
1. Those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy.
2. Those which are absolutely simulated or fictitious; Those whose cause or object did
not exist at the time of the transaction.
3. Those whose object is outside the commerce of men.
4. Those which contemplate an impossible service.
5. Those were the intention of the parties relative to the principal object cannot be
ascertained.
6. Those expressly prohibited or declared void by law.
7. Those which are the direct results of previous illegal contracts.
1.3 Sales
ARTICLE 1458
"BY THE CONTRACT OF SALE, ONE OF THE CONTRACTING PARTIES OBLIGATES HIMSELF TO
TRANSFER THE OWNERSHIP AND DELIVER A DETERMINATE THING, AND THE OTHER TO PAY A
CERTAIN IN MONEY OR ITS EQUIVALENT."
1.3.1 Nature, forms and requisites

● Stages of Contract of Sales:
1st Stage (Negotiation) - starting from the time the prospective contracting parties indicate
interest in the contract to the time the contract is perfected.
2nd Stage (Perfection) - takes place upon the concurrence of the essential elements of the
contract of sale.
3rd Stage (Consummation) - happens when the parties perform their respective undertaking.
● Essential Characteristics of Contract of Sale:

a. CONSENSUAL - it is perfected by mere consent.
b. NOMINATE - the civil code refer to it by special name or designation.
c. PRINCIPAL - it can stand on its own and does not depends on other contract for its validity.
d. BILATERAL - the buyer and seller are bound by obligation dependant upon each other.
e. ONEROUS - the thing imposes valuable consideration.
f. COMMUTATIVE - the value of the thing exchange is presumed to be equal.
● Consent (ARTICLE 1475) – “The contract of sale is perfected at the moment there is a meeting
of minds upon the thing which is the object and the price.
● Auction Sale (ARTICLE 1476) – It is perfected when the auctioneer announces its perfection by
the fall of the hammer or other customary manner.
Before the perfection of the Auction Sale:
(1) The bidder may retract their bid; or

(2) The auctioneer may withdraw the goods from sale unless the auction is announced as
without reserve.
● The seller may have the right to bid in the auction when:
(1) If it expressly reserve; o
(2) Notice is given that the seller has the right to bid in the auction.
● Reciprocal Obligation (ARTICLE 1479) – “A promise to buy and sell a determinate thing for a
price certain is reciprocally demandable."
“An accepted unilateral promise to buy or to sell a determinate thing for a price is binding
upon the promissor if the promise is supported by a consideration distinct from the price”
● Sale by Sample vs Sale by Description (ARTICLE 1481) – The contract of sale may be rescinded
if the bulk of the goods deliver:
1) Does not correspond to the sample or description; or
2) Does not correspond to the sample and description if the seller provides both
sample and description.
a. Sale by Sample - the seller gives a small quantity as a fair specimen of the bulk.
b. Sale by Description - the seller gives representation or description of the thing.
● Capacitated to Buy and Sell (ARTICLE 1489)
General Rule: All persons, whether natural or juridical, who can bind themselves, have legal
capacity to enter into a contract of sale.
Exception: Person who are incapacitated.
● Sale between Spouses (ARTICLE 1490)
General Rule: Husband and wife cannot sell property to each other.
Exception:
(1) Separation of property has been agreed upon in the marriage settlement.
(2) There has been a juridical separation of property.

● Persons prohibited to enter a Contract of Sale by reason of Profession/Function:
a. The guardian cannot acquire the property of the person under his guardianship.
b. Agents cannot acquire the property whose administration or sale may have been
entrusted to them, unless the principal gives his consent.
c. Executors and administrators cannot acquire the property of the estate under their
administration.
d. Public officers and employees cannot acquire the property of the state, subdivision,
or government-owned and controlled corporation whose administration has been
entrusted to them.
e. Officers and employees connected with the administration of justice (judges,
attorneys, etc.) cannot acquire the property and rights in litigation or levied upon an
execution before the court whose jurisdiction or territory they exercise their
respective function.
● Object (ARTICLES 1459 - 1465)

a. The thing must be licit (lawful), should not contrary to law, morals, good customs,
public order, or public policy.
b. The vendor must have a right to transfer the ownership of the thing at the time it is
delivered.
c. A thing is determinate when it is particularly designated or physically segregated from
all others of the same class.
d. Things having potential existence may be the object of the contract of sale.
e. Things subject to a resolutory condition may be the object of contract of sale.
● Emptio Rei Speratae vs Emptio Spei (ARTICLES. 1461)
Emptio Rei Speratae Emptio Spei
Sale of a thing with potential existence Sale of a mere hope or expectancy that the
thing will come to existence or the sale of
the hope itself
Sale is subject to the condition that the Sale is effective even if the thing does not
thing will exist; If it does not, there is not come into existence unless it is vain hope
contract
The object is a future thing The object is a present thing which is the
hope or expectancy
● Sale of Undivided Interest (ARTICLE 1463) – "The sole owner of a thing may sell an undivided
interest.
● Effects when the Object of Sale is Lost (Art. 1493)

a. Completely Lost - the contract shall be without any effect because there is an absence
of an essential element which is the object.
b. Partially Lost - the vendee may choose between:
(1) Withdrawing from the contract; or
(2) Demand the remaining part and pay the price in proportion to the total sum
agreed upon.
● Effects when the Object of Sale is Deteriorated – If the goods, without the knowledge of the
seller, have perished in part or have wholly or in a material part so deteriorated in quality the
buyer may treat the sale as:
1) As avoided; or

2) As valid in all the existing goods as not deteriorated, and binding the buyer to
pay the agreed price for the goods in which ownership will pass, if the sale
was divisible.
● Consideration (ARTICLES 1469 - 1474)
The price may be considered certain if:

○ It shall be sufficient that it be so with reference to another thing certain; or
○ Determination is left to the judgement of a special person.
● If the special person is unable or unwilling to fix the price then the contract is
inefficacious (ineffective), unless the parties subsequently agree upon the price.
● If the special person acted in bad faith or by mistake, the court may fix the price.
● If the special person is prevented from fixing the price by fault of the seller or buyer,
then the parties not in fault may have such remedies against the parties in fault.
● Fixing of the price can never be left to the discretion of one of the contracting parties.
However, if the price fixed by one of the parties is accepted by the other, the sale is
perfected.
● Contract of Piece of Work (ARTICLE 1467)
Contract of Piece of Work Contract of Sale
The thing is manufactured specially for the The thing is manufacture in the ordinary
customer and upon his special order. course of business and for general market
The thing is one not in existence and which The thing exists as a product of the seller.
never would have existed but for the order
of the party desiring to acquire it.
● Barter (ARTICLE 1468)
Barter Sale
A thing is given in exchange for another A thing is given in exchange of a price

thing. certain in money or its equivalent.
If the consideration is partly in money and partly in another thing:

(1) The transaction is characterized by the manifest intention of the parties.
(2) If there is no manifest intention:
a. Barter if the value of the thing is more valuable than money; or
b. Sale if the value of the thing is equal or less than the amount of money.
● Types of Delivery
a. ACTUAL - the actual thing is physically delivered to the buyer.
b. CONSTRUCTIVE - mode of delivery provided by the law.
1. Execution of Public Instrument - execution of a public instrument is
equivalent to the delivery of the thing.
2. Symbolic Delivery - uses a symbol to represent the thing delivered.
3. Traditio Longa Manu - the seller points out to the buyer the object of sale
without the need of actually delivering it.
4. Tradition Breva Manu - the buyer already had the possession of the object
before the contract of sale.
5. Constitutum Possessorium - the seller continuously possess the property he
already sold but not as an owner.
● Contract to Sell – “A contract to sell is a bilateral contract whereby the prospective seller,
while expressly reserving the ownership of the subject property despite delivery thereof to
the prospective buyer, binds himself to sell the said property exclusively to the prospective

buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase
price."
● Place and Time of Delivery (ARTICLE 1521)
a. Place of Delivery
(1) The place of delivery agreed upon.
(2) If there is no agreement, it is determined by the usage of trade.
(3) If there is no agreement and usage of trade, then the seller’s place of business
if he has one, and if not his residence.
(4) In case of contract of sale of specific goods, the place of delivery is where the
contract or sale was made.
b. Time of Delivery
(1) Stipulated time
(2) When there is no stipulation, within a reasonable time
● Forms of Contract of Sale (ARTICLE 1483)
General Rule: A contract of sale may be made in writing, or by word of mouth, or partly in
writing and partly by word of mouth, or may be inferred from the conduct of the
parties.
Exception: When the contract of sale is made through an agent, the authority of the latter shall
be in writing; otherwise, the sale shall be void
Exception: Those stated under the statute of frauds must be in writing for enforceability:
(1) Sale of real property;
(2) Sale of personal property at a price not less than P500.00; and
(3) Sale of property not to be performed within a year from the date of sale.
1.3.2 Earnest Money vs. Option Money
Earnest Money Option Money
Part of the purchase price Money given as a distinct consideration for an

option contract.
Given only where there is already a sale Applies to a sale not yet perfected
When earnest money is given, the buyer is When option money is given, the would-be
bound to pay the balance buyer is not required to buy
1.3.3 Rights/Obligations of the Vendor and Vendee

● Obligation of the Vendor
(1) To transfer the ownership
(2) To deliver the thing
(3) To warrant the object sold against eviction and hidden defects
(4) To take care of the object sold pending delivery
(5) To pay for the expenses of the contract
● When the Thing is considered Delivered? (ARTICLES 1495 - 1497)

a. The ownership of the thing sold is acquired by the vendee from the moment it is
delivered to him.
b. The thing shall be understood as delivered, when it is placed in the control and
possession of the vendee
● Delivery of Real and Personal Property (ARTICLE 1498)

a. Real Property - sale is made through a public instrument. The execution of a public
instrument shall be equivalent to the delivery of the thing.

b. Personal Property - delivery may also be made by the delivery of the keys of the place
or depository where it is store or located.
● Sale on Approval vs Sale on Return
Sale on Approval/Trial Sale on Return
Ownership remains in the seller until the Ownership passes to the buyer on
buyer signifies his approval or delivery and subsequent return will
acceptance to the seller reverts ownership in the seller
Subject to a suspensive condition Subject to a resolutory condition
Risk of loss remains with the seller Risk of loss rests upon the buyer
● Delivery of Accessions and Accessories (ARTICLE 1537) – “The vendor is bound to deliver the
thing sold and its accessions and accessories in the condition in which they were upon the
perfection of the contract”
“All fruits shall pertain to the vendee from the day on which the contract was perfected”
Accessions Accessories
Signifies all of those things which are Signifies all of those things which are
produced by the thing which is the object necessary or convenient for the perfection
of the obligation as well as those which of another thing
are naturally or artificially attached to the
thing.
● Loss, Deterioration, or Improvement before Delivery (ARTICLE 1538)

1. Loss without the Fault of Vendor - the obligation shall be extinguished.
2. Loss with the Fault of Vendor - the vendor is obliged to pay damages.
3. Deteriorates without the Fault of Vendor - the impairment is to be borne by the
creditor.
4. Deteriorates with the Fault of Vendor - the vendee may choose between rescission
and fulfillment, with indemnity for damages in either case.
5. Improvement by Nature or Time - the improvement shall insure to the benefit of the
vendee.
6. Improvement at the Cost of Vendor - the vendor shall have no other right than that
granted to the usufructuary.
● Delivery of Land sold by Price per Unit of Measure (ARTICLES 1539 - 1540)
a. Area is Smaller than what’s stated in the Contract - the vendee may:
(1) Choose a proportional reduction of the price; or
(2) Rescind the contract if the lack of area is more than one-tenth of
what’s stated in the contract.
b. Area is Bigger than what's stated in the Contract - the vendee may:
(1) Accept the area stated in the contract and reject the rest; or
(2) Accepts the whole area and pay the same at the contract rate.
● Delivery of Land sold by Lump Sum (ARTICLE 1542) – There shall be no increase or decrease
of the price, although there be a greater or less area or number than than stated in the
contract.
● Rules on Double Sale (ARTICLE 1544)
Requisites for a Double Sale:

(1) Two or more valid contract of sale
(2) Two or more buyers who are at odds over the rightful ownership of the object must
represent conflicting interest
(3) Must pertain exactly to the same object
(4) Must be bought from the same seller
Rules of Preference in case of Double Sale:

a. Movable Property – (1) First possessor in good faith.
b. Immovable Property:
(1) First registrant in good faith
(2) First possessor in good faith
(3) Person with the oldest title in good faith
● Obligation of the Vendee (ARTICLE 1582)

(1) To accept delivery
(2) To pay the price of the thing sold
● Delivery by Installment (ARTICLE 1583)
General Rule: vendee is not bound to accept delivery by installment.
Exception: if there is a stipulation or agreement.
● Opportunity to Examine the Thing Sold (ARTICLE 1584)
General Rule: the buyer has a reasonable opportunity to examine the goods upon delivery to
ascertain whether they are in conformity with the contract before accepting it.
Exception:
(1) There is a stipulation to the contrary
(2) The sale is by “Collect on Delivery” (COD)
● Payment of Interest (ARTICLE 1589) – The vendee shall owe interest for the period between
the delivery of the thing and payment of the price in the following cases:
(1) It have been stipulated.
(2) The thing sold and delivered produce fruits or income.
(3) The vendee is in default, from the time of judicial or extrajudicial demand for
the payment of the price.
● Suspension of Payment of the Price (ARTICLE 1590)
General Rule: The vendee may suspend the payment of the price if:
(1) The vendee is disturbed in the possession or ownership of the thing acquired;
or
(2) He has reasonable grounds to fear such disturbance, by vindicatory action or
a foreclosure of mortgage.
Exception:
1) The vendor gives security for the return of the price in a proper case.
2) It has been stipulated that, notwithstanding any such contingency, the vendee
shall be bound to make the payment.
3) The vendor has cause the disturbance or danger to cease.
● Unpaid Seller (ARTICLE 1525)
Who is an unpaid seller?

a. When the whole of the price has not been paid or tendered.
b. When the bill of exchange or other negotiable instrument has been received as
conditional payment, and the condition on which it was received has been broken by
reason of the dishonor of the instrument, insolvency of the buyer, or otherwise

● Rights of Unpaid Seller (ARTICLE 1524)
“The vendor shall not be bound to deliver the thing sold, if the vendee has not paid him the
price, or if no period for the payment has been fixed in the contract.”
● Remedies of the Unpaid Seller (ARTICLE 1526)

1. Possessory Lien
2. Right of stopping the goods in transit
3. Right of resale
4. Right to rescind
● Lien (ARTICLE 1527) – “Lien is the right to retain possession of the goods until payment of the
price."
Cases where Unpaid Seller has Right of Lien:

1) Where the goods have been sold without stipulation as to credit.
2) Where the goods have been sold on credit, but the term of credit has expired.
3) Where the buyer becomes insolvent.
● Stoppage in Transit (ARTICLE 1530 - 1532)
When is the Right of Stoppage in Transit Available?

1) The unpaid seller has parted with the possession of the goods; and
2) The buyer of goods is or becomes insolvent.
a. Goods are considered in Transit if:
(1) From the time the goods are delivery to a carrier until the buyer takes delivery
of them from such carrier; or
(2) If the goods are rejected by the buyer, and the carrier continues in possession
of them, even if the seller has refuse to receive them back.
b. Goods are no longer in Transit if:

(1) If the buyer obtains delivery of the goods before their arrival at the appointed
destination;
(2) If the carrier acknowledges to the buyer that he holds the goods on his behalf
and continues in possession of them as bailee for the buyer and it is
immaterial that further destination for the goods may have been indicated by
the buyer; and
(3) If the carrier wrongfully refuses to deliver the goods to the buyer.
● Resale (ARTICLE 1533)
Cases where Unpaid Seller has Right of Resale:

(1) Where the unpaid seller has the right of lien or stopping the goods in transit.
(2) Goods are perishable in nature.
(3) The unpaid seller expressly reserves the right of resale in case the buyer should make
default.
(4) The buyer has been in default in the payment of the price for an unreasonable time.
● Rescission (ARTICLE 1534)
Cases where Unpaid Seller has Right to Rescind:

(1) Where the unpaid seller has the right of lien or stopping the goods in transit.
(2) The unpaid seller expressly reserve the right to do so.
(3) The buyer has been in default in the payment of the price for unreasonable time.
1.3.4 Warranties
1.3.4.1 Express Warranties (in relation to consumer laws)

“Express warranty is a warranty created by the overt words or actions of the seller.”
“It is any affirmation of fact or any promise by the seller relating to the thing if the natural
tendency of such affirmation or promise is to induce the buyer to purchase the same, and if the
buyer purchases the thing relying thereon.”
a. Terms of Express Warranty - any seller who gives express warranty shall:
(1) Set forth the terms of warranty in clear and readily understandable language
and clearly identify himself as the warrantor;
(2) Identify the party to whom the warranty is extended;
(3) State the products or parts covered;
(4) State what the warrantor will do in the event of a defect, malfunction, or
failure to conform to the written warranty and at whose expense;
(5) State what the consumer must do to avail of the rights which accrue to the
warranty; and
(6) Stipulate the period within which the warrantor will perform any obligation
under the warranty.
b. Duration of Warranty
“The seller and consumer may stipulate the period within which the express
warranty shall be enforceable. If the implied warranty of merchantability accompanies an
express warranty, both will be equal duration”
c. Breach of Warranty
● The consumer may elect to have the goods repaired or its purchase price refunded by
the warrantor.
● In case the repair of the product in whole or in part is elected, the warranty work must
be made to conform to the express warranty within thirty (30) days by either the
warrantor or his representative.
● The thirty (30) day period may be extended by conditions which are beyond the control
of the warrantor or his representative.
● In case the refund of the purchase price is elected, the amount directly attributable to
the use of the consumer prior to the discovery of the non-conformity shall be
deducted.
1.3.4.1 Implied Warranties – “Implied warranty are obligation imposed by the law when there has been
no representation or promise; especially, a warranty arising by operation of law because of the
circumstances of a sale, rather than by the seller’s express promise”
Examples of Implied Warranty:
(1) Warranty that the seller has a right to sell

(2) Warranty against eviction
(3) Warranty against non-apparent burden or servitudes
(4) Warranty against hidden defects
(5) Warranty against redhibitory defects on animals.
a. Duration of Warranty – “If the implied warranty of merchantability accompanies an

express warranty, both will be equal duration
“Any other implied warranty shall endure not less than sixty (60) days nor
more than one (1) year following the sale of new consumer products.
b. Breach of Warranties – “The consumer may retain in the goods and recover damages,
or reject the goods, cancel the contract, and recover from the seller so much of the
purchase price as has been paid, including damages.
1.3.5 Installment Sales

1.3.5.1 Personal Property - Recto Law
● Where Recto Law Applied?

This law covers contracts of sale of personal property by installments (Act No. 4122).
It is also applied to contracts purporting to be leases of personal property with option to buy,
when the lessor has deprived the lessee of the possession or enjoyment of the thing.
● Remedies of Vendor in the Sale of Personal Property by Installment (ARTICLE 1484)

(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee’s failure to pay cover two or more
installment; and
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted,
should the vendee’s failure to pay cover two or more installments. In this
case, he shall have no further action against the purchaser to recover any
unpaid balance of the price. Any agreement to the contrary shall be void.
1.3.5.2 Real Property - Maceda Law

● Covered Properties (Sec.2) – “Maceda Law cover those buyer of real estate on install
payments to protect them from onerous and oppressive condition”
Requisites for Application of Maceda Law:
(1) Transaction involving the sale or refinancing of real estate on installment
payments, including residential condominium apartments; and
(2) Buyer defaults in payment of succeeding installment.
● When is the Maceda Law inapplicable?

(1) Sale covering industrial lots
(2) Sale covering commercial buildings
(3) Sale to tenants under agrarian reform laws
(4) Sale of lands payable in straight terms
● Rights of Buyer in case of Default in Payments (Sec. 3-4)

a. The Defaulting Buyer has paid at least 2 Years of Installments
(1) To pay, without additional interest, the unpaid installments due within the total
grace period earned by him, which is hereby fixed at the rate of one month
grace period for every one year of installment made: Provided, That this right
can only be exercise by the buyer once in every five years of the life contract
and its extensions, if any.
(2) If the contract is canceled, the seller shall refund to the buyer the case
surrender value of the payments on the property equivalent to fifty percent
(50%) of total payments made and, after five year of installments, an additional
five percent every year but not exceed ninety percent (90%) of the total
payments made.
b. The Defaulting Buyer paid less than 2 years of Installment

(1) The seller shall give the buyer a grace period of not less than sixty (60) days
from the date the installment became due.
(2) If the buyer fails to pay the installment due at the expiration of the grace
period, the seller may cancel the contract after thirty days from receipt by the
buyer of the notice of cancellation or demand for rescission of the contract by
a notarial act.
● Right to Assign and Sell the Buyer’s Interest (Sec. 5) – “The buyer shall have the right
to sell his rights or assign the same to another person or to reinstate the contract by
updating the account during the grace period and before actual cancellation of the
contract.”
● Advance Payment (Sec. 6) – “The buyer shall have the right to pay in advance any
installment or the full unpaid balance of the purchase price any time without interest
and to have such full payment of the purchase price annotated in the certificate of title
covering the property."

● Void Stipulation (Sec. 7) – “Any stipulation in any contract with regards to the
provisions of Sec 3,4,5, and 6, shall be null and void.”
1.3.5.1 PD 957 / Condominium Act

Requirements for Registration (Sec. 4):
a. The Project shall be register with the Authority by filing a sword registration
statement containing the following items:
(1) Name of the owner;
(2) Location of the owner’s principal business office, and if the owner is
non-resident Filipino, the name and address of his agent or
representative in the Philippines;
(3) Name and address of all directors and officers of the business firm,
if the owner is corporation, association, trust or other entity, and of
all the partners, if it be a partnership;
(4) General character of the business actually transacted or to be
transacted by the owner; and
(5) Statement of capitalization of the owner, including the authorized and
outstanding amounts of its capital stock and the proportion already
paid.
b. The following documents shall be attached to the Registration Statement:

(1) Copy of subdivision plan or condominium plan.
(2) Copy of advertisement to be used for the public offering of subdivision
lots or condominium units.
(3) In case of a business firm, balance sheet, articles of incorporation or
partnership and its amendments.
(4) Title of the property which is free from all lien.
● License to Sell and Performance Bond (Sec. 5-6)

● Owner or dealer can only sell a subdivision or condominium unit if he has a
license to sell.
● License to sell shall be obtained within two weeks from the registration of the
project.
● No license to sell shall be issued unless the owner or dealer have filed a
performance bond.
Requirements for the Issuance of License to Sell:

(1) The owner or dealer is of good repute.
(2) The business owner or dealer is financially stable.
(3) The proposed sale of lots or units to the public would not be
fraudulent.
Exempt Transaction (Sec. 7)

➢ Transaction where License to Sell and Performance Bond not
required:
(1) Sale of subdivision lot resulting from the partition of land
among co-owners and co-heirs.
(2) Sale or transfer of a subdivision lot by the original purchases
thereof and any subsequent sale of the same lot.
(3) Sale of a subdivision lot or condominium unit by or for the
account of a mortgagee in the ordinary course of business
when necessary to liquidate a bona fide debt.
● Suspension of License to Sell (Sec. 8)

a. When is the License to Sell suspended?
(1) Upon verified complaint filed by a buyer.

(2) If any information in the registration statement filed by the owner or
dealer is or has become misleading, incorrect. Inadequate or
incomplete.
(3) If the sale or offering for sale of the subdivision or condominium
project may work or tend to work fraud upon prospective buyers.
b. When the Suspension Order is Lifted?
(1) Upon dismissal of the complaint for lack of legal basis.
(2) If the registration statement has been corrected.
(3) If the sale to the public will neither be fraudulent nor result in fraud.
● Revocation of Registration and License (Sec. 9) – The Registration and License to Sell
shall be revoke when the Dealer or Owner:
(1) Is insolvent;
(2) Has violated any provision of this Decree, regulation, or any
undertaking of its performance bond;
(3) Has been or is engage or about to engage in fraudulent transaction;
(4) Has made misrepresentation in any literature about the subdivision
or condominium project that has been distributed to the prospective
buyers;
(5) Is of bad business repute; or
(6) Does not conduct his business in accordance with the sound business
principle.
● Registration of Brokers, Dealers, and Salesment (Sec. 11)

- Brokers, dealers, and salesmen shall not engage in the business of selling
subdivision lots or condominium units unless he has registered himself with
the authority.
- Every registration shall expire on the first day of December of each year.
● Alteration of Plans (Sec. 22)
General Rule: No owner or developer shall change or alter any form of subdivision
development as contained in the approved subdivision plan.
Exception: Unless permitted by the Authority with written conformity or consent of the
homeowners association, or in the absence of the latter, by the majority of the lot
buyers.
● Non-Forfeiture of Payments (Sec. 23)

Remedies in case of Incomplete Development of the Subdivision Project:
(1) Reimbursement of the total amount paid, including amortization
interest but excluding delinquency interests at the legal rate; or
(2) Suspend amortization payments until the completion of the project.
● Failure to Pay Installment (Sec. 24)

a. After August 26, 1972 - the rights of the buyer in his failure to pay installment due
for reasons other than the failure to develop the project shall be
governed by R.A. No. 6552 or MACEDA LAW.
b. Before August 26, 1972 - the defaulting buyer shall be entitled to the corresponding
refund based on the installments paid after the effectivity of the
MACEDA LAW.
● Issuance of Title (Sec. 25)

- Title of the lot shall be delivered to the buyer upon full payment of the lot or
unit.
- No fee shall be collected from the buyer except those require for the
registration of the deed of sale.
- If the lot or unit has outstanding mortgage at the issuance of title, the owner
or developer shall redeem the mortgage within six (6) months from such
issuance.

1.3.6 Extinguishment of a Contract of Sale
1.3.6.1 Conventional Redemption
When Conventional Redemption takes place? (ARTICLE 1601)
“Conventional redemption shall take place when the vendor reserves the right to
repurchase the thing sold, with the obligation of returning the vendee the price of the sale,
expense of the contract, other legitimate payments made by reason of the sale, and the
necessary and useful expense made on the thing sold”
● Équitable Mortgage (ARTICLE 1602) – “Equitable mortgage is one which although

lacking in some formality, form or words, or other requisites to be called as a
mortgage, nevertheless, reveals the intention of the parties to charge a real property
as security of a debt, and contains nothing impossible or contrary to law.”
Cases where Contract shall be presumed to be an Equitable Mortgage:

(1) Price is unusually inadequate.
(2) Vendor remains in possession as lessee or otherwise.
(3) When upon or after the expiration of the right to repurchase, another
instrument extending the period of redemption or granting a new period is
executed.
(4) The purchaser retains for himself a part of the purchase price.
(5) The vendor binds himself to pay the taxes on the thing sold.
(6) Other cases where it may be inferred that the real intention is to secure the
payment of a debt or performance of other obligation.
● Period of Validity (ARTICLE 1606)

a. No Period of Redemption agreed upon - it shall last four (4) years from the
date of contract.
b. Period of Redemption agreed upon - the period agreed upon cannot exceed
ten (10) years.
c. Agreed Period is Indefinite - the period shall not exceed ten (10) years.
d. The Contract is in Civil Action - the right may be exercised within thirty (30)
days from the final judgement if the contract was a true sale with right to
repurchase rather than equitable mortgage.
1.3.7 Legal Redemption (ARTICLE 1619)

● What is Legal Redemption? (ARTICLE 1619)
“It is the right to be subrogated, upon the same terms and conditions stipulated in the contract,
in the place of one who acquires a thing by purchase, dation in payment, or by any other transaction whereby
ownership is transmitted by onerous title.”
● Instances of Legal Redemption (ARTICLE 1620)

● “When the shares of all or any of the other co-owners are sold to a third person, the
co-owner who didn’t sell his share may exercise his right of redemption or
repurchase."
● “If the price of alienation (the 3rd person who the share is sold) is grossly excessive,
the redemptioner shall pay only a reasonable one.”
● “If two or more co-owners desire to exercise the right of redemption, they may only
do so in proportion to the share they have in the thing owned."
● Period (ARTICLE 1623) – “The right can only be exercised within thirty (30) days from the notice
in writing by the redemptioner or prospective vendor”
1.4 Credit Transactions
All transactions involving, purchase or loan of goods, services, or money in the present with a
promise to pay or deliver in the future.

Credit Transactions are really Contracts of Security.
TYPES OF CONTRACT OF SECURITY
1. Secured Transactions (Contracts of REAL Supported by a collateral or an encumbrance of

Security) property.
2. Unsecured Transactions (Contracts of Fulfillments of which by the principal debtor are

PERSONAL Security) secured or supported ONLY by a promise to pay
or the personal commitment of another such as a
guarantor or surety.
Examples of Credit Transactions:

1. Bailment contracts, together with the other related subjects such as usury.
2. The contracts of guarantee and suretyship, mortgage, antichresis, and concurrence and
preference of credits.
1.4.1 Pledge, Real Mortgage and Chattel Mortgage

1.4.1.1 Similarities – They are:
1. Both are executed to secure performance of a principal obligation;
2. Both are constituted only on personal property;
3. Both are indivisible;
4. Both constitute a lien on the property;
5. In both cases, the creditor cannot appropriate the property to himself in payment of the debt;
6. In both cases, when the debtor defaults, the property must be sold for the payment of the
creditor; and
7. Both are extinguished by the fulfillment of the principal obligation or by the destruction of the
property pledged or mortgaged.
1.4.1.2 Requisites
● ARTICLE 2085 – The following requisites are essential to the contracts of pledge and
mortgage:
1. That they be constituted to secure the fulfillment of a principal obligation;
2. That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged; and
3. That the persons constituting the pledge or mortgage have the free disposal
of their property, and in the absence thereof, that they be legally authorized
for the purpose.
Third persons who are not parties to the principal obligation may secure the latter by pledging
or mortgaging their own property.
1.4.1.3 Indivisibility
● A PLEDGE or MORTGAGE is one and indivisible as to the contracting parties and the rule
applies even if the obligation is joint and not solidary.
● Generally, the divisibility of the principal obligation is not affected by the indivisibility of the
pledge or mortgage. As a consequence of this indivisibility:
1. Single Thing. Every portion of the property pledged or mortgaged is answerable for
the whole obligation as soon as it falls due.
2. Several Things. When several things are pledged or mortgaged to secure the same
debt in its entirety, all of them are liable for the totality of the debt and the creditor
does not have to divide his action by distributing the debt, among the various things
pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things
are liable for such a balance. The debtor cannot ask for the release of one or some of

the several properties pledged or mortgaged (or any portion thereof) or the
proportionate extinguishment of the pledge or mortgage unless and until the debt
secured has been fully paid.
3. Debtor’s Heir/Creditor’s Heir. The debtor’s heir who has paid a part of the debt cannot
ask for the proportionate extinction of the pledge or mortgage nor can the creditor’s
heir who has received his share of the debt return the pledge or cancel the mortgage
if the debt is not completely satisfied.
● Exceptions to the Rule of Indivisibility

1. Where each one of several things guarantees a determinate portion of credit. The
exception is where there are several things given in pledge or mortgage and each one
of them guarantees only a determinate portion of the credit. Actually it is not an
exception because in such a case, there would be as many pledges or mortgages as
there are things given in pledge or mortgage.
2. Where only a portion of the loan was released. The rule of indivisibility of the mortgage
as outlined by Article 2089 presupposes several heirs of the debtor or creditor. It was
held not applicable to a situation where out of an P80,000.00 loan agreement entered
into by a bank and a borrower, only P17,000.00 was released, such that the real estate
mortgage on the loan became unenforceable to the extent of P63,000.00 or 78.75%
and subsists as a security only for the P17,000.00 debt or 21.25%.
In other words, in case of default by the borrower, the mortgage can be foreclosed
only to the extent of 21.25%. Thus, if the mortgage covers 100 hectares of land, the
foreclosure shall extend to 21.25 hectares only.
3. Where there was failure of consideration. Neither does it apply where there was
failure of consideration on the part of the mortgagee as where the mortgagee (bank)
took over the management of the borrowing corporation as one of the conditions for
the granting of the loan, and said corporation was led to bankruptcy thru
mismanagement, thereby defeating the very purpose of the loan, for it is as if the loan
was never delivered.
4. Where there is no debtor-creditor relationship. Although a mortgage (or pledge) is

indivisible as to the contracting parties and as to their successors in interest, it is not
so with respect to a third person who did not take part in the constitution thereof
either personally or through an agent. From the wordings of the law, indivisibility
arises only when there is a debt, that is, there is a debtor-creditor relationship. The
indivisibility concept is not applicable to the right of redemption of an accommodation
mortgagor and his assignee with respect to whom this relationship is not present.
Thus, in a case where the mortgage covers four (4) parcels of residential lots
belonging to the debtor-mortgagor and an agricultural land belonging to the
accommodation mortgagor who assigned her right to redeem to petitioners, it was
held that petitioners, being total strangers to said lots, lack legal personality to
redeem the same. Fair play and justice demand that petitioners, who are not indebted
to the mortgagee, redeem only the property belonging to their assignor.
1.4.1.4 PACTUM COMMISSORIUM

Prohibition against pactum commissorium.
1. Stipulation Null and Void. A stipulation whereby the thing pledged or mortgaged or
under antichresis shall automatically become the property of the creditor in the event
of nonpayment of the debt within the term fixed is known as pactum commissorium
or pacto commisorio which is forbidden by law and declared null and void. By such a
stipulation, the creditor would be able to acquire ownership of the property given as
security without need of public sale or foreclosure required by law.
“This forfeiture clause has traditionally been outlawed because it is contrary
to good morals and public policy.” The reason for the prohibition is that the amount of
the loan is ordinarily much less than the real value of the thing pledged or mortgaged.
2. Requisites. There are two requisites or elements for pactum commissorium to exist,
namely:

a. There should be a pledge, mortgage, or antichresis of property by way of
security for the payment of the principal obligation; and
b. There should be a stipulation for an automatic appropriation by the creditor
of the property in the event of nonpayment of the obligation within the
stipulated period. It is immaterial that the questioned stipulation was
voluntarily and freely entered into, pactum commissorium being void for being
prohibited by law.
c. Stipulation Presupposes the Existence of Security Contact. — Pactum
commissorium referred to in Articles 2088 and 2137, therefore, presupposes
the existence of mortgage or pledge or that of an antichresis. Thus, it has been
held that there was no pactum commissorium where pursuant to the contract
of sale, the sums already paid by the vendee were forfeited for his failure to
pay the stipulated installments in due time considering that the person to
whom the property was forfeited (vendor) was the real and equitable owner
of the same because title would not pass until payment of the last installment.
There is also no pactum commissorium where the alienation of the subject
property was by way of security and not by way of satisfying or extinguishing
the debt of the debtor.
d. Effect on security contract. The vice of nullity which vitiates such a stipulation
does not affect substantially the principal contract of pledge, mortgage, or
antichresis with regard to its validity and efficacy for the reason that the
contract, having been perfected, can subsist although the contracting parties
have not agreed as to manner the creditor can recover his credit inasmuch
as the law has expressly established the procedure in order that he may
recover the same, in case the debtor does not comply with his obligation. In
short, the security contract remains valid; only the prohibited stipulation is
void.
Prohibition refers to stipulation authorizing automatic appropriation.

What is prohibited by Article 2088 in connection with pacto commissorio is the
automatic appropriation by the creditor of the thing pledged or mortgaged upon failure of the
debtor to pay his debt within the period agreed upon by virtue of authority or right previously
given the creditor. Thus:
(1) A stipulation providing that the mortgaged property shall be considered in full
payment without further action in court” in case of nonpayment is null and void being
in the form of pacto commissorio. (Reyes vs. Nebrija, 48 Phil. 639 [1926]; see Northern
Motors, Inc. vs. Herrera and Taguba, 49 SCRA 392 [1973].)
(2) A stipulation in a purported pacto de retro sale (see VII, note 2.) that the ownership
over the property sold would automatically pass to the vendee in case no redemption
was effected within the stipulated period, is contrary to the nature of a true pacto de
retro sale, under which the vendee acquires ownership of the thing sold immediately
upon the execution of the sale, subject only to the vendor’s right of redemption. The
said stipulation is a pactum commissorium which enables the mortgagee to acquire
ownership of the mortgaged property without need of foreclosure. It is void. Its
insertion in the contract is an avowal of the intention to mortgage, rather than to sell,
the property. (Lanuza vs. De Leon, 20 SCRA 369 [1969].)
1.4.1.5 Third party pledgors/mortgagors

PLEDGOR OR MORTGAGOR MAY BE A THIRD PERSON.
“It is not necessary that the principal debtor should always be the pledgor or mortgagor.”
1. ACCOMMODATION PLEDGE OR MORTGAGE. It is not necessarily void simply because
the accommodation pledgor or mortgagor did not benefit from the same. Ordinarily,
he is not himself a recipient of the loan, otherwise that would be contrary to his
designation as such. It is not always necessary that he should be appraised
beforehand of the entire amount of the loan. As long as valid consent was given, the
fact that the loan was solely for the benefit of the debtor would not invalidate the
pledge or mortgage.

2. DUTY OF MORTGAGEE TO MAKE PROPER INQUIRY. The creditor, however, is required
to exercise due care and prudence by making proper inquiry where the debtor
borrows money and mortgages another person’s property to secure the loan without
the consent of the latter and he is guilty of negligence if he relied solely on the
representations made by the debtor, particularly where the creditor is engaged in the
banking business — a business affected with public interest. So as long as valid
consent was given, the fact that the loan was given solely for the benefit of the
principal debtor would not invalidate the mortgage.
3. WHERE MORTGAGE IS GRATUITOUS. Where the contract of mortgage (or pledge) is
purely gratuitous, the same should be strictly construed. In accordance with Article
1378 of the Civil Code, said contract should be so interpreted as to effect “the least
transmission of rights or interests” as possible.
4. LIABILITY FOR DEFICIENCY. The pledgor or mortgagor who pledged or mortgaged his
property to guarantee an indebtedness of another person, without expressly
assuming personal liability for such debt, is not liable for the payment of any
deficiency, should the property not be sufficient to cover the debt. ₱1,00,00.
a. He is not solidarily bound with the principal obligor.
b. A special power of attorney authorizing another to mortgage one’s property
as security of the former’s obligation does not of itself make the person
executing the same a co-mortgagor of the debtor.
1.4.2 Requirements to bind the parties and third persons
Public instrument necessary to bind third persons.
1. CONTENTS OF PUBLIC INSTRUMENTS. Even if all the essential requisites provided in Articles
2085 and 2093 are present, the contract of pledge is not effective against third persons unless
in addition to delivery of the thing pledged, it is embodied in a public instrument (i.e., one
attested and certified by a public officer authorized by law to administer oath, such as a notary
public) wherein it shall appear the description of the thing pledged; and the date of the pledge.
Article 2096 prescribes a requirement without which the contract of pledge cannot adversely
affect third persons.
2. OBJECT OF THE REQUIREMENT. The object is to forestall fraud, because a debtor may attempt
to conceal his property from his creditors when he sees it in danger of execution by simulating
a pledge thereof with an accomplice. The requirement is not a mere rule of adjective law
prescribing the mode whereby proof may be made of the date of the pledge contract, but a
rule of substantive law prescribing a condition without which the execution of a contract of
pledge cannot affect third persons adversely.
1.4.3 Obligations and rights of pledgor and pledgee

● RIGHT OF PLEDGEE TO RETAIN THINGS PLEDGED. (ARTICLE 2098)
Possession of the pledgee constitutes his security. Hence, the debtor cannot demand for its
return until the debt secured by it is paid. But the right of retention is limited only to the fulfillment of
the principal obligation for which the pledge was created.
● OBLIGATION OF PLEDGEE TO TAKE DUE CARE OF THING PLEDGED. (ARTICLE 2099)
Upon fulfillment of the principal obligation, the pledgee must return the thing pledged. Having
possession of the property, he has the obligation to take care of the same with the diligence of a good
father of the family. He is, however, entitled to reimbursement of the expenses incurred for its
preservation.
In case of the loss or deterioration of the thing pledged due to a fortuitous event, the pledgee
cannot be held responsible but he is liable for loss or deterioration by reason of fraud, negligence,
delay or violation of the terms of the contract.
● OBLIGATION OF PLEDGEE NOT TO DEPOSIT THINGS PLEDGED WITH ANOTHER. (Art. 2100)
While the pledgee is entitled to retain the possession of the thing pledged until the debt is paid,
he is not authorized to transfer possession to a third person. The prohibition is necessary for the
protection of the pledgor or the owner of the thing pledged. The exception is when there is stipulation
authorizing him to do so.
a. Responsibility of pledgee for acts of his employees or agents.

b. Responsibility of pledgee for flaws of things pledged. (Art. 2101)
● RIGHT OF PLEDGEE TO COMPENSATE EARNINGS OF PLEDGE WITH DEBT. (ARTICLE 2102)
The pledgee has no right to use the thing pledged or to appropriate the fruits thereof without
the authority of the owner. But the pledgee can apply the fruits, income, dividends, or interests earned
or produced by the thing pledged to the payment of interest, if owing, and thereafter to the principal
of his credit.
Unless there is a stipulation to the contrary, the interest and earnings of the right pledged and
in case of animals, their offsprings, are included in the pledge.
● RIGHT OF PLEDGEE AGAINST THIRD PERSONS. (ARTICLE 2103)

Except as provided in Article 2112, the pledgor remains the owner of the property pledged. The
creditor to whom the property pledged has been delivered is obliged to take care of it with the diligence
of a good father of a family. He is authorized to bring such action as pertaining to the owner in order
to recover it or defend it, against claims of third persons. Furthermore, unless given the right, the
creditor might be prejudiced by the negligence of the owner.
The right of a pledgee is a real right enforceable against third persons but it is necessary that
the contract of pledge be embodied in a public instrument which shall contain a description of the
thing pledged and the date of the pledge.
● OBLIGATION OF PLEDGEE NOT TO USE THINGS PLEDGED. (ARTICLE 2104)

The pledgee who is in possession of the thing pledged has no right to make use of it without
permission from the owner. This is the same rule in deposit. It is in consequence of the fact that the
pledgor in parting with his property transmits only possession but not ownership.
1. If, however, the thing pledged is of such a character that use is necessary in properly
caring for it, then it becomes his duty to use it so that it will not suffer from its disuse.
2. If from the use of the property profits are derived, the pledgee must account therefore
to the pledgor, and apply the net proceeds of such use to the payment of his claim.
● RIGHT OF PLEDGOR TO ASK THAT THING PLEDGED BE DEPOSITED – In the following cases,
the owner may ask that the thing pledged be deposited judicially or extrajudicially:
1. If the creditor uses the thing without authority;
2. If he misuses the thing in any other way; or
3. If the thing is in danger of being lost or impaired because of the negligence or willful
act of the pledgee.
● RIGHT OF PLEDGOR TO DEMAND RETURN OF THING PLEDGED. (ARTICLE 2105)
The thing pledged stands as security for the fulfillment of the pledgor’s obligation. Hence, he
cannot ask for its return until said obligation is fully paid including interest due thereon and expenses
incurred for its preservation. Prescription will not begin to run on the action to demand the return of
the thing pledged while the obligation subsists, neither will the possession of the pledgee as such
ripen into ownership by prescription because such possession is not in the concept of an owner.
As an exception to this rule, the pledgor is allowed to substitute the thing pledged which is in
danger of destruction or impairment with another thing of the same kind and quality.
● RIGHT OF PLEDGOR TO ASK FOR DEPOSIT OF THING PLEDGED. (ARTICLE 2106)

The pledgee has the duty to preserve the thing pledged with the diligence of a good father of
a family. If the thing should be exposed to loss or impairment through the negligence or willful act of
the pledgee, the pledgor may demand that it be deposited with a third person. The pledgor may also
require such deposit should the pledgee use the thing without authority or misuse it in any other way.
● RIGHT OF PLEDGOR TO SUBSTITUTE THING PLEDGED. (ARTICLE. 2107)

Two remedies are actually granted by Article 2107, to wit: to the pledgor, the right to demand
the return of the thing pledged upon offering another thing in pledge; and to the pledgee, the right to
cause the same to be sold at a public sale.
The following are the requisites for the application of Article 2017:
1. The pledgor has reasonable grounds to fear the destruction or impairment of the thing
pledged;
2. There is no fault on the part of the pledgee;
3. The pledgor is offering in place of the thing, another thing in pledge which is of the same kind
and quality as the former; and
4. The pledgee does not choose to exercise his right to cause the thing pledged to be sold at
public auction.
● RIGHT OF PLEDGEE TO CAUSE SALE OF THING PLEDGED. (ARTICLE 2108)
The pledgee’s right to have the thing pledged sold at public sale granted under the above
article is superior to that given to the pledge to substitute the thing pledged under Article 2107. The
law says the pledgor is given the right “without prejudice to the right of the pledgee.” The sale must
be a “public sale.” The pledgee shall keep the proceeds of the sale as security for the fulfillment of the
principal obligation. In other words, they shall belong to the pledgor.
● RIGHT OF PLEDGEE TO DEMAND SUBSTITUTE OR IMMEDIATE PAYMENT. (ARTICLE 2109) – This

article grants two remedies to the pledgee, in case he is deceived as to the substance or
quality of the thing pledged:
1. To claim another thing in pledge; and
2. To demand immediate payment of the principal obligation.
The remedies are alternative, that is, he is privileged to choose only one and not both.
● RIGHT OF PLEDGEE TO CAUSE SALE OF THINGS PLEDGED.

One of the essential requisites of pledge is that the object pledged may be alienated for the
payment to the creditor when the principal obligation becomes due.
The formalities required for such sale under the above article are as follows:
1. The debt is due and unpaid;
2. The sale must be at a public auction;
3. There must be notice to the pledgor and owner, stating the amount due; and
4. The sale must be made with the intervention of a notary public.
NOTE: Article 2112 does not require posting of the notice of sale and publication. Notification to the
pledgor and the owner of the thing pledged is sufficient. Only a notary public can conduct a public
auction after proper notice is sent to the pledgor and owner of the thing pledged. The sale is actually
extrajudicial in character without intervention by the courts.
● No provision in the Rules of Court or in any law requires that pledged properties sold at public
auction be sold separately.
● RIGHT OF PLEDGEE TO APPROPRIATE THING PLEDGED.
The pledgee may appropriate the thing pledged if after the first and second auctions, the thing
is not sold. This is an exception to the prohibition against pacto commisorio. If the creditor appropriates
the thing, it shall be considered as full payment for his entire claim. He is thus obliged to give an
acquittal for the same. The debtor is not entitled to the excess in case the value of the thing pledged
is more than the principal obligation.
● RIGHT OF PLEDGOR AND PLEDGEE TO BID AT A PUBLIC SALE. (ARTICLE 2113)

If the debt is not paid and a public sale takes place, both the pledgor and the pledgee may bid.
The pledgor shall be preferred if he offers the same terms as the highest bidder, the rule is just
considering that all the things belong to him.

To avoid fraud, the pledgee is not allowed to acquire the thing pledged if he is the only bidder.
● RIGHT OF PLEDGEE TO COLLECT AND RECEIVE AMOUNT DUE ON CREDIT PLEDGED. (ARTICLE
2114)
It would seem that under this article, it is not obligatory for the pledgee to collect and receive
the amount due on the credit pledged. He is given merely the right to do so. However, in view of Article
2009 which imposes upon him the obligation to take care of the thing pledged with the diligence of a
good father of a family, he has the duty to collect if delay would endanger the recovery of the credit.
● RIGHT OF PLEDGEE TO CHOOSE WHICH OF SEVERAL THINGS PLEDGED SHALL BE SOLD. (ART.
2119)
The right of choice given to the pledgee as to which of the things pledged he shall cause to be
sold is limited only by stipulation. After sufficient property has been sold to satisfy the obligation plus
interests and expenses, no more shall be sold.
Usually the value of the property pledged exceeds the amount of the debt guaranteed.
● RIGHT OF THIRD PERSON WHO PLEDGED HIS OWN PROPERTY.

A third person who is not a party to the principal obligation may secure the latter by pledging
his own property. The law grants him the same rights as a guarantor and he cannot be prejudiced by
any waiver of defense by the principal debtor.
1.4.4 Obligations and rights of mortgagor and mortgagee

● RIGHT IN CASE OF LEGAL MORTGAGES.
Legal Mortgages. It is in conformity with the rule established under the law on “Form of
Contracts'' which gives to the contracting parties the right to compel each other to observe the form
required by law like the execution of a document or other special forms provided the contract between
them is valid and enforceable.
● RIGHT OF MORTGAGEE TO RECOVER DEFICIENCY.
1. Mortgage is merely a security, not a satisfaction of an obligation. If there be a balance due to

the mortgagee after applying the proceeds of the sale, the mortgagee is entitled to recover
the deficiency. In judicial foreclosure, the Rules of Court specifically gives the mortgagee the
right to claim for deficiency in case deficiency exists while Act No. 3135 governing extrajudicial
foreclosure of mortgage does not give a mortgagee the right to recover deficiency after the
public auction sale, neither does it expressly or impliedly prohibit such recovery. To recover
deficiency, the extrajudicial foreclosure must be valid. In both judicial and extrajudicial
foreclosures, the principle is the same, that the mortgage is but a security and not a
satisfaction of the indebtedness. It is of no importance whether the buyer or the highest bidder
in the public auction is the creditor himself. Where a third person is the mortgagor, he is not
liable for any deficiency in the absence of a contrary stipulation. The action for the recovery
of such deficiency must be directed against the debtor.
2. Action for recovery of deficiency. If the deficiency is embodied in a judgment, it is referred to
as deficiency judgment. It is the settled rule that a mortgagee may recover any deficiency in
the mortgage account which is not realized in a foreclosure sale and that an independent civil
action for the recovery of deficiency may be filed even during the period of redemption. Once
the auction sale of the mortgaged property is affected and the resulting deficiency is
ascertained, the mortgagee-creditor is then and there entitled to secure a deficiency judgment
which may immediately be executed, whether or not the mortgagor is still entitled to redeem
the property sold.
3. Prescriptive period of action. The action to recover a deficiency after foreclosure prescribes
after ten (10) years from the time the right of action accrues as provided in Article 1144(2) of
the Civil Code.14 The mortgagee in both real and chattel mortgage sas, by law, the right to
claim for the deficiency resulting from the price obtained in the sale of the property at public
auction. Correlatively, the mortgagor has the corresponding obligation created by law to pay
such deficiency. It can also be said that the action can be governed by Article 1144(1) if the
mortgagee, in suing for the deficiency, is merely seeking to enforce the written promissory

note secured by the mortgage. Finally, the suit is in the nature of a mortgage action because
its purpose is precisely to enforce the mortgage contract. Such being the case, Article 1142 of
the Civil Code15 is likewise applicable.
● RIGHT OF REDEMPTION.
1. Period within which to exercise right. What is extant in extrajudicial foreclosure is the right of
redemption. In all cases of extrajudicial sale, the (individual) mortgagor may redeem the
property at any time within the term of one year from and after the date of the sale, i.e., date
of registration of the certificate of sale with the appropriate Registry of Deeds.
a. The filing of an action by the redemptioner to enforce his right to redeem does not
suspend the running of the statutory period to redeem the property, nor bar the
purchaser at public auction from procuring a writ of possession after the period had
lapsed, without prejudice to the final outcome of the action to enforce the right of
redemption. Neither is the period suspended by the institution of an action to annul
the foreclosure sale.
b. The existence of the right of redemption operates to depress the market value of the
land until the period expires and to render that period indefinite because of the suit
with either party unable to foresee when the final judgment will terminate the action,
would render nugatory the period fixed by law for making the redemption and virtually
paralyze any efforts of the purchaser to realize the value of his land. Under Article 13
of the Civil Code, a year is understood to be 365 days.
c. By an amendment by the General Banking Law of 2000 (R.A. No. 8791.), enacted on
May 23, 2000, juridical mortgagors like partnerships and corporations are barred from
the right of redemption of mortgaged property soldpursuant to an extrajudicial
foreclosure, after the registration of the certifi cate of foreclosure with the applicable
Register of Deeds. Section 47 (par. 2.) of the Act provides: “Notwithstanding Act No.
3135, juridical persons whose property is being sold pursuant to an extrajudicial
foreclosure, shall have the right to redeem the property in accordance with this
provision until, but not after the registration of the certificate of foreclosure sale with
the applicable Register of Deeds which in no case shall be more than three (3) months
after foreclosure, whichever is earlier. Owners of property that has been sold in a
foreclosure sale prior to the effectivity of this Act retain their redemption rights until
their expiration.’’
NOTE: Under the amendatory provision, the right of one-year redemption of

juridical mortgagors shall be retained but only if the foreclosure sale took
place before the effectiveness of the Act. This amendment is open to
constitutional objection of being violative of the equal protection guarantee
(Sec. 1, Art. III, Constitution.) for it discriminates against corporate or juridical
mortgagors and the prohibition against impairment of the obligation of
contracts (Sec. 10, Ibid.) because it takes from them a vested right of
redemption acquired under a contract executed prior to the effectivity of the
new law. R.A. No. 8791 now limits the redemption period to only three (3)
months, to begin from the date of the foreclosure sale but not after the
registration of the certificate of foreclosure sale whichever comes first. The
shorter period is also provided in Supreme Court En Banc Resolution A.M. No.
99-10-05-0, dated August 7, 2001. (supra.)
2. Effect of failure to exercise right. Title to the property sold under a mortgage foreclosure
remains with the mortgagor or his grantee until the expiration of the redemption period. The
right of the purchaser at the foreclosure sale is merely inchoate until after the period of
redemption has expired without the right being exercised.
a. If no redemption is made within the prescribed period, the purchaser becomes the
absolute owner of the property.

b. The one-year period for the exercise of the right of redemption is subject to the
provisions of special laws. The statutory period of redemption is only directory and
can be extended by agreement of the parties but two requisites must be established,
namely:
- Voluntary agreement of the parties to extend the redemption period; and
- The debtor’s commitment to pay the redemption price on a fixed date.
3. Effect of exercise of right. What actually is affected where redemption is seasonably exercised
by the judgment or mortgage debtor is not the recovery of the property which ownership is
never lost.
a. The redemption by the debtor eliminates but from his title the lien created by the levy
or attachment or judgment or registration of the mortgage thereon. The redemption
defeats the inchoate right of the purchaser and restores the property to the same
condition as if no sale had been made. Further, it does not give to the mortgagor a
new title, but merely restores to him the title freed of the encumbrance of the lien
foreclosed.
b. The exercise of the right of redemption is an implied admission of the regularity of the
foreclosure sale and stops the mortgagor from later impugning its validity on that
ground. Redemption is inconsistent with the claim of the invalidity of the sale.
4. Where mortgaged property is sold to a third party. A sale by the mortgagor to a third party of
the mortgaged property during the period for redemption transfers only the right to redeem
the property and the right to possess, use and enjoy the same during said period. Under the
Rules of Court (Rule 39, Sec. 31.), the judgment debtor remains in possession of the property
foreclosed and sold, during the period of redemption, but he cannot make a conveyance of the
ownership of the property as said ownership belongs to the purchaser at the foreclosure sale.
The right of redemption, as long as within the period prescribed, may be exercised
irrespective of whether or not the mortgagee has subsequently conveyed the property to
some other party.
5. Where sale is not registered and made without consent of the mortgagee. Where the
mortgagor, two days after the execution of the mortgage to a bank, executed in favor of a third
party a Deed of Sale with Assumption of Mortgage, no consent having been secured from the
bank to the sale which was not registered so that the title remained in the name of the
mortgagor, it was held that the buyer was not validly substituted as debtor, and hence, had no
right to redeem. The mortgagee-bank was charged with the obligation to recognize the right
of redemption only of the mortgagor.
6. Where extrajudicial foreclosure affected fraud. An extrajudicial foreclosure affected with
fraud is null and void ab initio. Consequently, the consolidation of ownership of the subject
property to the mortgagee as the highest bidder and its subsequent resale to a third party
(who was a buyer in bad faith) are also without legal force and effect. The mortgagor is entitled
to the equitable remedy of redemption.
● RIGHTS AND OBLIGATIONS OF MORTGAGEE IN POSSESSION.
A mortgagee in possession, is one who has lawfully acquired actual or constructive

possession of the premises mortgaged to him, standing upon his rights as mortgagee and not claiming
under another title, for the purpose of enforcing his security upon such property or making its income
help to pay his debt.
1. Similar to those of an antichresis creditor. As such mortgagee in possession, his rights and
obligations are similar to those of an antichresis creditor. He is entitled to retain such
possession until the indebtedness is satisfied and the property redeemed. Thus, a creditor
with a lien on real property who takes possession thereof with the consent of the debtor holds
it as an “antichresis creditor with the right to collect the credit with interest from the fruits,
returning to the antichretic debtor, the balance, if any, after deducting the expense. The
mortgagee has to account for the fruits received.
2. Without the right to reimbursement for useful expenses. Generally, however, a mortgagee in
possession of mortgaged property who introduces improvements thereon is not entitled to
reimbursement for the value thereof upon the redemption of the mortgage, for according to
Article 2125, “the persons in whose favor the law establishes a mortgage have no other right

than to demand execution and the recording of the document in which the mortgage is
formalized.” To hold otherwise would render redemption oppressive, if not nugatory, as a
scheming mortgagee could then put so much improvements thereon, until the debtor-
mortgagor is “improved out” of his property by his failure to pay the increased redemption
costs.
● RIGHT OF PURCHASER TO WRIT OF POSSESSION.

A writ of possession is generally understood to be an order by a court whereby the sheriff is
commanded to place in possession of real or personal property the person entitled thereto such as
when a property is extrajudicially foreclosed.
1. The issuance of the writ to a purchaser in an extrajudicial foreclosure is merely a ministerial
function. The law and jurisprudence are clear that both during and after the period of
redemption, the purchaser at the foreclosure sale is entitled as of right to a writ of possession,
regardless of whether or not there is a pending suit for annulment of the mortgage or the
foreclosure itself (without prejudice, of course, to the eventual outcome of said case.)
2. As a rule, any question regarding the validity of the mortgage or its foreclosure is not a legal
ground for refusing the issuance of the writ. Hence, an injunction to prohibit the issuance of
the writ is entirely out of place.
3. Any objection on the validity of the sale and the writ issued pursuant thereto should be
threshed out in a subsequent proceeding under Section 8 of Act No. 3135 before the Regional
Trial Court. Even then, under Section 8, the order of possession shall continue in effect during
the pendency of appeal
4. The right of the applicant or a subsequent purchaser to request for the issuance of a writ of
possession never prescribes.
● RIGHT BEFORE THE LAPSE OF THE REDEMPTION PERIOD.

In cases of extrajudicial foreclosure sales of real estate mortgages, the issuance of a writ
possession is governed by Section 730 of Act No. 3135.
1. Said provision allows the purchaser to take possession of the foreclosed property during the
period of redemption upon filing of an ex parte application and approval of a bond. The duty of
the trial court to grant the writ is ministerial. Such writ issues as a matter of course upon the
filing of the proper motion and the approval of the corresponding bond.
2. Any question regarding the regularity and validity of the writ shall, as well as the consequent
cancellation of the writ, is to be determined in a subsequent proceeding as outlined in Section
8 (infra.) of Act No. 3135. Such a question cannot be raised to oppose the issuance of the writ,
since the proceeding is ex parte.
3. The bond is required to protect the rights of the mortgagor so that he may be indemnifi ed in
case it be shown that the foreclosure sale was not justified, i.e., it was conducted without
complying with the requirements of the law or without the mortgagor violating the mortgage
contract.
● RIGHT AFTER THE LAPSE OF REDEMPTION PERIOD.
If a writ of possession may be issued even before the redemption period has expired on the
ex parte application of the purchaser, with greater reason could such writ be issued after the time for
redemption has expired, without redemption having been made, especially where a new title has
already been issued in the name of the purchaser. The purchaser at public auction has only to file a
petition for issuance of the writ pursuant to Section 33, Rule 39 of the Rules of Court.
1. Nature of petition/motion for issuance of writ. The petition and/or motion for the issuance of
a writ of possession is summary in nature and a non-litigious proceeding authorized in an
extrajudicial foreclosure of mortgage pursuant to Act No. 3135, as amended. It is brought for
the benefit of one party only, and without notice to, or consent by, any person adversely
interested. There is no necessity of giving notice to the mortgagor who had lost all interests
in the mortgaged property when he failed to redeem the same. The order for the issuance of
the writ is simply an incident in the transfer of title in the name of the petitioner. The trial court
is mandated and it is its ministerial duty to issue the writ upon a finding of the lapse of the
statutory period for redemption, the effect of which is to make the right of the purchaser to
the possession of the property absolute.

2. Right of purchaser to convey and to possession. The rule is that after the redemption period
has expired, the purchaser of the property has the right to a conveyance and to be placed in
possession thereof. To obtain possession, the vendee or purchaser may either ask for a writ
of possession or bring an appropriate independent action, such as a suit for ejection. The right
to possession is based simply on the purchaser’s ownership of the property. Thus, the mere
filing of an ex parte motion for the issuance of a writ of possession would suffice. Upon the
expiration of the redemption period, without the mortgagor having made use of his right of
redemption, ownership of the property becomes consolidated in the purchaser.
3. Right of purchaser to aid of court. The purchaser of the property sold is entitled to the aid of
the court in effecting its delivery, the reason being that upon expiration of the redemption
period (or confirmation of the sale), the ownership of the property is transferred to him.
a. Upon proper application and proof of title, the issuance of the writ of possession
becomes a ministerial duty of the court, and the relief is granted ex parte without
giving the person against whom the relief is sought an opportunity to be heard.
b. The purchaser is not obliged to bring a separate and independent suit for possession.
But to give effect to his right of possession, he must invoke the aid of the courts and
ask for a writ of possession. He cannot simply take the law into his own hands and
enter the property without judicial authorization.
c. As advertised to earlier, the pendency of an action questioning the validity of a
mortgage or its foreclosure cannot bar the issuance of the writ of possession
particularly after title to the property has been consolidated in the mortgagee as the
purchaser at the public auction, without prejudice to the outcome of the action.
d. The motion for issuance of the writ can proceed inde-pendently. Its issuance does not
bar a separate case for annul-ment of mortgage and foreclosure sale and, therefore,
the ex parte nature of the proceeding does not deny due process to the mortgagor.
e. No bond is required of the purchaser after the redemption period if the property is not
redeemed. To impose a bond requirement upon the purchaser who has become the
absolute owner of the foreclosed property purchased would be unreasonable if not
illogical, for if there are any rights to be protected, they are those of the purchaser
who, as owner, has a superior right over said property against all other persons.
4. Suspension of implementation of writ. Accordingly, where a writ of possession has been

issued by a court, it is the inescapable duty of the sheriff to enforce the writ. The sheriff has
nonauthority to give a grace period, and it would be gross error for the court which is
mandated by law to give effect to such a right, to suspend the implementation of the writ of
possession which should be issued as a matter of course. Once the writ of possession has
been issued, the court has no alternative but to enforce the writ without delay. Where the
reason given by a judge in issuing the order of suspension of the writ of possession was not
specified in the order, but stated only in general terms, as “humanitarian reasons,” the court
did not act within the bounds of law, especially if such order was issued motu proprio and
without the purchaser being afforded the right to present his side.
5. Where mortgaged property under lease. A mortgagee who has foreclosed upon the mortgaged
real property and has purchased the same at the foreclosure sale can be granted a writ of
possession over the property despite the fact that the premises are in the possession of a
lessee thereof and whose lease has not as yet been terminated, unless the lease had been
previously registered in the Registry of Property31 or unless despite non-registration, the
mortgagee had prior knowledge of the existence and duration of the lease, actual knowledge
being equivalent to registration.
6. Where mortgagor refuses to surrender property sold. In case of refusal to surrender the
possession of the property sold by the sheriff on the part of the debtor or mortgagor, the
purchaser cannot merely fi le petition for a writ of possession.32 The remedy is to fi le an
ordinary action for the recovery of possession in order that the debtor may be given an
opportunity to be heard not only regarding possession but also regarding the obligation
covered by the mortgage. The purchaser cannot take possession of the property by force
either directly or through the sheriff. The reason for this is that the creditor’s right of

possession is conditioned upon the fact of default, and the existence of this fact may naturally
be the subject of controversy.
7. Where a third party is in actual possession. The writ of possession issues as a matter of
course even without the filing and approval of a bond after consolidation of ownership and the
issuance of a new transfer certificate of title in the name of the purchaser. But the rule is not
without exception. Under Section 35, Rule 39 of the Rules of Court, which is made suppletory
to the extrajudicial foreclosure of real estate mortgages by Section 6 of Act 3135, as amended,
the possession of the mortgaged property may be awarded to a purchaser in the extrajudicial
foreclosure unless a third party is actually holding the property adversely to the judgment
debtor. Under Article 433 of the Civil Code, one who claims to be the owner of a property
possessed by another must bring the appropriate judicial action for its physical recovery. The
term “judicial process” could mean no less than an ejectment suit or reivindicatoria action in
which ownership claims of the contending parties may be properly heard and adjudicated. An
ex parte petition for issuance of a possessory writ under Section 7 of Act 3135, as amended,
is not, strictly speaking, a “judicial process' ' as contemplated in Article 433. The reason for
the limitation is that the writ does not issue in case of doubt.
● RIGHT ACQUIRED BY SECOND MORTGAGEE AND SUBSEQUENT PURCHASER.

1. Before payment of debt. After a chattel mortgage is executed, there remains in the mortgagor
a mere right of redemption and only this right passes to the second mortgagee in case of a
second mortgage. As between the first and second mortgagees, therefore, the latter can only
recover the property from the former by paying him the mortgage debt. Even when the second
mortgagee goes through the formality of an extrajudicial foreclosure, the purchaser acquires
no more than the right of redemption from the fi rst mortgagee.
2. After payment of debt. If the only leviable or attachable interest of a chattel mortgagor in a
mortgaged property is his right of redemption, it follows that the judgment or attaching
creditor who purchased the property at the execution sale could not acquire anything except
such right of redemption. He is not entitled to the actual possession and delivery of the
property without first paying the mortgage debt.
● RIGHT OF MORTGAGEE TO POSSESSION.
1. After default. When default occurs and the creditor desires to foreclose, the right of the
creditor to take the mortgaged property is clearly implied from the provision which gives him
the right to sell.
2. Before default. A chattel mortgagee is not entitled to the possession of the property upon the
execution of the chattel mortgage for otherwise, the contract becomes a pledge and ceases
to be a chattel mortgage.
3. Where mortgagor refuses to surrender possession. Where the debtor refuses to yield the
property, the creditor’s remedy is to institute an action either to effect a judicial foreclosure
directly or to secure possession as a preliminary to the sale contemplated in Section 14 of Act
No. 1508.
a. Mortgagee’s right of possession conditioned upon fact of default. The creditor cannot
lawfully take the property by force against the will of the debtor. The reason is that
the creditor’s right of possession is conditioned upon the fact of default, and the
existence of this fact may naturally be the subject of controversy.
b. Sheriff mere agent of mortgagee. Nor can the public offi cer, such as a sheriff, upon
whom the law places the responsibility of conducting the sale, seize the property
where the creditor could not, as it is manifest that such offi cer proceeding under the
authority or the language of Section 14 becomes the mere agent of the creditor. The
conclusion is thus clear that for the recovery of possession, where the right is
disputed, the creditor must proceed along the usual channels by action in court.
c. Sheriff without authority to seize mortgaged property. It is not required in case of such
default and the mortgagor refuses upon demand to surrender possession of the
mortgaged chattel, for the mortgagee before he can file an action for replevin or for
judicial foreclosure, to first ask the sheriff to foreclose the mortgage or take
possession of the property. Such a procedure is completely unnecessary not only

because the sheriff has no authority in the fi rst instance to seize the mortgaged
property but also because it would certainly be an exercise in futility.
d. Recoverable expenses against mortgagor. Where the mortgagor plainly refuses to
deliver the chattel subject of the mortgage upon his failure to pay two or more
installments, or if he conceals the chattel to place it beyond the reach of the
mortgagee, it logically follows as a matter of common sense, that the necessary
expenses incurred in the prosecution by the mortgagee of the action for replevin so
that he can regain possession of the chattel should be borne by the mortgagor.
Recoverable expenses would include expenses properly incurred in effecting seizure
of the chattel and reasonable attorney’s fees in prosecuting the action for replevin.
4. Where the right of the mortgage was conceded/disputed. Where the right of the plaintiff to the
possession of the specific property is so conceited or evident, the action need only be
maintained against him who so possesses the property. Persons having a special right of
property in the goods the recovery of which is sought, such as a chattel mortgagee, may
maintain an action for replevin therefore. Where the mortgage authorizes the mortgagee to
take possession of the property on default, he may maintain an action to recover possession
of the mortgaged chattels from the mortgagor or from any person in whose hands he may find
them. In effect then, the mortgagee, upon the mortgagor’s default, is constituted an attorney-
in-fact of the mortgagor enabling such mortgagee to act for and on behalf of the owner.
Accordingly, that the defendant is not privy to the chattel mortgage should be inconsequential.
By the fact that the object of replevin is traced to his possession, one can properly be a
defendant in an action for replevin. It is here assumed that the plaintiff’s right to possess the
thing is not or cannot be disputed. In case the right of possession on the part of the plaintiff,
or his authority to claim such possession or that of his principal, is put to great doubt (a
contending party might contest the legal basis for plaintiff’s cause of action or an adverse and
independent claim of ownership or right of possession is raised by that party), it could become
essential to have other persons involved and accordingly impleaded for a complete
determination and resolution of the controversy.
5. Where a third-party claims the title. Under Section 14, Rule 57 of the Rules of Court, a third
party claimant to a property levied upon by a writ of attachment must make an affidavit
showing that he has a title thereto or right to the possession thereof. This provision excludes
a chattel mortgage because a chattel mortgage is merely a security for a loan and does not
transfer title to the property mortgaged to the chattel mortgage.
6. Where claimant is an unpaid seller.
● RIGHT OF MORTGAGEE TO RECOVER DEFICIENCY.
1. Where the mortgage is foreclosed. The creditor may maintain an action for the deficiency
although the Chattel Mortgage Law is silent on this point. The reason is that a chattel mortgage
is only given as a security and not as payment for the debt in case of failure of payment. Both
the Chattel Mortgage Law and Act No. 3135 governing extrajudicial foreclosure of real estate
mortgage, do not contain any provision, expressly or impliedly, precluding the mortgagee from
recovering deficiency of the principal obligation. In our jurisdiction, when the law intends to
foreclose the right of a creditor to sue for any deficiency resulting from a foreclosure of a
security given to guarantee an obligation, it expressly provides such as with respect to sale
of things pledged and foreclosure of chattel mortgage on personal property sold on
installment basis. The action may be brought within ten (10) years from the time the cause of
action accrues, even if it is not upon a written contract because the obligation of the mortgagor
to pay the deficiency is one created by law, and furthermore, the action is in the nature of a
mortgage action because its purpose is precisely to enforce the mortgage contract.
2. Where mortgage constituted security for purchase of personal property payable in

installments. If the chattel mortgage is constituted, whether by the debtor-vendee or a third
person, as security for the purchase of personal property payable in installments, no
deficiency judgment can be asked and any agreement to the contrary shall be void.Once the
vendor of personal property sold on installment has foreclosed the chattel mortgage on the
thing sold, he is precluded from proceeding against the security put up by a third person for if
the latter should be compelled to pay the balance of the purchase price, he will, in turn, be

entitled to recover what he has paid from the debtor-vendee (see Art. 2066.); so that
ultimately, it will be the vendee who will be made to bear the payment of the balance of the
price, despite the earlier foreclosure of the chattel mortgage given by him, thereby indirectly
subverting the protection given by Article 1484. The remedies granted by Article 1484 are
alternative, not cumulative, and exclusive, that is, the exercise of one would bar the exercise
of the others.
3. Where mortgaged property subsequently attached and sold. The chattel mortgagee is entitled
to deficiency judgment in an action for specific performance where the mortgaged property is
subsequently attached and sold. The execution sale in such a case is not a foreclosure sale.
1.4.5 Modes of extinguishment

● EXTINGUISHMENT OF PLEDGE BY RETURN OF THINGS PLEDGED. (ARTICLE 2110)
One of the essential requisites of pledge is that the object be placed in the possession of the
creditor, or of a third person by common agreement. Hence, the pledge is extinguished if the object is
returned by the pledgee, and this is true notwithstanding any stipulation that the pledge would continue
although the pledgee is no longer in possession. The pledge is also extinguished by payment of the
debt, by renunciation or abandonment of the pledge, and by the sale of the thing pledged at public
auction.
● EXTINGUISHMENT OF PLEDGE BY RENUNCIATION OR ABANDONMENT. (ARTICLE 2111)
The pledge is a personal right of the pledgee which may be waived. Under Article 2111,
renunciation or abandonment must be in writing to extinguish the pledge, and such renunciation is not
conditioned upon the acceptance by the pledgor or owner nor upon the return of the thing pledged.
The waiver transforms the pledgee into a depositary with the rights and obligations of one. The
principal debt, however, is not affected by the waiver of the pledge. But the waiver of the principal
obligation carries with it that of the pledge. Under this article, the thing pledged remains in the
possession of the pledgee. Hence, the waiver must be in writing. Under Article 2110, the pledge is
extinguished even in the absence of waiver if the thing pledged is returned to the pledgor. Other causes
of extinguishment of pledge are prescription, loss of the thing, merger, compensation, novation, etc.
2.0 BOUNCING CHECKS
BATAS PAMBANSA BLG 22 - BOUNCING CHECKS
AN ACT PENALIZING THE MAKING OR DRAWING AND ISSUANCE OF A CHECK WITHOUT SUFFICIENT
FUNDS OR CREDIT AND FOR OTHER PURPOSE
BOUNCING CHECKS
A CHECK DISHONORED BY THE ISSUING BANK BECAUSE OF INSUFFICIENT FUNDS, OR EVEN WHEN
THE ACCOUNT AGAINST WHICH THE CHECK WAS DRAWN WAS ALREADY CLOSED.
2.1 Requisites to be liable under BP 22
2.1.1 Checks without insufficient funds

Any person who makes or draws and issues any check to apply on account or for value,
knowing at the time of issue that he does not have sufficient funds in or credit with the drawee bank
for the payment of such check in full upon its presentment, which check is subsequently dishonored
by the drawee bank for insufficiency of funds or credit or would have been dishonored for the same
reason had not the drawer, without any valid reason, ordered the bank to stop payment, shall be
punished by imprisonment of not less than thirty days but not more than one (1) year or by a fine of
not less than but not more than double the amount of the check which fine shall in no case exceed
Two Hundred Thousand Pesos, or both such fine and imprisonment at the discretion of the court.
The same penalty shall be imposed upon any person who, having sufficient funds in or credit with the
drawee bank when he makes or draws and issues a check, shall fail to keep sufficient funds or to

maintain a credit to cover the full amount of the check if presented within a period of ninety (90) days
from the date appearing thereon, for which reason it is dishonored by the drawee bank.
Where the check is drawn by a corporation, company or entity, the person or persons who actually
signed the check on behalf of such a drawer shall be liable under this Act.
2.1.2 Evidence without knowledge of insufficient funds

The making, drawing and issuance of a check payment of which is refused by the drawee because of
insufficient funds in or credit with such bank, when presented within ninety (90) days from the date of the
check, shall be prima facie evidence of knowledge of such insufficiency of funds or credit unless such maker
or drawer pays the holder thereof the amount due thereon, or makes arrangements for payment in full by the
drawee of such check within (5) banking days after receiving notice that such check has not been paid by the
drawee.
2.1.3 Duty of Drawee
DRAWEE
THE PARTY THAT HAS BEEN ORDERED BY THE DRAWER TO PAY A CERTAIN SUM OF MONEY TO THE
PERSON PRESENTING THE CHECK (THE PAYEE)
It shall be the duty of the drawee of any check, when refusing to pay the same to the holder thereof
upon presentment, to cause to be written, printed, or stamped in plain language thereon, or attached thereto,
the reason for drawee's dishonor or refusal to pay the same: Provided, That where there are no sufficient
funds in or credit with such drawee bank, such fact shall always be explicitly stated in the notice of dishonor
or refusal. In all prosecutions under this Act, the introduction in evidence of any unpaid and dishonored check,
having the drawee's refusal to pay stamped or written thereon or attached thereto, with the reason therefor
as aforesaid, shall be prima facie evidence of the making or issuance of said check, and the due presentment
to the drawee for payment and the dishonor thereof, and that the same was properly dishonored for the reason
written, stamped or attached by the drawee on such dishonored check.
Notwithstanding receipt of an order to stop payment, the drawee shall state in the notice that there were no
sufficient funds in or credit with such bank for the payment in full of such check, if such be the fact.
2.1.4 Credit Construed
CREDIT
AN ARRANGEMENT OR UNDERSTANDING WITH THE BANK FOR THE PAYMENT OF SUCH CHECK.
2.2 Comparison with Estafa (ARTICLE 315)
By means of any of the following false pretenses or fraudulent acts executed prior to or
simultaneously with the commission of the fraud:
(d) By postdating a check, or issuing a check in payment of an obligation when the offender had no
funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the check. The
failure of the drawer of the check to deposit the amount necessary to cover his check within three (3) days
from receipt of notice from the bank and/or the payee or holder that said check has been dishonored for lack
or insufficiency of funds shall be prima facie evidence of deceit constituting false pretense or fraudulent act.
ESTAFA REQUISITES
1. THE POSTDATING OR ISSUANCE OF A CHECK IN PAYMENT OF AN OBLIGATION CONTRACTED

AT THE TIME THE CHECK WAS ISSUED;

2. LACK OF SUFFICIENCY OF FUNDS TO COVER THE CHECK; AND
3. DAMAGE TO THE PAYEE
3.0 CONSUMER PROTECTION
CONSUMER PROTECTION ACT R.A. 7394
To protect the interests of the consumer, promote his general welfare and to establish standards of
conduct for business and industry.
3.1 Consumer Product Quality and Safety
Article 5. Declaration of Policy. – It shall be the duty of the State:

○ To develop and provide safety and quality standards for consumer products, as well as the
performance and the use of the products;
○ To assist the consumer in evaluating the quality, including safety, performance and comparative utility
of consumer products;
○ To protect the public against unreasonable risks of injury associated with consumer products;
○ To undertake research on quality improvement of products and investigation into causes and
prevention of product related deaths, illness and injuries; and
○ To assure the public of the consistency of standardized products.
Article 6. Implementing Agencies. – The provisions of this Article and its implementing rules and regulations
shall be enforced by:
a) The Department of Health with respect to food, drugs, cosmetics, devices and substances;
b) The Department of Agriculture with respect to products related to agriculture, and; and
c) The Department of Trade and Industry with respect to other consumer products not specified above.
Article 7. Promulgation and Adoption of Consumer Product Standards. – The concerned department shall
establish consumer product quality and safety standards which shall consist of one or more of the following:
a) Requirements to performance, composition, contents, design, construction, finish, packaging of a
consumer product;
b) Requirements as to kind, class, grade, dimensions, weights, material;
c) Requirements as to the methods of sampling, tests and codes used to check the quality of the products;
d) Requirements as to precautions in storage, transporting and packaging; and
e) Requirements that a consumer product be marked with or accompanied by clear and adequate safety
warnings or instructions, or requirements respecting the form of warnings or instructions.
For this purpose, the concerned department shall adopt existing government domestic product quality and
safety standards: Provided, That in the absence of such standards, The Philippine Government shall
established technical committees composed of representatives from the government, business, and consumer
sectors to develop consumer product quality and safety standards. These committees will consult with the
private sector to create their own standards after public hearings, and consider existing international
standards recognized by the government.
Article 8. Publication of Consumer Product Standards. – The concerned departments must publish or cause
the publication of an information campaign in two newspapers of general circulation at least once a week for
a period of one month, and may also conduct an information campaign to ensure the proper guidance of
consumers, businesses, industries and other sectors.
Article 9. Effectivity of Rules.

a) Consumer product standards and safety rules must take effect within 90 days of promulgation, unless
the department funds a later effective date in the public interest. After that, it is illegal to sell or
distribute products not complying with the standards or rules.
b) The department may prohibit a manufacturer from stockpiling consumer products to prevent them
from circumventing the purposes of this paragraph. Stockpiling means manufacturing or importing a

product between the date of promulgation and its effective date at a rate significantly greater than the
rate during a base period.
Article 10. Injurious, Dangerous and Unsafe Products. – The departments must make an order for the recall,
prohibition or seizure of a consumer product if it is found to be injurious, unsafe or dangerous. If the product
is declared imminently injurious, unsafe or dangerous, the seller, distributor, manufacturer or producer must
be given a hearing within 48 hours.
The ban on the sale and distribution of a consumer product adjudged injurious, unsafe or dangerous will
remain in force until its safety is assured or measures to ensure it are established.
Article 11. Amendment and Revocation of Declaration of the Injurious, Unsafe or Dangerous Character of a
Consumer Product. – People can petition the appropriate department to amend or revoke consumer product
safety rules or declare them unsafe.
In case the department, upon petition by an interested party or its own initiative and after due notice and
hearing, determines a consumer product to be substandard or materially defective, it shall so notify the
manufacturer, distributor or seller thereof of such finding and order such manufacturer, distributor or seller
to:
a) Give notice to the public of the defect or failure to comply with the product safety standards; and
b) Give notice to each distributor or retailer of such product.
The department shall also direct the manufacturer, distributor or seller of such product to extend any or all of
the following remedies to the injured person:
a) To repair defect to conform to consumer product standards;
b) To replace defective product with like or equivalent product;
c) To refund the purchase price of the product less a reasonable allowance for use; and
d) To pay the consumer reasonable damages as may be determined by the department.
Manufacturer, distributor or seller shall not charge the consumer for remedy.
Article 12. Effectivity of Amendments and Revocation of Consumer Product Safety Rule. – Any amendment or
revocation of a consumer product safety rule made by the concerned department shall specify the date on
which it shall take effect which shall not exceed ninety days from the date of amendment or revocation is
published unless the concerned department finds, for a good cause shown, that a later effective date is in the
public interest and publishes its reasons for such finding. The department shall promulgate the necessary
rules for the issuance, amendment or revocation of any consumer product safety rule.
Article 13. New Products. – The concerned department shall take measures to make a list of new consumer
products and to cause the publication by the respective manufacturers or importers of such products a list
thereof together with the descriptions in a newspaper of general circulation.
Article 14. Certification of Conformity to Consumer Product Standards. – The concerned department shall aim
at having consumer product standards established for every consumer product so that consumer products
shall be distributed in commerce only after inspection and certification of its quality and safety standards by
the department. The manufacturer shall avail of the Philippine Standard Certification Mark which the
department shall grant after determining the product's compliance with the relevant standard in accordance
with the implementing rules and regulations.
Article 15. Imported Products.

a) Any consumer product offered for importation into the customs of the Philippine territory shall be
refused admission if such product:
1. Fails to comply with an applicable consumer product quality and safety standard or rule;
2. Is or has been determined to be injurious, unsafe and dangerous;
3. Is substandard; or
4. Has material defect.
b) Samples of imported products can be obtained without charge.The owner or consignee of imported
consumer products under examination must have a hearing, with respect to the importation of such
products into the Philippines. If it appears from examination of such samples or otherwise that an
imported consumer product does not conform to the consumer product safety rule or is injurious,
unsafe and dangerous, is substandard or has a material defect, such product shall be refused

admission unless the owner or the consignee thereof manifests under bond that none of the above
ground for non-admission exists or that measures have been taken to cure them before they are sold,
distributed or offered for sale to the general public.
Any consumer product, the sale or use of which has been banned or withdrawn in the country of
manufacture, shall not be imported into the country.
c) If it appears that any consumer product which may not be admitted pursuant to paragraph (a) of this
Article can be so modified that it can already be accepted, the concerned department may defer final
examination as to the admission of such product for a period not exceeding ten (10) days, and in
accordance with such regulations as the department and the Commissioner of Customs shall jointly
promulgate, such product may be released from customs custody under bond for the purpose of
permitting the owner or consignee an opportunity to so modify such product.
d) All modifications taken by an owner or consignee for the purpose of securing admission of an imported
consumer product under paragraph (c) shall be subject to the supervision of the concerned
department. If the product cannot be so modified, or if the owner or consignee is not proceeding to
satisfactorily modify such product, it shall be refused admission and the department may direct
redelivery of the product into customs custody, and to seize the product if not so redelivered.
e) Imported consumer products not admitted must be exported, except that upon application, the
Commissioner of Customs may permit the destruction of the product if, within a reasonable time, the
owner or consignee thereof fails to export the same.
f) All expenses in connection with the destruction provided for in this Article, and all expenses in
connection with the storage, cartage or labor with respect to any consumer product refused admission
under this Article, shall be paid by the owner or consignee and, in default of such payment, shall
constitute a lien against any future importation made by such owner or consignee.
Article 16. Consumer Products for Export. – The preceding article on safety not apply to any consumer product
if:
a) It can be shown that such product is manufactured, sold or held for sale for export from the
Philippines, or that such product was imported for export, unless such consumer product is in fact
distributed in commerce for use in the Philippines; and
b) Such consumer product or the packaging thereof bears a stamp or label stating that such consumer
product is intended for export and actually exported.
Article 17. Powers, functions and duties. – In addition to their powers, functions and duties under existing laws,
the concerned department shall have the following powers, functions and duties:
a) To administer and supervise the implementation of this Article and its implementing rules and
regulations;
b) To undertake researches, develop and establish quality and safety standards for consumer products
in coordination with other government and private agencies closely associated with these products;
c) To inspect and analyze consumer products for purposes of determining conformity to established
quality and safety standards;
d) To levy, assess, collect and retain fees as are necessary to cover the cost of inspection, certification,
analysis and tests of samples of consumer products and materials submitted in compliance with the
provisions of this Article;
e) To investigate the causes of and maintain a record of product-related deaths, illnesses and injuries
for use in researches or studies on the prevention of such product-related deaths, illnesses and
injuries;
f) To accredit independent, competent non-government bodies, to assist in (1) monitoring the market for
the presence of hazardous or non-certified products and other forms of violations of Article 18; and
(2) other appropriate means to expand the monitoring and enforcement outreach of the department in
relation to its manpower, testing and certification resources at a given time; and
g) To accredit independent competent testing laboratories.
3.2 Deceptive Sales Acts and Practices
Article 48. Declaration of Policy. – The State shall promote and encourage fair, honest and equitable
relations among parties in consumer transactions and protect the consumer against deceptive, unfair and
unconscionable sales acts or practices.

Article 49. Implementing Agency. – The Department of Trade and Industry enforces the provisions of this
Chapter.
REGULATION OF SALES ACTS AND PRACTICES
Article 50. Prohibition Against Deceptive Sales Acts or Practices. – A deceptive act or practice by a seller or
supplier in connection with a consumer transaction is a violation of the Act, regardless of whether it occurs
before, during or after the transaction. Producers, manufacturers, suppliers, and sellers can be held liable for
deceptive acts or practices that induce consumers to purchase a product or service.
Without limiting the scope of the above paragraph, the act or practice of a seller or supplier is deceptive when
it represents that:
a) A consumer product or service has the sponsorship, approval, performance, characteristics,
ingredients, accessories, uses, or benefits it does not have;
b) A consumer product or service is of a particular standard, quality, grade, style, or model when in fact
it is not;
c) A consumer product is new, original or unused, when in fact, it is in a deteriorated, altered,
reconditioned, reclaimed or second-hand state;
d) A consumer product or service is available to the consumer for a reason that is different from the
fact;
e) A consumer product or service has been supplied in accordance with the previous representation
when in fact it is not;
f) A consumer product or service can be supplied in a quantity greater than the supplier intends;
g) A service, or repair of a consumer product is needed when in fact it is not;
h) A specific price advantage of a consumer product exists when in fact it does not;
i) The sales act or practice involves or does not involve a warranty, a disclaimer of warranties, particular
warranty terms or other rights, remedies or obligations if the indication is false; and
j) The seller or supplier has a sponsorship, approval, or affiliation he does not have.
Article 51. Deceptive Sales Act or Practices By Regulation. – The Department must declare any sales act,
practice or technique deceptive after due notice and hearing.
Article 52. Unfair or Unconscionable Sales Act or Practice. – An unfair or unconscionable sales act or practice
by a seller or supplier in connection with a consumer transaction violates this Chapter whether it occurs
before, during or after the consumer transaction. An act or practice shall be deemed unfair or unconscionable
whenever the producer, manufacturer, distributor, supplier or seller, by taking advantage of the consumer's
physical or mental infirmity, ignorance, illiteracy, lack of time or the general conditions of the environment or
surroundings, induces the consumer to enter into a sales or lease transaction grossly inimical to the interests
of the consumer or grossly one-sided in favor of the producer, manufacturer, distributor, supplier or seller.
In determining whether an act or practice is unfair and unconscionable, the following circumstances shall be
considered:
a) That the producer, manufacturer, distributor, supplier or seller took advantage of the inability of the
consumer to reasonably protect his interest because of his inability to understand the language of an
agreement, or similar factors;
b) That when the consumer transaction was entered into, the price grossly exceeded the price at which
similar products or services were readily obtainable in similar transaction by like consumers;
c) That when the consumer transaction was entered into, the consumer was unable to receive a
substantial benefit from the subject of the transaction;
d) That when the consumer was entered into, the seller or supplier was aware that there was no
reasonable probability or payment of the obligation in full by the consumer; and
e) That the transaction that the seller or supplier induced the consumer to enter into was excessively
one-sided in favor of the seller or supplier.
Article 53. Chain Distribution Plans or Pyramid Sales Schemes. – Chain distribution plans and pyramid sales
schemes prohibited in consumer products.
Article 54. Home Solicitation Sales. – No business entity shall conduct any home solicitation sale of any
consumer product or service without first obtaining a permit from the Department. Such permit may be denied

suspended or revoked upon cause as provided in the rules and regulations promulgated by the Department,
after due notice and hearing.
Article 55. Home Solicitation Sales; When Conducted. – Home solicitation sales may be conducted only
between the hours of nine o'clock in the morning and seven o'clock in the evening of each working day:
Provided, That solicitation sales may be made at a time other than the prescribed hours where the person
solicited has previously agreed to the same.
Article 56. Home Solicitation Sales; by Whom Conducted. – Home solicitation sales shall only be conducted by
a person who has the proper identification and authority from his principal to make such solicitations.
Article 57. Receipts for Home Solicitation Sales. – Sales generated from home solicitation sales shall be
properly receipted as per existing laws, rules and regulations on sale transactions.
Article 58. Prohibited Representations. – A home solicitation sale shall not represent that:
a) The buyer has been specially selected;
b) A survey, test or research is being conducted; or
c) The seller is making a special offer to a few persons only for a limited period of time.
Article 59. Referral Sales. – Referral selling plans shall not be used in the sale of consumer products unless
the seller executes in favor of the buyer a written undertaking that will grant a specified compensation or
other benefit to said buyer in return for each and every transaction consummated by said seller with the
persons referred by said buyer or for subsequent sales that said buyers has helped the seller enter into.
Article 60. Penalties. –

a) Any person who shall violate the provisions of Title III, Chapter I, shall upon conviction, be subject to
a fine of not less than Five Hundred Pesos (P500.00) but not more than Ten Thousand Pesos
(P10,000.00) or imprisonment of not less than five (5) months but not more than one (1) year or both,
upon the discretion of the court.
b) In addition to the penalty provided for in paragraph (1), the court may grant an injunction restraining
the conduct constituting the contravention of the provisions of Articles 50 and 51 and/or actual
damages and such other orders as it thinks fit to redress injury to the person caused by such conduct.
3.3 Product Service and Warranty
Article 66. Implementing Agency. – The Department of Trade and Industry, shall strictly enforce the provision
of this Chapter and its implementing rules and regulations.
Article 67. Applicable Law on Warranties. – The provisions of the Civil Code on conditions and warranties shall
govern all contracts of sale with conditions and warranties.
Article 68. Additional Provisions on Warranties. – In addition to the Civil Code provisions on sale with
warranties, the following provisions shall govern the sale of consumer products with warranty:
a) TERMS OF EXPRESS WARRANTY – Any seller or manufacturer who gives an express warranty shall:
1) Set forth the terms of warranty in clear and readily understandable language and clearly
identify himself as the warrantor;
2) Identify the party to whom the warranty is extended;
3) State the products or parts covered;
4) State what the warrantor will do in the event of a defect, malfunction of failure to conform to
the written warranty and at whose expense;
5) State what the consumer must do to avail of the rights which accrue to the warranty; and
6) Stipulate the period within which, after notice of defect, malfunction or failure to conform to
the warranty, the warrantor will perform any obligation under the warranty.
b) EXPRESS WARRANTY – operative from moment of sale. – All written warranties or guarantees issued
by a manufacturer, producer, or importer shall be operative from the moment of sale.
1) Sales Report. –Distributors must report all sales of products covered by this Article within 30
days of purchase, unless otherwise agreed upon. The report should include the purchase date,
model, serial number, name and address of the buyer.The report made in accordance with this
provision is equivalent to a warranty registration with the manufacturer, producer, or

importer. Such registration is sufficient to hold the manufacturer, producer, or importer liable,
in appropriate cases, under its warranty.
2) Failure to make or send report. – Failure of the distributor to make the report or send them
the form required by the manufacturer, producer, or importer shall relieve the latter of its
liability under the warranty: Provided, however, That the distributor who failed to comply with
its obligation to send the sales reports shall be personally liable under the warranty. For this
purpose, the manufacturer shall be obligated to make good the warranty at the expense of the
distributor.
3) Retail. – The retailer shall be subsidiarily liable under the warranty in case of failure of both
the manufacturer and distributor to honor the warranty. In such case, the retailer shall
shoulder the expenses and costs necessary to honor the warranty. Nothing therein shall
prevent the retailer from proceeding against the distributor or manufacturer.
4) Enforcement of warranty or guarantee. – The warranty rights can be enforced by presentment
of a claim. To this end, the purchaser needs only to present to the immediate seller either the
warranty card of the official receipt along with the product to be serviced or returned to the
immediate seller. No other documentary requirement shall be demanded from the purchaser.
If the immediate seller is the manufacturer's factory or showroom, the warranty shall
immediately be honored. If the product was purchased from a distributor, the distributor shall
likewise immediately honor the warranty. In the case of a retailer other than the distributor,
the former shall take responsibility without cost to the buyer of presenting the warranty claim
to the distributor in the consumer's behalf.
5) Record of purchases. – Distributors and retailers covered by this Article shall keep a record
of all purchases covered by a warranty or guarantee for such period of time corresponding to
the lifetime of the product's respective warranties or guarantees.
6) Contrary stipulations – null and void. – All covenants, stipulations or agreements contrary to
the provisions of this Article shall be without legal effect.
c) DESIGNATION OF WARRANTIES – A written warranty shall clearly and conspicuously designate such
warranty as:
1. "Full warranty" if the written warranty meets the minimum requirements set forth in
paragraph (d); or
2. "Limited warranty" if the written warranty does not meet such minimum requirements.
d) MINIMUM STANDARDS FOR WARRANTIES – For the warrantor of a consumer product to meet the
minimum standards for warranty, he shall:
1) Remedy such consumer product within a reasonable time and without charge in case of a
defect, malfunction or failure to conform to such written warranty; and
2) Permit the consumer to elect whether to ask for a refund or replacement without charge of
such product or part, as the case may be, where after reasonable number of attempts to
remedy the defect or malfunction, the product continues to have the defect or to malfunction.
The warrantor is not required to perform duties if the defect was caused by damage due to
unreasonable use.
e) DURATION OF WARRANTY – The seller and the consumer may stipulate the period within which the
express warranty shall be enforceable. If the implied warranty on merchantability accompanies an
express warranty, both will be of equal duration.
Any other implied warranty shall endure not less than sixty (60) days nor more than one (1) year
following the sale of new consumer products.
f) BREACH OF WARRANTIES
1) In case of breach of express warranty, The consumer can elect to have the goods repaired or
their purchase price refunded, but the warranty work must conform to the express warranty
within 30 days by either the warrantor or his representative. The thirty-day period, however,
may be extended by conditions which are beyond the control of the warrantor or his
representative. In case the refund of the purchase price is elected, the amount directly
attributable to the use of the consumer prior to the discovery of the non-conformity shall be
deducted.

2) In case of breach of implied warranty, the consumer may retain in the goods and recover
damages, or reject the goods, cancel and contract and recover from the seller so much of the
purchase price as has been paid, including damages.
Article 69. Warranties in Supply of Services.

a) In every contract for the supply of services there is an always implied warranty that the seller is
obligated to provide services with due care and skill, and any material supplied must be suitable for
the purpose for which it is supplied.
b) The seller has an implied warranty that the services supplied under the contract and any material
supplied in connection therewith will be reasonably fit for the purpose, unless the consumer does not
rely on the seller's skill or judgment.
Article 70. Professional Services. – The provision of this Act on warranty shall not apply to professional
services of certified public accountants, architects, engineers, lawyers, veterinarians, optometrists,
pharmacists, nurses, nutritionists, dietitians, physical therapists, salesmen, medical and dental practitioners
and other professionals engaged in their respective professional endeavors.
Article 71. Guaranty of Service Firms. – Service firms shall guarantee workmanship and replacement of spare
parts for a period not less than ninety (90) days which shall be indicated in the pertinent invoices.
Article 72. Prohibited Acts. – The following acts are prohibited:

a) Refusal without any valid legal cause by the total manufacturer or any person obligated under the
warranty or guarantee to honor a warranty or guarantee issued;
b) Unreasonable delay by the local manufacturer or any person obligated under the warranty or
guarantee in honoring the warranty;
c) Removal by any person of a product's warranty card for the purpose of evading said warranty
obligation; and
d) Any false representation in an advertisement as to the existence of a warranty or guarantee.
Article 73. Penalties.

a) Any person who shall violate the provisions of Article 67 shall be subject to fine of not less than Five
hundred pesos (P500.00) but not more than Five thousand pesos (P5,000.00) or an imprisonment of
not less than three (3) months but not more than two (2) years or both upon the discretion of the court.
A second conviction under this paragraph shall also carry with it the penalty or revocation of his
business permit and license.
b) Any person, natural or juridical, committing any of the illegal acts provided for in Chapter III, except
with respect to Article 67, shall be liable for a fine of not less than One thousand pesos (P1,000.00) but
not more than Fifty thousand pesos (P50,000.00) or imprisonment for a period of at least one (1) year
but not more than five (5) years, or both, at the discretion of the court.
The imposition of any of the penalties herein provided is without prejudice to any liability incurred
under the warranty or guarantee.
3.4 Labelling and Packaging
Article 74. Declaration of Policy. – The State must enforce labeling and fair packaging to ensure consumers
have accurate information about the contents of consumer products.
Article 75. Implementing Agency. – The Department of Trade and Industry shall enforce the provisions of this
Chapter and its implementing rules and regulations: Provided, That with respect to food, drugs, cosmetics,
devices and hazardous substances, it shall be enforced by the concerned department.
Article 76. Prohibited Acts on Labeling and Packaging. – It is unlawful for any person to display or distribute a
consumer product whose package or label does not conform to the provisions of this Chapter.
The prohibition in this Chapter shall not apply to persons engaged in the business of wholesale or retail
distributors of consumer products except to the extent that such persons:
a) Are engaged in the packaging or labeling of such products;
b) Prescribe or specify by any means the manner in which such products are packaged or labeled; or
c) Having knowledge, refuse to disclose the source of the mislabeled or mispackaged products.

Article 77. Minimum Labeling Requirements for Consumer Products. – All consumer products domestically
sold whether manufactured locally or imported shall indicate the following in their respective labels of
packaging:
a) It's correct and registered trade name or brand name;
b) Its duly registered trademark;
c) Its duly registered business name;
d) The address of the manufacturer, importer, repacker of the consumer product in the Philippines;
e) Its general make or active ingredients;
f) The net quality of contents, in terms of weight, measure or numerical count rounded of to at least the
nearest tenths in the metric system;
g) Country of manufacture, if imported; and
h) If a consumer product is manufactured, refilled or repacked under license from a principal, the label
shall so state the fact.
The following may be required by the concerned department in accordance with the rules and regulations they
will promulgate under authority of this Act:
a) Whether it is flammable or inflammable;
b) Directions for use, if necessary;
c) Warning of toxicity;
d) Wattage, voltage or amperes; or
e) Process of manufacture used if necessary.
Any words, statements, designs or devices required by the preceding paragraph must be prominently
displayed on the label or labeling to be read and understood.
The above requirements shall form an integral part of the label without danger of being erased or detached
under ordinary handling of the product.
Article 78. Philippine Product Standard Mark. – The label may contain the Philippine Product Standard Mark if
it is certified to have passed the consumer product standard prescribed by the concerned department.
Article 79. Authority of the Concerned Department to Provide for Additional Labeling and Packaging
Requirements. – Whenever the concerned department determines that regulations containing requirements
other than those prescribed in Article 77 hereof are necessary to prevent the deception of the consumer or to
facilitate value comparisons as to any consumer product, it may issue such rules and regulations to:
a) Establish and define standards for characterization of the size of a package enclosing any consumer
product which may be used to supplement the label statement of net quality, of contents of packages
containing such products but this clause shall not be construed as authorizing any limitation on the
size, shape, weight, dimensions, or number of packages which may be used to enclose any product;
b) Regulate the placement upon any package containing any product or upon any label affixed to such
product of any printed matter stating or representing by implication that such product is offered for
retail at a price lower than the ordinary and customary retail price or that a price advantage is
accorded to purchases thereof by reason of the size of the package or the quantity of its contents; and
c) Prevent the nonfunctional slack-fill of packages containing consumer products.
For purposes of paragraph (c) of this Article, a package shall be deemed to be nonfunctionally slack-filled if
it is filled to substantially less than its capacity for reasons other than (1) protection of the contents of such
package, (2) the requirements of machines used for enclosing the contents in such package, or (3) inherent
characteristics of package materials or construction being used.
Article 80. Special Packaging of Consumer Products for the Protection of Children. – The concerned
department may establish standards for the special packaging of any consumer product if it finds that:
a) The degree or nature of the hazard to children in the availability of such product, by reason of its
packaging, is such that special packaging is required to protect children from serious personal injury
or serious illness resulting from handling and use of such product; and
b) The special packaging to be required by such standard is technically feasible, practicable and
appropriate for such product. In establishing a standard under this Article, the concerned department
shall consider:
1) The reasonableness of such standard;

2) Available scientific, medical and engineering data concerning special packaging and
concerning accidental, ingestions, illnesses and injuries caused by consumer product;
3) The manufacturing practices of industries affected by this Article; and
4) The nature and use of consumer products.
Article 81. Price Tag Requirement. – states that it is unlawful to offer any consumer product for retail sale
without an appropriate price tag, label or marking publicly displayed to indicate the price. Lumber sold,
displayed or offered for sale must be tagged or labeled by indicating the price and the corresponding official
name of the wood. If products are too small or the nature of the product makes it impractical to place a price
tag, a price list placed at the nearest point may suffice.
Article 82. Manner of Placing Price Tags. – Price tags must clearly indicate the price per unit in pesos and
centavos.
Article 83. Regulations for Price Tag Placement. –The department must regulate the placement of price tags
for consumer products and services, without erasure or alteration.
Article 84. Additional Labeling Requirements for Food. – The following additional labeling requirements shall
be imposed by the concerned department for food:
a) Expiry or expiration date, where applicable;
b) Whether the consumer product is semi-processed, fully processed, ready-to-cook, ready-to-eat,
prepared food or just plain mixture;
c) Nutritive value, if any;
d) Whether the ingredients use are natural or synthetic, as the case may be; and
e) Such other labeling requirements as the concerned department may deem necessary and reasonable.
Article 85. Mislabeled Food. – A food shall also be deemed mislabeled:

a) If its labeling or advertising is false or misleading in any way;
b) If it is offered for sale under the name of another food;
c) If it is an imitation of another food, unless its label bears in type of uniform size and prominence, the
word "imitation" and, immediately thereafter, the name of the food imitated;
d) Its containers is so made, formed, or filled as to be misleading;
e) If in package form unless it bears a label conforming to the requirements of this Act: Provided, That
reasonable variation on the requirements of labeling shall be permitted and exemptions as to small
packages shall be established by the regulations prescribed by the concerned department of health;
f) If any word, statement or other information required by or under authority of this Act to appear on the
principal display panel of the label or labeling is not prominently placed thereon with such
conspicuousness as compared with other words, statements, designs or devices in the labeling and
in such terms as to render it likely to be read and understood by the ordinary individual under
customary conditions of purchase and use;
g) If it purports to be or is represented as a food for which a definition or standard of identity has been
prescribed unless:
1) Itt conforms to such definition and standard; and
2) Its labels bears the name of the food specified in the definition or standards, and insofar as
may be required by such regulations, the common names of optional ingredients other than
spices, flavoring and coloring, present in such food;
h) If it purports to be or represented as:
1) A food for which a standard of quality has been prescribed by regulations as provided in this
Act and its quality fall below such standard, unless its label bears in such manner and form
as such regulations specify, a statement that it falls below such standard; or
2) A food for which a standard or standards or fill of container have been prescribed by
regulations as provided by this Act and it falls below the standard of fill of container applicable
thereto, unless its label bears, in such manner and form as such regulations specify, a
statement that it falls below such standard;
i) If it is not subject to the provisions of paragraph (g) of this Article unless its label bears:
1) The common or usual name of the food, if there be any; and
2) In case it is manufactured or processed from two or more ingredients, the common or usual
name of such ingredient; except the spices, flavorings and colorings other than those sold as

such, may be designated as spices, flavorings and colorings without naming each: Provided,
That to the extent that compliance with the requirement of clause (2) of this paragraph is
impracticable or results in deception or unfair competition, exemptions shall be established
by regulations promulgated by the concerned department of health;
j) If it purports to be or is represented for special dietary uses, unless its label bears such information
concerning its vitamin or mineral or other dietary properties as the concerned department determines
to be, or by regulations prescribed as necessary in order fully to inform purchasers as its value for
such uses;
k) If it bears or contains any artificial flavoring, artificial coloring, or chemical preservative, unless it
bears labeling, stating that fact: Provided, That to the extent that compliance with the requirements of
this paragraph is impracticable, exemptions shall be established by regulations promulgated by the
concerned department. The provisions of this paragraph or paragraphs (g) and (i) with respect to the
artificial coloring shall not apply in the case of butter, cheese or ice cream.
Article 86. Labeling of Drugs. – The Generics Act shall apply in the labeling of drugs.
Article 87. Additional Labeling Requirements for Cosmetics. – The following additional requirements may be
required for cosmetics:
a) Expiry or expiration date;
b) Whether or not it may be an irritant;
c) Precautions or contra-indications; and
d) Such other labeling requirements as the concerned department may deem necessary and reasonable.
Article 88. Special Labeling Requirements for Cosmetics. – A cosmetic shall be deemed mislabeled:
a) If its labeling or advertising is false or misleading in any way;
b) If in package form unless it bears a label conforming to the requirements of labeling provided for in
this Act or under existing regulations: Provided, That reasonable variations shall be permitted, and
exemptions as to small packages shall be established by regulations prescribed by the concerned
department;
c) If any word, statement or other information required by or under authority of this Act to appear on the
label or labeling is not prominently placed thereon with such conspicuousness, as compared with
other words, statements, designs or devices in the labeling, and in such terms as to render it likely to
be read and understood by the ordinary individual under customary conditions of purchase and use;
d) If its container is so made, formed or filled as to be misleading; or
e) f its label does not state the common or usual name of its ingredients.
Article 89. Mislabeled Drugs and Devices. – A drug or device shall be deemed to be mislabeled:
a) If its labeling is false or misleading in any way;
b) If its in package form unless it bears a label conforming to the requirements of this Act or the
regulations promulgated therefor: Provided, that reasonable variations shall be permitted and
exemptions as to small packages shall be established by regulations prescribed by the concerned
department;
c) If any word, statement or other information required by or under authority of this Act to appear on the
principal display panel of the label or labeling is not prominently placed thereon with such
conspicuousness as compared with other words, statements, designs or devices in the labeling and
in such terms as to render it likely to be read and understood by the ordinary individual under
customary conditions of purchase and use; or
d) Igf it is for use by man and contains any quantity of the narcotic or hypnotic substance alpha-eucaine,
barbituric acid, beta-eucaine, bromal, cannabis, carbromal, chloral, coca, cocaine, codeine, heroin,
marijuana, morphine, opium, paraldehyde, peyote or sulfonmethane, or any chemical derivative of
such substance, which derivative has been designated by the concerned department after
investigation, and by regulations as habit forming; unless its label bears the name and quantity or
proportion of such substance or derivative and in juxtaposition therewith the statement "Warning-May
be habit forming";
e) Its labeling does not bear:
1. Adequate directions for use; and
2. Such adequate warning against use in those pathological conditions or by children where its
use may be dangerous to health, or against unsafe dosage or methods or duration of

administration or application, in such manner and form, as are necessary for the protection
of users: Provided, That where any requirement of clause (1) of this paragraph, as applied to
any drug or device, is not necessary for the protection of the public health, the concerned
department may promulgate regulations exempting such drug or device from such
requirement;
f) If it purports to be a drug the name of which is recognized in an official compendium, unless it is

packaged and labeled as prescribed therein: Provided, That the method of packing may be modified
with the consent of the concerned department;
g) If it has been found by the concerned department to be a drug liable to deterioration, unless it is
packaged in such form and manner, and its label bears a statement of such precautions, as the
concerned department, shall by regulations, require as necessary for the protection of the public
health;
h)
1) If it is a drug and its container is so made, formed or filled as to be misleading; or
2) If it is an imitation of another drug; or
3) If it is dangerous to health when used in the dosage, or with the frequency of duration
prescribed, recommended or suggested in the labeling thereof;
i) If it is, purports to be or is represented as a drug composed wholly or partly of insulin or of any kind
of penicillin, streptomycin, chlortetracycline, chloramphenicol, bacitracin, or any other antibiotic drug,
or any derivative thereof, unless:
1) It is from a batch with respect to which a certificate of release has been issued pursuant to
regulations of the concerned department; and
2) Such certificate of release is in effect with respect to such drug: Provided, That this paragraph
shall not apply to any drug or class of drugs exempted by regulations promulgated under
Authority of this Act.
Article 90. Regulation-making Exemptions- The concerned department may promulgate regulations
exempting food, cosmetics, drugs or devices from labeling requirements of this Act if they are processed,
labeled or repacked in substantial quantities at establishments other than those originally processed, labeled
or packed.
Article 91. Mislabeled Hazardous Substances. – Hazardous substances shall be deemed mislabeled when:
a) The packaging or labeling of a product intended for use in households, especially for children, is in
violation of special packaging regulations.
b) Such substance fails to bear a label;
1) Which states conspicuously:
01. The name and the place of business of the manufacturer, packer, distributor or seller;
02. The common or usual name or the chemical name, if there be no common or usual
name, of the hazardous substance or of each component which contributes
substantially to the harmfulness of the substance, unless the concerned department
by regulation permits or requires the use of the recognized generic name;
03. The signal word "danger" on substances which are extremely flammable, corrosive
or highly toxic;
04. The signal word "warning" or "caution" with a bright red or orange color with a black
symbol on all other hazardous substances;
05. A clear statement as to the possible injury it may cause if used improperly;
06. Precautionary measures describing the action to be followed or avoided;
07. Instructions when necessary or appropriate for first-aid treatment;
08. The word" poison" for any hazardous substance which is defined as highly toxic;
09. Instructions for handling and storage of packages which require special care in
handling and storage; and
10. The statement "keep out of the reach of children", or its practical equivalent, if the
article is not intended for use by children and is not a banned hazardous substance,
with adequate directions for the protection of children from the hazard involved. The
aforementioned signal words, affirmative statements, description of precautionary
measures, necessary instructions or other words or statements may be in English
language or its equivalent in Filipino; and

2) On which any statement required under clause 1) of this paragraph is located prominently in
bright red and orange color with a black symbol in contrast typography, layout or color with
the other printed matters on the label.
Article 92. Exemptions. – The department must promulgate regulations to exempt hazardous substances from
labeling requirements if they are impracticable or not necessary for public health and safety. Any hazardous
substance that does not bear a label in accordance with these regulations will be deemed mislabeled.
Article 93. Grounds for Seizure and Condemnation of Mislabeled Hazardous Substances:
a) Any mislabeled hazardous substance when introduced into commerce or while held for sale shall be
liable to be proceeded against and condemned upon order of the concerned department in accordance
with existing procedure for seizure and condemnation of articles in commerce: Provided, That this
Article shall not apply to a hazardous substance intended for export to any foreign country if:
1) It is in a package labeled in accordance with the specifications of the foreign purchaser;
2) It is labeled in accordance with the laws of the foreign country;
3) It is labeled on the outside of the shipping package to show that it is intended for export; and
4) It is so exported;
b) Any hazardous substance condemned under this Article must be disposed of by destruction or sale,
and the proceeds must be paid into the treasury of the Philippines. However, the department may
direct that the hazardous substance be delivered to or retained by the owner for destruction or
alteration under the supervision of an officer or employee designated by the department. The expenses
for such supervision must be paid by the person obtaining release of the hazardous substance.
c) The owner or consignee must pay all expenses related to the destruction and storage of hazardous
substances, and any default in payment will constitute a lien against any importation.
Article 94. Labeling Requirements of Cigarettes- it requires to all cigarettes for sale or distribution to be
labeled with the statement "Warning" Cigarette Smoking is Dangerous to Your Health. This statement must be
located in a conspicuous place on every cigarette package and must appear in conspicuous and legible type.
Any advertisement of cigarettes must contain the name warning as indicated in the label.
Article 95. Penalties.

a) Persons who violate the provisions of Title III, Chapter IV of this Act or its implementing rules and
regulations are subject to a fine of not less than P500.00 but not more than P20,000.00 or
imprisonment of not less than three months but not more than two years or both, at the discretion of
the court. If the consumer product is not a food, cosmetic, drug, device or hazardous substance, the
penalty is a fine of not less than P200.00 but not more than P5,000.00 or imprisonment of not less
than one month but not more than one year or both. Exception, Articles 81 to 83 of the same Chapter.
b) Any person who violates the provisions of Article 81 to 83 for the first time shall be subject to a fine
of not less than Two hundred pesos (P200.00) but not more than Five thousand pesos (P5,000.00) or
by imprisonment of not less than one (1) month but not more than six (6) months or both, at the
discretion of the court. A second conviction under this paragraph shall also carry with it the penalty
of revocation of business permit and license.
3.5 Consumer Rights
3.5.1 Price Tag Act
Price Tag Act R.A 71
AN ACT REQUIRING PRICE TAGS OR LABELS TO BE AFFIXED ON ALL ARTICLES OF COMMERCE

OFFERED FOR SALE AT RETAIL AND PENALIZING VIOLATIONS OF SUCH REQUIREMENT.
SEC 1. Articles of commerce and trade must be displayed with tags or labels to indicate the price, and sold
uniformly and without discrimination at the stated price Provided, That the Secretary of Agriculture and
Commerce may, upon the recommendation of the Director of Commerce, exempt from time to time certain
articles of commerce and trade or certain classes of establishments from the provisions of this Act. The

Secretary of Agriculture and Commerce is hereby authorized to issue rules and regulations to carry into effect
the provisions of this section.
SEC. 2. Any violation of this Act shall be punished by imprisonment of not more than six months or a fine of
not more than two hundred pesos, or both such fine and imprisonment in the discretion of the court.
SEC. 3. This Act shall take effect on the sixtieth day after its approval.
3.5.2 Lemon Law
Philippine Lemon Law of R.A No. 10642
AN ACT STRENGTHENING CONSUMER PROTECTION IN THE PURCHASE OF BRAND NEW MOTOR

VEHICLES
Section 2. Declaration of Policy. – It is hereby declared the policy of the State to promote full protection to the
rights of consumers in the sale of motor vehicles against business and trade practices which are deceptive,
unfair or otherwise inimical to consumers and the public interest.
The State recognizes that a motor vehicle is a major consumer purchase or investment. Hence, the rights of
consumers should be clearly defined, including the means for redress for violations thereof.
Section 4. Coverage. – This Act covers brand new motor vehicles purchased in the Philippines that are not
conforming to manufacturer or distributor's standards or specifications within 12 months or 20,000 kilometers
of operation after such delivery, whichever comes first. The following causes of nonconformity shall be
excluded:
(a) Noncompliance by the consumer of the obligations under the warranty;
(b) Modifications not authorized by the manufacturer, distributor, authorized dealer or retailer;
(c) Abuse or neglect of the brand new motor vehicle; and
(d) Damage to the vehicle due to accident or force majeure.
Section 5. Repair Attempts. – Consumers can invoke their rights under the Lemon Law if at least four repair
attempts by the same manufacturer, distributor, authorized dealer or retailer remain unresolved.
The repair may include replacement of part components, or assemblies.
Section 6. Notice of Availment of Lemon Law Rights. – The consumer shall notify the manufacturer, distributor,
authorized dealer or retailer of the unresolved complaint and their intention to invoke their rights under the
Lemon Law within the rights period.
The warranty booklet issued by the manufacturer, distributor, authorized dealer or retailer must clearly state
the manner and form of the notice and the consumer's responsibility.
Section 7. Availment of Lemon Law Rights. – Subsequent to filing the notice of availment referred to in the
preceding section, The consumer must bring the vehicle to the manufacturer, distributor, authorized dealer or
retailer for a final attempt to address their complaint.
The manufacturer, distributor, authorized dealer or retailer is responsible for attending to the complaints of
the consumer and making repairs to make the vehicle conform to the manufacturer's standards.
if the nonconformity issue remains unresolved despite the manufacturer, distributor, authorized dealer or
retailer's efforts to repair the vehicle, the consumer may file a complaint before the DTI as provided for under
this Act. However, if the vehicle is not returned for repair within thirty (30) calendar days from the date of
notice of release of the motor vehicle to the consumer following this repair attempt, the repair is deemed
successful. Finally, if the nonconformity issue still exists or persists after the thirty (30)-day period, the
consumer may be allowed to avail of the same remedies under Sections 5 and 6 hereof.
The Lemon Law requires a consumer to be provided with a reasonable daily transportation allowance,
equivalent to air-conditioned taxi fare, or a service vehicle at the option of the manufacturer, distributor,

authorized dealer or retailer. Any disagreement on this matter must be resolved by the DTI. This allowance
covers transportation from one residence to another and vice versa, equivalent to air-conditioned taxi fare.
Nothing herein shall be construed to limit or impair the rights and remedies of a consumer under any other
law.
Section 8. Remedies for Dispute Resolution. – The DTI shall exercise exclusive and original jurisdiction over
disputes arising from the provisions of this Act. All disputes arising from the provisions of this Act shall be
settled by the DTI in accordance with the following dispute resolution mechanisms:
(a) Mediation
(1) The principles of negotiation, conciliation and mediation towards amicable settlement between
the manufacturer, distributor, authorized dealer or retailer and the consumer shall be strictly
observed;
(2) In the course of its dispute resolution efforts, the DTI shall endeavor to independently
establish the validity of the consumer’s outstanding complaint. The DTI shall likewise retain
the services of other government agencies or qualified independent private entities in the
ascertainment of the validity of the consumer’s complaint. Any cost incurred in establishing
the validity of the consumer’s complaint shall be borne jointly by the consumer and the
manufacturer, distributor, authorized dealer or retailer;
(3) The complaint shall be deemed valid if it is independently established that the motor vehicle
does not conform to the standards or specifications set by the manufacturer, distributor,
authorized dealer or retailer;
(4) Upon failure of the negotiation or mediation between the manufacturer, distributor,
authorized, dealer or retailer and the consumer, the parties shall execute a certificate
attesting to such failure; and
(5) At any time during the dispute resolution period, the manufacturer, distributor, authorized
dealer or retailer and the consumer shall be encouraged to settle amicably. All disputes that
have been submitted for mediation shall be settled not later than ten (10) working days from
the date of filing of the complaint with the DTI.
(b) Arbitration, In the event there is a failure to settle the complaint during the mediation proceedings,
both parties may voluntarily decide to undertake arbitration proceedings.
(c) Adjudication
(1) In the event that both parties do not undertake arbitration proceedings, at least one of the
parties may commence adjudication proceedings, administered by the DTI. The DTI shall rely
on the qualified independent findings as to conformity to standards and specifications
established herein. In no case shall adjudication proceedings exceed twenty (20) working
days;
(2) In case a finding of nonconformity is arrived at, the DTI shall rule in favor of the consumer and
direct the manufacturer, distributor, authorized dealer or retailer to grant either of the
following remedies to the consumer:
● Replace the motor vehicle with a similar or comparable motor vehicle in terms of
specifications and values, subject to availability; or
● Accept the return of the motor vehicle and pay the consumer the purchase price plus
the collateral charges.
In case the consumer decides to purchase another vehicle with a higher value and specifications from
the same manufacturer, distributor, authorized dealer or retailer, the consumer shall pay the
difference in cost.
In both cases of replacement and repurchase, the reasonable allowance for use, as defined in this Act,
shall be deducted in determining the value of the nonconforming motor vehicle; and
(3) In case a nonconformity of the motor vehicle is not found by the DTI, it shall rule in favor of
the manufacturer, distributor, .authorized dealer or retailer, and direct the consumer to
reimburse the manufacturer, distributor, authorized dealer or retailer the costs incurred by
the latter in validating the consumer’s complaints.
An appeal may be taken from a final judgment or order of the Adjudication Officer which completely
disposes of the case within fifteen (15) days from receipt thereof.1âwphi1 The appeal shall be taken by

filing a Memorandum of Appeal with the Secretary of the DTI, with Notice of Appeal to the Adjudication
Officer, and with a copy duly furnished the adverse party or parties on any of the following grounds:
a. Grave abuse of discretion;
b. The decision/order is in excess of jurisdiction or authority of the Adjudication Officer; and
c. The decision/order is not supported by the evidence or there is serious error in the findings
of facts.
The Secretary of the DTI must decide on appeals within 30 days, and a party seeking further appeal
can file a case for certiorari to the Court of Appeals under Section 4, Rule 65.
Section 9. Determination of Reasonable Allowance for Use. – For purposes of this Act, "reasonable allowance
for use" shall mean twenty percent (20%) per annum deduction from the purchase price, or the product of the
distance traveled in kilometers and the purchase price divided by one hundred thousand (100,000) kilometers,
whichever is lower.
Section 10. Disclosure on Resale. – Should the returned motor vehicle be made available for resale, the
manufacturer, distributor, authorized dealer or retailer shall, prior to sale or transfer, disclose in writing to
the next purchaser of the same vehicle the following information:
(a) The motor vehicle was returned to the manufacturer, distributor, authorized dealer or retailer;
(b) The nature of the nonconformity which caused the return; and
(c) The condition of the motor vehicle at the time of the transfer to the manufacturer, distributor,
authorized dealer or retailer.
The responsibility of the manufacturer, distributor, authorized dealer or retailer under this section shall cease
upon the sale of the affected motor vehicle to the first purchaser.
Section 11. Penalty. – The manufacturer, distributor, authorized dealer or retailer is liable to pay a minimum of
P100,000.00 in damages to the aggrieved party without prejudice to any civil or criminal liability they and/or
the responsible officer may incur under existing laws.
Section 12. Assistance by Other Agencies. – The DOTC and other agencies, political subdivisions, local
government units, and government-owned and/or controlled corporations must provide assistance to the DTI
to effectively implement this Act.
Section 13. Implementing Rules and Regulations. –DTI to promulgate rules and regulations within 90 days of
Act's effectivity.
Section 14. Separability Clause. – If, for any reason, any part or provision of this Act is declared invalid, such
declaration shall not affect the other provisions of this Act.
Section 15. Repealing Clause. – All laws, decrees, executive orders, issuances, rules and regulations or parts
thereof which are inconsistent with the provisions of this Act are hereby deemed repealed, amended or
modified accordingly.
Section 16. Effectivity. –The Act takes effect 15 days after publication in Gazette or newspaper.
4. 0 FINANCIAL REHABILITATION AND INSOLVENCY
RA 10142 — FINANCIAL REHABILITATION AND INSOLVENCY
AN ACT PROVIDING FOR THE REHABILITATION OR LIQUIDATION OF FINANCIALLY DISTRESSED

ENTERPRISES AND INDIVIDUALS
4.1 Definition of Terms
(a) Administrative expenses – reasonable and necessary expenses:

(1) filing of a petition under the provisions of this Act;

(2) the conduct of the proceedings under this Act, including those incurred for the
rehabilitation or liquidation of the debtor;
(3) incurred in the ordinary course of business of the debtor after the commencement
date;
(4) for the payment of new obligations obtained after the commencement date;
(5) fees of the rehabilitation receiver or liquidator and of the professionals engaged by
them; and
(6) that are otherwise authorized or mandated under this Act or such other expenses as
may be allowed by the Supreme Court.
(b) Affiliate – corporation that is directly or indirectly under control by another corporation.
(c) Claim – all claims or demands of whatever nature or character against the debtor or its property
but not limited to;
(1) all claims of the government, whether national or local, including taxes, tariffs and
customs duties; and
(2) claims against directors and officers of the debtor arising from acts done in the
discharge of their functions falling within the scope of their authority.
➢ Provided, this inclusion does not prohibit the debtor from filing cases against
the directors and officers acting in their personal capacities.
(d) Commencement date – date on which the court issues the Commencement Order and is retroactive
to the date of filing of the petition.
(e) Commencement Order – order issued by the court under Section 16 of this Act.
(f) Control – power of a parent corporation to direct or govern the financial and operating policies of
an enterprise and to obtain benefits from its activities.
❖ Parent has more than 1/2 of the voting power – control to its affiliates are presumed to exist.
❖ Parent has 1/2 or less of the voting power – does not constitute control, unless:
(1) over more than one-half (1/2) of the voting rights by virtue of an agreement with
investors;
(2) direct or govern financial and operating policies of the enterprise under a statute or
an agreement;
(3) to appoint or remove the majority of the members of the board of directors or
equivalent governing body; or
(4) cast the majority votes at meetings of the board of directors or equivalent governing
body.
(g) Court – court designated by the Supreme Court to hear and determine the first instances of cases
brought under this Act.
(h) Creditor – natural or juridical person which has a claim against the debtor.
(i) Date of liquidation – date on which the court issues the Liquidation Order.
(j) Days – calendar days.
(k) Debtor – a sole proprietorship, a partnership, a corporation or an individual who has become
insolvent.
(l) Encumbered property – real or personal property of the debtor upon which a lien attaches.
(m) General unsecured creditor – creditor whose claim or a portion thereof is neither secured,
preferred nor subordinated under this Act.
(n) Group of debtors – are covered as:
(1) corporations that are financially related to one another as parent corporations,
subsidiaries or affiliates;
(2) partnerships that are owned more than fifty percent (50%) by the same person; and
(3) single proprietorships that are owned by the same person.
(o) Individual debtor – natural person who is a resident and citizen of the Philippines that has become
insolvent as defined herein.
(p) Insolvent – unable to pay its or his liabilities or has liabilities that are greater than its or his assets.
(q) Insolvent debtor's estate – estate of the insolvent debtor, which includes all the property and assets
of the debtor as of commencement date.
❖ Provided, trust assets and bailment, and other property and assets of a third party that are in
the possession of the debtor as of commencement date, are excluded therefrom.
(r) Involuntary proceedings – proceedings initiated by creditors.
(s) Liabilities – monetary claims against the debtor.
(t) Lien – claim on real or personal property to resort to payment of the debt.

(u) Liquidation – process of liquidating business.
(v) Liquidation Order – order issued by the court to liquidate the business.
(w) Liquidator – natural person or juridical entity appointed as such by the court and entrusted with
such powers and duties.
❖ Provided, if the liquidator is a juridical entity, it must designate a natural person who
possesses all the qualifications and none of the disqualifications as its representative.
➢ The juridical entity and the representative are solidarity liable for all obligations and
responsibilities of the liquidator.
(x) Officer – natural person holding a management position indicated in an entity's articles of
incorporation, bylaws or equivalent documents.
(y) Ordinary course of business – covers the usual transactions, customs and practices of a certain
business and of a certain firm.
(z) Ownership interest – ownership interest of third parties in property held by the debtor.
(aa) Parent – corporation which has control over another corporation.
(bb) Party to the proceedings – any other juridical or natural person who stands to be benefited or
injured by the outcome of the proceedings.
(cc) Possessory lien – lien on property which has been transferred to a creditor, representative, or
agent thereof.
(dd) Proceedings – judicial rulings commenced by the court's acceptance of a petition filed under this
Act.
(ee) Property of others – property held by the debtor in which other persons have an ownership
interest.
(ff) Publication notice – notice through publication in a newspaper of general circulation in the
Philippines on a business day for two (2) consecutive weeks.
(gg) Rehabilitation – restoration of the debtor to a condition of successful operation and solvency.
(hh) Rehabilitation receiver – person or persons, natural or juridical, appointed by the court and which
shall be entrusted with such powers and duties as set forth herein.
(ii) Rehabilitation Plan – plan wherein financial well-being of an insolvent debtor can be restored using
various means, but not limited to:
(1) Debt forgiveness
(2) Debt rescheduling
(3) Reorganization or quasi-organization
(4) Dacion en Pago
(5) Debt-equity conversion and sale of the business (or parts of it) as a going concern or
setting-up of a new business entity; or
(6) Other similar arrangements may be approved by the court or creditors.
(jj) Secured claim – claim that is secured by a lien.
(kk) Secured creditor – creditor with a secured claim.
(ll) Secured party – secured creditor, agent, or representative of such secured creditor.
(mm) Securities market participant – broker dealer, underwriter, transfer agent, or other juridical
persons transacting securities in the capital market.
(nn) Subsidiary – a corporation which has more than fifty percent (50%) of the voting stock of which
is owned or controlled, directly or indirectly, through one or more intermediaries by another
corporation, which thereby becomes its parent corporation.
(oo) Stakeholder – member of a nonstock corporation or a partner in a partnership.
(pp) Unsecured claim – claim that is not secured by a lien.
(qq) Unsecured creditor – creditor with an unsecured claim.
(rr) Voluntary proceedings – proceedings initiated by the debtor.
(ss) Voting creditor – creditor that is a member of a class of creditors, the consent of which is
necessary for the approval of a Rehabilitation Plan under this Act.
4.2 Suspension of Payments
SUSPENSION OF PAYMENTS ORDER (SPO)
AN ORDER WHICH PREVENTS CREDITORS FROM SUING OR INSTITUTING COLLECTION PROCEEDINGS

AGAINST THE DEBTORS. THUS, THE DEBTOR, CREDITOR, AND THE COURT WILL CONSIDER A PLAN

FOR THE DEBTOR TO SETTLE HIS OR HER DEBTS.
As the SPO is in effect, the law requires the debtor to propose a plan to the creditor for the settlement of such
liabilities. If the creditor approves it and subsequently by the court, then all parties are required to abide by it
until the satisfaction of the payment of debt.
Remedies for the settlement of such debt upon the SPO:

(1) a chance to save or earn money while waiting for the proposal to be approved; and
(2) a possibility of interests and penalties no longer being charged against the debtor.
The proceedings for Suspension of Payments is a balance between the debtor's ability to pay and the
creditors' right to receive payment.
4.3 Rehabilitation
REHABILITATION
THE RESTORATION OF THE DEBTOR TO A CONDITION OF SUCCESSFUL OPERATION AND SOLVENCY.
4.3.1 Types
A. Court-Supervised Rehabilitation
1. Voluntary Proceedings – initiated by an insolvent debtor. Petition must be done in a
stockholders' or member's meeting duly called for the purpose.
❖ Sole Proprietorship, Partnership, and Corporation – Majority vote of Board of
Directors or trustees, or at least ⅔ of the OCS.
❖ Nonstock Corporation – Vote of at least ⅔ of members.
The petition must include these as an attachment:
(a) Identification of the debtor, its principal activities and its addresses;
(b) Statement of the fact of and the cause of the debtor's insolvency;
(c) Specific relief sought pursuant to this Act;
(d) The grounds upon which the petition is based;
(e) Other information that may be required under this Act depending on the form
of relief requested;
(f) Schedule of the debtor's debts and liabilities including a list of creditors with
their addresses, amounts of claims and collaterals, or securities, if any;
(g) An inventory of all its assets including receivables and claims against third
parties;
(h) A Rehabilitation Plan;
(i) The names of at least three (3) nominees to the position of rehabilitation
receiver; and
(j) Other documents required to be filed with the petition pursuant to this Act.
The group of debtors may jointly file a petition for rehabilitation when the impossibility
to meet debt is foreseeable and would likely affect the financial condition, operation,
and participation of other members.
2. Involuntary Proceedings – Creditor/s, with a claim of at least One Million Pesos
(P1,000,000.00) or at least 25% of the subscribed capital stock or partner's
contribution, may initiate involuntary proceedings against debtor with the Court if:
(a) There is no genuine issue of fact on law on the claim/s of the petitioner/s;
(b) The demandable payments of debtor due thereon has failed for at least sixty
(60) days; or

(c) A creditor, other than the petitioner/s, has initiated proceedings against the
debtor.
(a) Identification of the debtor, its principal activities and its address;
(b) The circumstances sufficient to support a petition;
(c) The specific relief sought under this Act;
(d) A Rehabilitation Plan;
(e) The names of at least three (3) nominees to the position of rehabilitation
receiver;
(f) Other information that may be required under this Act; and
(g) Other documents required to be filed with the petition pursuant to this Act.
B. Pre-Negotiated Rehabilitation – an insolvent debtor, by itself or jointly with the creditor, may
file a petition with the Court for the approval of the rehabilitation approved by creditors having
fifty percent (50%) each of the total secured and unsecured claims of the debtors.
C. Out-of-court/Formal Restructuring – These must be met for the rehabilitation to be qualified:
(1) The debtor must agree to the out-of-court or informal restructuring;
(2) Approval of creditors representing at least sixty-seven percent (67%) of debtor's
secured obligations and seventy five percent (75%) for unsecured obligations;
(3) Approval of creditors holding at least eighty-five percent (85%) of debtor's total
liabilities.
4.3.2 Commencement Order
COMMENCEMENT ORDER
ORDER ISSUED BY THE COURT WHICH RETROACTS THE DATE OF THE FILING OF THE PETITION.
❖ If the Court finds the petition for rehabilitation to be efficient in form and substance, Commencement
Order shall be issued within five (5) working days.
❖ If the Court finds the petition deficient in form and substance, the Court may give the petitioner/s a
reasonable time for the completion of documents.
The Commencement Order shall:
(a) Identify the debtor, its principal business or activity/ies and its principal place of business;
(b) Summarize the ground/s for initiating the proceedings;
(c) State the relief sought under this;
(d) State the legal effects of the Commencement Order;
(e) Declare that the debtor is under rehabilitation;
(f) Publication of the Commencement Order must be in the newspaper of general circulation in the
Philippines once a week for two (2) consecutive weeks, 7 days from the time of its issuance;
(g) If the petitioner is the debtor, the delivery of the copy of the petition on each creditor holding at least
ten (10%) of debtor's total liabilities is within five (5) days;
If the petitioner is the creditor, personal delivery of the copy to the debtor is within five (5) days;
(h) Appoint a rehabilitation receiver who may or not be from among the nominees of the petitioner/s and
who shall exercise such powers and duties defined in this Act;
(i) Summarize the requirements and deadlines for creditors to establish their claims against the debtor
and direct it with the court at least five (5) days before the initial hearing;
(j) Direct Bureau of Internal Revenue (BIR) to check on the claims against the debtor;
(k) Prohibit the debtor's suppliers of good or services until he makes the payment for the supplies
delivered after the issuance of the Commencement Order;
(l) Authorize the payment for administrative expenses;
(m) Set the case for initial hearing not be more than forty (40) days from the date of filing of the petition;
(n) Make available copies of the petition and rehabilitation plan for examination and copying by any
interested party;
(o) Indicate the location/s at which documents regarding the debtor and the proceedings may be reviewed
and copied;
(p) Petitioner, other than the debtor and creditor, may nominate any other person as rehabilitation
receiver at least five (5) days before the initial hearing; and
(q) Include Stay or Suspension Order.

Effects of the Commencement Order:
(a) Grant the rehabilitation with all the powers and provided for this Act
(b) Enforcing claim against the debtor's property after the commencement date
(c) Serve as the legal basis for creditor to render the nullification of debtor's debt after the
commencement date
(d) Serve as the legal basis for rendering null of lien against debtor's property after the commencement
date
(e) Consolidate the resolution of all legal proceedings by the court to the debtor
❖ Provided, If the debtor initiated the petition, the court may allow the continuation of cases in
other courts.
4.3.3 Stay or Suspension Order
STAY OR SUSPENSION ORDER
ORDER ISSUED WITH THE COMMENCEMENT ORDER THAT SHALL:

1. Suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against
the debtor;
2. Suspend all actions to enforce any judgment or remedies against the debtor;
3. Prohibit the debtor from selling, encumbering, transferring or disposing any of its properties
except in the ordinary course of business; and
4. Prohibit the debtor from making any payment of its liabilities outstanding as of the
commencement date except in the ordinary course of business.
Stay or Suspension Order shall not apply:

(a) To cases already pending appeal in the Supreme Court as of commencement date;
❖ Provided, Final judgment arising from such appeal shall be referred to the court for
appropriate action.
(b) To cases that are filed at specialized court or quasi-judicial agency;
❖ Provided, Final judgment of such court or agency shall be referred to the court and shall be
treated as a non-disputed claim.
(c) To the enforcement of claims against sureties and other persons solidarily liable, accommodation
mortgagors, and issuers of letter of credit unless the property is necessary for the rehabilitation
determined by the court upon the recommendation of the rehabilitation receiver;
(d) To any form of customer's action to recover claim money and securities, and the settlement of such
claims by regulatory agency or self-regulatory organization;
(e) To the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a
securities pledge or margin agreement for the settlement of securities;
(f) The settlement of financial transactions through the facilities of a clearing agency or similar entities
duly authorized; and
(g) To any criminal action against the individual debtor.
4.3.4 Rehabilitation Receiver
REHABILITATION RECEIVER
OFFICER APPOINTED BY THE COURT WHICH WOULD MAXIMIZE THE VALUE OF THE DEBTOR'S ASSETS
DURING THE REHABILITATION PROCEEDINGS AND RECOMMEND REHABILITATION PLAN TO THE
COURT.
The court shall appoint rehabilitation received, who may or not be from the nominees.
❖ Provided, the court shall appoint the creditor's nominee as rehabilitation received if he/she was
nominated by the 50% of secured and unsecured creditors.
Qualifications of Rehabilitation Received
(a) A citizen of the Philippines or a resident of the Philippines in the six (6) months immediately preceding
his nomination
(b) Of good moral character and with acknowledged integrity, impartiality and independence

(c) Has the requisite knowledge of insolvency and other relevant laws, training and/or experience that
may be necessary to enable him to properly perform the duties and obligations of a rehabilitation
receiver
(d) Has no conflict of interest
Powers, Duties, and Responsibilities:
(a) To verify the accuracy of the petition, and correct
(b) To accept and incorporate the amendments to the Schedule of Debts and Liabilities
(c) To evaluate the claims against the debtor and to recommend to the court the rejection of liabilities due
on its insufficiency
(d) To submit to the court, and make available for the creditors’ review, a revised Schedule of Debts and
Liabilities
(e) To investigate the acts, conduct, properties, liabilities and financial condition of the debtor
(f) To sue and recover, with the approval of the court, all amounts and properties owed
(g) To examine the directors and officers of the debtor
(h) To make the documents available for the creditors and notices them to participate in the proceedings
(i) To report to the court all the causes of the debtor's misconduct and irregularities committed by the
other person against the debtor
(j) To employ professionals, with the approval of the court, which will assist the rehabilitation receiver
in performing his duties and functions
(k) To monitor the operations of the debtor and to immediately report to the court any material adverse
change in the debtor’s business
(l) To evaluate the existing assets and liabilities, earnings and operations of the debtor
(m) To determine and recommend to the court the best way to protect the interests of the creditors,
stockholders and the general public
(n) To study the Rehabilitation Plan proposed by the debtor together with any comments made thereon
(o) To prohibit and report to the court any encumbrance, transfer or disposition of the debtor’s property
outside of the ordinary course of business
(p) To prohibit and report to the court any payments made by the debtor outside of the ordinary course of
business
(q) To have unlimited access to the debtor’s employees, premises, books, records and financial
documents during business hours
(r) To inspect, copy, photocopy or photograph any document, whether in the possession of the debtor or
other persons, that pertain to the business of the debtor
(s) To gain entry into any property owned by the debtor for the purpose of inspecting, measuring,
surveying or photographing it
(t) To take possession, control and custody, and to preserve the value of all of the debtor’s assets
(u) To notify counterparties and the court about debtor's confirmation
(v) To be notified of and to attend all meetings of the BOD and stockholders of the debtor
(w) To recommend any modification of an approved Rehabilitation Plan
(x) To bring to the court any material affecting the debtor’s ability to meet the obligations
(y) To recommend the appointment of a management committee, when appropriate
(z) To submit a report to the management committee on the status of the debtor and the actions made by
the receiver
(aa) To recommend the termination of the proceedings and the dissolution of the debtor if he determines
that debtor's business is no longer profitable
(bb) To apply to the court his/her desirable aid for the performance of duties and functions
(cc) To make quarterly reports on the status of rehabilitation, or as often required by the court
(dd) To exercise such other powers
The rehabilitation receiver may be removed at any time by the court due to:
(1) Incompetence, gross negligence, failure to perform or failure to exercise the power;
(2) Lack of a particular or specialized competency required;
(3) Illegal acts or conduct in the performance of his duties and powers;
(4) Lack of qualification of any disqualification;
(5) Conflict of interest that arises after his appointment;
(6) Lack of independence that may cause harm to the stakeholders;
(7) Failure, without cause, to perform any of his powers and functions under these rules; or
(8) On any of the grounds for removing a trustee under the general principles of trusts.

4.3.5 Management Committee
MANAGEMENT COMMITTEE
COMPOSED OF PERSONS, NATURAL OR JURIDICAL, APPOINTED BY THE COURT TO SUPERVISE THE

REHABILITATION
The Management Committee has the same qualifications and responsibilities prescribed for the
rehabilitation receiver.
Compositions of the Management Committee:
1. The first member shall be nominated by the debtor.
2. The second member shall be nominated by the creditor/s holding more than 50% of the total
obligations of the debtor.
3. The third member, who shall act as chairman of the management committee, shall be nominated by
the first and second members within 10 days from the appointment.
➢ Provided, the court shall appoint such members if those stated failed to perform the
nomination.
The Management Committee may appoint professionals which are engaged to assist them in performing
their powers and functions. Before the Court approves for the employment of professionals, these should
take into account:
1. Reasons for the appointment;
2. Disclosure of conflict of interest;
3. Compensation, fees, or other arrangements;
4. Scope of work involved;
5. Specific area of expertise of the person to be appointed;
6. Confidentiality;
7. Expected work time to be spent in relation to the engagement; and
8. Other arrangements.
4.3.6 Rehabilitation Plan

The Rehabilitation Plan shall:
(a) Specify the underlying assumptions, the financial goals and the procedures proposed to
accomplish such goals;
(b) Compare the amounts expected to be received by the creditors;
(c) Contain information sufficient as it helps the creditors determine if there is financial interest
from the debtor therein;
(d) Establish classes and subclasses of voting creditors;
(e) Indicate how the insolvent debtor will be rehabilitated;
(f) Specify the treatment of each class and subclass described in subsection d;
(g) Provide for equal treatment of all claims, unless the creditor voluntarily agrees to less
favorable treatment;
(h) Ensure that the payments made under the plan follows the priority established under the
provisions of the Civil Code;
(i) Maintain the security interest of secured creditors and preserve the liquidation value of the
security, unless such has been waived or modified voluntarily;
(j) Include relevant foreign ownership limits or information, if any;
(k) Disclose all payments to creditors for pre-commencement debts made during the
proceedings;
(l) Describe the disputed claims and the provisioning of funds to account;
(m) Identify the debtor’s role in the implementation of the Plan;
(n) Rehabilitation covenants of the debtor and the breach of plan;
(o) Identify those responsible for the supervision in future management and implementation of
the debtor;
(p) Address the treatment of claims arising after the confirmation of the Rehabilitation Plan;
(q) Require the debtor and its counter-parties to adhere to the terms of all contracts agreed upon;
(r) Arrange for the payment of all outstanding administrative expenses unless such condition has
been waived in writing by the creditors concerned;

(s) Arrange for the payment of all outstanding taxes with the BIR or other applicable tax
authorities;
(t) Include a certified copy of a certificate of tax clearance or evidence of a compromise
settlement with the BIR;
(u) Include a valid and binding resolution of debtor's stockholders' meeting to increase the shares
up to its required amount;
(v) State the compensation status of the rehabilitation receiver after the approval of the plan;
(w) Contain provisions for reconciliation in the event of any disagreement in the implementation
of the Rehabilitation Plan;
(x) Include material financial undertakings or commitments to support the Rehabilitation Plan;
(y) Contain provisions for monitoring the implementation of the Rehabilitation Plan;
(z) Contain the manner of its implementation; and
(aa) Contain such other relevant information.
➢ If the Rehabilitation Plan is approved, the rehabilitation receiver shall submit the same to the court
for confirmation.
○ Within 5 days from receipt of the Rehabilitation Plan, the court shall notify the creditors that
the Rehabilitation Plan has been submitted for confirmation.
If there is objection:
➢ A creditor may file an objection to the Rehabilitation Plan within 20 days from receipt of notice from
the court that the Rehabilitation Plan has been submitted for confirmation. Objections to a
Rehabilitation Plan shall be limited to the following:
(a) The creditors’ support was induced by fraud;
(b) The documents or data relied upon in the Rehabilitation Plan are materially false or
misleading; or
(c) The Rehabilitation Plan is in fact not supported by the voting creditors.
If there is no objection, the court shall issue an order confirming the Rehabilitation Plan.
4.3.7 Cram Down Effect
CRAM-DOWN
POWER OF THE REHABILITATION COURT TO APPROVE AND IMPLEMENT A REHABILITATION PLAN

NOTWITHSTANDING THE OBJECTION OF THE MAJORITY OF CREDITORS.
The rehabilitation receiver shall notify the creditors and stakeholders that the plan is ready for their
examination. The plan is deemed approved by a class of creditors holding more than fifty percent (50%) of
the total claims of the said class vote in favor of the plan.
4.4 Liquidation
LIQUIDATION
ALLOWS CORPORATION TO WIND UP THEIR AFFAIRS AND EQUITABLY DISTRIBUTE ITS ASSETS
AMONG ITS CREDITORS.
4.4.1 Types
1. Liquidation Proceedings of Juridical Debtor
a. Voluntary Liquidation – liquidation proceedings initiated by an insolvent debtor.
1. A schedule of the debtor's debts and liabilities including a list of creditors with
their addresses, amounts of claims and collaterals, or securities, if any;
2. An inventory of all assets including receivables and claims against third
parties; and
3. The names of at least three (3) nominees to the position of liquidator
b. Involuntary Liquidation – liquidation proceedings initiated by three (3) or more
creditors.

Three creditors, with a claim of at least One Million Pesos (P1,000,000.00) or at least
25% of the subscribed capital stock or partner's contribution, may initiate the
rehabilitation proceedings into liquidation proceedings filed within the same court.
4.4.2 Conversion of rehabilitation to liquidation proceedings
During the pendency of court-supervised or pre-negotiated rehabilitation proceedings:
● The court may order the conversion of rehabilitation proceedings to liquidation proceedings;
or
● The debtor may initiate liquidation proceedings by filing a motion in the same court where the
rehabilitation proceedings are pending to make the conversion possible.
4.4.3 Liquidation Order
LIQUIDATION ORDER
DECLARES THE INSOLVENCY OF THE DEBTOR.
The Liquidation Order shall:

(a) Declare the debtor insolvent;
(b) Order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved;
(c) Order the sheriff to take possession all the property of the debtor, except those that may be exempt
from execution;
(d) Order the publication in a newspaper of general circulation once a week for two (2) consecutive weeks;
(e) Direct payments of debtor's conveyance of any property to the liquidator;
(f) Prohibit the debtor for any payments and transfer of property;
(g) Direct all creditors to file their claims with the liquidator within the period set;
(h) Authorize the payment of administrative expenses;
(i) Petitioner, aside from debtor and creditors, may submit names of nominees for the position of
liquidator; and
(j) Set the hearing for the appointment of liquidator.
● From the date of last publication, the settlement shall not be less than thirty (30) and not more
than forty-five (45) days.
These shall take an effect upon the issuance of liquidation order:
(a) The existence of juridical debtor shall be deemed dissolved and terminated;
(b) The legal title of all the debtor's assets, except those that are exempt, shall be vested in the liquidator
or with the court;
(c) All debtor's contract shall be terminated unless the liquidator, within ninety (90) days from the date of
his assumption, declares otherwise and the other party agrees;
(d) No separate action for an unsecured claim shall be allowed. The liquidator may accept, settle, or
contest the claim. The court shall resolve such contests and may proceed to the judgment therein; and
(e) No foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.
4.4.4 Rights of secured creditors
SECURED CREDITOR
HAS RIGHTS TO ENFORCE LIEN AND HAS THE OPTIONS TO WAIVE OR MAINTAIN THE RIGHTS UNDER
THE SECURITY OR LIEN.
If the Secured Creditor secured his rights:

(1) The value of the property may be fixed in a manner agreed upon by the creditor and the liquidator;
(2) The liquidator may sell the property and satisfy the secured creditor's entire claim from the proceeds
of the sale; or
(3) The secured creditor may enforce the lien or foreclose on the property.
4.4.5 Liquidator

Election of Liquidator – Only one, who have filed their claims within the period set by the court, will be
allowed to vote in the election of liquidator in an open court.
➢ The nominee receiving the highest number of votes and who is qualified shall be appointed as
the liquidator.
The court may appoint the liquidator if:
(a) On the date set for the election of the liquidator, the creditors do not attend;
(b) The creditors who attend fail or refuse to elect a liquidator;
(c) The liquidator fails to qualify after being elected; or
(d) A vacancy occurs for any reason whatsoever or may instead set another hearing for the
election.
The liquidator has the same qualifications prescribed for the rehabilitation receiver.
Powers, Duties, and Responsibilities of the Liquidator:
(a) To sue and recover all the assets, debts and claims, belonging or due to the debtor;
(b) To take possession of all the property of the debtor except property exempt by law from
execution;
(c) To sell, with the approval of the court, any property of the debtor which has come into his
possession or control;
(d) To redeem all mortgages and pledges, and so satisfy any judgment;
(e) To settle all accounts between the debtor and his creditors, subject to the approval of the
court;
(f) To recover any property or its value, fraudulently conveyed by the debtor;
(g) To recommend to the court the creation of a creditor's committee for the assistance of
functions discharge; and
(h) To engage professionals, approved by the court, to assist him in his performance as
liquidator.
TAKE NOTE:
● The liquidator shall be entitled to such reasonable compensation as may be
determined by the liquidation court which shall not exceed the maximum
amount as may be prescribed by the supreme court.
● The liquidator shall make and keep a record of all money received and all
disbursements made by him or under his authority as liquidator.
● In preparation for the discharge of liquidator, the liquidator will notify the
creditors and court all the claims against the debtor for the discharge from
liability as liquidator.
4.4.6 Determination of Claims

Registry of Claims – The liquidator shall prepare a preliminary registry of claims of secured and unsecured
creditors within twenty (20) days from his assumption into office.
❖ The liquidator shall make the registry available for public inspection and provide publication notice to
all the debtors and creditors on where and when they may inspect it.
❖ All claims must be duly proven before being paid.
Right of Set-off – If the debtor and creditor are mutually debtor and creditor of each other, the debt may set
off against the other.
Opposition or Challenge to Claims – Creditors and debtors may submit a challenge to claim/s to the court
within thirty (30) days from the expiration of the period for filing of applications for recognition of claims.
❖ Upon the expiration, the rehabilitation receiver shall submit to the court the registry of claims
containing the undisputed claims that have not been subject to challenge.
❖ Such claims shall become final upon the filing of the register and may be subsequently set aside on
grounds of illicit.
4.4.7 Liquidation of Plan shall enumerate all the assets of the debtor and a schedule of liquidation of the assets
and payment of the claims.
Exempt Property to be Set Apart – Upon petition and after hearing, the court shall exempt and set apart real
and personal property or homestead of an insolvent to be exempt from the execution. The application for such
exemption shall:

(1) Be posted in at least three (3) public places in the province or city at least ten (10) days prior to the
time of such hearing;
(2) Include the name of the said insolvent debtor;
(3) include the time and place appointed for the hearing of such application;
(4) Indicate the homestead or property sought to be exempted or the property sought to be set aside; and
(5) Show proof and evidence of the court's satisfaction.
Sale of Assets in Liquidation – The liquidator may sell the unencumbered assets of the debtor at public auction
and convert into money. However, a private sale may be allowed with the approval of the court if:
(a) The goods to be sold are of a perishable nature; or
(b) The private sale is for the best interest of the debtor and his creditors.
With the approval of the court, unencumbered property of the debtor may also be conveyed to a creditor in
satisfaction of his claim or part thereof.
Upon determining that the liquidation has been completed according to this Act and applicable law, the court
shall issue an order removing the debtor from the list of registered entities at the Securities and Exchange
Commission. The court shall issue an order of termination upon the receipt of evidence removing the registry
at the SEC.
5.0 PHILIPPINE COMPETITION ACT
RA 10667 – PHILIPPINE COMPETITION ACT
AN ACT PROVIDING FOR A NATIONAL COMPETITION POLICY PROHIBITING ANTICOMPETITIVE

AGREEMENTS, ABUSE OF DOMINANT POSITION AND ANTI-COMPETITIVE MERGERS AND
ACQUISITIONS, ESTABLISHING THE PHILIPPINE COMPETITION COMMISSION AND APPROPRIATING
FUNDS THEREFOR
5.1 Definition and scope of application
Section 4. Definition of Terms. – As used in this Act:

(a) Acquisition refers to the purchase of securities or assets, through contract or other means, for the
purpose of obtaining control by:
(1) One (1) entity of the whole or part of another;
(2) Two (2) or more entities over another; or
(3) One (1) or more entities over one (1) or more entities;
(b) Agreement refers to any form of contract, arrangement, understanding, collective recommendation,
or collective action.
(c) Conduct refers to any type or form of undertaking, collective recommendation, independent or
concerted action or practice, whether formal or informal;
(d) Commission refers to the Philippine Competition Commission created under this Act;
(e) Confidential business information relates to information of operations, production, sales, etc.
(f) Control refers to the ability to substantially influence or direct the actions or decisions of an entity,
whether by contract, agency or otherwise;
(g) Dominant position refers to 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;
(h) Entity refers to any person, natural or juridical, sole proprietorship, partnership, combination or
association in any form, whether incorporated or not, domestic or foreign, including those owned or
controlled by the government, engaged directly or indirectly in any economic activity;
(i) Market refers to 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;
(j) Merger refers to the joining of two (2) or more entities into an existing entity or to form a new entity;
(k) 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
5.1 Section 3. Scope and Application.

This Act shall be enforceable against any person or entity engaged in any trade, industry and
commerce in the Republic of the Philippines. It shall likewise be applicable to international trade
having direct, 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 the combinations or activities of workers or employees that are designed
solely to facilitate collective bargaining in respect of conditions of employment.
5.2 Prohibited Acts
5.2.1 Anti Competitive agreements

(a) The following agreements, between or among competitors, are per se prohibited:
(1) Restricting competition as to price, or components thereof, or other terms of trade;
(2) Fixing price at an auction or in any form of bidding.
(b) The following agreements, between or among competitors which have the object or effect of
substantially preventing, restricting or lessening competition shall be prohibited:
(1) Setting, Kmiting, 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 me.
(c) Agreements other than those specified in (a) and (b) of this section are prohibited: Provided they
contribute to improving the production or distribution of goods and services while allowing consumers
a fair share of the benefits. while allowing consumers a fair share of the resulting benefits, may not
necessarily be deemed a violation of this Act.
Competitors are entities that have common economic interests and are not able to act independently
of each other, shall not be considered competitors for purposes of this section.
5.2.2 Abuse of Dominant Position
Section 15. Abuse of Dominant Position. – It shall be prohibited for one or more entities to abuse their dominant
position by engaging in conduct that would substantially prevent, restrict or lessen competition:
(a) Selling goods or services below cost with the object of driving competition out of the market, provided
that the Commission considers whether the price was in good faith to meet or compete with a
competitor in the same market;
(b) Imposing barriers to entry or committing acts that prevent competitors from growing in the market is
anti-competitive, except those developed due to superior products, processes, or legal rights;
(c) Making a transaction subject to acceptance by the other parties of other obligations which, by their
nature or according to commercial usage, have no connection with the transaction;
(d) 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:
Provided, That the following shall be considered permissible price differentials:
(1) Socialized pricing for the less fortunate sector of the economy;
(2) Price differential which reasonably or approximately 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;
(3) 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
(4) Price changes in response to changing market conditions, marketability of goods or services,
or volume;

(e) Imposing restrictions on the lease or contract for sale or trade of goods or services, such as fixing
prices, giving preferential discounts or rebates, or imposing conditions not to deal with competing
entities, to prevent, restrict or lessen competition substantially. Provided, That nothing contained in
this Act shall prohibit or render unlawful:
(1) Permissible franchising, licensing, exclusive merchandising or exclusive distributorship
agreements such as those which give each party the right to unilaterally terminate the
agreement;
(2) Agreements protecting intellectual property rights, confidential information, or trade secrets;
(f) Supply of goods or services dependent on purchase of other goods or services from the supplier,
which have no direct connection with the main goods or services to be supplied;
(g) 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;
(h) Unfair prices are those imposed on competitors, customers, suppliers or consumers due to superior
products, processes, business acumen or legal rights or laws shall not be considered unfair prices;
and
(i) Limiting production, markets or technical development to the prejudice of consumers, provided that
limitations that develop in the market as a result of or due to a superior product or process, business
acumen or legal rights or laws shall not be a violation of this Act:
Provided, That this Act does not prohibit the acquisition, maintenance and increase of market share through
legitimate means that do not substantially prevent, restrict or lessen competition.
Provided, further, That 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 may not necessarily be considered an abuse of dominant position:
Provided, finally, That the foregoing shall not constrain the Commission or the relevant regulator from
pursuing measures that would promote fair competition or more competition as provided in this Act.
5.2.3 Section 20. Prohibited. Mergers and Acquisitions. – Merger or acquisition agreements that substantially
prevent, restrict or lessen competition or in the market for goods or services as may be determined by the
Commission shall be prohibited.
5.2.4 Section 21. Exemptions from Prohibited. Mergers and Acquisitions. – Merger or acquisition agreement
may be exempt from prohibition in the following cases:
(a) 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
(b) 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:
Provided, That an entity shall not be prohibited from continuing an entity
1. To continue to own and hold stock or other share capital or assets acquired prior; and
2. To the approval of this Act without violating the provisions of this Act.
Acquisition of stock or other share capital for investment and not to prevent, restrict, or
lessen competition in the relevant market shall not be prohibited.
5.3 Covered Transactions
5.3.1 Thresholds for compulsory notification

The Commission shall, from time to time, adopt and publish regulations stipulating:
(a) The transaction value threshold and such other criteria subject to the notification requirement;
(b) The information that must be supplied for notified merger or acquisition;
(c) Exceptions or exemptions from the notification requirement; and

(d) Other rules relating to the notification procedures.
5.3.2 Notifying entity

A party where the value of the transaction exceeds one billion pesos (P1,000,000,000.00) are
prohibited from consummating their agreement until thirty (30) days after providing notification to the
Commission.
➢ Provided, That the Commission shall promulgate other criteria, such as increased market
share in the relevant market in excess of minimum thresholds.
An agreement consummated in violation of this requirement to notify the Commission shall be

considered void and subject the parties to an administrative fine of one percent (1%) to five percent
(5%) of the value of the transaction.
5.3.3 Period of notifications

1. 60 days after the request for information is received by the parties - extension of the period within
which the agreement may not be consummated.
2. Total period for review by the Commission of the subject agreement should not exceed ninety (90)
days from initial notification by the parties.
➢ The merger or acquisition shall be deemed approved and the parties may proceed to implement or
consummate it – when the above periods have expired and no decision has been promulgated for
whatever reason.
➢ Documents and information required in this act shall be subject to confidentiality except when there
is consent of the notifying entity, required by the law, or ordered by the court.
For merger or acquisition of banks, banking institutions, building and loan associations, trust companies,
insurance companies, public utilities, educational institutions and other special corporations governed by
special laws, the Commission shall rule no-objection for a favorable recommendation.
5.3.4 Exceptions – The combinations or activities of workers or employees nor to agreements or arrangements
with their employers when such combinations, activities, agreements, or arrangements are designed solely
to facilitate collective bargaining in respect of conditions of employment.
6.0 GOVERNMENT PROCUREMENT LAW
RA 9184 – GOVERNMENT PROCUREMENT REFORM ACT
AN ACT PROVIDING FOR THE MODERNIZATION, STANDARDIZATION

AND REGULATION OF THE PROCUREMENT ACTIVITIES OF THE
GOVERNMENT AND FOR OTHER PURPOSES
6.1 General Principles - (Sec. 2)
● To promote good governance and its effort to adhere to the principles of transparency, accountability,
equity, efficiency, and economy in its procurement process.
● It is the policy of the GoP that procurement of Goods, Infrastructure Projects and Consulting Services
shall be competitive and transparent, and therefore shall undergo competitive bidding, except as
provided in Rule XVI of this IRR
6.2 Scope and application- (Sec. 4)
• This IRR shall apply to all procurement of any branch, agency, department, bureau, office, or
instrumentality of the GoP, including government-owned and/or -controlled corporations (GOCCs),
government financial institutions (GFIs), state universities and colleges (SUCs), and local government
units (LGUs).
• Any Treaty or International or Executive Agreement to which the GoP is a signatory affecting the
subject matter of the Act and this IRR shall be observed. In case of conflict between the terms of the
Treaty or International or Executive Agreement and this IRR, the former shall prevail.

• This IRR shall apply to Foreign-funded Procurement of Goods, Infrastructure Projects, and Consulting
Services by the GoP, unless the executive Agreement expressly provides another or different
procurement procedures and guidelines. If the executive Agreement states otherwise, the negotiating
panel must ensure that the reasons for the adoption of a different rule or method of procurement are
clearly reflected in the records of discussion.
This IRR shall not apply to the following activities:

• R.A. 8182 and R.A. 8555 exempt ODA from the Foreign Debt Limit to facilitate the absorption and
optimize the utilization of ODA resources, unless the GoP and foreign grantor/foreign or international
financing institution agree otherwise.
• Acquisition of real property governed by R.A. 10752 and other applicable laws.
• Public-Private sector infrastructure or development projects and other
procurement covered by R.A. 6957, as amended by R.A. 7718, entitled “An Act
Authorizing the Financing, Construction, Operation and Maintenance of
Infrastructure Projects by the Private Sector, and for Other Purposes,” as
amended: Provided, however, the provisions of the Act and this IRR apply to portions financed by the
GOP.
The following are not procurement activities under R.A. 9184 and this IRR:
• a) Direct financial or material assistance given to beneficiaries in accordance with the existing laws,
rules and regulations, and subject to the guidelines of the concerned agency;
• b) Participation in local or foreign scholarships, trainings, continuing education, conferences,
seminars or similar activities that shall be governed by applicable COA, CSC, and DBM rules;
• c) Lease of government-owned property as lessor for private use;
• d) Hiring of Job Order Workers;
• e) Joint Venture under the revised NEDA Guidelines (GOCC and Private Entities), and Joint Venture
Agreements by LGU with Private entities; and
• f) Disposal of Property and Other Assets of the Government.
6.3 Definitions of Terms (Sec. 5)
For purposes of this IRR, the following terms or words and phrases shall mean or be understood as
follows:
(a) Act - refers to R.A. 9184, entitled Government Procurement Reform Act.
(b) Approved Budget for the Contract (ABC) - refers to the budget for the contract duly approved by
the HoPE, as provided for in the General Appropriations Act (GAA), continuing, and automatic
appropriations, in the case of national government agencies (NGAs); the corporate budget for the
contract approved by the governing board, pursuant to Executive Order (E.O).
(c) Bid - Refers to a signed offer or proposal to undertake a contract submitted by a bidder in response
to and in consonance with the requirements of the Bidding Documents.
- the term "Bid" shall be equivalent to and be used interchangeably with "Proposal" and
"Tender."
(d) Bidders - term used to describe a contractor, manufacturer, supplier, distributor, or consultant
who places a bid in response to the specifications outlined in the Bidding Documents.
(e) Bidding Documents - bids should be prepared in accordance with the Procuring Entity's
documentation, which should contain all the information a potential bidder needs to construct a bid
for the Goods, Infrastructure Projects, and/or Consulting Services needed by the Procuring Entity.
(f) Bids and Awards Committee (BAC) - refers to the Committee established in accordance with Rule
V of this IRR.
(g) Common-Use Supplies and Equipment (CSE) - CSE is the goods, materials and equipment used in
Procuring Entities' operations, as outlined in the Electronic Catalogue
(h) Competitive Bidding - public bidding is a method of procurement open to any interested party,
consisting of advertisement, pre-bid conference, eligibility screening, receipt and opening of bids,
evaluation of bids, post-qualification, and award of contract.
(i) Consulting Services - are services that the GoP may need to undertake for infrastructure projects,
such as advisory and review services, pre-investment or feasibility studies, design, construction
supervision, management and related services, and other technical services or special studies.

(j) Domestic Bidder - refers to any entity offering or manufacturing unmanufactured or manufactured
articles, materials, or supplies of the Philippines.
(k) Domestic Entity - a Philippine citizen or corporation with at least 75% of outstanding capital stock
owned by Filipinos
- established in business for 5 consecutive years and engaged in manufacturing or sales of
covered merchandise.
(l) Executive Agreements - International agreements do not require legislative ratification.
(m) Expendable Supplies - articles with a life expectancy of over one year but decreased value after
use (e.g. medicines, stationery, fuel, spare parts) should be avoided.
(n) Foreign Bid - refers to non-manufactured items derived from the Philippines.
(o) Foreign-funded Procurement - Foreign Loans or Grants, as well as International or Executive
Agreements, are used to fund infrastructure projects.
- the term "foreign-funded procurement" is also used interchangeably with "foreign-assisted
projects".
(p) Foreign Grants - grants without repayment obligations are provided in monetary, goods, works,
and consultancy services.
(q) Foreign Loans - loans, credits, and indebtedness with foreign banks, foreign governments,
agencies, or instrumentalities of foreign governments, foreign financial institutions, or other
international organizations are necessary to finance industrial, agricultural, or other economic
development purposes or projects authorized by law.
(r) Goods - Procuring Entity refers to all items, supplies, materials and general support services
needed in public businesses, such as equipment, furniture, stationery, materials for construction,
personal property, repair, hauling, janitorial, security, related or analogous services.
(s) Government Procurement Policy Board (GPPB) - refers to the Body created in accordance with
Rule XX of this IRR
(t) Head of the Procuring Entity (HoPE) - The HoPE for government agencies, governing boards, and
local chief executives is typically the head of the agency or authorized official. In decentralized
agencies, the head of the unit is considered the HoPE, subject to limitations and authority delegated
by the head.
(u) Infrastructure Projects - Involve the construction, improvement, rehabilitation, demolition, repair,
restoration, and maintenance of roads, bridges, railways, airports, seaports, communication facilities,
civil works, and other related construction projects. The term "Infrastructure Projects" is
interchangeable with "civil works" or "works
(v) International Agreement - a contract between the GoP and another government or international
financing institution governed by international law.
- Embodied in a single instrument or in two (2) or more related instruments
(w) Non-expendable Supplies - refer to articles which are not consumed in use and ordinarily retain
their original identity during the period of use.
- Have a serviceable life of over one year, adding to the assets of the GoP.
Ex. Furniture and Equipment
(x) Philippine Government Electronic Procurement System (PhilGEPS) - refers to the electronic
System as provided in Section 8 in IRR
(y) Philippine National - an individual or a sole proprietor who is a citizen of the Philippines or a
partnership, corporation, or association organized under the law.
- At least sixty percent (60%) of the capital or interest is owned by citizens of the Philippines
(z) Portal - a website that aggregates content to attract and aggregate users.
(aa) Procurement - involves the acquisition of goods, consulting services, and infrastructure projects
by a Procuring Entity.
- In mixed procurements, the nature of the contract is determined by the primary purpose.
Real property procurement is governed by R.A. 10752 and other applicable laws, rules, and regulation
(bb) Procuring Entity - any branch of constitutional commission, procures goods, infrastructure
projects and consulting services.
(cc) Treaties - International agreements require legislative ratification after executive concurrence.
(dd) Universal or Commercial Banks - Universal or commercial banks authorized under R.A.
8791.known as “The General Banking Act of 2000.”
6.4 Procurement Procedure

6.4.1 Preparation of bidding document - (Sec. 17-19)

SEC. 17. Form and Contents of Bidding Documents. – The Bidding Documents shall be prepared by the
Procuring Entity following the standard forms and manuals prescribed by the GPPB. The Bidding
Documents shall include the following:
(a) Approved Budget for the Contract;
(b) Invitation to Bid/Request for Expression of Interest;
(c) Eligibility Requirements;
(d) Instructions to Bidders, including scope of bid, documents comprising the bid, criteria for
eligibility, bid evaluation methodology/criteria in accordance with the Act, and post-
qualification, as well as the date, time and place of the prebid conference (where applicable),
submission of bids and opening of bids;
(e) Terms of Reference, for Consulting Services;
(f) Scope of work, where applicable;
(g) Plans/Drawings and Technical Specifications;
(h) Form of Bid, Price Form, and List of Goods or Bill of Quantities;
(i) Delivery Time or Completion Schedule;
(j) Form, Amount, and Validity Period of Bid Security;
(k) Form, Amount, and Validity of Performance Security and Warranty; and
(l) Form of Contract and General and Special Conditions of Contract.
NOTES:
• The Bidding Documents must reflect the necessary specifications required to meet
the needs of the Procuring Entity in clear and unambiguous terms.
• In mixed procurements, the Procuring Entity shall specify the requirements, criteria
and other conditions of the bidding procedures and of the ensuing contract as
applicable to each component of the project.
• The Procuring Entity shall make the Bidding Documents available from the time the
Invitation to Bid/Request for Expression of Interest is advertised until the deadline for
the submission and receipt of bids.
• Bidders may be asked to pay a fee to recover the cost for the preparation and
development of the Bidding Documents. The Bidding Documents may also be secured
from the BAC Secretariat upon payment of the corresponding fee. The Bidding
Documents Fee may be refunded in accordance with the aforementioned Guidelines.
SEC. 18. Reference to Brand Names. – Specifications for procurement of Goods should be based on
relevant characteristics, functionality and performance requirements. Reference to brand names only
allowed for items or parts compatible with existing equipment to maintain the performance,
functionality and useful life of the equipment.
SEC. 19. Access to Information. – In all stage of preparation of bidding document, the procuring entity
shall ensure equal access to information. Prior to their official release no aspect of bidding document
or released to any prospective bidder or person having direct or indirect interest in the project.
6.4.2 Invitation to bid - (Sec. 20-22)

SEC. 20. Pre-Procurement Conference. –
• Before the Invitation was issued Pre-procurement conferences must be held by the BAC
before every single procurement, except those contracts below a certain level or amount
specified in the IRR, in which case, the holding of the same is optional.
• The pre-procurement conference shall evaluate the procurement's readiness by verifying the
certification of funding availability and analyzing all pertinent papers in light of their
compliance with the law. The BAC, the official or officials who created the draft invitation to
bid and the bidding materials, as well as consultants hired by the relevant agency and the
end-user representative, must be present.
SEC. 21. Advertising and Contents of the Invitation to Bid. –

• In line with the principle of transparency and competitiveness, all Invitations to Bid for
contracts under competitive bidding shall be advertised by the Procuring Entity in such
manner and for such length of time as may be necessary under the circumstances, in order

to ensure the widest possible dissemination thereof, such as, but not limited to, posting in the
Procuring Entity’s premises, in newspapers of general circulation, the G-EPS and the website
of the Procuring Entity, if available. The details and mechanics of implementation shall be
provided in the IRR to be promulgated under this Act.
The Invitation to Bid shall contain, among others:
(a) A brief description of the subject matter of the Procurement;
(b) A general statement on the criteria to be used by the Procuring Entity for
the eligibility check, the short listing of prospective bidders, in the case of the
Procurement of Consulting Services, the examination and evaluation of Bids, and
post-qualification;
(c) The date, time and place of the deadline for the submission and receipt of
the eligibility requirements, the pre-bid conference if any, the submission and receipt
of bids, and the opening of bids;
(d) The Approved Budget for the Contract to be bid;
(e) The source of funds;
(f) The period of availability of the Bidding Documents, and the place where these may
be secured;
(g) The contract duration; and,
(h) Such other necessary information deemed relevant by the Procuring Entity.
SEC. 22. Pre-bid Conference. –

• At least 1 pre-bid conference shall be conducted for each procurement, unless provided in
the IRR. Subject to approval of the BAC, pre-bid may also conducted upon written request of
any prospective bidder. The pre-bid conference(s) shall be held within reasonable period
before deadline for receipt of bids to allow prospective bidders to adequately prepare their
bids.
6.4.3 Receipt and opening of bids - (Sec. 23-29)

SEC. 23. Eligibility Requirements for the Procurement of Goods and Infrastructure Projects. – For
purposes of determining the eligibility of bidders using the criteria stated in Section 23.4 of this IRR,
only the following documents shall be required by the BAC, using the forms prescribed in the Bidding
Documents:
a) Class “A” Documents
• Legal Documents
i) Registration certificate from SEC, Department of Trade and Industry (DTI) for sole
proprietorship, or CDA for cooperatives.
ii) Mayor’s/Business permit issued by the city or municipality where the principal
place of business of the prospective bidder is located, or the equivalent document for
Exclusive Economic Zones or Areas. In cases of recently expired Mayor’s/Business
permits, it shall be accepted together with the official receipt as proof that the bidder
has applied for renewal within the period prescribed by the concerned local
government unit, provided that the renewed permit shall be submitted as a post
qualification requirement in accordance with Section 34.2 of this IRR.
iii) Tax clearance per E.O. 398, s. 2005, as finally reviewed and approved by
the Bureau of Internal Revenue (BIR).
• Technical Documents
iv) Statement of the bidder of all its ongoing government and private contracts,
including contracts awarded but not yet started, if any, whether similar or not similar
in nature and complexity to the contract to be bid.
v) Statement of the bidder’s Single Largest Completed Contract (SLCC) similar to the
contract to be bid, except under conditions provided for in Sections 23.4.1.3 and
23.4.2.4 of this IRR, within the relevant period as provided in the Bidding Documents
in the case of Goods. All of the above statements shall include all information required
in the PBDs prescribed by the GPPB.
vi) In the case of procurement of Infrastructure Projects, a valid
Philippine Contractors Accreditation Board (PCAB) License or Special PCAB
License in case of Joint Ventures, and registration for the type and cost of the contract
to be bid.

• Financial Documents
vii) The bidder’s audited financial statements, showing, among others, the bidder’s
total and current assets and liabilities, stamped “received” by the BIR or its duly
accredited and authorized institutions, for the preceding calendar year which should
not be earlier than two (2) years from the date of bid submission.
viii) The bidder’s computation of Net Financial Contracting Capacity (NFCC). However,
in the case of procurement of Goods, a bidder may submit a committed Line of Credit
from a Universal or Commercial Bank, in lieu of its NFCC computation.
b) Class “B” Document

• For Goods, valid joint venture agreement (JVA), in case the joint venture is already in
existence. In the absence of a JVA, duly notarized statements from all the potential joint
venture partners should be included in the bid, stating that they will enter into and abide by
the provisions of the JVA in the event that the bid is successful. Failure to enter into a joint
venture in the event of a contract award shall be ground for the forfeiture of the bid security.
• For Infrastructure Projects, JV bidders shall submit a JVA in accordance with R.A. 4566 and
its IRR.
• Each partner of the joint venture shall submit their respective PhilGEPS Certificates of
Registration in accordance with Section 8.5.2 of this IRR. The submission of technical and
financial eligibility documents by any of the joint venture partners constitutes compliance:
Provided, That the partner responsible to submit the NFCC shall likewise submit the
Statement of all of its ongoing contracts and Audited Financial Statements
SEC. 24. Eligibility Requirements and Short Listing for Consulting Services. – For purposes of
determining the eligibility and short list of bidders in accordance with Sections 24.4 and 24.5 of this
IRR, only the following documents shall be required by the BAC, using the forms prescribed in the
Bidding Documents:
a) Class “A” Documents
• Legal Documents
i) Registration certificate from SEC, DTI for sole proprietorship, or CDA
for cooperatives.
ii) Mayor’s/Business permit issued by the city or municipality where the principal
place of business of the bidder is located, or the equivalent document for Exclusive
Economic Zones or Areas. In cases of recently expired Mayor’s/Business permits, it
shall be accepted together with the official receipt as proof that the bidder has applied
for renewal within the period prescribed by the concerned local government unit:
Provided, That the renewed permit shall be submitted as a post qualification
requirement in accordance with Section 34.2 of this IRR. For individual consultants
not registered under a sole proprietorship, a BIR Certificate of Registration shall be
submitted, in lieu of DTI registration and Mayor’s/Business permit.
iii) Tax clearance per E.O. 398, s. 2005, as finally reviewed and approved by the BIR.
• Technical Documents
iv) Statement of the bidder of all its ongoing and completed government and private
contracts, including contracts awarded but not yet started, if any, whether similar or
not similar in nature and complexity to the contract to be bid, within the relevant
period as provided in the Bidding Documents. The statement shall include all
information required in the PBDs prescribed by the GPPB.(a)
v) Statement of the consultant specifying its nationality and confirming that those who
will actually perform the service are registered professionals authorized by the
appropriate regulatory body to practice those professions and allied professions,
including their respective curriculum vitae.
• Financial Document
vi) The consultant’s audited financial statements, showing, among others, the
consultant’s total and current assets and liabilities, stamped “received” by the BIR or

its duly accredited and authorized institutions, for the preceding calendar year which
should not be earlier than two (2) years from the date of bid submission.
b) Class “B” Document

• Valid joint venture agreement (JVA), in case a joint venture is already in existence. In the
absence of a JVA, duly notarized statements from all the potential joint venture partners
stating that they will enter into and abide by the provisions of the JVA in the instance that the
bid is successful, shall be included in the bid. Failure to enter into a joint venture in the event
of a contract award shall be ground for the forfeiture of the bid security. Each partner of the
joint venture shall submit the PhilGEPS Certificate of Registration in accordance with Section
8.5.2 of this IRR. The submission of technical and financial documents by any of the joint
venture partners constitutes compliance.
SEC. 25. Submission and Receipt of Bids. –

• Bidders must submit their bids through their authorized representative in two sealed bid
envelopes or password-protected Bidding Documents in compressed archive folders, with the
first containing the technical component and the second containing the financial component,
and which shall be submitted simultaneously.
• Bids submitted after the deadline will not be accepted by the BAC, and the BAC must record
the bidder's name, representative, and time of late submission in the minutes of bid
submission and opening.
• To ensure transparency and accurate representation of the bid submission, the BAC
Secretariat shall notify in writing all bidders whose bids it has received through its PhilGEPS-
registered physical address or official e-mail address. The notice shall be
issued within seven (7) calendar days from the date of the bid opening.
• Unsealed or unmarked bid envelopes, or in case of electronic bid submission, bidding
Documents not in compressed archive folders and are not password-protected,56 shall be
rejected. However, bid envelopes that are not properly sealed and marked or not properly
compressed and password-protected, as required in the Bidding Documents, shall be
accepted, provided that the bidder or its duly authorized representative shall acknowledge
such condition of the bid as submitted. The BAC shall assume no responsibility for the
misplacement of the contents of the improperly sealed or marked bid, or improperly
compressed or password-protected folder, or for its premature opening.
SEC. 26. Modification and Withdrawal of Bids.–

• A bidder may modify his bid, provided that this is done before the deadline for the receipt of
bids. The modification shall be submitted in a sealed envelope duly identified as a modification
of the original bid and stamped received by the BAC. Bid modifications received after the
applicable deadline shall not be considered and shall be returned to the bidder unopened.
• For online or electronic bid submission, where a bidder modifies its Bid, it shall not be allowed
to retrieve its original Bid, but shall only be allowed to send another Bid equally secured and
properly identified.
• A bidder can withdraw their bid before the deadline, but after the deadline, they may be subject
to sanctions. A letter must reach and be stamped by the BAC before the deadline, and a bidder
who withdraws their bid cannot submit another bid.
SEC. 27. Bid Security. –

• All bids must be accompanied by a bid security, payable to the Procuring Entity, to guarantee
that the successful bidder will enter into contract with the Procuring Entity and furnish the
performance security required in Section 39 of this IRR. Failure to enclose the required bid
security in the form and amount prescribed herein shall automatically disqualify the bid
concerned.
SEC. 28. Bid Validity. –

• Bids and bid securities must be valid for a reasonable period, not exceeding 120 calendar days,
as determined by the HoPE.
• The Procuring Entity must request extension of bids and bid securities before expiration, but
bidders have the right to refuse without forfeiting their bid security.

SEC. 29. Bid Opening. -
• The BAC shall publicly open all bids at the time, date, and place specified in the bidding
documents. The minutes of the bid opening shall be made available to the public upon written
request and payment of a specified fee.
• In case the bids cannot be opened as scheduled due to justifiable reasons, the BAC shall take
custody of the bids submitted and reschedule the opening of bids on the next working day or
at the soonest possible time through the issuance of a Notice of Postponement to be posted
in the PhilGEPS website and the website of the Procuring Entity concerned. The bidders or
their duly authorized representatives may attend the opening of bids. The BAC shall ensure
the integrity, security, and confidentiality of all submitted bids. The abstract of bids as read
and the minutes of the bid opening shall be made available to the public upon written request
and payment of a specified fee to recover cost of materials.
6.4.4 Bid evaluation - (Sec. 30-33)

SEC. 30. Preliminary Examination of Bids. –
• BAC shall examine first the technical components of the bids using "pass/fail" criteria to
determine whether all required documents are present. Only bids that are determined to
contain all the bid requirements of the technical component shall be considered for opening
and evaluation of their financial component.
SEC. 31. Ceiling for Bid Prices. –

• The ABC shall be the upper limit or ceiling for the Bid prices. Bid prices that exceed this ceiling
shall be disqualified outright from further participating in the bidding. There shall be no lower
limit to the amount of the award.
SEC. 32. Bid for the Procurement of Goods and Infrastructure Projects. –
• For the procurement of Goods and Infrastructure Projects, the BAC shall evaluate the financial
component of the bids. The bids that passed the preliminary examination shall be ranked from
lowest to highest in terms of their corresponding calculated prices. The bid with the lowest
calculated price shall be referred to as the "Lowest Calculated Bid."
SEC. 33. Bid Evaluation of Short Listed Bidders for Consulting Services. –
• From submission and receipt of bids until the approval by the HoPE of the ranking of short
listed bidders, those that have submitted their bids are prohibited from making any
communication with any BAC member, including its staff and personnel, as well as its
Secretariat and TWG, regarding matters connected to their bids. However, the BAC, through
its Secretariat, may ask in writing the bidder for a clarification of its bid. All responses to
requests for clarification shall be in writing.
6.4.5 Post-qualification - (Sec. 34-36)

SEC. 34. Objective and Process of Post-qualification. –
• Post-qualification is the stage where the bidder with the Lowest Calculated Bid, in the case of
Goods and Infrastructure Projects, or the Highest Rated Bid, in the case of Consulting
Services, undergoes verification and validation whether he has passed all the requirements
and conditions
• If the bidder with the Lowest Calculated Bid or Highest Rated Bid passes all the criteria for
post-qualification, his Bid shall be considered the “Lowest Calculated Responsive Bid,” in the
case of Goods and Infrastructure or the “Highest Rated Responsive Bid,” in the case of
Consulting Services. However, if a bidder fails to meet any of the requirements or conditions,
he shall be “post-disqualified” and the BAC shall conduct the post-qualification on the bidder
with the second Lowest Calculated Bid or Highest Rated Bid
SEC. 35. Failure of Bidding. –

There shall be a failure of bidding if:
a) No bids are received;
b) All prospective bidders are declared ineligible;

c) All bids fail to comply with all the bid requirements or fail post-qualification, or, in the case
of Consulting Services, there is no successful negotiation; or
d) The bidder with the LCRB, HRRB, SCRB or SRRB refuses, without justifiable cause, to accept
the award of contract, and no award is made in accordance with Section 40 of the Act and this
IRR.
• In order to determine the reason for the failed bidding, the BAC shall conduct a mandatory
review and evaluation of the terms, conditions, and specifications in the Bidding Documents,
including its cost estimates.
• Based on its findings, the BAC shall revise the terms, conditions, and specifications, and if
necessary, adjust the ABC, subject to the required approvals, and conduct a re-bidding with
re-advertisement and/or posting, as provided for in Section 21.2 of this IRR.
• All bidders who have initially responded to the Invitation to Bid/Request for Expression of
Interest and have been declared eligible or short listed in the previous biddings shall be
allowed to submit new bids. The BAC shall observe the same process and set the new periods
according to the same rules followed during the previous bidding(s).
• Should there occur a second failure of bidding, the Procuring Entity may resort to negotiated
procurement as provided for in Section 53.1 of this IRR.
SEC. 36. Single Calculated/Rated and Responsive Bid Submission. –

A single calculated/rated and responsive bid shall be considered for award if it falls under any of the
following circumstances:
(a) If after advertisement, only one prospective bidder submits a Letter of Intent and/or applies
for eligibility check, and meets the eligibility requirements or criteria, after which it submits a
bid, which is found to be responsive to the bidding requirements;
(b) If after the advertisement, more than one prospective bidder applies for eligibility check,
but only one bidder meets the eligibility requirements or criteria, after which it submits a bid
which is found to be responsive to the bidding requirements; or
(c) If after the eligibility check, more than one bidder meets the eligibility requirements, but
only one bidder submits a bid, and its bid is found to be responsive to the bidding requirements.
In all instances, the Procuring Entity shall ensure that the ABC reflects the most advantageous
prevailing price for the Government.
6.4.6 Award, implementation and termination of the contract - (Sec. 37-42)

SEC. 37. Notice and Execution of Award. -
• Within a period not exceeding fifteen (15) calendar days from the determination and
declaration by the BAC of the Lowest Calculated Responsive Bid or Highest Rated Responsive
Bid, and the recommendation of the award, the Head of the Procuring Entity or his duly
authorized representative shall approve or disapprove the said recommendation.
• In case of approval, the Head of the Procuring Entity or his duly authorized representative
shall immediately issue the Notice of Award to the bidder with the Lowest Calculated
Responsive Bid or Highest Rated Responsive Bid.
• Within ten (10) calendar days from receipt of the Notice of Award, the winning bidder shall
formally enter into contract with the Procuring Entity. When further approval of higher
authority is required, the approving authority for the contract shall be given a maximum of
twenty (20) calendar days to approve or disapprove it.
• In the case of government-owned and/or -controlled corporations, the concerned
board shall take action on the said recommendation within thirty (30) calendar days from
receipt thereof.
• The Procuring Entity shall issue the Notice to Proceed to the winning bidder not later than
seven (7) calendar days from the date of approval of the contract by the appropriate authority.
All notices called for by the terms of the contract shall be effective only at the time of receipt
thereof by the contractor.

SEC. 38. Period of Action on Procurement Activities. –
• The procurement process from the opening of bids up to the award of contract shall not
exceed three (3) months, or a shorter period to be determined by the procuring entity
concerned, If no action on the contract is taken by the head of the procuring entity, or by his
duly authorized representative, or by the concerned board, in the case of government- owned
and/or -controlled corporations, within the periods specified in the preceding paragraph, the
contract concerned shall be deemed approved.
SEC. 39. Performance Security. –

• Prior to the signing of the contract, the winning bidder shall, as a measure of guarantee for
the faithful performance of and compliance with his obligations under the contract prepared
in accordance with the Bidding Documents, be required to post a performance security in such
form and amount as specified in the Bidding Documents.
• The performance security shall be denominated in Philippine Pesos and posted in favor of the
Procuring Entity, which shall be forfeited in the event it is established that the winning bidder
is in default in any of its obligations under the contract.
SEC. 40. Failure to Enter into Contract and Post Performance Security. –
• The bidder with the LCRB, HRRB, SCRB or SRRB must submit documents, enter into a contract
with the Procuring Entity, and post the Performance Security within the stipulated period. If
the bidder fails, refuses or is unable to do so, the bid security will be forfeited and sanctions
will be imposed.
• The BAC must disqualify a bidder with LCRB or HRRB if they fail to submit documents or enter
into contract and post. Performance Security. This process must be repeated until the LCRB
or HRRB is determined for award. If no bidder passes post-qualification, the BAC will declare
the bidding a failure and conduct a re-bidding with readvertisement. If another failure of
bidding occurs, the Procuring Entity may enter into a negotiated procurement.
• The BAC may disqualify a bidder if they fail to submit documents or enter into contract and
post. Performance Security, and conduct a re-bidding with re-advertisement and/or posting.
If there is another failure of bidding after the re-bidding, the Procuring Entity may enter into
a negotiated procurement.
SEC. 41. Reservation Clause. –

• The Head of the Agency reserves the right to reject any and all Bids, declare a failure of
bidding, or not award the contract in the following situations:
(a) If there is prima facie evidence of collusion between appropriate public officers or
employees of the Procuring Entity, or between the BAC and any of the bidders, or if
the collusion is between or among the bidders themselves, or between a bidder and
a third party, including any act which restricts, suppresses or nullifies or tends to
restrict, suppress or nullify competition;
(b) If the BAC is found to have failed in following the prescribed bidding procedures;
or
(c) For any justifiable and reasonable ground where the award of the contract will not
redound to the benefit of the government as defined in the IRR.
SEC. 42. Contract Implementation and Termination. –

• The rules and guidelines for the implementation and termination of contracts awarded
pursuant to the provisions of this Act shall be prescribed in the IRR. The rules and guidelines
shall include standard general and special conditions for contracts. The rules and guidelines
for the implementation and termination of contracts awarded pursuant to the provisions of
this Act shall be prescribed in the IRR.

6.5 Disclosure of relations (Sec. 47)
• All bids shall be accompanied by a sworn affidavit of the bidder that it is not related to the HoPE,
members of the BAC, the TWG, and the BAC Secretariat, the head of the PMO or the end-user or
implementing unit, and the project consultants, by consanguinity or affinity up to the third civil degree.
Failure to comply with the aforementioned provision shall be a ground for the automatic
disqualification of the bid in consonance with Section 30 of this IRR. For this reason, relation to the
aforementioned persons within the third civil degree of consanguinity or affinity shall automatically
disqualify the bidder from participating in the procurement of contracts of the Procuring Entity
notwithstanding the act of such persons inhibiting themselves from the procurement process. On the
part of the bidder, this provision shall apply to the following persons:
a) If the bidder is an individual or a sole proprietorship, to the bidder himself;
b) If the bidder is a partnership, to all its officers and members;
c) If the bidder is a corporation, to all its officers, directors, and controlling
stockholders;
d) If the bidder is a cooperative, to all its officers, directors, and controlling
shareholders or members; and
e) If the bidder is a joint venture, the provisions of items (a), (b), (c), or (d) of
this Section shall correspondingly apply to each of the members of the said
joint venture, as may be appropriate
• All bidders also found to have conflicting interests with each other shall be disqualified to participate
in the procurement at hand, without prejudice to the imposition of appropriate administrative, civil,
and criminal sanctions. A bidder may be considered to have conflicting interests with another bidder
in any of the events described in paragraphs (a) through (c) below and a general conflict of interest in
any of the circumstances set out in paragraphs (d) through (j) below:
a) A bidder has controlling shareholders in common with another bidder;
b) A bidder receives or has received any direct or indirect subsidy from any other bidder;
c) A bidder has the same legal representative as that of another bidder for purposes of this
bid;
d) A bidder has a relationship, directly or through third parties, that puts them in a position to
have access to information about or influence on the bid of another bidder or influence the
decisions of the Procuring Entity regarding this bidding process. This will include a firm or an
organization who lends, or temporarily seconds, its personnel to firms or organizations which
are engaged in consulting services for the preparation related to procurement for or
implementation of the project if the personnel would be involved in any capacity on the same
project;
A bidder submits more than one bid in this bidding process. However, this does not limit the
participation of subcontractors in more than one bid;
f) A bidder who participated as a consultant in the preparation of the design or technical

specifications of the Goods and related services that are the subject of the bid; A bidder who
lends, or temporarily seconds, its personnel to firms or organizations which are engaged in
consulting services for the preparation related to procurement for or implementation of the
project, if the personnel would be involved in any capacity on the same project;
h) If a consultant combines the function of consulting with those of contracting and/or supply
of equipment
i) If a consultant is associated with, affiliated to, or owned by a contractor or a manufacturing
firm with departments or design offices offering services as consultants unless such
consultant includes relevant information on such relationships along with a statement in the
technical proposal cover letter to the effect that the consultant shall limit its role to that of a
consultant and disqualify itself and its associates from work in any other capacity that may
emerge from the project (including bidding for any part of the future project). The contract
with the consultant selected to undertake the project shall contain an appropriate provision
to such effect; or

j) If there is a conflict among consulting projects, the consultant (including its personnel and
subcontractors) and any subsidiaries or entities controlled by such consultant shall not be
recruited for the relevant project. The duties of the consultant depend on the circumstances
of each case. While continuity of consulting services may be appropriate in particular
situations where no conflict exists, a consultant cannot be recruited to carry out a project that,
by its nature, shall result in conflict with a prior or current project of such consultant.
Examples of the situations mentioned are when a consultant engaged to prepare engineering
design for an infrastructure project shall not be recruited to prepare an independent
environmental assessment for the same project; similarly, a consultant assisting a Procuring
Entity in privatization of public assets shall not purchase, nor advise purchasers, of such
assets; or a consultant hired to prepare terms of reference for a project
shall not be recruited for the project in question
6.6 Alternative methods of procurement (Sec. 48-54)
SEC. 48. Alternative Methods. –

• Subject to the prior approval of the Head of the Procuring Entity or his duly authorized representative,
and whenever justified by the conditions provided in this Act, the Procuring Entity may, in order to
promote economy and efficiency, resort to any of the following alternative methods of Procurement:
(a) Limited Source Bidding, otherwise known as Selective Bidding – a method of Procurement
that involves direct invitation to bid by the Procuring Entity from a set of pre-selected
suppliers or consultants with known experience and proven capability relative to the
requirements of a particular contract;
(b) Direct Contracting, otherwise known as Single Source Procurement – a method of
Procurement that does not require elaborate Bidding Documents because the supplier is
simply asked to submit a price quotation or a pro-forma invoice together with the conditions
of sale, which offer may be accepted immediately or after some negotiations;
(c) Repeat Order – a method of Procurement that involves a direct Procurement of Goods from
the previous winning bidder, whenever there is a need to replenish Goods procured under a
contract previously awarded through Competitive Bidding;
(d) Shopping – a method of Procurement whereby the Procuring Entity simply requests for
the submission of price quotations for readily available off-the-shelf Goods or
ordinary/regular equipment to be procured directly from suppliers of known qualification; or
(e) Negotiated Procurement – a method of Procurement that may be resorted under the
extraordinary circumstances provided for in Section 53 of this Act and other instances that
shall be specified in the IRR, whereby the Procuring Entity directly negotiates a contract with
a technically, legally and financially capable supplier, contractor or consultant.
In all instances, the Procuring Entity shall ensure that the most advantageous price for the
Government is obtained.
SEC. 49. Limited Source Bidding. –

Limited Source Bidding may be resorted to only in any of the following conditions:
(a) Procurement of highly specialized types of Goods and Consulting Services which are
known to be obtainable only from a limited number of sources; or
(b) Procurement of major plant components where it is deemed advantageous to limit the
bidding to known eligible bidders in order to maintain an optimum and uniform level of quality
and performance of the plant as a whole.
SEC. 50. Direct Contracting. – Direct Contracting may be resorted to only in any of the following conditions:
(a) Procurement of Goods of proprietary nature, which can be obtained only from the
proprietary source, i.e. when patents, trade secrets and copyrights prohibit others from
manufacturing the same item;
(b) When the Procurement of critical components from a specific manufacturer, supplier or
distributor is a condition precedent to hold a contractor to guarantee its project performance,
in accordance with the provisions of his contract; or,

(c) Those sold by an exclusive dealer or manufacturer, which does not have sub- dealers
selling at lower prices and for which no suitable substitute can be obtained at more
advantageous terms to the Government.
SEC. 51. Repeat Order. –

• When provided for in the Annual Procurement Plan, Repeat Order may be allowed wherein the
Procuring Entity directly procures Goods from the previous winning bidder whenever there arises a
need to replenish goods procured under a contract previously awarded through Competitive Bidding,
subject to post-qualification process prescribed in the Bidding Documents and provided all the
following conditions are present:
o (a) The unit price must be equal to or lower than that provided in the original contract;
o (b) The repeat order does not result in splitting of requisitions or purchase orders;
o (c) Except in special circumstances defined in the IRR, the repeat order shall be availed of
only within six (6) months from the date of the Notice to Proceed arising from the original
contract; and,
o (d) The repeat order shall not exceed twenty-five percent (25%) of the quantity of each item of
the original contract.
SEC. 52. Shopping. –

• Shopping may be resorted to under any of the following instances:
o (a) When there is an unforeseen contingency requiring immediate purchase: Provided,
however, That the amount shall not exceed Fifty Thousand Pesos (P50,000); or
o (b) Procurement of ordinary or regular office supplies and equipment not available in the
Procurement Service involving an amount not exceeding Two Hundred Fifty Thousand Pesos
(P250,000): Provided, however, That the Procurement does not result in Splitting of Contracts:
Provided, further, That at least three (3) price quotations from bona fide suppliers shall be
obtained.
• The above amounts shall be subject to a periodic review by the GPPB. For this purpose, the GPPB shall
be authorized to increase or decrease the said amount in order to reflect changes in economic
conditions and for other justifiable reasons.
SEC. 53. Negotiated Procurement. –

• Negotiated Procurement shall be allowed only in the following instances:
(a) In cases of two failed biddings, as provided in Section 35 hereof;
(b) In case of imminent danger to life or property during a state of calamity, or when time is
of the essence arising from natural or man-made calamities or other causes where
immediate action is necessary to prevent damage to or loss of life or property, or to restore
vital public services, infrastructure facilities and other public utilities;
(c) Take-over of contracts, which have been rescinded or terminated for causes provided for
in the contract and existing laws, where immediate action is necessary to prevent damage to
or loss of life or property, or to restore vital public services, infrastructure facilities and other
public utilities;
(d) Where the subject contract is adjacent or contiguous to an on-going infrastructure project,
as defined in the IRR: Provided, however, That the original contract is the result of a
Competitive Bidding; the subject contract to be negotiated has similar or related scopes of
work; it is within the contracting capacity of the contractor; the contractor uses the same
prices or lower unit prices as in the original contract less mobilization cost; the amount
involved does not exceed the amount of the ongoing project; and, the contractor has no
negative slippage: Provided, further, That negotiations for the procurement is commenced
before the expiry of the original contract. Whenever applicable, this principle shall also govern
consultancy contracts, where the consultants have unique experience and expertise to deliver
the required service; or,
(e) Subject to the guidelines specified in the IRR, purchases of Goods from another agency of
the Government, such as the Procurement Service of the DBM, which is tasked with a
centralized procurement of commonly used Goods for the government in accordance with
Letters of Instruction No. 755 and Executive Order No. 359, series of 1989.
SEC. 54. Terms and Conditions for the use of Alternative Methods. –

• For alternative methods of procurement, the Procuring Entity may dispense with the
advertisement in the newspaper and posting requirement as prescribed in Section 21.2.1 of
this IRR.
• In all instances of alternative methods of procurement, the BAC, through the Secretariat, shall
post, for information purposes, the notice of award, contract or purchase order, including
notice to proceed if necessary, in the PhilGEPS website, the website of the Procuring Entity
concerned, if available, and at any conspicuous place reserved for this purpose in the
premises of the Procuring Entity, except for contracts with ABC of Fifty Thousand Pesos
(₱50,000.00) and below.
• The specific terms, conditions and documentary requirements, including the limitations and
restrictions, for the application of each of the alternative methods mentioned in this article
shall be provided for in Annex "H" of this IRR and guidelines specifically issued for this
purpose.
7.0 LAW ON BUSINESS ORGANIZATIONS
7.1 Partnerships
PARTNERSHIP
TWO OR MORE PERSONS BIND THEMSELVES TO CONTRIBUTE MONEY, PROPERTY OR INDUSTRY TO A

COMMON FUND, WITH THE INTENTION OF DIVIDING PROFITS AMONG THEMSELVES.
TWO OR MORE PERSONS MAY ALSO FORM PARTNERSHIP FOR THE EXERCISE OF PROFESSION.
PARTNERSHIP AS JURIDICAL PERSONALITY (ARTICLE 1768): It is separate and distinct from that of each
partner.
7.1.1 Nature and as distinguished from corporation
Nature of Contribution (MPI) Requisites of a Contract of Characteristics of a Contract of

Partnership Partnership
(VCOLE) (CCPBONP)
1. Money 1. Valid contract 1. Consensual

2. Property 2. Contribution 2. Commutative
3. Industry 3. Organized for gain or profit 3. Principal
4. Lawful object or purpose 4. Bilateral
5.Established for the common 5. Onerous
benefit/interest of the partners 6. Nominate
7. Preparatory
Rules in Determining the Existence of Partnership (PCSR)

Rule #1: Persons who are not partners to each other are not partners to as to third persons.
Rule #2: Co-ownership or co-possession does not establish partnership.
Rule #3: Sharing of gross returns does not establish partnership.
Rule #4: Receipt by a person of a share of the profits is prima facie evidence that he is a partner in
the business.
Exceptions to Rule #4: (DWAIC)
a. Debt by installments or otherwise.
b. Wages of an employee or rent to a landlord.
c. Annuity to a widow or representative of a deceased person.
d. Interest on a loan.
e. Consideration for the sale of a goodwill of a business or other property.

PARTNERSHIP AS DISTINGUISHED FROM CORPORATION
PARTNERSHIP CORPORATION
Creation Voluntary agreement of parties Created by the state in the form of a

special character or by a general
enabling the law (The Corporation
Code)
Number of organizers 2 or more Not more than 15 (incorporators)
Powers Can do anything by agreement of Can exercise only such powers and
parties provided only that it is not functions expressly granted to it by law
contrary to law, morals, good and those that are necessary or
customs or public order. incidental to its existence
Existence No time limit except agreement of Perpetual existence under the Revised
parties Corporation Code
Liability of owners All partners, including industrial Limited liability - liable only up to their
ones (except a limited partner) are capital contributions.
liable pro rata with all their property
and after all the partnership
property has been exhausted, for all
partnership liability (Art. 1813)
Transferability of All partners need to consent Does not need to the consent of other
interest (delectus personae) stockholders
Ability of owners to A partner can sue another partner A stockholder cannot sue a director
bind the firm who mismanages who mismanages, it must be in the
name of the corporation, through a
derivative suit
Nationality A national of the country where it Generally, under whose laws it was
was created, and dependent on created as to whether domestic or
percentage of ownership foreign, and as to nationality, on the
ownership of the outstanding capital
stock
Legal personality From the time the contract begins Generally, from the issuance of COR
Rights of succession None. Death, retirement, insolvency, Yes. Such causes do not dissolve a
civil interdiction, or insanity of a corporation. (strong juridical
partner dissolves the partnership personality)
Dissolution Partners may dissolve their Cannot be dissolved by mere

partnership at will or at any time agreement of the stockholders. The
they deem it fit consent of the State is necessary for it
to cease as a body corporate.
7.1.2 Kinds of partnerships
AS TO OBJECT

Universal Partnership Particular Partnership
1. Universal Partnership of ALL PROFITS Where the object is/are:

● Only the usufruct of the properties of the a. Determinate things, their use or fruits;
partners become common property; b. A specific undertaking, or
NAKED OWNERSHIP is retained by each of c. The exercise of a profession or
the partners. occupation.
● ALL PROFITS acquired by industry or work
of the partners become common property
(regardless of whether or nor said profits
were obtained through the usufruct
contributed)
● Properties acquired by gratuitous
transfer? exclusive property
2. Universal Partnership of ALL PRESENT
PROPERTY
● ALL the property belonging to the partners
are contributed both ownership and naked
ownership.
● As a rule, aside from the contributed
properties, only the PROFITS OF THE
CONTRIBUTED PROPERTY.
● Profits from other sources may become
partnership property. But only if there is a
stipulation to such effect.
● Properties subsequently acquired by
inheritance, legacy, or donation, cannot be
included in the stipulation, BUT the fruits
thereof can be included in the stipulation.
AS TO LIABILITY
General Partnership Limited Partnership
where all partners are general partners whose where at least one of the partners are liable only
liability extends to their individual properties, after up to the extent of his contribution
the assets of the partnership have been
exhausted;
AS TO TERM
Partnership w/ a Fixed Term or Particular Partnership at Will

Undertaking
upon arrival of the fixed term or fulfillment of a where there is no fixed term or particular
particular undertaking, the partnership is undertaking (existence is solely dependent on the
dissolved, and if continued, it will constitute a will of the partners, applying affection societatis
partnership at will and the rights and duties of the and delectus personae)
partners remain the same, so far as is consistent
with a partnership at will.
7.1.3 Formalities required

General Rule: A partnership may be constituted in any form (consensual in character).
Exception: Formal requirement whenever immovable property is contributed.
A contract of partnership is VOID, whenever immovable property is contributed thereto, if:
(1) An inventory of said property is not made

(2) Signed by the parties, and
(3) Attached to the public instrument.
When capital is more than P3,000? – The contract of partnership must appear in a public instrument,
which must be recorded in the SEC. This does not in any way affect the validity of the partnership as
it is intended only to affect third persons. (Oral with no immovable property contribution? Still VALID.)
7.1.4 Rules of management

Rule #1: One Managing Partner
MANAGING PARTNER in the ARTICLES OF PARTNERSHIP (before partnership was created): may
execute all acts of administration, in good faith, even with opposition from the other partners;
The power to execute all acts of administration can only be revoked if (1) with just or lawful cause; and
(2) by a vote of the partners representing the controlling interest.
MANAGING PARTNER AFTER PARTNERSHIP HAS BEEN CONSTITUTED: the power as manager may be
revoked by a vote of the partners representing the controlling interest EVEN WITHOUT just or lawful
cause.
Rule #2: Multiple Managing Partners (minimum 1, maximum none)

a. With stipulation that no Managing Partner may act without the consent of the others - no one
can perform an act of administration without the others’ consent
b. With specification of duties - each Managing Partner can perform an act of administration
within their respective duties
c. Without specification of their respective duties, or without a stipulation that one of them shall
not act without the consent of all the others:
i. Each managing partner may separately execute all acts of administration;
ii. Should one of the managing partners oppose the act of another, the matter shall be decided
by a majority of the managing partners per head count;
iii. Should there be a tie in the votes of the managing partners, the controlling interest of ALL
the partners shall prevail.
Rule #3: No Managing Partner; WITH Stipulation that no partner cannot act without the support of
partners: the concurrence of all shall be necessary for the validity of the acts, and the absence or
disability of any one of them cannot be alleged.
Except: if there is imminent danger of grave or irreparable injury to the partnership.
Rule #4: No agreement as to the management of partnership: All the partners shall be considered
agents and whatever any one of them may do alone shall bind the partnership, without prejudice to
the provisions of Art. 1801 (on Multiple Managing Partners) (any can oppose, controlling interest will
decide)
Except: None of the partners may make important alterations in the immovable property of the
partnership without the consent of the others, even if it may be useful to the partnership.
Exception to the exception: if the refusal of consent by the other partners is manifestly prejudicial to
the interest of the partnership, the court’s intervention may be sought (approval of courts necessary
to make alterations kahit others oppose).
7.1.5 Obligations of partners

7.1.5.1 To the partnership and to the partners
OBLIGATIONS OF PARTNERS TO THE PARTNERSHIP AND TO THE PARTNERS
1. To give his contribution
2. To give additional contribution in case of imminent losses
3. Not to engage in another business
4. Credit to the firm payment made by a common debtor to the managing partner
Other obligations:
1. Not to convert partnership funds/property for his own use (malversation) (Art. 1788)
2. To account for and hold as trustee, unauthorized or secret personal profits (Art. 1807)

3. Pay for damages caused by his fault (cannot be reduced just because of a partner's efforts,
except if effort is extraordinary) (Art. 1794)
4. Share with other partners the share of the partnership credit which he has received from
an insolvent firm debtor (Art. 1743)
5. Keep the partnership books in the principal office (except when otherwise agreed) and allow
other partners to have access, inspect, and copy the same.
6. Reimburse the partnership of damages suffered by it through his fault. a. The liability for
damages is not compensable with profits and benefits earned for the partnership; b. Damages,
however, may be decreased by courts if through the partner’s extraordinary efforts, the
partnership earned unusual profits.
7. To inform the other partners on all matters affecting the partnership or relative to
partnership affairs.
8. To observe the diligence of a good father of a family in all his dealings.
9. To adhere to the partnership agreement and decisions of appointed managing partner.
TO GIVE HIS CONTRIBUTION

1. Unless there is a stipulation to the contrary, the partners shall contribute equal
shares to the capital of the partnership.
2. As a rule, the contribution must be provided upon perfection of the contract, except if
the partners stipulate otherwise.
3. A partner who has undertaken to contribute a sum of money and fails to do so
becomes a debtor for the interest and damages from the time he should have
complied with his obligation. Thus, no demand shall be necessary since the law
specifically provides for the liability in case of delay (demand is not necessary to
consider delay of a partner).
4. A partner is likewise liable similar to a vendor:
a. He is bound to deliver the fruits thereof for the time they should have been
delivered, without the need of demand (Art. 1786).
b. A partner must exercise due diligence in preserving the thing promised to be
contributed; otherwise, he shall be liable for loss and deterioration.
c. Warrant the thing delivered against eviction
Risk of loss:
LOSS BORNE BY THE PARTNER:
1. Thing contributed is specific and determinate which is NOT fungible and only their use
and fruits may be for the common benefit (res perit domino); and
2. There is stipulation that he shall bear the loss of the thing brought and appraised in
the inventory.
LOSS BORNE BY THE PARTNERSHIP:
1. Thing contributed are
a. fungible;
b. cannot be kept without deteriorating (depreciation is borne by the partnership); or
c. they were contributed to be sold; and
2. There was appraisal in the inventory and no stipulation that partner will bear the loss.
TO GIVE ADDITIONAL CONTRIBUTION IN CASE OF IMMINENT LOSSES

In case of an imminent loss of the business of the partnership, any partner who refuses to
contribute an additional share to the capital to save the venture, shall be obliged to sell his
interest (share in the profits and surplus assets) to the other partners.
Except:
1. Industrial partners except if there is stipulation that he will likewise contribute
2. If there is stipulation to the contrary
NOT TO ENGAGE IN ANOTHER BUSINESS

Industrial partners - cannot engage in business for himself except when the capitalist
partners permit him to do so.
Effect of non-compliance: The capitalist partners may either

1. Exclude him from the firm or
2. Avail themselves of the benefits which he may have obtained in violation of this
provision
Capitalist partners - the prohibition is limited to businesses in the same industry as that of
the partnership which may result in competition.
Except:
1. When it is expressly stipulated that the capitalist partner can so engage himself;
2. When the other partners allow him to do so, whether expressly or impliedly;
3. During the period of liquidation and winding up, when the partnership is already non-
existent;
4. When the general-capitalist partner becomes a limited partner in a competitive
enterprise.
Effect of non-compliance: The capitalist partners may either
1. He shall bring to the partnership all the profits illegally obtained;
2. He is liable, personally, for all the losses;
3. He may be ousted for loss of trust and confidence.
CREDIT TO THE FIRM PAYMENT MADE BY A COMMON DEBTOR TO THE MANAGING PARTNER
To prevent the managing partner from furthering his personal interest to the detriment of the
firm, if such managing partner collects a sum from a common debtor who owes money both
to said managing partner and to the partnership:
1. If the managing partner issued a receipt in the name of the partnership, the payment
shall be applied to the partnership credit;
2. If the managing partner issued a receipt in his name: the payment shall be applied
proportionate to the amounts of the two debts.
Except: when the debt owed by the debtor to the managing partner is more onerous,
the debtor may choose to apply the payment exclusively to such
7.1.5.2 To third persons (FLAAESSPL)
OBLIGATIONS OF PARTNERS TO THIRD PERSONS:

1. Firm name: Every partnership shall operate under a firm name, which may or may not
include the name of one or more of the partners.
Strangers who include their name in the firm are liable as partners because of
estoppel but do not have the rights of the partners (to protect customers from being
misled).
If a limited partner included his name in the firm name, he shall be liable as a general
partner.
2. Liability after exhaustion of partnership assets: All partners, including industrial ones,
shall be liable pro rata with all their property and after all the partnership assets have
been exhausted, for the contracts which may be entered into in the name and for the
account of the partnership, under its signature and by a person authorized to act for
the partnership.
However, any partner may enter into a separate obligation to perform a partnership
contract
Any stipulation to the contrary is VOID (as to third persons), except as to the partners.
3. Authority to act for and in behalf of the partnership: Every partner is an agent of the
partnership for the purpose of its business. The authority of the partner to act in behalf
of the partnership may be:
a. EXPRESS (agreed upon and expressly granted); or

b. IMPLIED - implied from the express authority (inventory manager: buy
inventory); or
c. APPARENT - when he apparently (a) carries on the usual business of the
partnership and (b) the person to whom he is dealing has no knowledge of
the fact that he has no such authority.
If the partner is not carrying on the usual business of the partnership, the act will not
bind the partnership unless it is authorized by the other partners.
Consent of ALL partners necessary to:

1. Assign the partnership property in trust for creditors or on the assignee’s
promise to pay the debts of the partnership (dacion en pago);
2. Dispose of the good-will of the business;
3. Do any other act which would make it impossible to carry on the ordinary
business of a partnership (ex: natititrang asset na kailangan);
4. Confess a judgment;
5. Enter into a compromise concerning a partnership claim or liability
(receivable and payable);
6. Submit a partnership claim or liability to arbitration;
7. Renounce a claim of the partnership.
Except when authorized by the other partners or unless they have abandoned the
business.
4. Admissions and notices

Admission of Partners: an admission made by one partner within the scope of his
authority is evidence against the partnership
Notice to a Partner: operates as notice to the partnership, except in case of fraud
committed by such partner
5. Effects of conveyance of property
CONVEYED BY TITLE IS IN THE EXECUTED IN THE EFFECT

NAME OF NAME OF
Any partner Partnership Partnership Title passes to the buyer but

the partnership may recover.
One or more One or more One or more EXCEPT (no recovery):
partners partners partners 1. If in the usual way of
business, except
when the buyer has
knowledge of
partner/s’ lack of
authority;
2. Real property was
transferred to an
innocent buyer
Any partner Partnership Partner Passes the equitable interest

of the partnership provided
the conveyance was in the
One or more Partner/ Partner usual way of business
partners Partnership
All partners All partners All partners Passes all the rights in such
property

6. Solidary liability for quasi-delict/ torts: Where, by any wrongful act or omission of any
partner acting in the ordinary course of the business of the partnership or with the authority
of co-partners, loss or injury is caused to any person, not being a partner in the partnership,
or any penalty is incurred, the partnership is liable therefor to the same extent as the partner
so acting or omitting to act.
7. Solidary liability for misappropriation

The partnership is bound to make good the loss, in two situations:
1. Pertains to partner as receiver: Where one partner acting within the scope of his
apparent authority receives money or property of a third person and misapplies it.
2. Pertains to partnership as receiver: Where the partnership in the course of its
business receives money or property of a third person and is misapplied by any
partner while it is in the custody of the partnership.
In cases of both Torts and Misappropriation, all the partners are solidarily liable as to each
other and the partnership.
8. Partner by estoppel (whether there arises partnership liability)

1. One who represents himself as a partner of an existing partnership with or without
consent of the partnership:
a. When the partnership consented - a partnership by estoppel is created
between the original members and the deceiver. A partnership liability
results.
b. When the partnership did NOT consent - deceiver becomes a partner by
estoppel where he is liable as a partner but does not acquire the rights
thereof. No partnership liability exists.
2. One who represents himself as a partner of a NON-existent partnership. Liability of
parties is pro rata, since there is no partnership liability. (no separate juridical
personality)
9. Liability of new (incoming) partner

1. Debts incurred prior to admission: liable up to his contribution (except if there is
stipulation)
2. Debts incurred after admission: liable up to his personal assets (he could have
objected)
7.1.6 Rights of a partner

RIGHTS OF A PARTNER:
1. Right to share in profits
2. Property rights
Other rights:
1. To associate with another person in his share (Art. 1804) but the associate shall not
be admitted into the partnership without the consent of all the other partners, even if
the partner having an associate should be a manager. (staff only, not a partner)
2. To inspect and copy partnership books (Art. 1805) kept in the principal place of
business unless otherwise agreed.
3. To demand a formal account (Art. 1809) in the ff. cases:
a. A partner was wrongfully excluded from the partnership business or possession of
its property by his co-partners;
b. When there is a stipulation granting such right
c. As to information affecting partnership affairs, such as secret profits earned by other
partners;
d. Whenever just and reasonable.
4. To ask for a dissolution of the firm at the proper time (can either be completion of a
specific undertaking, arrival of a specific term, or anytime if the partnership is at will)
and the right to return of capital and advancements - subject to the rules of
distribution of partnership assets during liquidation.
5. Right to compensation only if there is an agreement or stipulation granting such right
or entitlement

6. Right to reimbursement for the amounts he may have disbursed on behalf of the
partnership and for the corresponding interest from the time the expense was made.
7.1.7 Sharing of profits and losses

DISTRIBUTION OF PROFITS:
1. In accordance with the agreement;
2. In proportion to contribution and the industrial partner shall receive such share as may be
just and equitable. (bayaran muna ang industrial partner then prorata na sa capitalist partner)
(what is just & equitable? Smallest share of capitalist partner)
3. Equal
DISTRIBUTION OF LOSSES:
1. In accordance with the agreement; If there was agreement as to profits but not losses, same
proportion;
2. In proportion to contribution but the industrial partner shall not be liable for losses (if may
stipulation, industrial partner can be liable for loss)
3. Equal
Pactum Leonina: stipulation which excludes one or more partners from any share in the profits or
losses - VOID. (industrial partner, valid pag loss)
7.1.8 Dissolution and winding up

● Dissolution - the change in the relation of the partners caused by any partner ceasing to be associated
in the carrying on as distinguished from the winding up of the business
On dissolution, the partnership is not terminated but continues until the winding up of the partnership
affairs is completed.
● Winding up: the process of settling the business affairs after dissolution
● Termination: the point where all the partnership affairs have been wound up (assets had been sold,
creditors had been paid, remaining balance distributed to partners)
GROUNDS FOR DISSOLUTION OF A PARTNERSHIP
EXTRAJUDICIAL JUDICIAL
(no involvement of court) (requires trial, court intervention is necessary)
1. Without violation of the agreement between the 1. A partner has been declared insane in any
partners (no liability for damages) (voluntary); judicial proceeding or is shown to be of unsound
a. By the termination of the definite term or mind;
particular undertaking specified in the
agreement; 2. A partner becomes in any other way incapable
b. By the express will of any partner, who of performing his part of the partnership contract
must act in good faith, when no definite (physical, mental disability, etc.);
term or particular is specified;
c. By the express will of all the partners who 3. A partner has been guilty of such conduct as
have not assigned their interests or tends to affect prejudicially the carrying on of the
suffered them to be charged for their business;
separate debts, either before or after the
termination of any specified term or 4. A partner willfully or persistently commits a
particular undertaking; breach of the partnership agreement, or otherwise
d. By the expulsion of any partner from the so conducts himself in matters relating to the
business bona fide (justified ground) in partnership business that is not reasonably
accordance with such a power conferred practicable to carry on the business in partnership
by the agreement between the partners with him (obligation of a partner to conduct
business in due diligence);
2. In contravention of the agreement between the
partners, where the circumstances do not permit 5. The business of the partnership can only be
a dissolution under any other provision of this carried on at a loss;
article, by the express will of any partner at any

time (liable for damages) (involuntary); 6. Other circumstances render a dissolution
equitable. (to establish the facts)
Note: that the partnership may be dissolved with
or without contravention to the agreement of the
parties, but if it is dissolved in contravention to the
agreement, the partner who causes the
dissolution will be liable for damages.
3. By operation of law (automatic dissolution):

a. By any event which makes it unlawful;
b. When a specific thing which a partner had
promised to contribute to the partnership,
perishes before the delivery; in any case
by the loss of the thing, when the partner
who contributed it having reserved the
ownership thereof, has only transferred to
the partnership the use or enjoyment of
the same; but the partnership shall not be
dissolved by the loss of the thing when it
occurs after the partnership has acquired
the ownership thereof (not dissolved);
c. By the death of any partner;
d. By the insolvency of any partner or of the
partnership;
e. By the civil interdiction of any partner;
EFFECTS OF DISSOLUTION
1. The mutual agency is terminated. As a rule, the partners can no longer act to bind the partnership,
subject to the following rules:
a. If the cause of the dissolution is Acts, Insolvency or Death (AID) - NOTICE should be given by
the partners to terminate the mutual agency
b. If the cause is NOT AID - the mutual agency is terminated and the dissolution is binding even
without notice.
2. The following acts are still binding even after dissolution:
a. acts to wind-up the affairs of the partnership
b. contracts with creditors who had no notice of the dissolution
3. The partners may continue the partnership after dissolution of the old partnership. Such continuation
still dissolves the old partnership. Such continuation still dissolves the old partnership and a new
partnership is created. The creditors of the old partnership are also creditors of the person or
partnership continuing the business.
7.1.9 Limited Partnership
One formed by two or more persons under the provisions of the following article, having as members
one or more general partners and one or more limited partners. (at least one general partner and at
least one limited partner)
Limited liability: a limited partners’ liability is limited only to his capital contribution. Such that, after
exhaustion of partnership assets, he cannot be made to contribute to answer the remaining liabilities
to third parties.
7.2 Corporations
RA 11232 – REVISED CORPORATION CODE

AN ACT PROVIDING FOR THE REVISED CORPORATION CODE OF THE PHILIPPINES
7.2.1 Definition of corporation
CORPORATION is an (1) artificial being (2) created by operation of law, (3) having the right of succession
and the (4) powers, attributes and properties expressly authorized by law or incident to its existence
7.2.2 Classes of corporations
As to the authority to distribute surplus profits
STOCK have capital stock divided into shares and are authorized to distribute to the
CORPORATIONS holders of such shares dividends or allotments of the surplus profits on the
basis of the shares held
NON - STOCK not authorized to distribute surplus profits (can still have shares, surplus
CORPORATIONS profits are used for operations)
As to under what law it was created
DOMESTIC are those organized or created under or by virtue of the Philippine laws, either
CORPORATION by legislative act or under the provisions of the General Corporation Law.
FOREIGN are those formed, organized or existing under any laws other than those of the
CORPORATION Philippines
As to whether the public can own shares
CLOSE/ FAMILY are those whose shares of stock are held by a limited number of persons like
CORPORATIONS the family or other closely-knit group (maximum of 20 shareholders).There are
no public investors and the shareholders are active in the conduct of the
corporate affairs.
OPEN CORPORATIONS those formed to openly accept outsiders as stockholders or investors. They
are authorized and empowered to list in the stock exchange and to offer their
shares to the public such that stock ownership can widely be dispersed. In
which case, they are called PUBLICLY-LISTED CORPORATIONS (listed in SE)
As to purpose
PRIVATE - those formed for some private purpose, benefit, aim or end.
CORPORATIONS - created for the immediate benefit and advantage of the individuals or
members composing it and
- their franchise may be considered as privileges conferred by the State to be
exercised and enjoyed by them in the form of the corporation.
PUBLIC those formed or organized for the government of a portion of the State or any
CORPORATIONS (ex: of its political subdivisions and which have for their purpose the general good
brgys, cities, etc.) and welfare.
As to whether for a religious purpose
ECCLESIASTICAL are composed exclusively of ecclesiastics organized for spiritual purposes or

CORPORATIONS for administering properties held for religious ones. They are organized to
secure public worship or perpetuating the right of a particular religion.
LAY CORPORATIONS those organized for purposes other than religion. They may further be
classified as
a. ELEEMOSYNARY: created for charitable and benevolent purposes such
as those organized for the purpose of maintaining hospitals and
houses for the sick, aged or poor
b. CIVIL: organized not for the purpose of public charity but for the
benefit, pecuniary or otherwise, of its members
As to number of persons composing it
AGGREGATE are those composed of a number of individuals vested with corporate powers
CORPORATIONS (more than one)
CORPORATION SOLE those consist of one person or individual only and who are made as bodies
corporate and politic in order to give them some legal capacity and advantage
which, as natural persons. they cannot have Under the Code, a corporation
sole may be formed by the chief archbishop, bishop, priest, minister, rabbi, or
other presiding elder or religious denominations, sects or churches.
ONE PERSON not for a religious purpose

CORPORATION
As to validity of formation
Compliance w/ requirements for Separate and Questioning the

valid incorporation distinct personality of the
personality from corporation
stockholders
Direct Collateral
Attack Attack
DE JURE Full Compliance Yes No No

CORPORATION
DE FACTO Colorable Compliance Yes Yes, via No

CORPORATION - There is an attempt of quo
good faith, VALID if 3 warranto
reqs are met
CORPORATION BY No compliance at all. The None, Yes Yes

ESTOPPEL persons who compose it only stockholders
set themselves out as a are liable as
corporation general
partners
7.2.3 Nationality of corporations
Incorporation Test: is applied in determining whether a corporation is domestic or foreign. If it is

incorporated under Philippine laws, it is deemed a domestic corporation. If it is incorporated in another
state, it is a foreign corporation, irrespective of the nationality of its stockholders. (the test PH uses)

CONTROL TEST GRANDFATHER RULE
- used to determine corporate nationality for - a method of determining the nationality of a

purposes of applying laws, e.g., prohibition to corporation which in turn is owned by another
acquire lands applicable to corporations more corporation by breaking down the entity structure
than 40% of which is owned by non-Filipinos. of the shareholders of the corporation.
- there is no need to further trace the ownership - The true Filipino ownership is traced all the way
of the 60% (or more) Filipino stockholdings of the to the individual stockholders of the corporation
Investing Corporation since a corporation which is (A) owning shares in another corporation (B), by
at least 60% Filipino-owned is considered as multiplying the Filipino ownership of the first
Filipino (na-meet na ang 60% na ownership, corporation (A) to the corresponding ownership of
Filipino na ang corp.) the other corporation (B). (equity owned by Filipino
citizens= Filipino ownership of A x Filipino
ownership of B)
- It applies to nationalized activities or those which
require whole or partial Filipino ownership.
7.2.4 Corporate juridical personality
As a legal entity, the corporation is possessed with a juridical personality separate and distinct from
the individual stockholders or members and is not affected by the personal rights, obligations or
transactions of the latter.
The properties it possesses belongs to it exclusively as a separate juridical entity such that the
personal creditors of its stockholders or members cannot attach corporate properties to satisfy their
claims.
On the other hand, the corporation is not likewise liable for the debts, obligations or liabilities of its
stockholders. Neither may it properties be made answerable to satisfy the claim of creditors against
its stockholders or member even if the stockholder concerned is its president.
7.2.4.1.1 Liability for tort and crimes

General rule: Stockholders are not liable for the debts or obligations of the corporation,
including legal liability for torts or contract actions.
Exception: Bad faith
7.2.4.1.2 Recovery of damages

General rule: A juridical person is not entitled to moral damages because, unlike a
natural person, it cannot experience physical suffering or such sentiments as
wounded feelings, serious anxiety, mental anguish or moral shock. (Mambulao
Lumber Co. v. PNB, et al.)
Exception: If it has a good reputation which is besmirched. (obiter dictum)
7.2.4.2 Doctrine of piercing the corporate veil

The applicability of the corporate entity theory is confined to legitimate transactions and is
subject to equitable limitations to prevent its being used as a cloak or cover for fraud or
illegality, or to work injustice.
7.2.4.2.1 Grounds for application of doctrine

When the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, defend crime, the law will regard the corporation as a mere association
of persons, or in the case of two corporations, merge them into one, the one being
merely regarded as part or instrumentality of the other. The same is true where a
corporation is a mere dummy and serves no business purpose and is intended only
as a blind, or an alter-ego or business conduit for the sole benefit of the stockholders.
(only the courts can pierce the veil)

In cases where the doctrine of piercing the veil of corporate fiction, the concept of a
separate juridical personality shall be set aside.
7.2.4.2.2 Test in determining applicability

The test in determining the applicability of piercing the veil of corporate fictions is as
follows:
1. Control, not mere majority or complete stock control, but complete domination,
not only in finances but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty or dishonest
and unjust act in contravention of plaintiff’s legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust los complained of.
7.2.5 Capital structure – refers to the specific mix of debt and equity used to finance a corporation’s assets
and operations.
7.2.5.1 Number and qualifications of incorporators
Incorporators
- those mentioned in the AOI as originally forming the corporation and who are signatories in
the AOI.
- an incorporator may be considered as a corporator as long as he continues to be a
stockholder or a member, but not all corporators are incorporators.
Number of Incorporators: (2 or more but) not more than 15. (Only OPC may have a
single stockholder and director)
Qualifications:
1. Must own or subscribe to at least one share
2. May be composed of a combination of
a. Natural Persons
b. SEC-registered partnership/s (EXCEPT. Partnerships under "Dissolved" or
"Expired" status)
c. SEC-registered domestic corporations or association/s (EXCEPT:
Corporations under "Delinquent, Suspended, or Revoked" status)
d. Foreign corporations.
e. Incorporators who are natural persons must be of legal age, and must sign
the AOI/by-laws.
As it stands, it would be noted that:

1. Juridical persons may be incorporators
2. The residency requirement has already been removed
a. Natural persons who are incorporators are still required to be of legal age.
7.2.5.2 Subscription requirements
Stock corporations shall not be required to have a minimum capital stock, except as otherwise
specifically provided by special law. (Sec. 12)
7.2.5.3 Corporate term
Perpetual Existence: limitation of 50 years for corporate existence is removed. Corporation
shall have perpetual existence unless its AOI provides otherwise.
As to corporations already existing prior to the effectivity of the Code, and which continue to
exist, they shall have perpetual existence. Except if by majority vote of its stockholders, it
notifies the SEC to retain its specific corporate term. The same section provides that
dissenting stockholders can exercise their appraisal right.
EXTENSION: 3 years prior to expiration, not earlier unless there are justifiable reasons (such
extension takes effect on the day following the original or subsequent expiry dates).
REVIVAL: a corporation may file for revival of its corporate existence. Upon approval by the
Commission, the corporation shall be deemed revived and a certificate of revival of corporate

existence shall be issued, giving it perpetual existence, unless its application for revival
provides otherwise.
7.2.5.4 Classification of shares

As to whether they are voting rights
VOTING: COMMON NON-VOTING:
PREFERRED REDEEMABLE SHARES
- are those which entitles its owner to an - is a stock that gives - those subject to
equal or pro-rata division of profits, if the holder preference redemption, as
there are any, but without any preference over the holder of indicated in the
or advantage in that respect over any common stocks with contract.
other stockholder or class of respect to the payment - This type of shares
stockholders. of dividends and/or with grants the corporation
respect to distribution the right to repurchase
Voting Rights: A common share usually carries of capital upon the shares at its option
with it the right to vote, and frequently, the liquidation. or at the option of the
exclusive right to do so. The only time a common - may be preferred as to holder based on the
stock's right to vote may be limited is where there dividends or upon face or issued value
exists Founders' Shares liquidation or both plus a specified
premium.
Limitations imposed by - The redemption may
the Code in the issuance be optional or
of preferred stocks: mandatory at a fixed
1. They can be issued future date. The
only with a stated par repurchase is not
value; and 2. The subject to the
preference must be availability of
stated in the AOI and in unrestricted retained
the certificate of stock earnings. (elected as
otherwise each share redeemable at
shall be, in all respect, issuance, always
equal to every other preferred)
share.
As to par value
PAR VALUE SHARES NO - PAR VALUE SHARES
- those whose values are fixed in the - those whose issued price are not stated in
Articles and shown on the certificate. the certificate of stock but may be (1) fixed
- The par value or face value is the minimum in the AOI (not required), or (2) by the BOD
subscription or original issue price of the when so authorized the articles or the by-
shares. laws, or in the absence thereof, (3) the
stockholders themselves
The Code allows the issuance of no par value

shares, subject to the following limitations:
1. Such shares once issued, are deemed fully paid
and thus, non-assessable;
2. The consideration for its issuance should not be

less than P5;
3. The entire consideration constitutes capital,
hence, not available for dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust
companies, insurance companies, public utilities
and building and loans associations.
Other kinds
FOUNDER’S SHARES TREASURY SHARES
- are shares issued to the founders of the - shares of stock which have been issued
corporation which are granted certain and fully paid for, but subsequently
right and privileges such as the exclusive reacquired by the issuing corporation by
right to vote and be voted for in the purchase, redemption, donation or
election of directors*, for a period not to through some other lawful means.
exceed 5 years**. (exclusive rights, sila Subsequently, the corporation can re-
lang, all other shareholders, including issue the shares of stock or sell them or
common shareholders ay di kasali) declare them as property dividends.
(approval of the SEC not required - Such shares, though paid for already, do
anymore) not form part of outstanding shares and
accordingly, do not have the right to vote
*That such exclusive right shall not be allowed if and receive dividends.
its exercise will violate Commonwealth Act No.
108, otherwise known as the "Anti-Dummy Law";
Republic Act No. 7042, otherwise known as the
"Foreign Investments Act of 1991"; and other
pertinent laws.
**The period of 5 years is non-extendable because

it may result in the almost perpetual
disqualification of other stockholders to elect or be
elected as members of the BOD resulting to the
lack of proper representation thereat.
7.2.6 Incorporation and organization
STAGES OF ORGANIZATION AND INCORPORATION
1. Promotional Stage - undertaken by the organizers or promoters who bring together persons
interested in the business venture. They enter into contract either in their own names or in the
name of the proposed corporation.
2. Process of Incorporation: includes the drafting of the Articles of Incorporation, preparation and
submission of additional and supporting documents, filing with the SEC, and the subsequent
issuance of the Certificate of Incorporation. (drafting + prep & submit + file + issuance)
7.2.6.1 Promoter
A promoter, although he may assume to act for and on behalf of a projected corporation and
not for himself, will be held personally liable on contracts made by him for the benefit of a
corporation he intends to organize. The personal liability continues even after the formation
of the corporation unless there is novation or other agreement to release him from liability.
7.2.6.2 Subscription contract

Any contract for the acquisition of unissued stock in an existing corporation or a corporation
still to be formed shall be deemed a subscription, notwithstanding the fact that the parties
refer to it as a purchase or some other contract.
7.2.6.3 Pre-incorporation subscription agreements – refer to subscriptions for shares of stock of a

corporation still to be formed and are deemed irrevocable (cannot backout):
1. For a period of at least 6 months from the date of subscription unless
(a) all the subscribers’ consent to the revocation; or
(b) the incorporation fails to materialize within said period or within a longer period
as may stipulated in the contract of subscription; and
2. After submission of the AOI to the SEC .113
7.2.6.4 Consideration for stocks
CONSIDERATION FOR STOCKS
1. Actual cash paid to the corporation;
2. Property. tangible or intangible, actually received by the corporation and necessary or
convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital,
6. Outstanding shares exchanged for stocks in the event of reclassification or conversion,
7. Shares of stock in another corporation, and/or
8. Other generally accepted form of consideration.
Note: Stocks cannot be issued for a consideration less than the par or issue price thereof AND
promissory notes or future service CANNOT be considered valid consideration for stocks.
7.2.6.5 Articles of Incorporation – set of formal documents filed with a government body to legally
document the creation of a corporation.
7.2.6.5.1 Contents
a. NAME OF THE CORPORATION
- A corporation, once formed, cannot use any other name, unless its Articles of
Incorporation has been amended in accordance with law. A corporation, once formed,
cannot use any other name, unless its Articles of Incorporation has been amended in
accordance with law.
b. The SPECIFIC PURPOSE OR PURPOSES for which the corporation is being

incorporated. Where a corporation has more than one stated purpose, the articles of
incorporation shall state which is the primary purpose and which is/are the secondary
purpose or purposes: Provided, that a non-stock corporation may not include a
purpose which would change or contradict its nature as such;
- to define the scope of authority of the corporate enterprise or undertaking
- congers and also limits the actual authority of the corporate representatives.
SECONDARY PURPOSE: no restriction nor limit for the number of purpose or purposes
which a corporation may have, although, it is required that if it has more than one
purpose, the purpose as well as the secondary ones must be indicated therein.
c. The PLACE where the PRINCIPAL OFFICE of the corporation is to be located, which
MUST BE WITHIN THE PHILIPPINES;
- AOI: specify the province, City or Municipality where it is located. (principal office may
be in one place, but the business operations are actually conducted in other areas -
does not require statement of place)
d. The TERM for which the corporation is to exist;
Perpetual Existence: limitation of 50 years for corporate existence is removed.

Corporation shall have perpetual existence unless its AOI provides otherwise.

EXTENSION: 3 years prior to expiration, not earlier unless there are justifiable
reasons (such extension takes effect on the day following the original or subsequent
expiry dates).
REVIVAL: a corporation may file for revival of its corporate existence. Upon approval
by the Commission, the corporation shall be deemed revived and a certificate of
revival of corporate existence shall be issued, giving it perpetual existence, unless its
application for revival provides otherwise.
e. The NAMES, NATIONALITIES AND RESIDENCES of the INCORPORATORS;

Corporators (or stockholders) - all who compose the corporation at any given time
and need not be among those who executed the AOI at the start of its formation or
organization.
Incorporators - those mentioned in the AOI as originally forming the corporation and
who are signatories thereof.
- an incorporator may be considered as a corporator as long as he continues
to be a stockholder or a member, but not all corporators are incorporators.
Number of Incorporators: (2 or more but) not more than 15. (Only OPC may have a
single stockholder and director)
f. THE NUMBER OF DIRECTORS OR TRUSTEES

Directors - compose the governing board in stock corporations.
Trustees - pertain to non-stock corporations
1. The number of directors as indicated in the Articles is "not more than 15", while for
trustees, "may be more than 15" (does not apply with trustees, it can br more than 15)
2. Section 22 of the RCC, the following corporations vested with public interest shall
have independent directors constituting at least 20% of such board (20% of board must
be independent):
a. Corporations covered by the Securities Regulations Code;
b. Banks and quasi-banks, non-stock savings and loans associations,
pawnshops, corporations engaged in money service business, pre-need, trust
and insurance companies, and other financial intermediaries: and
c. Other corporations engaged in business vested with public interest similar to
the above, as may be determined by the SEC.
g. The NAMES, NATIONALITIES AND RESIDENCES of persons who shall act as

DIRECTORS OR TRUSTEES until the first regular directors or trustees are duly
elected and qualified in accordance with this Code; (until the election of the
regular directors or trustees)
h. If it be a stock corporation, the amount of its authorized capital stock in lawful

money of the Philippines, the number of shares into which it is divided, and in
case the share are par value shares, the par value of each, the names,
nationalities and residences of the original subscribers, and the amount
subscribed and paid by each on his subscription, and if some or all of the
shares are without par value, such fact must be stated; (amt of authorized
capital stock + number of shares + par value, if par value shares + nn&r of
original subscribers and amt. subscribed and paid by each)
i. If it be a non-stock corporation, the AMOUNT OF ITS CAPITAL, the NAMES,

NATIONALITIES AND RESIDENCES OF THE CONTRIBUTORS and THE AMOUNT
CONTRIBUTED by each; and
j. Such OTHER MATTERS are not inconsistent with law and which the
incorporators may deem necessary and convenient. (ex:Restrictions &
Preferences)
7.2.6.5.2 Non-amendable items

Those matters referring to accomplished facts, except to correct mistakes, such as:
1. Names of Incorporators;
2. Names of original subscribers to the capital stock of the corporation and their
subscribed and paid up capital;
3. Names of original directors;
4. Treasurer elected by the original subscribers
5. Members who contributed to the initial capital stock of the non-stock corporation; or
6. Witnesses to and acknowledgement with AOI.
7.2.6.6 Corporate name; limitations on use of corporate name

A corporation, once formed, cannot use any other name, unless its Articles of Incorporation has
been amended in accordance with law), and inclusion of following does NOT make name distinct:
1. The word "corporation", "company", "incorporated", "limited", "limited liability", or an
abbreviation of one of such words; and
2. Punctuations, articles, conjunctions, contractions, prepositions, abbreviations, different
tenses, spacing, or number of the same word or phrase.
The same provision likewise granted the following powers to the SEC:
1. Authority to summarily order the corporation to immediately cease and desist from using
such name and require the corporation to register a new one whenever its name is
a. not distinguishable from a name already reserved or registered for the use of
another corporation;
b. already protected by law; or
c. contrary to law, rules and regulations.
2. Cause the removal of all visible signages, marks, advertisements, labels, prints and other
effects bearing such corporate name; and
3. Hold the corporation and its responsible directors or officers in contempt and/or hold
them administratively, civilly and/or criminally liable and/or revoke the registration of the
corporation if the corporation fails to comply with the Commission's order.
7.2.6.7 Registration, incorporation and commencement of corporate existence

A person or group of persons desiring to incorporate shall submit the intended corporate
name to the Commission for verification. If the Commission finds that the name is
distinguishable from a name already reserved or registered for the use of another
corporation, not protected by law and is not contrary to law, rules and regulations, the name
shall be reserved in favor of the incorporators. The incorporators shall then submit their
articles of incorporation and bylaws to the Commission.
If the Commission finds that the submitted documents and information are fully compliant with
the requirements of this Code, other relevant laws, rules and regulations, the Commission
shall issue the certificate of incorporation. (Sec. 18)
Corporate existence is reckoned from the time of the issuance of its CERTIFICATE OF
INCORPORATION or registration. It is only from this time that it acquires juridical personality
and legal existence.
Except:
a. Corporations by Estoppel;
b. Those created by special laws;
c. Those organized as Cooperatives covered by Bureau of Cooperatives and Home
Owners’ Associations covered by Home Insurance Guaranty Corporation.
d. Corporation Sole – which is reckoned from the filing of verified articles. (Sec. 112)
7.2.6.8 Election of directors or trustees

1. Majority of the outstanding capital stock, whether in person or by written proxy must be
present at the election of the directors; or majority of members entitled to vote, in the case of
a non-stock corporation. If the required quorum is not obtaining, the meeting may be
adjourned;
2. On the request of any voting stockholder or member, the election may be held by ballot
otherwise viva-voce would suffice.

3. The candidates receiving the highest number of votes shall be elected.
CUMULATIVE VOTING:
1. Cumulative voting gives the stockholder entitled to vote the right to give a candidate as many
votes as the number of directors to be elected multiplied by the number of his shares shall
equal or he may distribute them among the candidates as he may see fit.
2. This is granted by law to each stockholder with voting rights. However, in non-stock
corporations, cumulative voting is generally not allowed, UNLESS allowed by the AOI or by-
laws.
3. Under this method, if there are 10 directors to be elected, a holder of 1,000 shares will have
10,000 votes which he may cast in favor of one candidate or may apportion to any number of
candidate he may wish;
4. PURPOSE: to allow the minority to have a rightful representation in the board of directors.
7.2.6.9 Adoption of by-laws

BY-LAWS: are rules and ordinances made by a corporation for its own government; to regulate
the conduct and define the duties of the stockholders or members towards the corporation
and among themselves. They are the rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions, affairs and concerns and tis
stockholder or members and directors and officers with relation thereto and among
themselves in their relation to it.
EFFECTIVITY: After approval by the SEC.
Adoption of by-laws: may be made:
1. PRIOR TO INCORPORATION - it must be signed by all the incorporators without need
of the majority vote of outstanding stocks or members as long as it is submitted
together with the AOI;
2. AFTER INCORPORATION - must be approved by majority of the outstanding capital
stock or members.
Amendment of by-laws; two modes:
1. By a majority vote of the directors or trustees and the majority vote of the outstanding
capital stock or members, at a regular or special meeting called for that purpose; or
2. By the board of directors alone when delegated by stockholders owning 2/3 of the
outstanding capital stock or 2/3 of the members. This power, however, is considered
revoked, when so voted by a majority of the outstanding capital stock or members in
a regular or special meeting.
NOTE: The RCC now includes "The modes by which a stockholder, member, director, or trustee
may attend meetings and cast their vote." It likewise includes that an arbitration agreement
may be provided in the bylaws.
The submission of the amended by-laws no longer requires that it be filed with the SEC
attached to the original articles of incorporation and original by-laws.
7.2.6.10 Effects of non-use of corporate charter

a. CORPORATE ORGANIZATION
Once the certificate of incorporation has been issued, the corporation MUST formally organize
and commence its business.
NON-USE OF CORPORATE CHARTER: Apparent from the above provision is that the failure of
the corporation to organize within 2 years would result in it automatic dissolution, unless, of
course, its failure to do so is due to causes beyond its control.
FORMAL ORGANIZATION: refers to the process of structuring the corporation to enable it to
effectively pursue the purpose for which it was organized. It includes:
a. Organizational meeting of the stockholders to elect the BOD;
b. Adoption of by-laws, if not simultaneously filed with the AOI, and its subsequent filing
with the SEC which must be within 1 month from the issuance of the certificate of
incorporation;
c. Organizational meeting of the BOD to elect the corporate officers, adoption of
corporate seal, accepting preincorporation subscriptions, establishing the principal
office and such other steps necessary to transact the legitimate business for which
the corporation was formed.

b. COMMENCEMENT OF BUSINESS/TRANSACTION
This means that the corporation has actually functioned and engaged in business for which it
was organized which must be done within two years from the issuance of the certificate of
incorporation lest it is deemed dissolved. This may take the form of entering into contracts
which tend to pursue its business undertaking or other acts related thereto.
If a corporation has commenced its business but subsequently becomes inoperative

continuously for a period of at least 5 years, the same shall be merely a ground for suspension
or revocation of its corporate franchise or certificate of registration.
7.2.7 Corporate powers

7.2.7.1 General powers; theory of general capacity
Theory of General Capacity: The general capacity theory maintains that a corporation is said to
hold such powers as are not prohibited or withheld from it by general law.
1. Sue and be sued in its corporate name;
2. Succession;
3. Adopt and use a corporate Seal;
4. Amend Articles of Incorporation
5. Adopt, amend or repeal By-laws;
6. For stock corporations – Issue stocks to subscribers and to sell treasury stocks; For non-
stock corporations – admit members;
7. Purchase, receive, take, or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with real and personal property, pursuant to its lawful business;
8. Enter into Partnership, joint venture, merger, consolidation, or any other commercial
agreement with natural and juridical persons;
9. Reasonable Donations for public welfare, hospital, charitable, cultural, scientific, civil or
similar purposes (Prohibited: for partisan political activity);
10. Establish pension, retirement and other Plans for the benefit of directors, trustees,
officers and employees; and
11. Other powers essential or necessary to carry out its purposes.
7.2.7.2 Specific powers; theory of specific capacity

Theory of Specific Capacity: The specific capacity theory maintains that the corporation cannot
exercise powers except those expressly/impliedly given.
1. Power to extend or shorten corporate term (Sec. 36)
2. Power to increase or decrease capital stock or incur, create, increase bonded
indebtedness (Sec. 37)
3. Power to deny pre-emptive rights (Sec. 38)
4. Power to sell or dispose corporate assets (Sec. 39)
5. Power to acquire own shares (Sec. 40)
6. Power to invest corporate funds in another corporation or business (Sec. 41)
7. Power to declare dividends (Sec. 42)
8. Power to enter into management contract (Sec. 43)
7.2.7.3 Power to extend or shorten corporate term
There should be a written notice of stockholders/members meeting stating:

1. Proposed action and time and place of meeting;
2. Addressed to each stockholder/ member;
3. Deposited to the addressee in post office, with postage prepaid or served personally;
Note: When allowed in the by-laws or done with the consent of the stockholder, sent electronically
in accordance with the rules and regulations of the SEC on the use of electronic data messages
Vote needed:
1. Board majority (in board meeting) and
2. Ratified by 2/3 of OCS or members in a meeting – mere written assent is not enough
7.2.7.4 Power to increase or decrease capital stock or incur, create, increase bonded indebtedness

There shall be no increase or decrease of capital stock unless:
● Approved by majority of the board;
● Approved by at least 2/3 of OCS in a meeting;
● With notice of the proposal and meeting given to stockholders - given personally or
through electronic means if allowed;
● With prior approval of the SEC
- The application with the SEC shall be made within six (6) months from the date of
approval of the board of directors and stockholders, which period may be
extended for justifiable reasons;
● Accompanied by a sworn statement of the treasurer showing that the 25-25 rule has been
complied with.
7.2.7.5 Power to deny pre-emptive rights

General rule: Stockholders have the preemptive right to subscribe to all issues or disposition
of shares by the corporation of any class in proportion to their shareholdings
Exceptions:
1. Denied by the Articles of Incorporation or amendment thereto;
2. Shares are issued in compliance with laws requiring minimum stock ownership by
the public;
3. Shares issued in good faith in exchange for property for corporate purposes approved
by 2/3 of the OCS;
4. Shares in payment of previously contracted debts approved by 2/3 of OCS
7.2.7.6 Power to sell or dispose corporate assets

Votes Required:
1. Power to Sell or Dispose Corporate Assets (Not all or Substantially All) - Majority Vote by
Board of Directors or Trustees ONLY
2. Power to Sell or Dispose All or Substantially All Corporate Assets Including its Goodwill
Needs vote of:
a. Majority Vote by Board of Directors or Trustees; and
b. 2/3 of OCS or members
7.2.7.7 Power to acquire own shares

Requirements:
1. Corporation has unrestricted retained earnings in its books to cover the shares to be
purchased or acquired; and
2. It is for a legitimate corporate purpose or purposes, including the following cases:
a. To eliminate fractional shares arising out of stock dividends;
b. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during
said sale;
c. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of the Corporation Code.
7.2.7.8 Power to invest corporate funds in another corporation or business

Needs vote of:
1. Board majority in meeting;
2. 2/3 of OCS or members - Stockholders/members’ approval not needed if investment in
stock of other corporations is reasonably necessary to accomplish primary purpose;
3. Written notice of proposed investment and time and place of meeting sent to stockholders;
4. Dissenting stockholders have appraisal rights
7.2.7.9 Power to declare dividends

UNRESTRICTED RETAINED EARNINGS: the undistributed earnings of the corporation which
have not been allocated for any managerial, contractual or legal purposes and which are free
for distribution to the stockholders as dividends.
TYPES OF DIVIDENDS:
1. Cash dividends – payable in lawful money or currency;

2. Property dividends - those paid in the form property (e.g., bonds, notes, shares in
another corporation);
3. Stock dividends – corporation’s own shares of stock out of the remaining unissued
shares which would require the approval of the stockholders representing 2/3 of the
outstanding capital stock at a regular or special meeting duly called for that purpose.
This is to be valued at par value or issue price.
Cash and property dividends have the effect of reducing corporate assets to the extent of the
dividends declared. In stock dividends, it would generally not increase the proportionate
interest of the stockholders of the corporation although it will have the effect of increasing
the subscribed and paid-up capital (exception is when the stock dividend declaration would
result in fractional shares like when 1 share is declared as dividend for every 9 shares held)
OVERISSUANCE OF SHARES: happens when a corporation issues shares beyond its

authorized capital stock, even in the form of stock dividends.
WHO CAN DECLARE DIVIDENDS? The BOD. They cannot be compelled to declare dividends,
except: (1) When the unrestricted retained earnings is in excess of 100% of the paid-up capital;
and (2) In the case of Mandatory If Earned Preference Shares.
The judgment of the BOD is conclusive, EXCEPT: (1) when they act in bad faith; (2) for a
dishonest purpose; (3) they act fraudulently, oppressively, unreasonably or unjustly; or (4)
abuse of discretion can be shown as to impair the rights of the complaining shareholders. The
TEST of bad faith is to determine if the policy of the directors is dictated by their personal
interest rather than the corporate welfare.
WHEN DIVIDENDS RIGHTS VEST: It has been succinctly said that the right of the stockholders
to be paid dividends vest as soon as they have been lawfully and finally declared by the BOD.
It is not revocable unless: (1) it has not been officially communicated to the stockholders; or
(2) it is in the form of stock dividends which is revocable any time prior to distribution because
this does not result in the distribution of assets but merely the division of existing shares of a
stockholder into smaller units or integers.
7.2.7.10 Power to enter into management contract

Where one corporation undertakes to manage all or substantially all of the business of
another corporation, whether the contract is called “service contracts” or “operating
agreement”
General Rule: Contract may not exceed 5 years per term.

Exception: Contracts relating to exploration, development, exploitation or utilization of natural
resources, where pertinent laws or regulations will govern.
REQUIREMENTS OF A VALID MANAGEMENT CONTRACT:

1. Resolution of the BOD;
2. Approval by the stockholders representing a majority of the outstanding capital stock or
majority of the members of both the managing and the managed corporation;
3. The approval of the stockholders or members must be made at the meeting called for that
purpose; and
4. The contract shall not be for a period longer than 5 years for any one term, except those which
relate to exploration, development or utilization of natural resources which may be entered
into for such periods as may be provided by pertinent laws and regulations;
5. 2/3 of the stockholders or members would be required, where:
a. The stockholders representing the same interest of both the managing and the
managed corporation own or control more than 1/3 of the total outstanding capital
stock of the managing corporation;
b. A majority of the members of the BOD of the managing corporation also constitute a
majority of the directors of the managed corporation;
c. The contract would constitute the management or operation of all or substantially all
of the business of another corporation, whether such contracts are called service

contracts. If it will not constitute the management of all or substantially all of the
business of another corporation, the first paragraph of Sec. 44 will apply and not that
of the second, that is, only the vote of the majority is required.
7.2.7.11 Ultra vires acts – An act not within the express or implied, and incidental powers of the
corporation.
Type of Ultra Vires Cases
a. First type: Acts done beyond the powers of the corporation as provided for in the law or
its articles of incorporation (Sec. 44)
b. Second type: Acts or contracts entered into on behalf of the corporation by persons
without corporate authority, even though the contract is within the powers of the
corporation; and
c. Third type: Acts or contracts, which are per se illegal as being contrary to law.
7.2.7.12 Doctrine of individuality of subscription

No certificate of stock shall be issued to a subscriber until the full amount of the subscription
together with interest and expenses (in case of delinquent shares), if any is due, has been
paid. (Sec. 63)
7.2.7.13 Doctrine of equality of shares

All stocks issued by the corporation are presumed equal with the same privileges and
liabilities, provided that the Articles of Incorporation is silent on such differences.
7.2.7.14 Trust fund doctrine

The subscriptions to the capital stock of a corporation constitute a fund to which the creditors
have a right to look for satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize assets for the
payment of its debts.
7.2.8 Stockholders and members
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock

corporation are called members.
7.2.8.1 Fundamental rights of a stockholder
The following are important rights of stockholders:

1. Participation in the management of the corporate affairs by exercising their right to vote and
be voted upon either personally or by proxy;
2. To enter into a voting trust agreement subject to the procedure, requirements and limitations
imposed (more permanent character than proxy);
3. To receive dividends and to compel their declaration if warranted;
4. To transfer shares of stock subject only to reasonable restrictions;
5. To be issued a certificate of stock for fully paid-up shares;
6. To exercise preemptive rights;
7. To exercise their appraisal right;
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for delinquency;
10. To inspect the books of the corporation subject only to the limitations;
11. To be furnished by the most recent financial statement of the corporation;
12. To be issued a new stock certificate in lieu of the lost or destroyed one subject to the
procedure laid down;
13. To have the corporation dissolved;
14. To participate in the distribution of assets of the corporation upon dissolution;
15. In the case of a close corporation, to petition the SEC to arbitrate in the event of a deadlock
(tie) as allowed; and
16. Also, in the case of a close corporation, to withdraw therefrom, from any reason, and compel
the corporation to purchase his shares (appraisal right: broader if not absolute)

7.2.8.2 Participation in management
Participation in the management of the corporate affairs by exercising their right to vote and
be voted upon either personally or by proxy;
Instances where the concurrence of the stockholders are necessary for the exercise of the
powers of the Corporations:
a. Requiring majority vote of the BOD and concurrence of the stockholders representing 2/3
of the outstanding capital stock:
i. Increase/decrease corporate stock
ii. Incur or create bonded indebtedness;
iii. Sell, dispose, lease, encumber all or substantially all of corporate assets;
iv. Invest in another corporation other than the primary purpose;
v. Amend the articles of incorporation.
vi. Merger or consolidation
vii. Voluntary dissolution of the corporation
viii. Extend or shorten the corporate term;
ix. Deny pre-emptive right
x. Declare stock dividends
xi. Enter into a management contract - where a stockholder(s) own 1/3 of the capital
stock of the managing corporation or where a majority of the members of the board
of the managing corporation also constitute a majority of the board of the managed
corporation
b. Majority of the BOD + majority of the outstanding capital:
i. Enter into a management contract, as a general rule (other than above);
ii. adopt, amend or repeal the by-laws
c. Without board resolution, 2/3 of the stockholders may:
i. Delegate to the board the power to amend the by-laws
ii. Remove a member of the Board of Directors — vote required
iii. Ratify a business opportunity entered into by a member of the Board (corporate
opportunity doctrine)
iv. Ratification of contracts of self-dealing directors, where his presence is required
to constitute a quorum and/or his vote is required for its approval by the BOD.
d. Without board resolution, majority of the stockholders may:
i. Revoke delegated power to amend by-laws
ii. Calling a special meeting to remove directors
iii. To fix compensation of directors
iv. To fix the issue price or stated value of no-par value shares.
7.2.8.2.1 Proxy – acts as an agent or representative.

PROXY VOTING: is a right granted by law to all stockholders entitled to vote in stock
corporations and cannot, therefore, be denied.
Except: In a non-stock corporation with by-laws providing for a prohibition on the use of
proxies (Sec. 88).
Requirements: In the absence of a by-law provision regulating the form and execution of
proxy, Sec. 58 requires:
1. The proxy must be in writing;
2. It is signed by the stockholder or member or his duly authorized representative; and
3. It is filed on or before the scheduled meeting with the corporate secretary.
Duration: May be fixed by the proxy’s own terms but it cannot exceed 5 years and for not more
than 5 years for each renewal. Otherwise, it expires after the meeting for which it was given.
7.2.8.2.2 Voting trust

VOTING TRUST: is one created by an agreement between a group of stockholders of a
corporation and a trustee, or a group of identical agreements between individual stockholders
and a common trustee, whereby it is provided that for a term of years, or for a period
contingent upon a certain event, or until the agreement is terminated, control over the stock

owned by such stockholders, shall be lodged in the trustee, either with or without reservation
to the owners or persons designated by them the power to direct how such control shall be
issued.
VOTING TRUSTS DISTINGUISHED FROM PROXY
VOTING TRUST PROXY
The beneficial owner of the shares ceased to be Legal title to the shares remain with the beneficial
stockholder of record of the corporation since the owner
shares are transferred to the trustee
Trustee votes as owner of the shares Proxy votes merely as an agent
The beneficial owner is disqualified to be a director The owner of the shares may be elected as such
since legal title thereof remains with him
Purpose is to acquire voting control of the Generally used to secure voting an quorum
corporation requirements or merely for the purpose of
representing an absent stockholder
Irrevocable Revocable anytime unless coupled with an interest
The trustee can act and vote at any meeting during Proxy can generally act as such only at a particular
the duration of the VTA meeting
Trustee may vote in person or by proxy Proxy holder must vote in person
Duration may exceed five years Proxy is of a shorter duration and may not exceed
5 years
VTA to be valid and effective, must be notarized Unless required by the by-laws, proxies need not
and filed with the SEC be notarized nor is it required to be filed with the
SEC.
7.2.8.2.3 Cases when stockholders' action is required

CORPORATE ACTS WHERE STOCKHOLDERS’ ACTION IS REQUIRED:
a. To amend the AOI
b. To elect directors or trustees
c. To remove directors or trustees
d. To call special meeting to remove directors or trustees
e. To ratify a contract of a director/trustee or officer with the corporation
f. To extend or shorten corporate term
g. To increase or decrease capital stock
h. To incur, create, or increase bonded indebtedness
i. To sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially
all of the corporate assets
j. To invest corporate funds in another corporation or business or for any other
purposes other than the primary purpose
k. To issue stock dividends
l. To enter into management contracts
m. To adopt by-laws
n. To amend or repeal the by-laws
o. To delegate the BOD/T the power to amend or repeal the by-laws or adopt new by-
laws
p. To revoke the preceding power to delegate to the BOD/T
q. To fix the issued price of no par value shares
r. To effect or amend a plan of merger or consolidation

s. To dissolve a corporation
t. To adopt a plan of distribution of assets of a non-stock corporation
7.2.8.2.4 Manner of voting – The corporation shall establish the appropriate requirements and
procedures for voting through remote communication and in absentia, taking into account the
company’s scale, number of shareholders or members, structure and other factors consistent
with the basic right of corporate suffrage.
7.2.8.3 Proprietary rights – also known as property rights, are the theoretical or legal rights that an
entity has to own property, whether tangible or intangible.
7.2.8.3.1 Appraisal right

Appraisal right is the method of paying a shareholder for the taking of his property. It
is a statutory means whereby a stockholder can avoid the conversion of his property
into another property not of his own choosing.
When may it be exercised:
a. 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 superior to those of outstanding shares of any class, OR
of extending or shortening the term of corporate existence
b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all
or substantially all of the corporate property and assets as provided in the Code;
c. In case of merger or consolidation;
d. Investment of funds in another corporation or business or for any other purpose other
than its primary purpose;
e. In a close corporation, a stockholder has the unbridled right to compel the corporation
"for any reason' to purchase his shares at their fair value which shall not be less than
the par or issued value, when the corporation has sufficient assets to cover its debts
and liabilities, exclusive of capital stock.
7.2.8.3.2 Right to inspect

To inspect the books of the corporation subject only to the limitations;
a. Includes an enumeration of, and specified, the records to be kept in the principal place
of business.
b. Specifies that the inspection of the books and records are bound by the Intellectual
Property Law, the Data Privacy Act. the Securities Regulations Code and the Rules of
Court.
c. A requesting party who is not a stockholder or member of record, or is a competitor
or otherwise represents the interests of a competitor shall have no right to inspect
or demand reproduction of corporate records.
d. Abuse of the right to inspect is punishable under Section 158.
e. If the corporation denies or does not act on a demand for inspection and/or
reproduction, the aggrieved party may report such to the SEC. Within five (5) days
from receipt of such report, the SEC shall conduct a summary investigation and issue
an order directing the inspection or reproduction of the requested records.
f. The SEC may require stock corporations which transfer and/or trade stocks in
secondary markets to have an independent transfer agent.
7.2.8.3.3 Preemptive right – is a right granted by law to all existing stockholders of a stock
corporation to subscribe to all issues or disposition of shares of any class, in proportion to
their respective holdings.
BASIS OF RIGHT: The grant of this right is for the preservation, unimpaired and undiluted, of
the old stockholders’ relative and proportionate voting strength and control, that is, the
existing ratio of their property interest and voting power in the corporation.
Exceptions (Under Sec. 38):
1. When shares to be issued is in compliance with laws requiring stock offerings or
minimum stock ownership by the public; or

2. Shares to be issued in good faith with the approval of the stockholders representing
2/3 of the outstanding capital stock either:
a. in exchange for property needed for corporate purpose; or
b. in payment of a previously contracted debt.
3. In case the right is denied in the Articles of Incorporation;
The exceptions will not apply to stockholders of close corporation whose pre-emptive right,
is broader if not absolute. See Sec. 101.
The right may likewise be lost by waiver, express or implied or inability or failure to exercise
it having been notified of the proposed disposition of shares.
7.2.8.3.4 Right to vote
Being a property right, a stockholder can vote his share the way he pleases except in the
following:
1. Non-voting shares are not entitled to vote except in those instances provided in the
penultimate paragraph of Sec. 6 of the Code;
2. Treasury shares have no voting rights while they remain in the treasury (Sec. 56);
3. Shares of stock declared delinquent are not entitled to vote at any meeting; and
4. Unregistered transferee of shares of stock.
PROXY VOTING: is allowed or through a voting trust agreement, or by the executor,

administrator, receiver or other legal representative appointed by the court.
7.2.8.3.5 Right to dividends
To receive DIVIDENDS and to compel their declaration if warranted;

If the dividends to be declared are stock dividends, it requires not only the majority vote of the
BOD but also the approval of stockholders owning at least 2/3 of the outstanding capital stock.
The BOD can be compelled to declare dividends if the (unrestricted) retained earnings are in
excess of 100% of the paid-up capital. However, the BOD can still refuse, if:
a. Justified by a definite corporate expansion/projects/programs approved by the Board
(expansion);
b. The corporation is prohibited under a loan agreement to declare dividends without the
creditor's consent and such consent has not yet been secured (loan agreement/ bond
covenant);
c. It can be clearly shown that such retention is necessary under special circumstances
obtaining in the corporation (emergency/ contingency)
If there are no retained earnings, dividends, as a rule, cannot be declared out of capital stock
(will violate trust fund doctrine). EXCEPT:
a. Liquidating dividends (return of the capital to sh already)
b. Investments in wasting assets such as mining, oil, well, etc.
7.2.8.4 Remedial rights

REMEDIES AGAINST ERRING OFFICERS/DIRECTORS
In case of a wrongful or fraudulent act of a director, officer or agent, stockholders have the following options:
INDIVIDUAL SUIT REPRESENTATIVE/CLASS SUIT DERIVATIVE SUIT
– those brought by the – those brought by the – those brought by one or more
shareholder in his own name stockholder on behalf of himself stockholders/members in the
against the corporation when a and all other stockholders name and on behalf of the
wrong is directly inflicted against similarly situated when a wrong corporation to redress wrongs
him. is committed against a group of committed against it, or
stockholders protect/vindicate corporate

rights whenever the officials of
the corporation refuse to sue, or
the ones to be sued, or has
control of the corporation.
The requisites for a derivative

suit are as follows:
a. the party bringing suit
should be a shareholder
as of the time of the act
or transaction
complained of, the
number of his shares not
being material;
b. he has tried to exhaust
intra-corporate
remedies, i.e., has made
a demand on the board
of directors for the
appropriate relief but
the latter has failed or
refused to heed his plea;
and
c. the cause of action
actually devolves on the
corporation, the
wrongdoing or harm
having been, or being
caused to the
corporation and not to
the particular
stockholder bringing the
suit.
7.2.8.5 Obligations of a stockholder

OBLIGATIONS OF A STOCKHOLDER
1. Obligation to the corporation for the unpaid subscription;
2. Obligation to the corporation for interest on unpaid subscription;
3. Obligation to creditors of corporation on unpaid subscription;
4. Obligation for watered stock;
5. Obligation for dividends unlawfully paid;
6. Obligations for failure to create corporation
7.2.8.6 Meetings – apply to every duly convened assembly either of stockholders, members,
directors or trustees, managers, etc. for any legal purpose or the transaction of business of
common interest.
DIRECTORS STOCKHOLDERS
Quorum Majority (headcount) Majority of the Outstanding Capital

Stock (51%)
Date of Regular Meeting Monthly as fixed in the by-laws Annual as fixed in the by-laws.
If no such date is fixed, any date after

April 15 as the BOD/T may determine.

Date of Special Meeting At any time deemed necessary or as At any time deemed necessary or as
provided for in the by-laws provided for in the by-laws
Notice Regular & Special Meetings — 2 Regular Meetings — 21 days prior

days prior to the meeting Special Meetings — 1 week
Place Anywhere (even outside the PH) Principal place of business, unless it
is not practicable: in the city or
municipality where the principal
office is located.
Metro Cebu and Metro Davao, Metro

Manila, as well as other Metropolitan
Areas are now considered a city or
municipality.
Proxy Voting Not allowed for a director or Generally allowed

trustee, since he was supposedly
elected because of his personal
qualifications and thus must
personally attend and vote on
matters brought before the
meeting.
Voting Requirement Genral Rule: Majority of those Refer to voting requirements under
present shall be valid as a Rights of Stockholders
corporate act.
Exception:
a. Election of corporate
officers: majority of all the
members of the board.
b. The approval of a self-
dealing directors’
transactions for corps.
vested with public interest:
2/3 of all members of the
board + majority of the
independent directors
c. When the by-laws provide
for higher voting
requirement.
STOCKHOLDERS' MEETINGS: DIRECTORS' MEETINGS:
1. Notice can now be sent through electronic 1. Directors/trustees are now allowed to attend the
means and shall be accompanied by: meeting through remote communication such as
a. The agenda for the meeting videoconferencing, teleconferencing, or other
b. A proxy form which shall be submitted to alternative modes of communication that allow
the corporate secretary within a them reasonable opportunities to participate. Still,
reasonable time prior to the meeting directors or trustees cannot attend or vote by
c. When attendance, participation, and voting proxy at board meetings.
are allowed by remote communication or 2. A director or trustee who has a potential interest
in absentia, the requirements and in any related party transaction must recuse from
procedures to be followed when a voting on the approval of the related party
stockholder or member elects either transaction without prejudice to compliance with
option; and the requirements for Self-Dealing Directors.

d. When the meeting is for the election of
directors or trustees, the requirements
and procedure for nomination and election
2. Unless the by-laws for a longer period, the stock
and transfer book (contains all transactions about
stocks) or membership book shall be closed at
least 20 days for regular meetings and 7 days for
special meetings before the scheduled date of the
meeting
3. Postponement can be validly made if there is a
notice of at least 2 weeks prior to the meeting.
4. A director, trustee, stockholder, or member may
propose any other matter for inclusion in the
agenda at any regular or special meeting 5. In the
stockholders' meeting for the election of
directors/trustees, Section 23 of the RCC now
specifically allows the stockholders or members
to vote through remote communication or in
absentia (deemed present for purposes of
quorum), in case the by-laws or majority of the
BOD authorizes the same, or even without such
authorization in case of corporations vested with
public interest.
7.2.9 Board of directors and trustees

7.2.9.1 Repository of corporate powers
Unless otherwise provided in this Code, the board of directors or trustees shall exercise the
corporate powers, conduct all business, and control all properties of the corporation.
7.2.9.2 Tenure, qualifications and disqualifications of directors

TERM: Directors shall be elected for a term of one (1) year from among the holders of stocks
registered in the corporation’s books, while trustees shall be elected for a term not exceeding
three (3) years from among the members of the corporation. Each director and trustee shall hold
office until the successor is elected and qualified.
QUALIFICATIONS OF BOD/T:
1. Must own at least 1 share in their own names or a member (in the case of trustees) (must
be a stockholder or a member);
2. Majority must be resident of the Philippines. Even aliens may be elected as directors,
provided that the majority of such directors are residents of the Philippines.
EXCEPT: in activities exclusively reserved to Filipino citizens like the management of
educational institutions and those governed by the Retail Trade Law.
DISQUALIFICATIONS OF DIRECTORS
1. Permanent Disqualification - the following shall be grounds for the permanent
disqualification of a director:
A. Any person convicted by final judgment or order by a competent judicial or
administrative body of any crime that (security or bank-related):
a. Involves the purchase or sale of securities, as defined in the Securities
Regulation Code;
b. Arises out of the person's conduct as an underwriter, broker, dealer,
investment adviser, principal, distributor, mutual fund dealer. futures
commission merchant, commodity trading advisor, or floor broker; or
c. Arises out of his fiduciary relationship with a bank, quasi-bank, trust
company, investment house or as an affiliated person of any of them;
B. Any person who. by reason of misconduct, after hearing, is permanently enjoined
by a final judgment or order of the Commission or any court or administrative
body of competent jurisdiction from:

a. Acting as underwriter. broker, dealer, investment adviser, principal
distributor, mutual fund dealer, futures commission merchant,
commodity trading advisor, or floor broker;
b. Acting as director or officer of a bank, quasi bank, trust company,
investment house, or investment company;
c. Engaging in or continuing any conduct or practice in any of the capacities
mentioned in sub-paragraphs (a) and (b) above, or willfully violating the
laws that govern securities and banking activities.
C. Any person convicted by final judgment or order by a court or competent
administrative body of an offense involving moral turpitude, fraud, embezzlement,
theft, estafa, counterfeiting, misappropriation, forgery, bribery, false affirmation,
perjury or other fraudulent acts;
D. Any person who has been adjudged by final judgment or order of the Commission,
court, or competent administrative body to have willfully violated, or willfully
aided, abetted, counseled, induced or procured the violation of any provision of
the Corporation Code, Securities Regulation Code or any other law administered
by the Commission or BSP, or any of its rule, regulation or order;
E. Any person earlier elected as independent director who becomes an officer,
employee or consultant of the same corporation;
F. Any person judicially declared as insolvent:
G. Any person found guilty by final judgment or order of a foreign court or equivalent
financial regulatory authority of acts, violations or misconduct similar to any of
the acts, violations or misconduct enumerated in subparagraphs (i) to (v) above;
viii. Conviction by final judgment of an offense punishable by imprisonment for
more than six (6) years, or a violation of the Corporation Code committed within
five (5) years prior to the date of his election or appointment
2. Temporary Disqualification - the Board may provide for the temporary disqualification of a
director for any of the following reasons:
A. Refusal to comply with the disclosure requirements of the Securities Regulation
Code and its IRR (Implementing Rules and Regulations). The disqualification shall
be in effect as long as the refusal persists.
B. Absence in more than 50% of all regular and special meetings of the Board during
his incumbency, or any twelve (12) month period during the said incumbency,
unless the absence is due to illness, death in the immediate family or serious
accident. The disqualification shall apply for purposes of the succeeding election.
C. Dismissal or termination for cause as director of any corporation covered by this
Code. The disqualification shall be in effect until he has cleared himself from any
involvement in the cause that gave rise to his dismissal or termination.
D. If the beneficial equity ownership of an independent director in the corporation or
its subsidiaries and affiliates exceeds 2% of its subscribed capital stock. The
disqualification shall be lifted if the limit is later complied with.
E. If any of the judgments or orders cited in the grounds for permanent
disqualification has not yet become final.
A temporarily disqualified director shall, within sixty (60) business days from such disqualification,
take the appropriate action to remedy or correct the disqualification. If he fails or refuses to do so
for unjustified reasons, the disqualification shall become permanent
7.2.9.3 Corporations vested with public interest

The board of the following corporations vested with public interest shall have independent
directors constituting at least twenty percent (20%) of such board:
(a) Corporations covered by Section 17.2 of Republic Act No. 8799, otherwise known
as “The Securities Regulation Code”, namely those whose securities are
registered with the Commission, corporations listed with an exchange or with
assets of at least Fifty million pesos (P50,000,000.00) and having two hundred
(200) or more holders of shares, each holding at least one hundred (100) shares
of a class of its equity shares;

(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
7.2.9.4 Independent directors – apart from shareholdings and fees received from the
corporation, is independent of management and free from any business or other
relationship which could, or could reasonably be perceived to materially interfere with the
exercise of independent judgment in carrying out the responsibilities as a director
7.2.9.5 Elections
ELECTION OF MEMBERS OF THE BOARD/TRUSTEES:
1. Majority of the outstanding capital stock, whether in person or by written proxy
must be present at the election of the directors; or majority of members entitled
to vote, in the case of a non-stock corporation. If the required quorum is not
obtaining, the meeting may be adjourned (no valid election);
2. On the request of any voting stockholder or member, the election may be held by
ballot otherwise viva-voce (boses lang) would suffice.
3. The candidates receiving the highest number of votes shall be elected (no
minimum votes required).
Manner of Election
a. In any form; or
b. By ballot when requested by any voting stockholder or member
c. In stock corporations, voting may be in person or by proxy
Report Requirement:
1. Non-holding of elections: RCC requires a report within 30 days to be submitted to
the SEC, which shall include a new date for the election, which shall not be later
than 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, summarily order that an election be held.
2. Vacancy: Should a director, trustee or officer die, resign or in any manner cease
to hold office, the secretary, or the director, trustee or officer of the corporation,
or in case of death, the officer's heirs shall, within seven (7) days from knowledge
thereof, report in writing such fact to the SEC.
7.2.9.6 Removal
By-laws may provide for causes or grounds for removal of a director;
● A director representing the minority may not be removed except for those causes or
grounds;
● A director NOT representing the minority may be removed even without a cause.
The SEC is now empowered to motu proprio and after due notice and hearing, order the removal
of a director or trustee elected despite the disqualification, or whose disqualification arose, or is
discovered subsequent to an election.
Requisites for a valid removal:
1. The removal should take place at a general or special meeting duly call for that purpose;
2. The removal must be by the vote of the stockholders holding or representing 2/3 of the
outstanding capital stock or the members entitled to vote in cases of non-stock
corporations; and
3. There must be a previous notice to the stockholders or members of the intention to
propose such removal at the meeting either by publication or on written notice to the
stockholders or members.
7.2.9.7 Filling of vacancies
CAUSE OF VACANCY WHO WILL FILL THE VACANCY WHEN ELECTION WILL BE HELD

Removal Stockholders Same day of the meeting authorizing
the removal
Expiration of the term Stockholders Same day of the meeting authorizing

the removal
Other causes (death, Board of Directors — if they still No later than 45 days from the time
resignation, constitute a quorum; the vacancy arose
abandonment)
Stockholders — if the Directors no
longer constitute a quorum
Increase in the number Stockholders In a general or special meeting called

of Directors for the purpose or in the same
meeting authorizing the increase in
the number of directors
7.2.9.8 Compensation
COMPENSATION OF DIRECTORS/TRUSTEES
General Rule: Directors are not entitled to receive any compensation because the office of a
director is usually filled up by those chiefly interested in the welfare of the institution by virtue of
their interest in stock or other advantages and such interests are presumed to be the motive for
executing duties of the office without compensation.
Exception:
1. Reasonable per diems;
*Section 29 of the RCC now specifically prohibits the Director/Trustee from participating
in the fixing of their own per diems or compensation.
2. As provided in the by-laws
3. Upon a majority vote of the stockholders; and
4. If they are performing functions other than that of a director.
Limit: In no case shall the total yearly compensation of the directors (except number 4 above),
exceed 10% of the net income before tax of the corporation during the preceding year (does not
apply to #4) (Section 30)
Sec. 29 of the RCC also requires corporations vested with public interest to submit to their
shareholders and the Commission, an annual report of the total compensation of each of their
directors or trustees.
7.2.9.9 Disloyalty
INSTANCES OF DISLOYALTY APPARENT FROM SEC. 31 AND 34:
1. When a director or trustee “acquires any personal or pecuniary interest in conflict with
(his) duty as such director or trustee”;
2. When he “attempts to acquire or acquires, in violation of his duty, any interest adverse to
the corporation in respect to any matter which has been reposed in him in confidence, as
to which equity imposes a disability upon him to deal in his own behalf”; and
3. When he, “by virtue of his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profit to the prejudice of such corporation”.
CORPORATE OPPORTUNITY DOCTRINE: it places a director of a corporation in the position of a
fiduciary and prohibits him from seizing a business opportunity and/or developing it at the expense
and with the facilities of the corporation. He cannot appropriate to himself opportunity which in
fairness should belong to the corporation.
RATIFICATION:
1. The second paragraph of Sec. 31 which makes a director liable to account for profits if he
attempts to acquire or acquires any interest adverse to the corporation in respect to any
matter reposed in him in confidence as to which equity imposes a disability upon him to
deal in his own behalf is not subject to ratification.

2. Whereas, in Sec. 34, if a director acquires a business opportunity which should belong to
the corporation, he is bound to account for such profits unless his act is ratified by the
stockholders owing or representing at least 2/3 of the outstanding capital stock.
7.2.9.9.1 Business judgment rule – Although directors are commonly said to be responsible
both for reasonable care and also prudence, the formula is continually repeated that they
are not liable for losses due to imprudence or honest error of judgment. The business
judgment rule in effect states that questions of policy and management are left solely to
the honest decision of the board of directors and the courts are without authority to
substitute its judgment as against the former. The directors are business managers and
as long as they act in good faith, its actuations are not subject to judicial review.
7.2.9.9.2 Solidary liabilities for damages

A director, trustee, or officer of a corporation may be made solidarily liable with it for all
damages suffered by the corporation, its stockholders or members, and other persons in
any of the following cases:
1. The director or trustee willfully and knowingly voted for or assented to a patently
unlawful corporate act;
2. The director or trustee was guilty of gross negligence or bad faith in directing
corporate affairs; and
3. The director or trustee acquired personal or pecuniary interest in conflict with his
or her duties as director or trustee.
7.2.9.10 Personal liabilities

Personal liability of a corporate director, trustee or officer along (although not necessarily) with
the corporation may so validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or (c) gross
negligence in directing its affairs, or (d) conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto (unless they
have a written objection);
3. He agrees to hold himself personally and solidarity liable with the corporation;
4. He is made, by a specific provision of law, to personally answer for his corporate action.
(ex: signatory of check)
7.2.9.11 Responsibility for crimes

General Rule: A corporate officer or agent is not civilly or criminally liable for acts done by him as
such officer or agent, or when absent bad faith or malice.
Exception: Unless the law specifically provides.
7.2.9.12 Special fact doctrine

The Special Fact Doctrine holds that a corporate officer with superior knowledge gained by virtue
of being an insider owes a fiduciary duty to a shareholder in transactions involving transfer of
stocks.
7.2.9.13 Inside information

Inside information is regarded as material, non-public information.
7.2.9.14/15 Contracts between corporations with interlocking directors

INTERLOCKING DIRECTOR a director in one corporation who deals or transacts with another
corporation of which he is also a director. In such case, there may effectively be a dual agency, a
divided allegiance where allegiance in one corporation may be subordinated to the other.
General Rule: The contract between corporations with interlocking director is VALID provided it is
reasonable under the circumstances;
Exception:
1. If there is fraud; or

2. If the interest of the interlocking director in one corporation exceeds 20% (substantial)
and in the other merely nominal, the contract becomes VOIDABLE at the latter
corporation's option. In effect, the director would be treated as a self-dealing director
discussed above.
If the interest in both companies is either both substantial or both nominal, the transaction is
VALID.
7.2.9.16 Executive and other special committees
The by-laws of a corporation may create an executive committee, composed of not less than three
(3) members of the Board, to be appointed by the Board.
Said committee may act, by majority vote of all its members, on such specific matters within the
competence of the board, as may be delegated to it in the by-laws or on a majority vote of the
board, except with respect to: (1-5: Executive Committees have no power to)
1. Approval of any action for which shareholders' approval is also required;
2. The filing of vacancies in the board;
3. The amendment or repeal of bylaws or the adoption of new by-laws;
4. The amendment or repeal of any resolution of the board which by its express terms is not
so amendable or repealable; and
5. A distribution of cash dividends to the shareholders.
The board of directors may create special committees of temporary or permanent nature and to
determine the members' term, composition, compensation, powers, and responsibilities.
7.2.9.17 Meetings
DIRECTORS/TRUSTEES
Quorum Majority (headcount)
Date of Regular Meeting Monthly as fixed in the by-laws
Date of Special Meeting At any time deemed necessary or as provided for in the by-laws
Notice Regular & Special Meetings — 2 days prior to the meeting
Place Anywhere (even outside the PH)
Remote Communication Can participate and vote through remote communication such as
videoconferencing, teleconferencing, or other alternative modes of
communication that allow them reasonable opportunities to
participate.
Proxy Voting Not allowed for a director or trustee, since he was supposedly
elected because of his personal qualifications and thus must
personally attend and vote on matters brought before the meeting.
Voting Requirement General Rule: Majority of those present shall be valid as a corporate
act.
Exception:
d. Election of corporate officers: majority of all the members
of the board.
e. The approval of a self-dealing directors’ transactions for
corps. vested with public interest: 2/3 of all members of the
board + majority of the independent directors
f. When the by-laws provide for higher voting requirements.

7.2.10 Capital affairs
7.2.10.1 Certificate of stock
A stock certificate or a certificate of stock is defined as a written instrument signed by the proper
officer of a corporation stating or acknowledging that the person named in the document is the
owner of a designated number of shares of its stock.
7.2.10.2 Watered stocks – are those issued at less than par value where the stockholders will
remain liable for the difference between what he paid and the actual par value thereof (Sec. 65).
7.2.10.3 Payment of balance of subscription

Enforcement of payment of subscriptions: Unpaid subscription together with interest if required
by the by-laws or the contract of subscription, shall be paid either
1. on the date/s fixed in the contract or subscription; or
2. on the date/s that may be specified by the BOD pursuant to a "call" declaring any or all
unpaid portion thereof to be so payable
To enforce payment, the following remedies are available:
1. By board action; and
2. By a collection case in court.
Failure or refusal of the BOD to enforce or collect payment of unpaid subscription will not prevent
the creditors or the receiver of the corporation to institute a court action to collect the unpaid
portion thereof.
If within thirty (30) days from the said date no payment is made, all stocks covered by said
subscription shall thereupon become delinquent and shall be subject to sale as hereinafter
provided, unless the board of directors orders otherwise.
7.2.10.4 Sale of delinquent shares

EFFECT OF DELINQUENCY
General Rule: the stockholder thereof immediately loses the right to vote and be voted upon or
represented in any stockholders meeting as well as all the rights pertaining to a stockholder
Exceptions: the right to receive dividends:
1. Cash dividend - shall first be applied to the unpaid balance on his subscription plus cost
and expenses; while
2. Stock dividends - shall be withheld until his unpaid subscription is paid in full.
DELINQUENCY SALE (one of the board action):
1. Amount to be paid includes:
a. The balance due on each subscription
b. All accrued interest
c. Costs of advertisement
d. Expenses of sale
2. Bids: shall all be for the amount due above and shall differ only on the number of shares
that the bidders are willing to accept in exchange of the said amount.
3. Highest Bidder: shall be the bid made for the least number of shares in exchange for the
total amount due.
4. Effect of Delinquency Sale: 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.
The remaining shares, if any, shall be credited in favor of the delinquent stockholder who
shall likewise be entitled to the issuance of a certificate of stock covering such shares.
5. No bidder: Should there be no bidder at the public auction, the corporation may bid for the
same, and the total amount due shall be credited as paid in full in the books of the
corporation. Title to all the shares of stock covered by the subscription shall be vested in
the corporation as treasury shares
7.2.10.5 Alienation of shares

RIGHT TO TRANSFER SHARES OF STOCK: may not be unreasonably restricted prohibited.
In Padgett vs. Bobcock & Templeton and Fleischer vs. Botica Nolasco, the SC held that every owner
of corporate shares has the same uncontrollable right to alienate them and is under no obligation

from selling them at his sacrifice and for the welfare and benefit of the corporation and other
stockholders. But while unreasonable restrictions may not be allowed, the right to transfer may
be “regulated” to give the corporation protection against colorable or fraudulent transfer or to
enable it to know who its stockholders are. Also, as a matter of policy, the SEC allows the grant
of “preferential rights” to existing stockholders and/or the corporation, giving them the first option
to purchase the shares of a selling stockholder within a reasonable period not exceeding thirty
days provided that the same is contained in the AOI and in all the stock certificates to be issued.
This is considered “reasonable” since it merely suspends the right to transfer within the period
specified.
OTHER RESTRICTIONS:
1. It is not valid, except as between the parties, until recorded in the books of the corporation;
2. Shares of stock against which the corporation holds any unpaid claim shall not be
transferrable in the books of the corporation. Unpaid claims, refer to claims arising from
unpaid subscription and not to any indebtedness which a stockholder may owe the
corporation such as monthly dues;
3. Restrictions required to be indicated in the AOI, bylaws and stock certificates of a close
corporation;
4. Restrictions imposed by special law, such as the Public Service Act requiring the approval
of the government agency concerned if it will vest unto the transferee 40% of the capital
of the public service company;
5. Sale to aliens in violation of maximum ownership of shares under the Nationalization
Laws; and
6. Those covered by reasonable agreement of the parties.
TRANSFER: as used in the Corporation Code, refers to absolute and unconditional transfer to
warrant registration in the books of the corporation in order to bind the latter and other third
persons.
7.2.10.6 Corporate books and records

7.2.10.6.1 Records to be kept at principal office
THE FOLLOWING SHALL BE KEPT AND MAINTAINED BY THE CORPORATION:

1. Records of all business transactions which include, among others, (1) journals, (2)
ledger, (3) contracts, (4) vouchers and receipts, (5) financial statements and other
books of accounts, (6) income tax returns, and (7) voting trust agreements - which
must be kept and carefully preserved at its principal office;
2. Minutes of all meetings of stockholders or members and of the directors or
trustees setting forth in detail (1) the date, time and place of meeting, (2) how
authorized, (3) the notice given, (4) whether the same be regular or special, and
if special, the purpose thereof shall be specified, (5) those present and absent,
and (6) every act done or ordered done thereat - which must likewise be kept at
the principal office of the said corporation; and
3. Stock and Transfer Book showing the (1) names of the stockholders, (2) the
amount paid or unpaid on all stocks for which the subscription has been made,
(3) a statement of every alienation, sale or transfer of stock made, if any (4) the
date thereof, and (5) by whom and to whom - which must also be kept at the
principal office of the corporation or in the office of its stock transfer agent.
STOCK AND TRANSFER AGENT: is the person who records every movement of the shares
by the minute or by the hour.
NON-STOCK CORPORATIONS: can also have a stock and transfer agent for purposes of
the club share-membership.
7.2.10.6.2 Right to inspect corporate records

INSPECTION & COPIES: These books are subject to inspection by any of the directors,
trustees, stockholders or members of the corporation at reasonable hours on business
days and a copy of excerpts of said records may be demanded.

7.2.10.6.3 Effect of refusal to inspect corporate records
REMEDIES OF STOCKHOLDERS UNJUSTIFIABLY REFUSED THE RIGHT TO INSPECT THE
CORPORATE BOOKS: (MDC)
1. Mandamus. In such event, the corporate secretary shall be included as a party
respondent since he is customarily charged with the custody of all documents or
records of the corporation and against whom personal order of the court would
be made;
2. Damages either against the corporation or the responsible officer who refused
the inspection; or
3. Criminal complaint for violation of his right to inspect and copy excerpts of all
business transactions and minutes of meetings. The officer or agent who refused
the examination or copying thereof, shall be guilty and liable of an offense
punishable under Sec. 144 of the Code. Sec. 144 imposes a penalty of a fine of not
less than P1,000 but not more than P10,000 or an imprisonment for not less than
30 days but not more than 5 years, or both, at the discretion of the court. If the
refusal is pursuant to a resolution or order of the board, the liability shall be
imposed upon the directors/trustees who voted for such refusal.
7.2.11 Dissolution and liquidation

DISSOLUTION is the extinguishment of the corporate franchise and the termination of corporate
existence.
When a corporation is dissolved, it ceases to be a juridical entity and can no longer pursue the
business for which it was incorporated. It will nevertheless continue as a body corporate for
another period of three years from the time it is dissolved but only for the purpose of winding up
its affairs and the liquidation of its assets.
LIQUIDATION AND WINDING UP

1. The assets are collected and sold;
2. The rights and claims of creditors are settled;
3. The remaining assets, if any, are distributed to the stockholders.
Liquidation and winding-up may be done by: (1) the corporation itself through the BOD, (2) a trustee
appointed by the corporation, (2) by appointment of a receiver
7.2.11.1 Modes of dissolution

MODES OF VOLUNTARY DISSOLUTION:
1. Voluntary Dissolution where no creditors are affected (Sec. 118);
a. A meeting must be held on the call of directors or trustees;
b. Notice of the meeting should be given to the stockholders by personal
delivery or registered mail at least twenty (20) days prior to the meeting;
c. The notice of meeting should also be published for once in a newspaper
published in the principal place of business, otherwise, in a newspaper of
general circulation;
d. The resolution to dissolve must be approved by the majority of the
directors/trustees and approved by the stockholders representing at
least majority of the outstanding capital stock or majority of members;
e. A verified request for dissolution is then filed with the SEC;
f. Submission of the following documents;
g. The SEC shall, within 15 days from the receipt of the verified request for
dissolution, and in the absence of any withdrawal within said period,
approve the request and issue the certificate of dissolution, upon which
the dissolution will take effect. (Sec. 134)
2. Voluntary Dissolution where creditors are affected (Sec. 119);
a. A verified petition for dissolution shall be filed with the SEC;
b. The petition shall be:
● signed by a majority of the corporation’s board of directors or
trustees;
● verified by its president or secretary or one of its directors or
trustees;

● shall set forth all claims and demands against it;
● that its dissolution was resolved upon by the affirmative vote of
the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or at least two-thirds (2/3) of the
members at a meeting of its stockholders or members called for
that purpose.
c. The petition shall likewise state:
● the reason for the dissolution;
● the form, manner, and time when the notices were given;
● the date, place, and time of the meeting in which the vote was
made.
d. The corporation shall submit to the SEC the following:
● a copy of the resolution authorizing the dissolution, certified by a
majority of the board of directors or trustees and countersigned
by the secretary of the corporation; and
● list of all its creditors.
e. By an order reciting the purpose of the petition, the SEC shall fix a
deadline for filing objections to the petition (shall not be less than thirty
(30) days nor more than sixty (60) days after the entry of the order);
f. Publication: Before such the deadline, a copy of the order shall be
published at least once a week for three (3) consecutive weeks in a
newspaper of general circulation published in the municipality or city
where the principal office of the corporation is situated, otherwise, in a
newspaper of general circulation in the Philippines;
g. Posting: A similar copy shall be posted for three (3) consecutive weeks in
three (3) public places in such municipality or city.
h. After the expiration of the time to file objections, a hearing shall be
conducted upon prior five (5) day notice to hear the objections;
i. Judgment shall be rendered dissolving the corporation and directing the
disposition of assets; the judgment may include appointment of a receiver;
j. The dissolution shall take effect only upon issuance by the SEC of a
certificate of dissolution* (Sec. 135)
3. Shortening of corporate term (Sec. 120).
a. A private corporation may extend or shorten its term by amending the the
articles of incorporation when approved by a majority vote of the board
of directors or trustees, and ratified at a meeting by the stockholders or
members representing at least two-thirds (2/3) of the outstanding capital
stock or of its members;
b. Written notice of the proposed action and the time and place of the
meeting shall be sent to stockholders or members;
c. In case of extension of corporate term, a dissenting stockholder may
exercise the right of appraisal under the conditions provided in this Code.
(Sec. 137)
7.2.11.2 Methods of liquidation

2 WAYS OF DISSOLUTION:
1. VOLUNTARY - wilfully
a. Where no creditors are affected;
b. Where creditors are affected
c. By shortening the corporate term
2. INVOLUNTARY - without the intention
Grounds for dissolution of the corporation:
a. Non-use of corporate charter;
● If a corporation does not formally organize and commence its
business within 5 years.
b. Continuous inoperation of a corporation;
● A corporation has commenced its business but subsequently
becomes inoperative for a period of at least 5 consecutive years.

c. Upon receipt of a lawful court order dissolving the corporation;
d. Upon finding by final judgment that the corporation procured its
incorporation through fraud;
e. Upon finding by final judgment that the corporation:
1. Was created for the purpose of committing, concealing or aiding
the SEC of securities violations, smuggling, tax evasion, money
laundering, or graft and corrupt practices;
2. Committed or aided in the SEC of securities violations, smuggling,
tax evasion, money laundering, or graft and corrupt practices, and
its stockholders knew of the same; and
3. Repeatedly and knowingly tolerated the SEC of graft and corrupt
practices or other fraudulent or illegal acts by its directors,
trustees, officers, or employees. (Sec. 138)
7.2.12 Other corporations

7.2.12.1 Non-stock corporations
One where no part of its income is distributable as dividends to its members, trustees, or officers,
except upon dissolution. Any profit which a non-stock corporation may obtain as an incident to its
operations shall, whenever necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized.
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific provisions pertaining to non-stock
corporations.
NONSTOCK CORPORATIONS AS DISTINGUISHED TO STOCK CORPORATION
STOCK CORPORATION NON-STOCK CORPORATION
Purpose Generally, for profit Primarily organized for charitable,

religious, educational, professional,
cultural, scientific, social, civic service, or
similar purposes, like trade, industry,
agricultural and like chambers or any
combination thereof (can be for profit)
Distribution of dividend Authorized Not authorized, upon dissolution only
Term of office of the 1 year (can continue as 3 years

directors/ trustees hold-over directors) until 5 years— for Educational Institutions
their successor is elected
and qualified
Voting Cumulative Straight voting unless cumulative voting is

authorized under the by-laws or AOI
Manner of voting Either in person or by "the by-laws may xxx authorize voting
proxy through remote communication and/or in
absentia."
Transferability of interest Transferable, unless Membership is personal and

prohibited nontransferable, unless the AOI or by-
laws provide otherwise
Ownership of director Ownership of director Member
*Independent trustees are not required to

be a member

Place of meeting of Principal Office unless not Any place in the Philippines
stockholders/ members practicable, it will be in the
city or municipality
7.2.12.2 Educational corporations

Trustees of educational institutions organized as nonstock corporations shall not be less than five
(5) nor more than fifteen (15): Provided, That the number of trustees shall be in multiples of five
(5).
TERM: 1/5 of their number shall expire every year.
FILLING UP THE VACANCIES: Trustees elected thereafter to fill vacancies caused by expiration of
term shall hold office for five (5) years.
7.2.12.3 Religious corporations

Religious corporations may be incorporated by one (1) or more persons. Such corporations may
be classified into corporations sole and religious societies.
For the purpose of administering and managing, as trustee, the affairs, property and temporalities
of any religious denomination, sect or church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi, or other presiding elder of such religious denomination,
sect, or church.
7.2.12.4 One person corporations

One formed by a natural person, a trust or an estate, who is the sole stockholder thereof.
Corporate Name: must contain "OPC".
Not Applicable to OPC:
(1) Authorized Capital Stock (all shares are held by one),
(2) By-Laws,
(3) Minutes of the Meetings of the Board of Directors (in lieu of which shall be the resolutions
recorded in a Minutes Book)
Not allowed to incorporate as an OPC:
1. Banks, quasi-banks, pre-need, trust company, insurance companies (trusts can be OPC,
trust company ang bawal)
2. Public and publicly-listed companies
3. Non-chartered GOCCs
4. Natural persons for the purpose of exercising their profession.
Articles of Incorporation shall be the same as an ordinary corporation with the following additional
provisions:
1. If the single stockholder is a trust or an estate, the name, nationality, and residence of the
trustee, administrator, executor, guardian, conservator, custodian, or other person
exercising fiduciary duties together with the proof of such authority to act on behalf of the
trust or estate; and
2. Name, nationality, residence of the nominee and alternate nominee, and the extent,
coverage and limitation of the authority.
Corporate Officers: The sole stockholder shall automatically be the sole director and the
President. Within 15 days from the issuance of its certificate of incorporation, an OPC shall appoint
a treasurer, corporate secretary, and other officers as it may deem necessary, and notify the SEC
thereof within 5 days from appointment.
Other positions of the president/sole stockholder:
1. Corporate Secretary: not allowed
2. Treasurer: allowed provided he shall give a bond to the SEC in such a sum as may be
required and a written undertaking to faithfully administer the OPC's funds to be received
as treasurer, and to disburse and invest the same according to the Articles as approved
by the SEC.
Corporate Secretary of OPC: In addition to the functions designated by the OPC, the corporate
secretary shall (will show why the President sole stockholder cannot be a Corp. Secretary):
a. Be responsible for maintaining the minutes book and/or records of the corporation;

b. Notify the nominee or alternate nominee of the death or incapacity of the single
stockholder, which notice shall be given no later than 5 days from such occurrence;
c. Notify the SEC of the death of the single stockholder within 5 days from such occurrence
and stating in such notice the names. residence addresses, and contact details of all
known legal heirs; and
d. Call the nominee or alternate nominee and the known legal heirs to a meeting and advise
the legal heirs with regard to, among others, the election of a new director, amendment
of the articles of incorporation, and other ancillary and/or consequential matters.
Nominee and Alternate Nominee: The single stockholder shall designate a nominee and an
alternate nominee who shall, in the event of the single stockholder's death or incapacity, take the
place of the single stockholder as director and shall manage the corporation's affairs.
The articles of incorporation shall state the names, residence addresses and contact details of the
nominee and alternate nominee, as well as the extent and limitations of their authority in managing
the affairs of the OPC.
The written consent of the nominee and alternate nominee shall be attached to the application for
incorporation. Such consent may be withdrawn in writing any time before the death or incapacity
of the single stockholder.
Term of the Nominee: When the incapacity of the single stockholder is temporary, the nominee
shall sit as director and manage the affairs of the OPC until the stockholder, by self-determination,
regains the capacity to assume such duties.
In case of death or permanent incapacity of the single stockholder, the nominee shall sit as
director and manage the affairs of the OPC until the legal heirs of the single stockholder have
been lawfully determined, and the heirs have designated one of them or have agreed that the
estate shall be the single stockholder of the OPC.
The alternate nominee shall sit as director and manage the OPC in case of the nominee's inability,
incapacity, death, or Ai refusal to discharge the functions as director and manager of the
corporation, and only for the same term and under the same conditions applicable to the nominee.
Change of Nominee: The single stockholder may, at any time, change its nominee and alternate
nominee by submitting to .4. the SEC the names of the new nominees and their corresponding
written consent. For this purpose, the articles of incorporation need not be amended.
Liability of Single Stockholder: Generally, limited up to his capital contribution. A sole shareholder
claiming limited liability has the burden of affirmatively showing that the corporation was
adequately financed.
Where the single stockholder cannot prove that the property of the OPC is independent of the
stockholder's personal property, the stockholder shall be jointly and severally liable for the debts
and other liabilities of the OPC.
The principles of piercing the corporate veil applies with equal force to OPC as with other
corporations.
Conversion from Ordinary Corporation to OPC: When a single stockholder acquires all the stocks
of an ordinary stock corporation, the latter may apply for conversion into an OPC, subject to the
submission of such documents as the SEC may require.
If the application for conversion is approved, the Commission shall issue certificate of filing of
amended articles of incorporation reflecting the conversion. The OPC converted from an ordinary
stock corporation shall succeed the latter and be legally responsible for all the latter's outstanding
liabilities as of the date of conversion.
Conversion from OPC to Ordinary Corporation: An OPC may be converted into an ordinary stock
corporation after due notice to the SEC (within 60 days from occurrence) of such fact and of the

circumstances leading to the conversion, and after compliance with all other requirements for
stock corporations under the RCC. If all requirements have been complied with, the Commission
shall issue an amended certificate of incorporation reflecting the conversion.
In case of death of the single stockholder, the nominee or alternate nominee shall transfer the
shares to the duly designated legal heir or estate within 7 days from receipt of either an affidavit
of heirship or self adjudication executed by a sole heir, or any other legal document declaring the
legal heirs of the single stockholder and notify the SEC of the transfer. Within 60 days from the
transfer of the shares, the legal heirs shall notify the SEC of their decision to either wind up and
dissolve the OPC or convert it into an ordinary stock corporation.
The ordinary stock corporation converted from an OPC shall succeed the latter and be legally
responsible for all the latter's outstanding liabilities as of the date of conversion.
7.2.12.5 Foreign corporations

One formed, organized or existing under any laws other than those of the Philippines. (for tax and
operation of PH law purposes)
7.2.12.5.1 Bases of authority over foreign corporations

Incorporation Test: is applied in determining whether a corporation is domestic or foreign.
If it is incorporated under Philippine laws, it is deemed a domestic corporation. If it is
incorporated in another state, it is a foreign corporation, irrespective of the nationality of
its stockholders. (the test PH uses)
CONTROL TEST OR LIBERAL RULE VS THE GRANDFATHER RULE
CONTROL TEST GRANDFATHER RULE
Control Test - used to determine corporate Grandfather Rule/Test - a method of determining

nationality for purposes of applying laws, e.g., the nationality of a corporation which in turn is
prohibition to acquire lands applicable to owned by another corporation by breaking down
corporations more than 40% of which is owned by the entity structure of the shareholders of the
non-Filipinos. corporation.
- there is no need to further trace the ownership - The true Filipino ownership is traced all the way
of the 60% (or more) Filipino stockholdings of the to the individual stockholders of the corporation
Investing Corporation since a corporation which is (A) owning shares in another corporation (B), by
at least 60% Filipino-owned is considered as multiplying the Filipino ownership of the first
Filipino corporation (A) to the corresponding ownership of
the other corporation (B). (equity owned by Filipino
citizens = Filipino ownership of A x Filipino
ownership of B)
- It applies to nationalized activities or those which
require whole or partial Filipino ownership.
7.2.12.5.2 Necessity of a license to do business

RESIDENT AGENT: As a condition precedent to the grant of license to do or transact
business in the Philippines, the foreign corporation is required to designate its resident
agent on whom summons and other legal processes may be served in all actions or legal
proceedings against such corporation.
- A resident agent corporation for a foreign corporation is now required that it is of sound
financial standing and must show proof that it is in good standing as certified by the SEC.
LICENSE REQUIREMENT: A foreign corporation must secure the necessary license before
it can transact or do business in the Philippines. What constitutes "doing business": Doing
business in the Philippines may be determined using the following tests:
1. Continuity test — doing business implies a continuity of commercial dealings and
arrangements and contemplates to some extent the performance of acts or works

or the exercise of some functions normally incident to and in progressive
prosecution of the purpose and object of its organization;
2. Substance test — a foreign corporation is doing business in the country if it is
continuing the body or substance of the enterprise of business for which it was
organized
3. Contract test — actual performance of specific commercial acts within the
territory of the Philippines (pursuant to a contract)
7.2.12.5.3 Personality to sue

GENERAL RULE:
No foreign corporation transacting business in the Philippines without a license, or its
successor or assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines.
7.2.12.5.4 Suability of foreign corporations

DOING BUSINESS WITHOUT A LICENSE: a foreign corporation shall NOT be permitted to
maintain or intervene in any action, suit or proceeding in any court or administrative
agency of the Philippines; but such corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid cause of action recognized under
Philippine laws.
"It is not the lack of required license but doing business without a license which bars a
foreign corporation from access to our courts" (Universal Shipping vs. IAC)
7.2.12.5.5 Instances when unlicensed foreign corporations may be allowed to sue (isolated
transactions)
The Implementing Rules and Regulations of the Foreign Investments Act thus enumerate
specific business acts that are “isolated” in nature, to wit:
1. Mere investment as a shareholder by a foreign entity in domestic corporations
duly registered to do business, and/or exercise of rights as such investor
(regardless of %, unless you participate in management), nor
2. Having a nominee director or officer to represent its interest in such corporation;
nor
3. Appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account.
EXCEPTIONS ON DOING BUSINESS WITHOUT A LICENSE:
1. Foreign corporations can sue before the Philippine Courts if the act or transaction
involved is an "isolated transaction" or the corporation is not seeking to enforce
any legal or contractual rights arising from, or growing out of, any business which
it has transacted in the Philippines (Western Equipment Supply vs. Reyes)
2. Neither is a license required before a foreign corporation may sue before the
forum if the purpose of the suit is to protect its trademark, trade name, corporate
name, reputation or goodwill; (Western Equipment Supply vs. Reyes)
3. Or where it is based on a violation of the Revised Penal Code (Le Chemise Lacoste,
SA vs. Fernandez);
4. Or merely defending a suit filed against it (Time, Inc. vs. Reyes)
5. Or where a party is estopped to challenge the personality of the corporation by
entering into a contract with it (Communications Materials and Design, Inc. vs. CA
and ITEC)
7.2.12.5.6 Grounds for revocation of license

Grounds for revocation of license:
(a) Failure to file its annual report or pay any fees as required by this Code;
(b) Failure to appoint and maintain a resident agent in the Philippines as required by
this Title;
(c) Failure, after change of its resident agent or address, to submit to the Commission
a statement of such change as required by this Title;

(d) Failure to submit to the Commission an authenticated copy of any amendment to
its articles of incorporation or bylaws or of any articles of merger or consolidation
within the time prescribed by this Title;
(e) A misrepresentation of any material matter in any application, report, affidavit or
other document submitted by such corporation pursuant to this Title;
(f) Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully
due to the Philippine Government or any of its agencies or political subdivisions;
(g) Transacting business in the Philippines outside of the purpose or purposes for
which such corporation is authorized under its license;
(h) Transacting business in the Philippines as agent of or acting on behalf of any
foreign corporation or entity not duly licensed to do business in the Philippines;
or
(i) Any other ground as would render it unfit to transact business in the Philippines.
7.2.13 Merger and consolidation

7.2.13.1 Definition and concept
MERGER CONSOLIDATION
Merger is when a corporation absorbs the other Consolidation – Two or more corporations unite,
and remains in existing, the others are dissolved giving rise to a new corporate body and dissolving
the constituent corporations which cease to exist
as separate corporation
Merger – Two or more corporations unite, one Consolidation is the union of two or more existing
corporation which retains its corporate existence corporations. A ration is created, and
absorbing or merging in itself the other which consolidation corporations are extinguished.
disappears as a separate corporation.
Example: Example:
Suppose Company A and Company B merge into a Companies A and B join together to become a new
single organization. To do this, Company A, called business, Company C. The new business is known
the survivor company, assumes all the assets and as the successor company. Some state laws use
liabilities of Company B, which ceases to exist. The the term “merger” for consolidation too.
survivor company keeps the Company A name.
7.2.13.2 Distinguish: constituent and consolidated corporation
CONSTITUENT CORPORATIONS CONSOLIDATED CORPORATION
Refers to the absorbed and absorbing The new single formed corporation
corporations in case of merger; and to two or more
corporate bodies desiring to unite into a new
corporation in the case of consolidation.
If B and C agreed to form a new corporation, A Company, which will absorb both business, and all of B's
and C's assets, properties, rights and liabilities are transferred to A which will continue their combined
business while B and C will be dissolved, a consolidation takes place. (B + C = A)
Here, B and C are known as the constituent corporations, while A, the newly formed corporation is
known as the consolidated corporation. In effect, in a consolidation, the constituent corporations are all
dissolved, while in a merger, the absorbing or surviving corporation is not, only the absorbed.
7.2.13.2 Plan of merger or consolidation

Plan of Merger or Consolidation contains:
1. Name of corporations involved
2. Terms and mode of carrying out
3. Statement of changes, if any, in the present articles of surviving the corporation, or the
articles of the new corporation to be formed in the case of consolidation.
4. Such other provisions with respect to the proposal merger and consolidation are deemed
necessary or desirable.
7.2.13.3 Articles of merger or consolidation

Contents of the Articles of Merger or Consolidation
An article of merger or Consolidation is a document to be signed by the president or vice president
of each corporation and signed by their secretary or assistant secretary setting forth
1. The plan of the merger or the plan of consolidation
2. As to stock corporations the articles must state the number of outstanding capital stock,
and if for non-stock corporations, the number of members to be admitted in the resulting
combined corporation.
3. As to each corporation, the number of shares or members voting for and against such
pain, respectively
7.2.13.4 Procedure, effectivity, limitations and effects

REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR CONSOLIDATION
1. The BOD/T of each constituent corporations shall approve a plan of merger or
consolidation setting for the matters required in Sec. 76;
2. Approval of the plan by the stockholders representing 2/3 outstanding capital stock or 2/3
of the member in non-stock corporations of each of such corporations at separate
corporate meetings called for the purpose;
3. Prior notice of such meeting + a copy or summary of the plan of merger or consolidation
shall be given to all stockholders or members in the same manner as in regular/special
meetings of stockholders (from 2 weeks, either personally or by registered mail stating
the purpose thereof);
4. Execution of the articles of merger or consolidation by each constituent corporations to
be signed by the president or vice-president and certified by the corporate secretary or
assistant secretary setting forth the matters required in Sec. 78;
5. Submission of the articles of merger or consolidation to the SEC subject to the
requirement of Sec. 79 that if it involve corporations under direct supervision of any other
government agency or governed by special laws the favorable recommendation of the
government agency concerned shall first be secured; and
6. Issuance of the certificate of merger or consolidation by the SEC at which time the merger
or consolidation shall be effective. If the plan, however, is believed to be contrary to law,
the SEC shall set a hearing to give the corporations concerned an opportunity to be heard
upon notice and thereafter, the Commission shall proceed as provided in the Code.
Effectivity of Merger or Consolidation: Upon issuance by the SEC of the certificate of merger and
consolidation.
Effects of Merger or Consolidation
1. The constituent corporations shall become a single corporation
2. The separate existence of the constituents shall cease except that of the surviving
corporation (in merger) or the consolidated corporation (in consolidation)
3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities, franchise of each of the constituent corporations.
4. All property, real or personal, and all receivables due on whatever choses in action, and
all the other interest thereof, or belonging to, or due to each constituent corporation, shall
be taken and deemed transferred to and vested in such surviving or consolidated
corporation without further act or deed.
5. The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations in the same manner as
if the surviving or consolidated corporation and itself incurred such liabilities or
obligations.

7.2.14 Investigations, offenses, and penalties
7.2.14.1 Authority of Commissioner
Authority of the SEC
● The SEC may investigate an alleged violation of the RCC, or of its rule, regulation or order.
● The SEC may publish its findings, orders, opinions, advisories or information concerning
any such violation, as may be relevant to the general public or to the parties
concerned,subject to the provision of the data privacy act of 2012 and other pertinent laws.
● The Sec shall give reasonable notice to and coordinate with appropriate regulatory agency
prior to any such publication involving companies under their special regulation
jurisdiction
● The SEC, through its designated officer may administer oaths and affirmation, issues of
subpoena and subpoena duces tecum, takes testimony in any inquiry or investigation, and
may perform other acts necessary to the preceding or to the investigation.
Subpoena - a writ ordering a person to attend a court.
Subpoena duces tecum - a writ ordering a person to attend a court and bring relevant
documents.
● The SEC may issue cease or desist orders.
A cease and desist is a written notice demanding that the recipient immediately stop an
illegal or allegedly illegal activity.
a. Whenever it has reasonable basis to believe that a person has violated or is about
to violate the rcc a rule regulation or order of the sec.
b. SEC may also issue CODs ex parte to enjoin an act or practice which is the length
or can be reasonably expected to cause significant, imminent, and irreparable
danger or injury to public safety or welfare.
VALIDITY OF EX PARTE: It is valid for a maximum period of twenty (20)days, without prejudice to
the order being made permanent after due notice and hearing.
What happens after it becomes a permanent CDO?
*The SEC may proceed administratively against such person and/or transmit evidence to the
Department of Justice for preliminary investigation or criminal prosecution/or initiate criminal
prosecution for any violation of this RCC, rule or regulation
7.2.14.1.2 Contempt
CONTEMPT POWERS
● Any person who, without justifiable cause, fails or refuses to comply with any
lawful order, decision, or subpoena issued by the SEC shall, after due notice and
hearing, be held in contempt and fined in an amount not exceeding Thirty thousand
pesos (30,000).
– In other words when SEC held and contempt the person, he/she is liable
to pay 30,000 pesos.
● When the refusal amounts to clear and open defiance of the Commission's order,
decision, or subpoena, the Commission may impose a daily fine of 1,000 pesos
until the order, decision, or subpoena complied with.
7.2.14.2 Sanctions for violations

7.2.14.2.1 Administrative sanctions
Administrative Sanctions: If, after you notice and hearing, the SEC finds that any provision
of the RCC, rules are regulations, any of the SEC's order has been violated, the Sec may
impose any or all of the following function, taking into consideration the extent of
participation, nature, effects,frequency and seriousness of the violation:
a. Imposition fine ranging from five thousand pesos(5,000) to Two million

pesos (2,000,000), and not more than One thousand pesos(1,000) for each
day of continuing violation but in no case to exceed Two million pesos
(2,000,000)
b. Issuance of a permit cease and desist order;
c. Suspension or revocation of the certification of incorporation;and

d. Dissolution of the corporation and forfeiture of its asset under the
condition in Title XIV of the RCC.
7.2.14.2.2 Prohibited Acts

Prohibited Acts
1. Unauthorized use of Corporate Name ( Sec. 159, RCC)
PENALTY: Ranging from Ten thousand pesos (10,000) to Two hundred thousand
pesos (200,000)
2. Violation of this Disqualification provision (SEC. 160, RCC); When, despite the
knowledge of existence of the ground for disqualification as provided in Section
26 of this RCC, a director, trustee, or officer willfully holds office, or willfully
conceal such disqualification such director,trustees, or officers.
pesos (200,000) and permanently disqualified from being a director, trustee or
officer of any corporation.
When it is injurious or detrimental to the public, the penalty shall be fine ranging
from Twenty thousand pesos (20,000) to Four hundred thousand pesos (400,000).
3. Violation of Duty to Maintain Records, to Allow their Inspection or Reproduction
(Sec 161, RCC): The unjustified failure or refusal by the corporation, or by those
responsible for keeping and maintaining corporate record shall be punished with
fine.
pesos (200,000) for the seriousness of the violation and its implications.
from Twenty thousand pesos (20,000) to Four hundred thousand pesos (400,000).
4. Willful Certification of Incomplete, Inaccurate, False, or Misleading Statement
Reports (Sec 162, RCC): any person who willfully certifies a report required under
the RCC, knowing that the same contents incomplete, inaccurate, false, or
misleading information or statements.
PENALTY: Ranging from Twenty Thousand pesos (20,000) to Two hundred
thousand pesos (200,000).
from Forty thousand pesos (40,000) to Four hundred thousand pesos (400,000).
5. Independent Auditor Collusion (Sec 163,RCC): An independent auditor who, in
collusion with a corporation's director or representative, certifies the
corporation's financial statements despite its incompleteness or in accuracy, its
failure to give a fair and accurate presentation of the corporation's condition, or
despite containing false or misleading statements.
PENALTY: Ranging from Eighty thousand pesos (80,000) to Five hundred thousand
pesos (500,000)
When the statement is fraudulent, or has the effect of causing injury to the general
public, the auditor or responsible officer may be punished with a fine ranging from
One hundred thousand pesos (100,000) to Six hundred thousand pesos (600,000).
6. Obtaining Corporate Registration Through Fraud (Sec 164,RCC): Those responsible
for formation of a corporation through fraud, or who assisted directly or indirectly
therein.
PENALTY: Ranging from Two hundred thousand pesos (200,000) to Two million
pesos (2,000,000)
from Four hundred thousand pesos (400,000) to Five million pesos (5,000,000).
7. Fraudulent Conduct of Business (Sec 165, RCC)
PENALTY: Ranging from Two hundred thousand pesos (200,000) to Two million
pesos (2,000,000)
from Four hundred thousand pesos (400,000) to Five million pesos (5,000,000).
8. Acting as Intermediaries for Graft and Corrupt Practices (Sec 166, RCC): A
corporation used for fraud or for committing other concealing graft and corrupt
practices as defined under pertinent statutes.

PENALTY: Ranging from One hundred thousand pesos (100,000) to Five million
pesos (5,000,000).
● There is a prima facie evidence of corporate liability under this section when there
is a finding that any of its directors, officers, employees, agents, or representative
are engaged in graft and corruption practices, the corporation's failure to install:
a. safeguards for the transparent and law for delivery of services; and
b. policies, code of ethics, and procedures against graft and corruption.
9. Engaging Intermediaries for Graft and Corruption Practices (Sec 167, RCC): A
corporation that appoints an intermediary who engages in graft and corrupt
practices for the corporation's benefit or interest.
PENALTY: Ranging from One hundred thousand pesos (100,000) to One million
pesos (1,000,000).
10. Tolerating Graft and Corruption Practices (Sec 168, RCC): A director, trustees or
officers who knowingly fails sanction, report, or file the appropriate action with a
proper agencies, allows or tolerates the graft and corruption practices or
fraudulent act committed by the corporations directors, trustees officers or
employees.
PENALTY: Ranging from Five hundred thousand pesos (500,000) to One million
pesos (1,000,000).
11. Retaliation Against Whistleblowers (Sec 169, RCC)
A whistleblower refers to any person who provides truthful information relating
to the commission or possible commission of any offense or violation under the
RCC.
Any person who knowingly and with the intent to retaliate, commits acts
detrimental to a whistleblower such as interfering with the lawful employment or
livelihood of the whistleblower.
PENALTY: Ranging from One hundred thousand pesos (100,000) to One million
pesos (1,000,000).
12. Other Violations of the RCC (Sec 170, RCC)
Violation of any of the provisions of this code or its amendment not otherwise
specifically penalized therein.
PENALTY: Not less than Ten thousand pesos (10,000) but not more than One
million pesos (1,000,000).
If the violation is committed by a corporation, the same may, after notice and
hearing, be dissolved in appropriate proceeding before the SEC
● Such dissolution shall not preclude the institution of appropriate action
against the director, trustee, or officer of the corporation responsible for
said violation
● nothing in this section shall be construed to repeal the other causes for
dissolution of a corporation provided in the RCC
Liability for any of the foregoing offenses shall be separate from any other
administrative, civil, or criminal liability under the RCC and other laws
7.2.14.3 Who are liable?

Liability of Directors, Trustees, Officers, or other Employees (Sec 171, RCC)
Every person has an insurable interest in the life and health:
(a) Of himself, of his spouse and of his children;
(b) Of any person on whom he depends wholly or in part for education or support, or
in whom he has a pecuniary interest;
(c) Of any person under a legal obligation to him for the payment of money. or
respecting property or services, of which death or illness might delay or prevent
the performance; and
(d) Of any person upon whose life any estate or interest vested in him depends.If the
offender is a corporation, the penalty may, at the discretion of the court, be
imposed upon such corporation and/or upon its directors, trustees, stockholders,
members, officers, or employees responsible for the violation or indispensable to
its commission.

Liability of Aiders and Abettors and Other Secondary Liability (Sec 172, RCC)
Anyone who shall aid, abet, counsel, command , induce or cause any violation of the RCC
or any rule regulation or order of the Sec shall be punished with a fine not exceeding not
imposed on the principal offenders, at the discretion of the court, after taking into account
their participation in the offense.
7.2.15 Corporate Governance – The purpose of it is to promote the developments of a strong corporate
governance culture and keep abreast with recent developments in corporate governance best practices.
7.2.15.1 Publicly-listed companies – Publicly listed companies shall cover only those companies
whose equity securities are listed in the Philippines Stock Exchange.
7.2.15.2 Public companies and registered issuers

Public company - refers to a company with assets of at least P50 million and having 200 or more
shareholders holding at least 100 shares of equity securities.
Registered Issuer - refers to company that (1) issues proprietary and/or non-proprietary
shares/certificates; (2) issues equity securities to the public that are not listed in an exchange;
or(3) issues debt securities to the public that are not required to be registered to the SEC, whether
are not listed in an exchange.
7.2.16 Securities – are shares, participation, or interest in a corporation or commercial enterprise or profit-
making venture and evidenced by a certificate, contract, instrument whether written or electronic in
character.
7.2.16.1 Kinds of securities
1. Equity Instruments- .Share of stocks, certificate of interest or participation in a profits
sharing agreement, certificates of deposit for a future subscription, proprietary or non-
proprietary membership certificate incorporations.
2. Investment instruments -investment contracts fractional undivided interest in oil gas or
other mineral rights.
3. Debt instruments - Bonds, Debentures, Notes or Evidence of Indebtedness or asset-
backed securities
4. Derivative - options and warrants
5. Trust instrument - certificates of assignment, certificate of participation, trust certificates,
voting trust certificates or similar instruments
6. Future - Other instrument as may in the future be determined by the SEC
7.2.16.2 Procedure for registration of securities

Procedure for Registration of Securities
1. Filing of SWORN REGISTRATION STATEMENTS containing the information of the SEC may
be required.
a. Signatories to registration statement: executive officer, principal operating
officer, principal financial officer, controller, principal accounting officer,
corporate secretary.
b. Written consent of the expert named as having certified any part of the
registration statement, whether necessary.
c. Where the registration statement includes shares to be solved by selling
shareholders, a written certification by such selling shareholders as the accuracy
of any part of the registration statement contributed to by such selling
shareholders also be filed.
2. PAYMENT off the filing fees which shall not exceed to 1/10 of 1% of the aggregate price at
which such securities are proposed to be offered
3. PUBLICATION of the notice of the filing of the registration statement into newspaper of
general circulation once for two consecutive weeks
4. within 45 days after the date of filing, or by such later date to which the issuer has
consented, the SEC shall give an ORDER declaring the registration statement effective or
rejecting it

5. PROSPECTUS under the oath that all requirements satisfied and all statements in
registration statement and in such prospectus are correct
7.2.16.3 Prohibition on fraud, manipulation and insider trading

Person Deemed as insider:
1. The issuer;
2. A director or officer or (person performing similar functions) of, or a person controlling
the issuer;
3. A person whose relationship or former relationship to the issuer gives him access to
material information about the issuer or the security that is not generally available to the
public.
4. A government employee, or director or officer of an exchange, clearing agency and/or
self-regulatory organization who has access to material information about an issuer or a
security that is not generally available to the public; or
5. A person who learns such information by a communication from any of thr foregoing
insiders.
Insider Trading: when an insider in possession of material non-public information buys or sells a
security. Exceptions: a person in possession of material non-public information can buy or sell
securities: 1) When he can prove that the information was not gained from an insider; 2) If the other
party is identified and that he: (1) Disclosed the information; or (2) Had reason to believe that the
other party is also in possession of the information.
Material Non-Public Information: Information that will affect the price of the security or would
influence a person in deciding whether to buy, sell, or hold a security which is not available to
the public.
Liability for disclosure: It shall be unlawful for any insider to communicate material nonpublic
information about the issuer or the security to any person who, by virtue of the communication,
becomes an insider, where the insider communicating the information knows or has reason
to believe that such person will likely buy or sell a security of the issuer whole in possession of
such information. This is regardless of whether the one to whom the communication was given
actually traded on the securities
Unlawful Acts, Directly or Indirectly:

1. To create a false or misleading appearance of active trading in any listed security traded
in an exchange or any other trading market;
2. To effect, alone or with others, a series of transaction in securities that:
● Raises their price to induce the purchase of a security
● Depresses their price to induce the purchase of a security
● Creates active trading to induce such a purchase or sale to manicure save devices
3. To circulate or disseminate information that the price of any securities listed in in
exchange will or is likely to rise or fall because of manipulative market operations
4. To make false or misleading statements with respect to any material facts, which he knew
or had reasonable grounds to believe was so false or misleading, for the purpose of
inducing the purchase or sale of any security listed or traded in an exchange.
5. To effect any series of transactions for the purchase and/or sale of any security traded in
an Exchange for the purpose of pegging, fixing or stabilizing the price of such security,
unless otherwise allowed by this code.
Prohibited Conducts:
1. Painting the Tape - engaging in a series of transactions in securities that are reported
publicity to give the impression of activity or price movement in a security.
2. Marking the Close - buying and selling securities at the close of the market in an effort to
alter the closing price of the security.
3. Improper Matched Orders - engaging in a transaction where both the buy and sell orders
are entered at the same time with the same price and quantity by different but colluding
parties.

4. Height and Dump - engaging in buying activity at increasingly higher prices in then selling
securities in the market at the higher prices.
5. Wash Sales - engaging in transactions in which there is no genuine change in actual
ownership of a security.
6. Squeezing The Float - taking advantage of a shortage of security in the market by
controlling the demand size and exploiting market congestion during such shortages in a
way as to create artificial prices.
7. Short and Distort. - Selling at lower prices and then buying at such lower prices.
8. Disseminating false or misleading market information through media,including the
internet, or any other means to move the price of a security in a direction that is favorable
to a position held or a transaction; and
9. Other types of prohibited conduct and/or manipulative practices which
include, among others, the creation of temporary funds for the purpose
of engaging in other manipulative practices.
7.2.16.4 Protection of shareholders interest
7.2.17 Securities Regulation Code (SRC) Rule 68

Securities Regulation Code
Purpose is to establish a socially conscious free market that regulates itself, encourage the widest
participation of ownership in an enterprise, enhance the democratization of wealth, promote the
development of the capital market, protect investors, ensure full and timely disclosure of material
information, and/or minimize if not eliminate insider trading and other fraudulent or manipulative
devices and practices which create distortions in the free market.
7.3 Insurance
RA 10607 – THE INSURANCE CODE
AN ACT STRENGTHENING THE INSURANCE INDUSTRY
7.3.1 Concept of insurance

An agreement whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event.
7.3.2 Elements of an insurance contract

DISTINGUISHING ELEMENTS OF AN INSURANCE CONTRACT
1. The insured possesses an insurable interest susceptible of pecuniary estimation;
2. The insured is subject to a risk of loss through the destruction or impairment of that
interest by the happening of designated perils;
3. The insurer assumes that risk of loss;
4. Such assumption is part of a general scheme to distribute actual losses among a large
group or substantial number of persons bearing somewhat similar risks; and
5. The insured makes a ratable contribution (premium) to a general insurance fund.
A contract possessing only the first 3 elements above is a risk-shifting device. If all the elements,
it is a risk-distributing device.
7.3.3 Characteristics and nature of insurance contracts

The following are the characteristics of an insurance contract:
1. CONSENSUAL – it is perfected by the meeting of the minds of the parties.
2. VOLUNTARY – the parties may incorporate such terms and conditions as they may deem
convenient.
3. ALEATORY – it is an aleatory but not a wagering contract. By an aleatory contract, one of
the parties or both reciprocally bind themselves to give or to do something in
consideration of what the other shall give or do upon the happening of an event which is
uncertain, or which is to occur at an indeterminate time (Art. 2010, NCC)

4. UNILATERAL – a contract of insurance is wholly executed on the party of the insured by
the payment of the premium, and remains executory on the part of the insurer, subject
to the condition of the happening of the event insured against.
5. PERSONAL – it is personal in the sense that each party to it, in entering into the
insurance contract, takes into account the character, credit and conduct of the other.
6. CONDITIONAL – the insurer’s liability is based on the happening of the event insured
against
7. Indemnity is the basis
7.3.4 Classes Life

a. INDIVIDUAL - Life insurance is insurance on human lives and insurance appertaining thereto
or connected therewith.
Suicide - will relieve the insurer from liability unless:
1. It occurs after 2 years from the date of issue or last reinstatement; o
2. Insured is insane.
b. GROUP - Life insurance for a group of people, e.g. employees, officers.
Normally offered as a flexible product.
c. NON-LIFE - Industrial life insurance as used in this Code shall mean that form of life insurance
under which the premiums are payable either monthly or oftener, if the face amount of
insurance provided in any policy is not more than five hundred times that of the current
statutory minimum daily wage in the City of Manila.
Life insurance for low income earners.

Non-life:
a. MARINE - anything related to sea voyage.
b. FIRE - insurance against loss by fire, lightning, windstorm, tornado or earthquake and
other allied risks, when such risks are covered by extension to fire insurance policies
or under separate policies.
Alteration in the use or condition of a thing insured limited by the policy without the
consent of the insurer and increasing the risks, entitles an insurer to rescind a
contract of fire insurance.
c. CASUALTY - Insurance covering loss or liability arising from accident or mishap,
excluding certain types of loss which by law or custom are considered as falling
exclusively within the scope of other types of insurance such as fire or marine.
It includes, but is not limited to, employer's liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary and theft insurance, personal accident and
health insurance as written by non-life insurance companies, and other substantially
similar kinds of insurance
d. CMVL - Compulsory Motor Vehicle Liability Insurance two main components - PUV
and owners of motor vehicles in case of liability for death or injury to third parties.
NO FAULT INDEMNITY 15,000
Suretyship - an agreement whereby a party called the surety guarantees the performance by
another party called the principal or obligor of an obligation or undertaking in favor of a third party
called the obligee.
It includes official recognizances, stipulations, bonds or undertakings issued by any company joint
and several with the obligor:
1. HEALTH – pays for medical expenses;
2. DISABILITY – insures earned income against risk of disability making working impossible
a Casualty-written to cover the loss that is a direct result of an accident.
3. LIFE – insurer agrees to pay money upon the insured's death in exchange for payment of
premiums.
4. PROPERTY – provides protection against most risk to property. Open or Named.
5. LIABILITY – Very broad superset that covers legal claims against the insure.
6. CREDIT – repays some or all of a loan back when certain things happen to the borrower.
7.3.5 Variable contracts

Any policy or contract on either a group or on an individual basis issued by an insurance company
providing for benefits or other contractual payments or values thereunder to vary so as to reflect
investment results of any segregated portfolio of investments or of a designated separate account
in which amounts received in connection with such contracts shall have been placed and
accounted for separately and apart from other investments and accounts.
No foreign insurance company shall be authorized to issue, deliver or sell any variable contract
in the Philippines, unless it is likewise authorized to do so by the laws of its domicile. Variable
universal life (VUL) is a type of permanent life insurance policy with a built-in savings component
that allows for the investment of the cash value.
7.3.6 Insurable interest

Legal right to ensure any type of property or any event that may cause a financial loss or create
a legal liability.
Every person has an insurable interest in the life and health:

(a) Of himself, of his spouse and of his children;
(b) Of any person on whom he depends wholly or in part for education or support, or in whom
he has a pecuniary interest;
(c) Off any person under a legal obligation to him for the payment of money. or respecting
property or services, of which death or illness might delay or prevent the performance;
and
(d) Of any person upon whose life any estate or interest vested in him depends.
Insurable interest in the life and health
➢ Revocable unless waived.
➢ Beneficiary in a life insurance policy shall be forfeited when the beneficiary is the
principal, accomplice, or accessory in willfully bringing about the death of the insured.
➢ Share forfeited shall pass:
● Other beneficiaries, unless otherwise disqualified; and
● Accordance with the policy contract. estate of the insured.
Insurable interest in property:

Every interest in property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the insured, is an
insurable interest.
It may consist of:
(a) An existing interest;
(b) An inchoate interest founded on an existing interest; or
(c) An expectancy, coupled with an existing interest in that out of expectancy arises.
Carrier or depository of any kind has an insurable interest in a thing held by him.
Measure of an insurable interest in property is the extent to which the insured might be damnified
by loss or injury thereof.
No contract or policy of insurance on property shall be enforceable except for the benefit of some
person having an insurable interest in the property insured.
7.3.7 Perfection of the contract of insurance

It is a consensual contract, it is perfected by meeting of minds.
● Signed insurance application is merely an offer to enter into a contract

● Cognition Theory
● Generally consensual unless otherwise stipulated
E.g. Upon issuance of policy, upon payment of premium.
7.3.8 Rescission of insurance contracts

GROUNDS:
a. Concealment
b. Misrepresentation

c. Breach of material warranty
d. Breach of a condition subsequent
Waiver of the right to rescind: Acceptance of premium payments despite the knowledge of the
ground for rescission. (Sec. 45)
Limitations on the right of the insurer to rescind:
1. NON-LIFE – such right must be exercised prior to the commencement of an action on the
contract;
2. LIFE – such right must be availed of during the first two years from the date of issue of
policy or its last reinstatement; prior to “incontestability.” (Sec. 48)
7.3.9 Claims settlement and subrogation

Principle of Subrogation: It is a process of legal substitution where the insurer steps into the
shoes of the insured and he avails of the latter’s rights against the wrongdoer at the time
of loss.
The principle of subrogation is a normal incident of indemnity insurance as a legal effect of
payment; it inures to the insurer without any formal assignment or any express stipulation to
that effect in the policy. Said right is not dependent upon nor does it grow out of any private
contract. Payment to the insured makes the insurer a subrogee in equity. (Malayan Insurance Co.,
Inc. v. CA, 165 SCRA 536; see also Art. 2207, NCC)
There can be no subrogation in cases:
a. Where the insured by his own act releases the wrongdoer or third party liable for the loss
or damage;
b. Where the insurer pays the insured the value of the loss without notifying the carrier who
has in good faith settled the insured’s claim for loss;
c. Where the insurer pays the insured for a loss or risk not covered by the policy. (Pan
Malayan Insurance Company v. CA, 184 SCRA 54)
d. In life insurance
A legal technique by which one party steps into the shoes of another so as to have the benefit of
the latter's rights and remedies against a 3rd party:
a. Assignment except that it can occur without agreement of the parties;
b. Sue 3rd party who caused the loss/injury; and
c. Includes right over securities/collaterals
7.4 Cooperatives
RA 9520 – PHILIPPINE COOPERATIVE CODE OF 2008
AN ACT AMENDING THE COOPERATIVE CODE OF THE PHILIPPINES TO BE KNOWN AS THE

“PHILIPPINE COOPERATIVE CODE OF 2008”
7.4.1 Organization and Registration of Cooperatives

Organizing a primary cooperative:
● 15 or more natural persons who are:
a. Filipino citizens;
b. Of legal age;
c. Having a common bond of interest; and
d. Are actually residing or working in the intended area of operation, may organize
a primary cooperative, provided that a prospective member of a primary
cooperative must have completed a Pre-Membership Education Seminar (PMES).
Any newly organized primary cooperative may be registered as a multi-purpose cooperative only
after compliance with the minimum requirements for multi-purpose cooperatives to be set by the
Cooperative Development Authority (CDA).
A single-purpose cooperative may transform into a multi-purpose or may create subsidiaries only
after at least 2 years of operations. Under Article VI of CDA MC 2015-07, except for agriculture

cooperatives and agrarian reform cooperatives, only those cooperatives with a minimum paid-up
capital of P100,000.00 or as required in the feasibility study, whichever is higher, may be allowed
to transform into a multi-purpose cooperative.
A cooperative duly registered shall have limited liability. A cooperative can be likened to a
corporation with a personality separate and distinct from its owner-members.
Registration: A cooperative formed and organized under this Code acquires juridical personality
from the date the Authority issues a certificate of registration under its official seal. All
applications for registration shall be finally disposed of by the Authority within a period of sixty
(60) days from the filing thereof, otherwise the application is deemed approved, unless the cause
of the delay is attributable to the applicant: Provided, That in case of a denial of the application for
registration, an appeal shall lie with the Office of the President within ninety (90) days from receipt
of notice of such denial: Provided, further, That failure of the Office of the President to act on the
appeal within ninety (90) days from the filing thereof shall mean approval of said application.
7.4.2 Administration
The general assembly shall be composed of such members who are entitled to vote under the
articles of cooperation and bylaws of the cooperative. (Art 32)
7.4.3 Responsibilities, Rights and Privileges of Cooperatives
RESPONSIBILITIES
a. Address - Every cooperative shall have an official postal address to which all notices and
communications shall be sent. Such address and every change thereof shall be registered
with the Authority.
b. Book to be Kept Open - Every cooperative shall have the following documents ready and
accessible to its members and representatives of the Authority for inspection during
reasonable office hours at its official address:
• A copy of this Code and all other laws pertaining to cooperatives;
• A copy of the regulations of the Authority;
• A copy of the articles of cooperation and bylaws of the cooperative;
• A register of members;
• The books of the minutes of the meetings of the general assembly, board of directors
and committee;
• Share books, where applicable;
• Financial statement; and
• Such other documents may be prescribed by laws or the bylaws
Primary responsible - Accountant or Bookkeeper

c. Reports - Every cooperative shall draw up regular reports of its program of activities,
including those in pursuance of their socio-civic undertakings, showing their progress and
achievements at the end of every fiscal year.
• The reports shall be made accessible to its members, and copies thereof shall be
furnished to all its members or record. These reports shall be filed with the Authority
within one hundred twenty (120) days from the end of the calendar year. The form and
contents of the reports shall be as prescribed by the rules of the Authority. Failure to
file the required reports shall subject the accountable officer/s to fines and penalties
as may be prescribed by the Authority, and shall be a ground for the revocation of
authority of the cooperative to operate as such. The fiscal year of every cooperative
shall be the calendar year except as may be otherwise provided in the bylaws.
• If a cooperative fails to make, publish and file the reports required herein, or fails to
include therein any matter required by the Code, the Authority shall, within fifteen (15)
days from the expiration of the prescribed period, send such cooperative a written
notice, stating its non-compliance and the commensurate fines and penalties that will
be imposed until such time that the cooperative has complied with the requirements.

d. Register of Members as Prima Facie Evidence - Any register or list of members shares kept
by any registered cooperative shall be prima facie evidence of the following particulars
entered therein:
• The date on which the name of any person was entered in such register or list of
member; and
• The date on which any such person ceased to be a member.
e. Probative Value of Certified Copies of Entries.
• A copy of any entry in any book, register or list regularly kept in the course of business
in the possession of a cooperative shall, if duly certified in accordance with the rules
of evidence, (be admissible as evidence of the existence of entry and prima facie
evidence of the matters and transactions therein recorded.)
• No person or a cooperative is possession of the books of such cooperative shall, in
any legal proceedings to which the cooperative is not a party, be compelled to produce
any of the books of the cooperative, the contents of which can be proved and the
matters, transactions and accounts therein recorded, unless by order of a competent
court.
f. Bonding of Accountable Officers - Every director, officer, and employee handling funds,
securities or property on behalf of any cooperative shall be covered by a surety bond to be
issued for a duly registered insurance or bonding company for the faithful performance of
their respective duties and obligations. The board of directors shall determine the adequacy
of such bonds.
• Upon the filing of the application for registration of a cooperative, the bonds of the
accountable officers shall be required by the Authority. Such bonds shall be renewed
manually and the Authority shall accordingly be informed of such renewal.
g. Preferences of Claims - Notwithstanding the provisions of existing laws, rules and regulations
to the contrary, but subject to the prior claim of the Authority, (any debt due to the cooperative
from the member shall constitute a first lien) upon any raw materials, production, inputs, and
products produced; or any land, building, facilities, equipment, goods or services acquired and
held, by such member through the proceeds of the loan or credit granted by the cooperative
to him for as long as the same is not fully paid.
• No property or interest on property which is subject to a lien under paragraph (1) shall
be sold nor conveyed to third parties without the prior permission of the cooperative.
The lien upon the property or interest shall continue to exit even after the sale or
conveyance thereof until such lien has been duly extinguished.
• Notwithstanding the provisions of any law to the contrary, any sale or conveyance
made in contravention of paragraph (2) hereof shall be void.
RIGHTS
1. Instrument for Salary or Wage Deduction.
• A member of a cooperative may, notwithstanding the provisions of existing laws to the
contrary, execute an instrument in favor of the cooperative authorizing his employer to deduct
from his/her salary or wages, commutation of leave credits and any other monetary benefits
payable to him by the employer and remit such amount as maybe specified in satisfaction of
a debt or other demand due from the member to the cooperative.
• Upon the execution of such instrument and as may be required by the cooperative contained
in a written request, the employer shall make the deduction in accordance with the agreement
and deduction in accordance with the agreement and remit forthwith the amount so deducted
within ten (10) days after the end of the payroll month to the cooperative. The employer shall
make the deduction for as long as such debt or other demand remains unpaid by the employee.
2. Primary Lien
• A cooperative shall have primary lien upon the capital, deposits or interest of a member for
any debt due to the cooperative from such a member.
3. Tax Treatment of Cooperative

• Duly registered cooperatives under this Code which do not transact any business with non-
members or the general public shall not be subject to any taxes and fees imposed under the

internal revenue laws and other tax laws. Cooperatives not falling under this article shall be
governed by the succeeding section.
4. Tax and Other Exemptions.

• Cooperatives transacting business with both members and non- members shall not be
subjected to tax on their transactions with members.
• In relation to this, the transactions of members with the cooperative shall not be subject to
any taxes and fees, including not limited to final taxes on members' deposits and documentary
tax.
• Notwithstanding the provisions of any law or regulation to the contrary, such cooperatives
dealing with nonmembers shall enjoy the following tax exemptions:
• Cooperatives with accumulated reserves and undivided net savings of not more than Ten
million pesos (P10,000,000.00) shall be exempt from all national, city, provincial, municipal or
barangay taxes of whatever name and nature.
• Exempt from customs duties, advance sales or compensating taxes on their importation of
machineries, equipment and spare parts used by them and which are not available locally and
certified by the department of trade and industry (DTI).
5. Deeds of Title
• Any register of deeds shall accept for registration, free of charge, any instrument relative to
a loan made under this Code which does not exceed Two Hundred Fifty Thousand Pesos
(P250,000.00) or the deeds of title of any property acquired by the cooperative or any paper
or document drawn in connection with any action brought by the cooperative or with any court
judgment rendered in its favor or any instrument relative to a bond of any accountable officer
of a cooperative for the faithful performance of his duties and obligations.
6. Chapters
• Cooperatives shall be exempt from the payment of all court and sheriff's fees payable to the
Philippine Government for and in connection with all actions brought under this Code, or
where such actions is brought by the Authority before the court, to enforce the payment of
obligations contracted in favor of the cooperative.
• All cooperatives shall be exempt from putting up a bond for bringing an appeal against the
decision of an inferior court or for seeking to set aside any third party claim: Provided, That a
certification of the Authority showing that the net assets of the cooperative are in excess of
the amount of the bond required by the court in similar cases shall be accepted by the court
as a sufficient bond.
• Any security issued by cooperatives shall be exempt from the provisions of the Securities Act
provided such security shall not be speculative.
PRIVILEGES OF COOPERATIVES
a. Cooperatives registered under this Code, notwithstanding the provisions of any law to the
contrary, be also accorded the following privileges:
b. Cooperatives shall enjoy the privilege of depositing their sealed cash boxes or containers,
documents or any valuable papers in the safes of the municipal or city treasurers and other
government offices free of charge, and the custodian of such articles shall issue a receipt
acknowledging the articles received duly witnessed by another person;
c. Cooperatives organized among government employees, notwithstanding any law or regulation
to the contrary, shall enjoy the free use of any available space in their agency, whether owned
or rented by the Government,
d. Cooperatives rendering special types of services and facilities such as cold storage, ice plant,
electricity, transportation, and similar. services and facilities shall secure a franchise
therefore, and such cooperatives shall open their membership to all persons qualified in their
areas of operation,
e. In areas where appropriate cooperatives exist, the preferential right to supply government
institutions and agencies rice, corn and other grains, fish and other marine products, meat,
eggs, milk, vegetables, tobacco and other agricultural commodities produced by their
members shall be granted to the cooperatives concerned,

f. Preferential treatment in the allocation of fertilizers, including seeds and other agricultural
inputs and implements, and in rice distribution shall be granted to cooperatives by the
appropriate government agencies;
g. Preferential and equitable treatment in the allocation or control of bottomries of commercial
shipping vessels in connection with the shipment of goods and products of cooperatives;
h. Cooperatives and their federations, such as farm and fishery producers and suppliers, market
vendors and such other cooperatives, which have for their primary purpose the production
and/or the marketing of products from agriculture, fisheries and small entrepreneurial
industries and federations thereof,, shall have preferential rights in the management of public
markets and/or lease of public market facilities, stalls or spaces: Provided, That these rights
shall only be utilized exclusively by cooperatives: Provided, further, That no cooperative
forming a joint venture, partnership or any other similar arrangement with a non-cooperative
entity can utilize these rights;
i. Cooperatives engaged in credit services and/or federations shall be entitled to loans credit
lines, rediscounting of their loan notes, and other eligible papers with the Development Bank
of the Philippines, the Land Bank of the Philippines and other financial institutions except the
Bangko Sentral ng Pilipinas (BSP)
j. The Philippine Deposit Insurance Corporation (PDIC) and other government agencies,
government-owned and controlled corporations and government financial institutions shall
provide technical assistance to registered national federations and unions of cooperatives
which have significant engagement in savings and credit operations in order for these
federations and unions to establish and/or strengthen their own autonomous cooperative
deposit insurance systems;
k. A public transport service cooperative may be entitled to financing support for the acquisition
and/or maintenance of land and sea transport equipment, facilities and parts through the
program of the government financial institutions. It shall have the preferential right to the
management and operation of public terminals and ports whether land or sea transport where
the cooperative operates and on securing a franchise for active or potential routes for the
public transport;
l. Cooperatives transacting business with the Government of the Philippines or any of its
political subdivisions or any of its agencies or instrumentalities, including government-owned
and controlled corporations shall be exempt from prequalification bidding requirements
notwithstanding the provisions of Republic Act No.9184, otherwise known as, the Government
Procurement Act;
m. Cooperative shall enjoy the privilege of being represented by the provincial or city fiscal or
the Office of the Solicitor General, free of charge, except when the adverse party is the
Republic of the Philippines;
n. Cooperatives organized by faculty members and employees of educational institutions shall
have the preferential right in the management of the canteen and other services related to
the operation of the educational institution where they are employed: Provided, That such
services are operated within the premises of the said educational institution; and
o. The appropriate housing agencies and government financial institutions shall create a special
window for financing housing projects undertaken by cooperatives, with interest rates and
terms equal to, or better than those given for socialized housing projects. This financing shall
be in the form of blanket loans or long-term wholesale loans to qualified cooperatives, without
need for individual processing.
p. The Authority, in consultation with the appropriate government agencies and concerned
cooperative sector, shall issue rules and regulations on all matters concerning housing
cooperatives.
7.4.4 Membership
Section 1. Membership.
This Cooperative shall have regular membership only.
A regular member is one who has complied with all the membership requirements and entitled to
all the rights and privileges of membership.
7.4.5 Capital, Property, and Funds

Art. 72 Cooperatives registered under this Code may derive their capital from any or all of the
following sources:
a. Member's share capital;
b. Loans and borrowings including deposits;
c. Revolving capital which consists of the deferred payment of patronage refunds, or interest
on share capital; and
d. Subsidies, donations, legacies, grants, aids and such other assistance from any local or
foreign institution whether public or private: Provided, That capital coming from such
subsides, donations, legacies, grants, aids and other assistance shall not be divided into
individual share capital holdings at any time but shall instead form part of the donated
capital or fund of the cooperative.
"Upon dissolution, such donated capital shall be subject to escheat."
LIMITATION ON SHARE CAPITAL HOLDINGS

No member of a primary cooperative other than a cooperative itself shall own or hold more than
ten per centum(10%) of the share capital of the cooperative.
Where a member of a cooperative dies, his heir shall be entitled to the shares of the descent:
provided, That the total shareholding of the heir does not exceed ten per centum (10%) of the share
capital of the cooperative:
Provided further, That the heir quality and is admitted as member of the cooperative: Provided
finally, That where the heir fails to qualify as a member or where his total shareholding exceeds
ten per centum (10%) of the share capital, the share er shares in excess will revert to the
cooperative pon payment to the heir of the value of such shares.
ASSIGNMENT OF SHARE CAPITAL CONTRIBUTION OR INTEREST

Subject to the provisions of this Code, no member shall transfer his shares or interest in the
cooperative or any part thereof unless:
1. He has held such share capital contribution or interest for not less than one (1) year;
2. The assignment is made to the cooperative or to a member of the cooperative or to a
person who falls within the field of membership of the cooperative; and
3. The board of directors has approved such assignment
CAPITAL BUILD-UP
The by-laws of every cooperative shall provide for a reasonable and realistic member capital
build- up program to allow the continuing growth of the member's investment in their cooperative
as their own conditions continue to improve.
SHARES – refers to a unit of capital in a primary cooperative the per value of which may be fixed
at any figure not more than One thousand pesos (P 1,000.00). The share capital of a cooperative is
the money paid or required to be paid for the operations of the cooperative. The method for the
issuance of share certificates shall be prescribed in its by-laws.
FINES
The by-laws of a cooperative may prescribe a fine on unpaid subscribed share capital: Provided,
That such fine is fair and reasonable under the circumstances
INVESTMENT OF CAPITAL
A cooperative may invest its capital in any of the ff:
(a) In shares or debentures or securities of cooperative; any other
(b) In any reputable bank in the locality, or any cooperative;
(c) in securities issued or guaranteed by the Government; and
(d) In real state primarily for the use of the cooperative or its members, or any other manner
authorized in the by-laws.
REVOLVING CAPITAL

The general assembly of any cooperative may authorize the board of directors to raise a revolving
capital to strengthen its capital structure by deferring the payment of patronage refunds and
interest on share capital or by the authorized deduction of a percentage from the proceeds of
products sold or services rendered, or per unit of Product or services handled.
The board of directors shall issue revolving capital certificates with serial number, name, amount,
and rate of interest to be paid and shall distinctly set forth the time of retirement of such
certificates and the amounts to be returned.
7.4.6 Audit, Inquiry and Members’ Right to Examine

Annual Audit
Cooperatives registered under this Code shall be subject to an annual financial, performance and
social audit. The financial audit shall be conducted by an external auditor who satisfies all
following qualifications:
(1) He is independent of the cooperative or any of its subsidiary that he is auditing; and
(2) He is a member in good standing of the Philippine Institute of Certified Public Accountants
(PICPA) and is accredited by both the Board of Accountancy and the Authority.
Audit Report
The Auditor shall submit to the board of directors and to the audit committee the financial audit
report which shall be in accordance with the generally accepted auditing standards for
cooperatives as jointly promulgated by the Philippine Institute of Certified Public Accountants
(PICPA) and the Authority
Non-liability for Defamation

The auditor is not liable to any person in an action for defamation based on any act done, or any
statement made by him in good faith in connection with any matter he is authorized or required to
do pursuant to the Code.
Right to Examine
A member shall have the right to examine the records required to be kept by the cooperative
under Article 52 of this Code during reasonable hours on business days and he may demand, in
writing, for a copy of excerpts from said records without charge except the cost of reproduction.
Any officer of the cooperative who shall refuse to allow any member of the cooperative to examine
and copy excerpts from its records shall be liable to such member for damages and shall be guilty
of an offense which shall be punishable under Article 140 of this Code: Provided, That if such
refusal is pursuant to a resolution or order of the board of directors, the liability under this article
shall be imposed upon the directors who voted for such refusal: Provided, further, That it shall be
defense to any action under this article that the member demanding to examine and copy excerpts
from the cooperative records has improperly used any information secured through any prior
examination of the records of such cooperative or was not acting in good faith or for a legitimate
purpose in making his demand
Safety of Records
Every cooperative shall, at its principal office, keep and carefully preserve the records required
by this Code to be prepared and maintained. It shall take all necessary precaution to prevent its
loss, destruction or falsification.
7.4.7 Allocation and Distribution of Funds

Order of Distribution.
The net surplus of every cooperative shall be distributed as follows:
(1) An amount for the reserve fund which shall be at least ten per centum (10%) of net surplus.
● Allocation and Distribution of Net Surplus Reserve Fund: Provided, That in the first
five (5) years of operation after registration, this amount shall not be less than
fifty per centum (50%) of the net surplus;

● Date of Registration – January 2020 application-Year 2020 to 2024 (50%) if the net
surplus is 100,000.00, the reserve fund-50,000,00 (50%).
Reserve Fund:
1) The reserve fund shall be used for the stability of the cooperative and to meet net losses
in its operations.
Presentation in the Statement of Operation: CY 2020
Net Loss. (50,000.00)
Statutory Funds:
Reserve Fund- (50,000.00)
Cooperative Education (00.00)
Optional Fund (00.00)
and Training Fund (00.00)
Community Development Fund (00.00)
Reserve Fund:
2) The general assembly may decrease the amount allocated to the reserve fund when the
reserve fund already exceeds the share capital. (authorized)
Reserve Fund 1,000,000.00

Authorized Share Capital 900,000.00
Excess RF-ASC 100,000.000
(may be used at anytime for any project that would expand the operations of the
cooperative.)
3) Upon the dissolution of the cooperative, the reserve fund shall not be distributed among
the members. The general assembly may resolves:
a. To establish a usufructuary trust fund for the benefit of any federation or union to
which the cooperative is affiliated; and
b. To donate, contribute, or otherwise dispose of the amount for the benefit of the
community where the cooperative operates.
If the members cannot decide upon the disposal of the reserve fund, the same shall go to the
federation or union to which the cooperative is affiliated. (10%) of the net surplus (e.g. 1%-10%).
Half of the amounts transferred to the education and training fund annually under this subsection
shall be spent by the cooperative for education and training purposes, (50% of 10%)
Education and training fund:

While the other half may be remitted to a union or federation chosen by the cooperative or of
which it is a member (50 union or federation)
Education and training fund:

Upon the dissolution of the cooperative, the unexpended balance of the education and training
fund appertaining to the cooperative shall be credited to the cooperative education and training
fund of the chosen union or federation
Community development fund, which shall not be less than three per centum (3%) of the net
surplus. (3%-up)
The community development fund shall be used for projects or activities that will benefit the
community where the cooperative operates.
Community development fund: (CDF)

MC No. 2021-01
Utilization of CDF

The cooperative may 'adopt a community program. (more than 1 community within the area of
operation.)
For medium and large cooperative. The CDF shall be used for infrastructure projects, at least 50%
but not to exceed 60%;
For small and micro cooperative, they shall use their CDF for infrastructure projects or social
services at their desired percentage of allocation.
Optional fund – a land and building, and any other necessary fund the total of which shall not
exceed seven per centum (7%). (Members benefit)
Interest on Share Capital and Patronage Refund.

● The remaining net surplus shall be made available to the members in the form of interest
on share capital and patronage refunds.
● In the case of a member patron with paid-up share capital contribution, the patronage
refund shall be paid to him.
● In the case of a member patron with unpaid share capital contribution, the patronage
refund shall be credited to his/her account until the share capital contribution has been
fully paid.
● n the case of non-member patron, his/her proportionate amount of patronage refunds,
shall be set aside in a general fund for such patron.
Failed to comply with the requirements for membership of the non-member patron. The amount
for such patron shall be credited to the
Reserve Fund or to the Education and Training Fund.
7.4.8 Types and Categories of Cooperatives
CREDIT COOPERATIVE-It is one that promotes and undertakes savings and lending services
among its members. It generates a common pool of funds in order to provide financial assistance
to its members for productive and provident purposes,
● Cooperative that gives loans to members and collect savings

- CONSUMER'S COOPERATIVE is one of the primary purpose of which is to procure
and distribute commodities to members and non-members;
● Cooperative gives goods and commodities to their members

- PRODUCER'S COOPERATIVE is one that undertakes joint production whether
agricultural or industrial. It is formed and operated by its members to undertake
the production and processing of raw materials or goods produced by its
members into finished or processed products for sale by the cooperative to its
members and non-members. Any end product or its derivative arising from the
raw materials produced by its members, sold in the name and for the account of
the cooperative, shall be deemed a product of the cooperative and its members;
Cooperative like banana growers or growers of rice to finance the production and
the cooperative will also buy it and sell it.
- MARKETING COOPERATIVE is one which engages in the supply of production

inputs to members and markets their products; More on sales
- SERVICE COOPERATIVE- is one which engages in medical and dental care,

hospitalization, transportation, insurance, housing, labor, electric light and power,
communication, professional and other services; E.g Unicare
- MULTI-PURPOSE COOPERATIVE - is one which combines two (2) or more of the

business activities of these different types of cooperatives;

- ADVOCACY COOPERATIVE - is a primary cooperative which promotes and
advocates cooperativism among its members and the public through socially-
oriented projects, education and training, research and communication, and other
similar activities to reach out to its intended beneficiaries; The purposes is more
on advocacy
- AGRARIAN COOPERATIVE- is one organized by marginal farmers majority of

which are agrarian reform beneficiaries for the purpose of developing an
appropriate system of land tenure, land development, land consolidation or land
management in areas covered by agrarian reform,
- COOPERATIVE BANK - is one organized for the primary purpose of providing a

wide range of financial services to cooperatives and their members,
- DAIRY COOPERATIVE - is one whose members are engaged in the production of

fresh milk which may be processed and/or marketed as dairy
- EDUCATION COOPERATIVE is one organized for the primary purpose of owning

and operating licensed educational institutions notwithstanding the provisions of
Republic Act No. 9155, otherwise known as the Governance of Basic Education Act
of 2001;
- ELECTRIC COOPERATIVE is one organized for the primary purposed of

undertaking power generations, utilizing renewable energy sources, including
hybrid systems, acquisition and operation of subtransmission or distribution to its
household members,
- FINANCIAL SERVICE COOPERATIVE is one organized for the primary purpose of

engaging in savings and credit services and other financial services,
- FISHERMEN COOPERATIVE is one organized by marginalized fishermen in

localities whose products are marketed either as fresh or processed products,
- HEALTH SERVICES COOPERATIVE is one organized for the primary purpose of

providing medical, dental and other health services,
- HOUSING COOPERATIVE is one organized to assist or provide access to housing

for the benefit of its regular members who actively participate in the savings
program for housing. It is co-owned and controlled by its members,
- INSURANCE COOPERATIVE is one engaged in the business of insuring life and

poverty of cooperatives and their members;
- TRANSPORT COOPERATIVE is one which includes land and sea transportation,

limited to small vessels, as defined or classified under the Philippine maritime
laws, organized under the provisions of this Code,
- WATER SERVICE COOPERATIVE is one organized to own, operate and manage

waters systems for the provision and distribution of potable water for its
members and their households,
- WORKERS COOPERATIVE is one organized by workers, including the self-

employed, who are at same time the members and owners of the enterprise its
principal purpose is to provide employment and business opportunities to its
members and manage it in accordance with cooperative principles,
OTHERS:
Categories of Cooperative

A. In terms of membership, cooperative shall be categorized into:
1. Primary - The members of which are natural persons;
2. Secondary - The members of which are primaries, and
3. Tertiary - The members of which are secondary cooperatives.
B. In terms of territory, cooperatives shall be categorized according to areas of operations
which may or may not coincide with the political subdivisions of the country.
C. Federation of Cooperatives.
D. Cooperative Unions.
7.4.9 Merger and Consolidation of Cooperatives
MERGER – refer to a union of two or more existing cooperatives belonging to the same category
whereby the surviving cooperative, retaining its identity, absorbs one or more constituent
cooperatives/s.
Example:
Suppose Cris Company and Canonoy Company merge into a single organization. To do this, Cris
Company assumes all the assets and liabilities of Canonoy Company, which ceases to exist.
Consolidation – refer to a union of two or more existing cooperatives belonging to the same
category to form a new cooperative called the consolidated cooperative.
Example:
Cris Company and Canonoy Company join together to become a new business, Masaganda
Company
Effects of Merger and Consolidation

1. The constituent cooperatives shall become a single cooperative, which in case of merger
shall be the surviving cooperative, and in case of consolidation, shall be the consolidated
cooperative.
2. The separate existence of the constituent cooperatives shall cease, except that of the
surviving or the consolidated cooperative.
3. The surviving or the consolidated cooperative shall possess all rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a cooperative
organized under this Code.
4. The surviving or the consolidated cooperative shall possess all the assets, rights,
privileges, immunities and franchises of each of the constituent cooperatives.
5. The surviving or the consolidated cooperative shall be responsible for all the liabilities
and obligations of each of the constituent cooperatives in the same manner as if the
surviving or consolidated cooperative had itself incurred such liabilities or obligations.
Only cooperatives belonging to the same category can be parties to Merger or Consolidation
Procedures:
1. Approval of the proposal to merge or consolidate by the General/Representative
Assembly of each constituent cooperatives;
2. Formulation of Plan of Merger or Consolidation by the representatives of the constituent
cooperatives;
3. Presentation to and Approval of the Plan of Merger or Consolidation by the
General/Representative Assembly of each constituent cooperatives;
4. Formulation of the Amendment/New Articles of Cooperation and By-laws;
5. Posting/Publication of Merger or Consolidation;
6. Written Notification to Creditors through registered mail with return card and other
applicable electronic means;
7. Filing with the Authority the required documents for the registration of merger or
consolidation; and
8. Issuance of Certificate of Registration of Merger/Consolidation by the Authority.
The Plan of Merger or Consolidation shall includes the following:

1. Statement of Purpose of such Merger or Consolidation;

2. The Registered Names, Addresses and Registration/Confirmation Numbers, Contact
Details and Respective Areas of Operation of the Constituent Cooperatives;
3. The Proposed Amendments to the Surviving Cooperative's Articles of Cooperation and By-
laws, in case of Merger and with respect to Consolidation, the Proposed Articles of
Cooperation and By-laws;
4. List of Members of each Constituent Cooperatives showing their Share Capital
Contribution duly certified by the respective Board Secretaries and attested by the
respective Board Chairpersons;
5. The Name, Address and Area of Operation of the Surviving Cooperative, in case of Merger,
the Proposed Name, Address and Area of Operation, in case of Consolidation;
6. Feasibility Study indicating the Viability and Sustainability of the Merging/Consolidating
Cooperatives;
7. The Audited Financial Statements as of the immediate preceding year including the
schedule of assets, liabilities and capital of the merging or consolidating cooperatives;
and
8. Package Benefits of the Management Staff to be affected by the Plan.
7.4.10 Dissolution of Cooperatives

Kinds of Dissolution
1. Voluntary Dissolution
2. Involuntary Dissolution
3. Dissolution by Order of the authority
Voluntary Dissolution Where NO Creditors Are Affected.

a. Majority of the Board of Directors
b. By a resolution duly adopted by the affirmative vote of at least three-fourths (3/4) of all
the members with voting rights, present and constituting a quorum at a meeting to be held
upon call of the directors.
c. Provided, That the notice of time, place and object of the meeting shall be published for
three (3) consecutive weeks in a newspaper published in the place where the principal
office of said cooperative is located, or if no newspaper is published in such place, in a
newspaper of general circulation in the Philippines;
d. Provided, further, That the notice of such meeting is sent to each member of record either
by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A
copy of the resolution authorizing the dissolution shall be certified to by a majority of the
board of directors and countersigned by the board secretary. The Authority shall
thereupon issue the certificate of dissolution.
Voluntary Dissolution Where Creditors Are Affected.

a. The petition for dissolution shall be filed with the Authority.
b. The petition shall be signed by a majority of its board or directors or other officers
managing its affairs, verified by its chairperson or board secretary or one of its directors
and shall set forth all claims and demands against it and that its dissolution was resolved
upon by the affirmative vote of at least three-fourths (3/4) of all the members with voting
rights, present and constituting a quorum at a meeting called for that
purpose.
Involuntary Dissolution – A cooperative may be dissolved by order of a competent court after due
hearing on the grounds of:
a. Violation of any law, regulation or provisions of its bylaws; or
b. Insolvency
Dissolution by Order of the Authority

The Authority may suspend or revoke, after due notice and hearing, the certificate of registration
of a cooperative on any of the following grounds:
a. Having obtained its registration by fraud;
b. Existing for an illegal purpose;
c. Willful violation, despite notice by the Authority, of Code or its bylaws;

d. Willful failure to operate on a cooperative bosis; and the provisions of this; or
e. Failure to meet the required minimum number of members in the cooperative.
Dissolution by Failure to Organize and Operate.

If a cooperative has not commenced business and its operation within two (2) years after the
issuance of its certificate of registration or has not carried on its business for two (2) consecutive
years, the authority shall send a formal notice to the said cooperative to show cause as to its
failure to operate. Failure of the cooperative to promptly provide justifiable cause for its failure to
operate shall warrant the Authority to delete its name from the roster of registered cooperatives
and shott be deemed dissolved
8.0 LAW ON OTHER BUSINESS TRANSACTIONS
8.1 PDIC Law
RA 9576 - PHILIPPINE DEPOSIT INSURANCE CORPORATION LAW
AN ACT INCREASING THE MAXIMUM DEPOSIT INSURANCE COVERAGE.
● To strengthen the mandatory deposit insurance coverage system to generate, preserve, maintain
faith and confidence in the country’s banking system, and protect it from illegal schemes and
machinations.
8.1.1 Insurable deposits

● A joint account regardless of whether the conjunction ‘and,’ ‘or,’ ‘and/or’ is used, shall be insured
separately from any individually-owned deposit account.
● If the account is held jointly by two or more natural persons, or by two or more juridical persons
or entities, the maximum insured deposit shall be divided into as many equal shares as there are
individuals, juridical persons or entities, unless a different sharing is stipulated in the document
of deposit.
8.1.2 Maximum liability

• The maximum deposit insurance coverage is Five hundred thousand pesos (P500,000.00).
8.1.3 Requirements for Claims

● ORIGINAL EVIDENCE OF DEPOSITS such as savings passbook, certificate of time deposit, bank
statement, used or unused checks, or ATM card.
● ONE VALID ORIGINAL PHOTO-BEARING IDENTIFICATION DOCUMENT (ID) with clear signature of
depositor/claimant (e.g. Driver's License, SSS/GSIS ID, Senior Citizen's ID, Passport, PRC ID,
OWWA/OFW ID, Seaman's ID, Alien Certificate of Registration ID, Voter's ID) or PhilID. (IT IS
RECOMMENDED TO BRING AT LEAST TWO (2) VALID IDs IN CASE OF DISCREPANCIES IN
SIGNATURE).
● For depositors below eighteen (18) years old, photocopy of birth certificate from the Philippine
Statistics Authority (PSA) or a duly certified copy issued by the local civil registrar, and valid ID of
the parent.
● Original copy of a notarized Special Power of Attorney (SPA) for claimants who are not the
signatories in the bank records. In the case of minor depositor, the SPA must be executed by the
parent.
● Claim Form:
➢ When filing a claim during the onsite CSO period, or during personal filing at the PDIC PAC, a system
generated Claim Form shall be printed by PDIC representative after interview/processing.
➢ When filing through mail, download the PDIC Claim Form. The Claim Form needs to be accomplished,
signed, and notarized.
8.2 Secrecy of Bank Deposits

RA 1405 - SECRECY IN BANK DEPOSIT
AN ACT PROHIBITING DISCLOSURE OF OR INQUIRY INTO DEPOSIT WITH ANY BANKING

INSTITUTION AND PROVIDING PENALTY THEREFOR.
8.2.1 Purpose
• To give encouragement to the people to deposit their money in banking institutions and to
discourage private hoarding so that the same may be properly utilized by banks in authorized
loans to assist in the economic development of the country.
8.2.2 Prohibited acts
• It shall be unlawful for any official or employee of a banking institution to disclose to any person.
8.2.3 Deposits covered
• All deposits of whatever nature with banks or banking institutions in the Philippines including
investments in bonds issued by the Government of the Philippines, its political subdivisions and
its instrumentalities, are hereby considered as of an absolutely confidential nature and may not
be examined, inquired or looked into by any person, government official, bureau or office.
8.2.4 What are the Exceptions so that it may be examined, inquired or looked into?
(a) Upon written permission of the depositor.
(b) In cases of impeachment
(c) Upon order of a competent court in cases of bribery(fraud) or dereliction(negligence or failure)
of duty of public officials
(d) In cases where the money deposited or invested is the subject matter of the litigation.
8.2.5 Garnishment of deposits including foreign deposits

➢ All foreign currency deposits as well as foreign currency deposits are hereby declared as and
considered of an absolutely confidential nature.
What are the exceptions under foreign deposit?
➢ Upon the written permission of the depositor.
➢ Foreign currency deposits shall be exempt from attachment, garnishment, or any other order
or process of any court, legislative body, government agency or any administrative body
whatsoever.
8.3 Truth in Lending Act
RA 3765 - TRUTH IN LENDING ACT
AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN CONNECTION WITH EXTENSION

OF CREDITS.
8.3.1 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.
8.3.2 Obligation of creditors to persons to whom credit is extended

- Any 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.
What are the information included in the clear statement?
(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
(5) The total amount to be financed
(6) The finance charge expressed in terms of pesos and centavos

(7) The percentage that the finance bears to the total amount to be financed
8.3.3 What are the Covered Credit?

a. Any conditional sales contract
b. Any contract to sell, or sale or contract of sale of property or services, either for present or
future delivery
c. Any rental-purchase contract
d. Any contract or arrangement for the hire, bailment, or leasing of property
e. Any option, demand, lien
What is the excluded transaction?

- Under credit line- because it is not yet a contract of loan.
8.3.4 What are the consequences of non-compliance with obligation?

(a) 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.
(b) Except as specified in subsection (a) of this section, nothing contained in this Act shall affect
the validity or enforceability of any contract or transactions
(c) 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 one year or both.
(d) No punishment or penalty provided by this Act shall apply to the Philippine Government or any
agency or any political subdivision thereof.
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.
8.4 AMLA Law
RA 9160 - ANTI-MONEY LAUNDERING ACT
AN ACT DEFINING THE CRIME OF MONEY LAUNDERING, PROVIDING PENALTIES THEREFORE AND
FOR OTHER PURPOSE.
8.4.1 Purpose, Policies and Principles

- To protect and preserve the integrity and confidentiality of bank accounts and to ensure that the
Philippines shall not be used as a money laundering site for the proceeds of any unlawful activity.
-
8.4.2 Definition of terms
A. “COVERED TRANSACTION” refers to:
1. A transaction in cash or other equivalent monetary instrument exceeding
Php500,000.00(threshold amount within 1 banking day)
2. A transaction exceeding Php1,000,000.00 in cases of jewelry dealers, dealers in precious metals
and dealers in precious stones.
3. For Casino, in excess of 5,000,000
4. For real estate brokers and developers naman as covered person but only for single cash
transaction involving amounts in excess of 7.5M
B. SUSPICIOUS TRANSACTION refers to a transaction, regardless of amount, where any of the

following circumstances exists:
1. There is no underlying legal or trade obligation, purpose or economic justification;
2. The client is not properly identified hindi nakalagay yung tunay na identity;
3. The amount involved is not commensurate with the business or financial capacity of the client;
4. Any circumstance relating to the transaction which is observed to deviate from the profile of
the client and/or the client’s past transactions with the covered person;

5. Transaction structured in order to avoid being the subject of reporting requirements under
the AMLA;
6. The transaction is related to an unlawful activity or any money laundering activity or offense;
7. Any transaction that is similar, analogous or identical to any of the foregoing.
8.4.3 Unlawful activities

Unlawful Activity - refers to any act or omission, or series or combination thereof, involving or
having direct relation, to the following:
1. Kidnapping for Ransom
2. Comprehensive Dangerous Drugs Act of 2002
3. Anti-Graft and Corrupt Practices Act
4. Plunder
5. Robbery and Extortion
6. Jueteng and Masiao
7. Piracy on the High Seas
8. Qualified Theft
9. Swindling
10. Smuggling
11. Violations under Electronic Commerce Act of 200
12. Hijacking “Destructive Arson, and Murder
13. Terrorism and Conspiracy to Commit Terrorism
14. Financing of Terrorism
15. Bribery
16. Frauds and Illegal Exactions and Transactions
17. Malversation of Public Funds and Property
18. Forgeries and Counterfeiting
19. Violations of Anti-Trafficking in Persons Act of 2003
20. Violations of Revised Forestry Code of the Philippines
21. Violations of Philippine Fisheries Code of 1998
22. Violations of Philippine Mining Act of 1995
23. Violations of Wildlife Resources Conservation and Protection Act
24. Violations of National Caves and Cave Resources Management Protection Act
25. Violation of Anti-Carnapping Act of 2002
26. Violation of Codifying the Laws on Illegal/Unlawful Possession, Manufacture, Dealing In,
Acquisition or Disposition of Firearms, Ammunition or Explosives
27. Violation of Anti-Fencing Law
28. Violation of Migrant Workers and Overseas Filipinos Act of 1995
29. Violation of Intellectual Property Code of the Philippines, as amended
30. Violation of Anti-Photo and Video Voyeurism Act of 2009
31. Violation of Anti-Child Pornography Act of 2009
32. Violations of Special Protection of Children Against Abuse, Exploitation and
Discrimination
33. Fraudulent practices and other violations under Securities Regulation Code of 2000
34. Felonies or offenses of a nature similar to the aforementioned unlawful activities that
are punishable under the penal laws of other countries.
8.4.4 Covered persons

Cover person refers to the following:
1. Persons supervised or regulated by BSP, such as:
a. Banks;
b. Non-banks;
c. Quasi-banks;
d. Trust entities;
e. Pawnshops;
f. Non-stock savings and loan associations;
g. Electronic money issuers; and
h. All other persons and their subsidiaries and affiliates supervised or regulated by the
BSP.

2. Persons supervised or regulated by IC, such as:
a. Insurance companies;
b. Pre-need companies;
c. Insurance agents;
d. Insurance brokers;
e. Professional reinsurers;
f. Reinsurance brokers;
g. Holding companies;
h. Holding company systems;
i. Mutual benefit associations; and
j. All other persons and their subsidiaries and affiliates supervised or regulated by the
IC.
3. Persons supervised or regulated by SEC, such as:
a. Securities dealers, brokers, salesmen, investment houses, and other similar persons
managing securities or rendering services, such as investment agents, advisors, or
consultants;
b. Mutual funds or open-end investment companies, close-end investment companies or
issuers, and other similar entities; and
c. Other entities, administering or otherwise dealing in commodities, or financial derivatives
based thereon, valuable objects, cash substitutes, and other similar monetary instruments or
properties, supervised or regulated by the SEC
The following Designated Non-Financial Businesses and Professions:
4. Jewelry dealers, dealers in precious metals, and dealers in precious stones.
5. Company service providers which, as a business- ito yung someone who arranges for a
nominee shareholders
6. Persons, including lawyers and accountants, or other professionals- basta nagmamanage ng
mga assets of the client, and securities. Persons who provides the following:
● MANAGING of client money, securities or other assets
● Management of bank, savings or securities accounts
● Organization of contributions for the creation, operation or management of companies
● Creation, operation or management of juridical persons or arrangement and buying
and selling business entities
7. Casino (RA 10924)- including internet and shipbased casinos with respect to their casino cash
transaction related to their gaming operations.
8.4.5 Money laundering, terrorism and financing and asset forfeiture

• What are Money laundering offenses?
A. Any person who, knowing that any monetary instrument or property represents, involves, or
relates to the proceeds of any unlawful activity:
1. Transacts said monetary instrument or property;
2. Converts, transfers, disposes of, moves, acquires, possesses or uses said monetary
instrument or property;
3. Conceals or disguises the true nature with respect to said monetary instrument or
property;
4. Attempts or conspires to conform specific act) to commit money laundering offenses
5. Aids, abets, assists in, or counsels referred to in (1), (2), or (3) above; and
6. Performs or fails to perform any act as a result of which he facilitates the offense of
money laundering referred to in (1), (2), or (3) above.
B. Any covered person who, knowing that a covered or suspicious transaction is required
under the AMLA to be reported to the AMLC, fails to do so.
Asset Forfeiture.
A. Civil Forfeiture. - probable cause exists that any monetary instrument or property is
in any way related to an unlawful activity or a money laundering offense
B. Asset Forfeiture in Money Laundering Cases. - conviction for money laundering, the
court shall issue a judgment of forfeiture

C. Claim on Forfeited Assets. - Where the court has issued an order of forfeiture of the
monetary instrument or property in a criminal prosecution for any money laundering
offense, the offender or any other person claiming an interest therein may apply, by
verified petition
D. Payment in Lieu of Forfeiture - said order cannot be enforced because any particular
monetary instrument or property cannot, with due diligence, be located, or it has been
substantially altered, the court may, instead order the convicted offender to pay an
amount equal to the value of said monetary instrument or property.
8.4.6 Preventive measures and obligations of covered persons

Preventive Measures
1. Customer Due Diligence- Covered persons shall establish and record the true identity of
their clients based on official documents.
2. Record Keeping
3. Transaction Reporting – Covered persons shall report to the AMLC all covered
transactions and suspicious transactions within five (5) working days.
8.4.6.1 Prohibited accounts

Covered institution shall maintain accounts only in the true and full names of the account
owner or holder.
a. No new accounts shall be opened and created without face to face contact and full
compliance of minimum requirements.
b. Foreign and peso currency non checking numbered accounts shall be allowed,
provided that true identity is established.
8.4.7 Beneficial ownership

1. Ultimately owns or controls the customer and/or on whose behalf a transaction or activity is
being conducted; or
2. Has ultimate effective control over a legal person or arrangement.
8.4.8 Record keeping requirements

Covered persons shall maintain and safely store for five (5) years from the dates of transactions
all records of customer identification and transaction documents.
1. Retention of Records Where the Account is the Subject of a Case. - records must be
retained and safely kept beyond the five (5)-year period
2. Closed Accounts. - Covered persons shall maintain and safely store for at least five (5)
years from the dates the accounts were closed, all records of customer identification and
transaction documents.
3. Form of Records. - Covered persons shall retain all records as originals or in such forms
as are admissible in court.
➢ Covered persons shall, likewise, keep the electronic copies of all covered and suspicious
transaction reports for, at least, five (5) years from the dates of submission to the AMLC.
8.4.9 Safe Harbor

➢ If you may have reported covered transactions or suspicious transactions in good faith
and in the performance of your duty, there will be no administrative criminal or civil
proceedings that be made against him.
8.5 Intellectual Property Law (RA 8293)
RA 8493 - INTELLECTUAL PROPERTY LAW
AN ACT PRESCRIBING THE INTELLECTUAL PROPERTY CODE AND ESTABLISHING THE

INTELLECTUAL PROPERTY OFFICE, PROVIDING FOR ITS POWERS AND FUNCTIONS, AND FOR
OTHER PURPOSES

8.5.1 Patents
Any technical solution of a problem in any field of human activity which is new, involves an inventive
step and is industrially applicable shall be patentable. It maybe, or may relate to, a product or process,
or an improvement of any of the foregoing.
ELEMENTS
1. NOVELTY - An invention shall not be considered new if it forms part of a prior art
2. INVENTIVE STEP - An invention involves an inventive step if, having regard to prior art, it
is not obvious to a person skilled in the art at the time of the filing date or priority date of
the application claiming the invention.
3. INDUSTRIAL APPLICABILITY - An invention that can be produced and used in any industry
shall be industrially applicable.
4. ENABLEMENT - It is the ability to demonstrate that the concept actually works and that
the patent application teaches the public trained in that particular field how to make and
use the invention.
Not all inventions are patentable. In order to be patentable, an invention must be new,
useful, and non-obvious.
Non-Patentable Inventions
● Discoveries, scientific theories and mathematical methods;
● Schemes, rules and methods of performing mental acts, playing games or doing business, and
programs for computers;
● Methods for treatment of the human or animal body
● Plant varieties or animal breeds or essentially biological processes for the production of plants
or animals.
● Aesthetic creations; and Anything which is contrary to public order or morality
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 filing the foreign application: Provided, That:
a. The local application expressly claims priority;
b. It is filed within twelve (12) months from the date the earliest foreign application was filed; and
c. A 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.
8.5.2 Trademark, Service Marks and Trade Names

● TRADEMARK means any visible sign capable of distinguishing the goods
● SERVICE MARKS means any visible sign capable of distinguishing the services
● TRADE NAMES means the name or designation identifying or distinguishing an enterprise
REGISTRABILITY
A mark cannot be registered if it:
a. Consists of immoral, deceptive or scandalous matter;
b. Consists of the flag or other insignia of the Philippines
c. Consists of a name, portrait or signature identifying a particular living individual except
by his written consent;
d. Consists of the name, signature, or portrait of a deceased President of the Philippines,
during the life of his widow, if any, except by written consent of the widow;
e. Is identical with a registered mark belonging to a different proprietor
f. Is identical with, or confusingly similar to a mark which is considered by the competent
authority of the Philippines to be well-known internationally and in the Philippines
g. Is likely to mislead the public, particularly as to the nature, quality, characteristics or
geographical origin of the goods or services;
h. Consists exclusively of signs that are generic for the goods or services that they seek to
identify;

i. Consists exclusively of signs that have become customary or usual to designate the goods
or services in everyday language or in bona fide and established trade practice;
j. Consists exclusively of signs that may serve in trade to designate the kind, quality,
quantity, intended purpose, value, geographical origin, time or production of the goods or
rendering of the services, or other characteristics of the goods or services;
k. Consists of shapes that may be necessitated by technical factors, nature of the goods
themselves, or factors that affect their intrinsic value;
l. Consists of color alone, unless defined by a given form; or
m. Is contrary to public order or morality.
Unfair Competition
The essential elements of unfair competition are:
a. Confusing similarity in the general appearance of the goods; and
b. Intent to deceive the public and defraud a competitor.
8.5.3 Copyright
Copyright is the legal protection extended to the owner of the rights in an original work. “Original work”
refers to intellectual creation in the literary, scientific and artistic domain.
Literary and Artistic Works

Literary and artistic works are original intellectual creations in the literary and artistic domain
protected from the moment of their creation and shall include in particular:
a. Books, pamphlets, articles and other writings;
b. Periodicals and newspapers;
c. Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced
in writing or other material
d. Letters;
e. Dramatic or dramatic-musical compositions; choreographic works or entertainment in dumb
shows;
f. Musical compositions, with or without words;
g. Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art;
models or designs for works of art;
h. Original ornamental designs or models for articles of manufacture, whether or not registrable as
an industrial design, and other works of applied art;
i. Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography,
topography, architecture or science;
j. Drawings or plastic works of a scientific or technical character;
k. Photographic works including works produced by a process analogous to photography; lantern
slides;
l. Audiovisual works and cinematographic works and works produced by a process analogous to
cinematography or any process for making audio-visual recordings;
m. Pictorial illustrations and advertisements;
n. Computer programs; and
o. Other literary, scholarly, scientific and artistic works.
Derivative Works
The following derivative works shall also be protected by copyright:
a. Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of
literary or artistic works; and
b. Collections of literary, scholarly or artistic works, and compilations of data and other materials
which are original by reason of the selection or coordination or arrangement of their contents.
Works not protected

● Any idea, procedure, system, method or operation, concept, principle, discovery or mere data
as such, even if they are expressed, explained, illustrated or embodied in a work;
● News of the day and other miscellaneous facts having the character of mere items of press
information;

● Any official text of a legislative, administrative or legal nature, as well as any official
translation thereof;
● Any work of the Government of the Philippines.
RIGHTS OF CREATOR
Economic Rights
The right to carry out, authorize or prevent the following act;
a. Reproduction of the work or substantial portion thereof.
b. Carry-out derivation work (dramatization, translation, adaptation, abridgement,
arrangement or other transformation of the work).
c. The first public distribution of the original and each copy of the work by sale or other forms
of transfer of ownership.
d. Rental of the original or a copy of an audiovisual or cinematographic work, a work
embodied in a sound recording, a computer program, a compilation of data and other
materials or a musical work in graphic form, irrespective of the ownership of the original
or the copy which is the subject of the rental.
e. Public display of the original or a copy of the work.
f. Public performance of the work
g. Other communication to the public of the work
Moral Rights
The author of a work shall have the right to:
a. Require that the authorship of the works be attributed to him, in particular, the right that
his name, as far as practicable, be indicated in a prominent way on the copies, and in
connection with the public use of his work;
b. Make any alterations of his work prior to, or to withhold it from publication;
c. Object to any distortion, mutilation, or other modification of, or other derogatory action in
relation to, his work which would be prejudicial to his honor or reputation; and
d. Restrain the use of his name with respect to any work not of his own creation or in a
distorted version of his work.
8.6 Data Privacy Act
RA 10173 - DATA PRIVACY ACT
AN ACT PROTECTING INDIVIDUAL PERSONAL INFORMATION IN INFORMATION AND

COMMUNICATIONS SYSTEMS IN THE GOVERNMENT AND THE PRIVATE SECTOR, CREATING FOR
THIS PURPOSE A NATIONAL PRIVACY COMMISSION, AND FOR OTHER PURPOSES
8.6.1 Definitions
a. Data subject refers to an individual whose personal information is processed.
b. Personal information refers to any information from which the identity of an individual is apparent or
can be reasonably and directly ascertained by the entity holding the information, or when put together
with other information would directly and certainly identify an individual.
c. Personal information controller refers to a person or organization who controls the collection,
holding, processing or use of personal information, including a person or organization who instructs
another person or organization to collect, hold, process, use, transfer or disclose personal information
on his or her behalf. Except:
(1) A person or organization who performs such functions as instructed by another person or
organization; and
(2) An individual who collects, holds, processes or uses personal information in connection with the
individual’s personal, family or household affairs.

d. Personal information processor refers to any natural or juridical person whom a personal information
controller may outsource the processing of personal data pertaining to a data subject.
e. Privileged information refers to any and all forms of data which under the Rules of Court and other
pertinent laws constitute privileged communication.
f. Sensitive personal information refers to personal information:
● About an individual’s race, ethnic origin, marital status, age, color, and religious, philosophical or
political affiliations;
● About an individual’s health, education, genetic or sexual life
● About any proceeding for any offense committed or alleged to have been committed by a person,
the disposal of such proceedings, or the sentence of any court in such proceedings
● Issued by government agencies (i.e., social security numbers, health records, licenses, and tax
returns)
● Specifically established by an executive order or an act of Congress to be kept classified.
8.6.2 Scope of application

This Act applies to the processing of ALL types of personal information and to any natural and
juridical person involved in personal information processing including those personal information
controllers and processors who, although not found or established in the Philippines, use
equipment that are located in the Philippines, or those who maintain an office, branch or agency
in the Philippines.
This Act does not apply to the following:

a. Information about any individual who is/was an employee of a government institution that
relates to the position or functions of the individual;
b. Information about an individual who is/ was performing service under contract for a
government institution;
c. Information relating to any discretionary benefit of a financial nature (i.e., the granting of a
license or permit given by the government to an individual);
d. Personal information processed for journalistic, artistic, literary or research purposes;
e. Information necessary in order to carry out the functions of public authority;
f. Information necessary for banks and other financial institutions under the jurisdiction of BSP
to comply with the Anti-Money Laundering Act and other applicable laws; and
g. Personal information originally collected from residents of foreign jurisdictions in accordance
with the laws of those foreign jurisdictions, including any applicable data privacy laws, which
is being processed in the Philippines.
8.6.3 Data Privacy Principles

Personal information must, be:
a. Collected for specified and legitimate purposes determined and declared;
b. Processed fairly and lawfully;
c. Accurate, relevant and, kept up to date; inaccurate or incomplete data must be rectified,
supplemented, destroyed or their further processing restricted;
d. Adequate and not excessive in relation to the purposes for which they are collected and
processed;
e. Retained only for as long as necessary for the fulfillment of the purposes for which the data
was obtained;
f. Kept in a form which permits identification of data subjects for no longer than is necessary
for the purposes for which the data were collected and processed
Note: The personal information controller must ensure implementation of personal information
processing principles set out.
8.6.4 Processing of personal data

The processing of personal information shall be permitted only if not prohibited by law, and when
at least one of the following conditions exists:
a. The data subject has given his or her consent;
b. The processing of personal information is necessary and is related to the fulfillment of a
contract with the data subject or in order to take steps at the request of the data subject prior
to entering into a contract;

c. The processing is necessary for compliance with a legal obligation to which the personal
information controller is subject;
d. The processing is necessary to protect vitally important interests of the data subject, including
life and health;
e. The processing is necessary in order to respond to national emergency, to comply with the
requirements of public order and safety, or to fulfill functions of public authority
f. The processing is necessary for the purposes of the legitimate interests pursued by the
personal information controller or by a third party or parties to whom the data is disclosed.
8.6.5 Security measures for protection of personal data

a. The personal information controller must implement reasonable and appropriate
organizational, physical and technical measures against any accidental/ unlawful destruction,
alteration and disclosure, as well as against any other unlawful processing of personal
information.
b. The personal information controller shall implement reasonable and appropriate measures
to protect personal information against natural dangers (e.g., accidental loss/destruction, and
human dangers).
c. The determination of the appropriate level of security must take into account the nature of the
personal information to be protected, the risks represented by the processing, the size of the
organization and complexity of its operations, current data privacy best practices and the cost
of security implementation.
d. The personal information controller must further ensure that third parties processing
personal information on its behalf shall implement the security measures required by this
provision.
e. The employees, agents or representatives of a personal information controller who are
involved in the processing of personal information shall operate and hold personal
information under strict confidentiality if the personal information are not intended for public
disclosure.
f. The personal information controller shall notify the Commission and affected data subjects
when sensitive personal information that may be used to enable identity fraud are reasonably
believed to have been acquired by an unauthorized person, and the personal information
controller or the Commission believes that such unauthorized acquisition is likely to give rise
to a real risk of serious harm to any affected data subject.
8.6.6 Rights of Data Subject

The data subject is entitled to:
a. Be informed whether personal information pertaining to him or her shall be, are being or have
been processed;
b. Be furnished the following information before the entry of his or her personal information into
the processing system of the personal information controller, or at the next practical opportunity:
(1) Description of the personal information to be entered into the system;
(2) Purposes for which they are being or are to be processed;
(3) Scope and method of the personal information processing;
(4) The recipients/ classes of recipients to whom they are or may be disclosed;
(5) Methods utilized for automated access and the extent to which such access is authorized;
(6) The identity and contact details of the personal information controller or its representative;
(7) The period for which the information will be stored; and
(8) The existence of their rights, i.e., to access, correct, as well as the right to lodge a complaint
before the Commission.
Note: Any information supplied or declaration made to the data subject on these matters shall
not be amended without prior notification of data subject:
c. Reasonable access to, upon demand, the following:

(1) Contents of his or her personal information that were processed;
(2) Sources from which personal information were obtained;
(3) Names and addresses of recipients of the personal information;
(4) Manner by which such data were processed;
(5) Reasons for the disclosure of the personal information to recipients;

(6) Information on automated processes where the data will or likely to be made as the sole basis
for any decision significantly affecting or will affect the data subject;
(7) Date when his/her personal information concerning the data subject were last accessed and
modified; and
(8) The designation, or name or identity and address of the personal information controller;
d. Dispute the inaccuracy or error in the personal information and have the personal information
controller correct it immediately and accordingly, unless the request is vexatious or otherwise
unreasonable.
e. Suspend, withdraw or order the blocking, removal or destruction of his or her personal
information from the personal information controller’s filing system upon discovery and
substantial proof that the personal information are incomplete, outdated, false, unlawfully
obtained, used for unauthorized purposes or are no longer necessary for the purposes for which
they were collected.
f. Be indemnified for any damages sustained due to such inaccurate, incomplete, outdated, false,
unlawfully obtained or unauthorized use of personal information.
8.6.7 Data breach notification

The personal information controller shall promptly notify the Commission and affected data
subjects when sensitive personal information or other information that may be used to enable
identity fraud are reasonably believed to have been acquired by an unauthorized person, and the
personal information controller or the Commission believes that such unauthorized acquisition is
likely to give rise to a real risk of serious harm to any affected data subject. The notification shall
at least describe the nature of the breach, the sensitive personal information possibly involved,
and the measures taken by the entity to address the breach. Notification may be delayed only to
the extent necessary to determine the scope of the breach, to prevent further disclosures, or to
restore reasonable integrity to the information and communications system.
(1) In evaluating if notification is unwarranted, the Commission may take into account compliance
by the personal information controller with this section and existence of good faith in the
acquisition of personal information.
(2) The Commission may exempt a personal information controller from notification where, in its
reasonable judgment, such notification would not be in the public interest or in the interests
of the affected data subjects.
(3) The Commission may authorize postponement of notification where it may hinder the progress
of a criminal investigation related to a serious breach.
8.6.8 Outsourcing and subcontracting agreements

A personal information controller may subcontract the processing of personal information:
Provided, That the personal information controller shall be responsible for ensuring that proper
safeguards are in place to ensure the confidentiality of the personal information processed,
prevent its use for unauthorized purposes, and generally, comply with the requirements of Data
Privacy Act and other laws for processing of personal information.
8.6.9 Registration and compliance requirements
Enforcement of the Data Privacy Act

The Commission requires the following:
a. Registration of personal data processing systems operating in the country that involves
accessing or requiring sensitive personal information of at least 1,000 individuals,
including the personal data processing system of contractors, and their personnel,
entering into contracts with government agencies;
b. Notification of automated processing operations where the processing becomes the sole
basis of making decisions that would significantly affect the data subject;
c. Annual report of the summary of documented security incidents and personal data
breaches;
d. Compliance with other requirements that may be provided in other issuances of the
Commission.

Registration of Personal Data Processing Systems
The personal information controller/ personal information processor that employs fewer than 250
persons shall not be required to register unless the processing it carries out is likely to pose a
risk to the rights and freedoms of data subjects, the processing is not occasional, or the
processing includes sensitive personal information of at least 1,000 individuals.
The contents of registration shall include:

1. The name and address of the personal information controller/ personal information
processor, and of its representative, if any, including their contact details;
2. The purpose(s) of the processing, and whether processing is being done under an
outsourcing or subcontracting agreement;
3. A description of the category or categories of data subjects, and of the data or categories
of data relating to them;
4. The recipients or categories of recipients to whom the data might be disclosed;
5. Proposed transfers of personal data outside the Philippines;
6. A general description of privacy and security measures for data protection;
7. Brief description of the data processing system;
8. Copy of all policies relating to data governance, data privacy, and information security;
9. Attestation to all certifications attained that are related to information and
communications processing; and
10. Name and contact details of the compliance or data protection officer, which shall
immediately be updated in case of changes.
11. The procedure for registration shall be in accordance with these Rules and other
issuances of the Commission.
8.7 Electronic Commerce Act
RA 8792 - E-COMMERCE ACT
AN ACT PROVIDING FOR THE RECOGNITION AND USE OF ELECTRONIC COMMERCIAL AND NON-
COMMERCIAL TRANSACTIONS AND DOCUMENTS, PENALTIES FOR UNLAWFUL USE THEREOF,
AND FOR OTHER PURPOSES
8.7.1 Principles
Ecommerce Act aims to facilitate domestic and international dealings, transactions,
arrangements, agreements, contracts and exchanges and storage of information through the
utilization of electronic, optical and similar medium, mode, instrumentality and technology to
recognize the authenticity and reliability of electronic data messages or electronic documents
related to such activities and to promote the universal use of electronic transactions in the
government and by the general public.
8.7.2 Application
Shall apply to any kind of electronic data message and electronic document used in the context of
commercial and non-commercial activities to include domestic and international dealings,
transactions, arrangements, agreements, contracts and exchanges and storage of information.
a. “Addressee” refers to a person who is intended by the originator to receive the electronic data
message or electronic document.
b. “Electronic data message” refers to information generated, sent, received or stored by
electronic, optical or similar means.

c. “Electronic signature” refers to any distinctive mark in electronic form, representing the
identity of a person and attached to the electronic data message/ electronic document with
the intention of authenticating or approving an electronic data message/ electronic document.
d. “Electronic document” refers to information, or other modes of written expression, described,
by which a right is established or an obligation extinguished, or by which a fact may be proved
and affirmed, which is received, recorded, transmitted, stored, processed, retrieved or
produced electronically.
e. “Electronic key” refers to a secret code which secures and defends sensitive information that
crosses over public channels into a form decipherable only with a matching electronic key.
f. “Originator” refers to a person by whom the electronic document purports to have been
created, generated and/or sent. The term does not include a person acting as an intermediary
with respect to that electronic document.
g. “Service provider” refers to a provider of —
● Online services or network access, or the operator of facilities
● The necessary technical means by which electronic documents of an originator may be
stored and made accessible to a designated or undesignated third party.
Note: Such service providers shall have no authority to modify or alter the content of the electronic
document received or to make any entry therein on behalf of the originator, addressee or any third
party unless specifically authorized to do so.
8.7.4 Legal recognition and communication of electronic data messages and electronic documents
Electronic data messages Electronic documents
Information shall not be denied validity or Electronic documents shall have the
enforceability solely on the ground that it is in legal effect, validity or enforceability as any
the form of an electronic data message other document or legal writing, and —
purporting to give rise to such legal effect, or
that it is merely incorporated by reference in ● Where the law requires a document to be in
that electronic data message. writing, that requirement is met by an
electronic document if the said electronic
document maintains its integrity and
reliability and can be authenticated so as to
be usable for subsequent reference.
● For evidentiary purposes, an electronic

document shall be the functional equivalent
of a written document under existing laws.
8.7.5 Electronic commerce in carriage of good

Applies to:
a. (i) furnishing the marks, number, quantity or weight of goods;
(ii) stating or declaring the nature or value of goods;

(iii) issuing a receipt for goods;
(iv) confirming that goods have been loaded;
(b) (i) notifying a person of terms and conditions of the contract;

(ii) giving instructions to a carrier;
(c) (i) claiming delivery of goods;

(ii) authorizing release of goods;
(iii) giving notice of loss of, or damage to goods;
(d) giving any other notice or statement in connection with the performance of the contract;

(e) undertaking to deliver goods to a named person or a person authorized to claim delivery;
(f) granting, acquiring, renouncing, surrendering, transferring or negotiating rights in goods;
(g) acquiring or transferring rights and obligations under the contract.
TRANSPORT DOCUMENTS
Where the law requires that any action referred to contract of carriage of goods be carried out in
writing or by using a paper document, that requirement is met if the action is carried out by using
one or more data messages or electronic documents.
The paragraph above applies whether the requirement is in the form of an obligation or whether
the law simply provides consequences for failing either to carry out the action in writing or to use
a paper document.
8.7.6 Electronic transactions in government

All departments, bureaus, offices and agencies of the government, as well as all government-
owned and -controlled corporations shall —
a. accept the creation, filing or retention of documents in the form or electronic data
messages or electronic documents;
b. issue permits, licenses, or approval in the form of electronic data messages or
electronic documents;
c. require and/or accept payments, and issue receipts acknowledging such payments,
through systems using electronic data messages or electronic documents; or
d. transact the government business and/or perform governmental functions using
electronic data messages or electronic documents.
8.8 Ease of Doing Business and Efficient Delivery of Government Services
RA 11032 - ANTI-RED TAPE ACT OF 2007
EASE OF DOING BUSINESS AND EFFICIENT DELIVERY OF GOVERNMENT SERVICE DELIVERY ACT
8.8.1 Policy, construction and interpretation

This act promotes:
a. Integrity;
b. Accountability;
c. Proper management of public affairs and public property;
d. Establish effective practices;
e. Efficient turnaround of the delivery of government services; and
f. Prevention of graft and corruption.
a. Red Tape - Any regulation, rule, or administrative procedure or system that is detrimental in
achieving its intended objectives, as a result, produces slow, undesirable social outcomes.
b. Business One Stop Shop (BOSS) - Site, location, or website, designated for business permit
and licensing system of LGU.
8.8.3 Coverage and scope
• This act shall apply to ALL government offices and agencies, whether located in the Philippines or
not.
8.8.4 Reengineering of systems and procedures

All offices and agencies which provide government services are mandated to regularly undertake
cost compliance analysis, time and motion studies, undergo evaluation, and improvement of their
transaction systems and procedures and reengineer the same to reduce bureaucratic red tape
and processing time.
Note: All proposed regulation shall undergo regulatory impact assessment. Provided, when
necessary, may undergo pilot implementation.
8.8.5 Citizen’s charter
All government office and agencies shall set up their most current and updated service standards,
which shall be posted at the main entrance of offices or at the most conspicuous place. The most
current and updated service standards must include:
a. Checklist of requirements;
b. Procedure to obtain the service;
c. Person/s responsible for each step;
d. Maximum time to conclude the process;
e. Documents to be presented;
f. Amount of fees; and
g. Procedure for filing complaints.
8.8.6 Accessing government services
a. Acceptance of Applications/ Requests

b. Action of Offices
• Simple Transactions - No longer than (3) working days.
• Complex Transactions - No longer than (7) working days.
• Applications involving activities which impose danger to public - No longer than
(20) working days.
• Applications that require approval of local sanggunian - No longer than (45)
working days.
Note: If the cause of delay is due to force majeure, natural, or man-made disasters,
processing time shall be suspended.
c. Denial of Application - any denial shall be fully explained in writing, stating the name of person
who made the denial and grounds of denial.
d. Limitation of Signatories - Maximum of (3) signatories.
8.8.7 Streamlined procedures for the issuances of permits and licenses

a. Single application form
b. (BOSS) to receive and process manual or electronic submissions
c. Automate business permitting and licencing system or set up a (BOSS)
d. Business permit - valid for (1) year
8.8.8 Violations, jurisdiction, penalties, and immunity
Any person may be liable upon committing these acts:

a. Refuse to accept application without due cause;
b. Imposition of additional requirements;
c. Imposition of additional costs;
d. Failure to give written notice of disapproval;
e. Failure to render services within the time without due cause;
f. Failure to attend applications who are within the premises;
g. Failure or refusal to issue receipts; or
h. Fixing or collusion with fixers.
Penalties and Liabilities to be impose in violation:

A. 1st offense - Administrative liability with (6) months suspension.

B. 2nd offense - Administrative and criminal liability.
• Dismissal from service
• Disqualification from holding public office
• Forfeiture of retirement benefits
• Imprisonment of (1) year to (6) years with fine of (500k) to (2M)
8.9 Labor law
LABOR LAW
(Labor Code of the Philippines - P.D. 442, As amended)
LEGISLATION SPECIFYING RESPONSIBILITIES AND RIGHTS IN EMPLOYMENT, PARTICULARLY THE

RESPONSIBILITIES OF THE EMPLOYER AND THE RIGHTS OF THE EMPLOYEE
8.9.1 Labor Standards

Minimum requirements prescribed by existing laws, rules and regulations relating to wages, hours of
work, allowances and other monetary and welfare benefits, including those set by occupational safety
and health standards.
Labor standards shall apply to:

a. Employees in all establishments and undertakings
Labor standards shall not apply to:

a. Government employees;
b. Managerial employees;
c. Field personnel;
d. Members of the family of employer who are dependent on him;
e. Persons in the personal service of another, and
f. Workers who are paid by results.
8.9.1.1 Basic pay

• All remuneration or earnings paid by an employer to a worker for services rendered.
8.9.1.2 Overtime premium

• Those who performed/worked beyond (8) hours a day.
Benefits of who work beyond (8) hours on a:

a. Regular day - Additional compensation of at least (25%) of regular wage.
b. Holiday/Rest day - Additional compensation of at least (30%) of regular wage.
8.9.1.3 Night shift differential

• Those who performed/worked between 10pm-6am are entitled to night shift differential.
• Benefits: Night shift differential of at least (10%) of his regular wage for each hour of
work.
8.9.1.4 Holiday premium

a. Regular holiday - Double pay.
b. Special working holiday - No work, no pay.
c. Special Non-working holiday - Additional (30%) if there is work rendered. Additional
(50%) if there is a work rendered and it falls on the employee’s rest day.

8.9.1.5 13th month pay
To compute for the amount to be received as 13th month pay:
• Number of months rendered divided by 12 months multiplied by the basic pay.
8.9.1.6 Leaves
Note: There are different kinds of leave that the employee may be entitled to: service incentive,
maternity, paternity, and parental leave.
8.9.1.7 Service incentive leave

• Employees who have rendered at least (1) year of service are entitled to yearly (5) days
leave with pay.
Note: Shall not apply to those who are already enjoying the benefit.
8.9.1.8 Maternity leave

Covered person who has paid at least (3) monthly maternity contributions in the (12) month
period preceding the semester of childbirth and who is currently employed are entitled to
the maternity leave.
Benefits: Daily maternity benefit equivalent to (100%) of her basic salary, allowance, and
etc.
Note: The employee shall notify the employer about her pregnancy and duedate of
childbirth, and the employer shall notify SSS about it.
8.9.1.9 Paternity leave

Every married male employee in the private and public sectors shall be entitled to a leave
of (7) days with full pay for the first (4) deliveries of the legitimate spouse.
• 1960 - Any female worker entitled to maternity leave, at her option, allocate up
to (7) days to the child’s father, whether or not the same is married to the
female.
8.9.1.10 Parental leave for solo parent

Solo parent employee, regardless of employment status, who has rendered service of at least
(6) months, shall be granted (7) working days leave with pay is entitled for parental leave for
solo parent.
Benefits:
1. Full scholarship for (1) child
2. One thousand pesos per month if earning a minimum wage
3. 10% VAT discount and exemption on child’s (until (6) years old) necessities
4. Prioritization in re-entering work force
5. Prioritization in housing projects
8.10 Social Security Law
RA 1161 - SOCIAL SECURITY LAW
PURPOSE: TO ESTABLISH, DEVELOP, PROMOTE, AND PERFECT A SOUND AND VIABLE TAX-EXEMPT
SOCIAL SECURITY SERVICE SUITABLE TO THE NEEDS OF THE PEOPLE.
• PROVIDE COVERED PERSONS AGAINST THE HAZARDS OF DISABILITY, SICKNESS, OLD AGE,
AND HEALTH.
8.10.1 Definitions
a. Beneficiaries - dependent spouse and children (primary beneficiaries), dependent parents,
legitimate descendants and illegitimate children (secondary beneficiaries).
b. Contingency - retirement, death, permanent disability, injury or sickness.
c. Monthly salary credit - the compensation base for contributions and benefits.

8.10.2 Scope and Coverage
Coverage in the SSS shall be compulsory upon all employees not over sixty years of age and their
employers.
Note: Private plans which are existing and in force at the time of compulsory coverage shall be
integrated with the plan of the SSS and shall not be discontinued, reduced, or impaired.
8.10.3 Pension, Retirement and other benefits

Amount of pension to be received by dependents:
• The dependents' pension shall be equivalent to (10%) of the monthly pension for each
dependent child but not exceeding (5) , beginning with the youngest and without substitution.
Entitled to retirement benefits:

a. The covered employee who has paid at least (120) monthly contributions prior to the semester
of retirement, and
1. Who has reached the age of (60) years and is not receiving monthly compensation of
at least (300) pesos, or
2. Who has reached the age of (65) years, shall be entitled for as long as he lives to the
monthly pension.
b. A covered member who is (60) years old at retirement and who does not qualify for pension
benefits, shall be entitled to a lump sum benefit equal to the total contributions paid by him
and on his behalf: Provided, That he is separated from employment and is not continuing
payment of contributions to the SSS on his own.
b. Upon the death of the retired employee pensioner, his primary beneficiaries shall be entitled
to (80%) of the monthly pension and his dependents to the dependents' pension: Provided, That
if he has no primary beneficiaries and he dies within (60) months from the start of his monthly
pension, his secondary beneficiaries shall be entitled to a lump sum benefit equivalent to the
bigger of (20 x the monthly pension) or [(60 x the monthly pension) - total monthly pensions
paid by the SSS excluding the dependents' pension].
Note: The monthly pension shall be reduced upon the re-employment of a retired employee who is
less than (65) years old by an amount equivalent to (½) his earnings over (300) pesos.
8.10.4 Exemptions from tax, legal process and lien

SSS is exempted from tax, legal process and lien. All its assets and properties, all contributions
collected and all accruals and income or investment earnings, supplies, equipment, papers or
documents shall be exempt from any tax, assessment, fee, charge, or customs or import duty; and all
benefit payments made by the SSS shall likewise be exempt from all kinds of taxes, fees or charges,
and shall not be liable to attachments, garnishments, levy or seizure by or under any legal process,
except to pay any debt of the covered employee to the SSS.
Note: Any tax assessment against, and still unpaid by the SSS shall be null and void.
8.10.5 Employee’s and employer’s contributions

The employer shall deduct and withhold from such employee's monthly salary, wage, compensation
or earnings, the employee's contribution in an amount corresponding to his salary, wage,
compensation or earnings during the month.
Note: The maximum covered earnings or compensation of all SSS members shall be limited to (3K)
pesos per month.
Employer’s contribution - Employer shall pay, with respect to such covered employee, the employer's
contribution. Notwithstanding any contract to the contrary, an employer shall not deduct, directly or
indirectly, from the compensation of his employees covered by the SSS or otherwise recover from
them the employer's contributions with respect to such employees.
Note: The remittance of such contributions by the employer shall be supported by a quarterly
collection list to be submitted to the SSS at the end of each calendar quarter indicating the correct ID

number of the employer, the correct names and SS numbers of the employees and the total
contributions paid for their account during the quarter.
8.10.6 Contributions from self-employed member

The average monthly net earnings declared by the self-employed at the time of his registration with
the SSS shall be considered as his monthly compensation and he shall pay both the employer and
employee contributions.
Note: The average monthly net earnings declared by the self-employed member at the time of his
registration shall remain the basis of his monthly salary credit.
8.10.7 Remittance of contributions

a. Contribution imposed shall be remitted to the SSS within the first (7) days of each calendar month.
o Every employer is required to deduct and remit such contributions, if not paid, he shall pay
the contribution and penalty of (3%) per month.
o The collection and remittance shall be made quarterly or semi-annually.
b. The right to institute necessary action against the employer may be commenced within (20) years from
the time the delinquency is known.
o Should an person default, the commission may collect:
o By an action in court
c. By issuing a warrant to the sheriff
d. The last complete record of monthly contributions paid by the employer shall be presumed to be the
monthly contributions payable by and due from the employer to the SSS.
e. Any employer who is delinquent within (6) months remit said contributions and submit the
corresponding collection lists without incurring the (3%) penalty. If failed to remit within (6) months
grace period, the (3%) penalty shall be imposed.
8.10.8 Method of collection and payment

Method of collection and payment - The SSS shall require a complete and proper collection and
payment of contributions and proper identification of the employer and the employee. Payment may
be made in cash, checks, stamp, coupons, tickets, or other reasonable devices that the Commission
may adopt.
8.10.9 Employment records and reports

a. Each employer shall report to the SSS the names, ages, civil status, occupations, salaries and
dependents of all his employees. Provided, if an employee should be in contingency without the SSS
having previously received any report or written communication about him from his employer or a
contribution paid in his name by his employer, the said employer shall pay to the SSS the damages
equivalent to the benefits to which said employee would have been entitled had his name been
reported on time by the employer to the SSS, except that in case of pension benefits, the employer
shall be liable to pay the SSS damages equivalent to (5) year's monthly pension; including dependents'
pension: Provided, further, That if the contingency occurs within (30) days from the date of
employment, the employer shall be relieved of his liability for damages.
b. Should the employer misrepresent the true date of employment of his employees or remit to
the SSS contributions which are less than those required in this Act, resulting in a reduction of
benefits, the employer shall pay to the SSS damages to the extent of such reduction.
c. The records and reports duly accomplished and submitted to the SSS by the employee or the
employer, as the case may be, shall be kept confidential by the SSS.
d. Every employer shall keep true and accurate work records.
e. Each employer shall require as a condition to employment, the presentation of a registration
number of the employee from the SSS.
8.10.10 Penal Clauses

a. Whoever, made any false statement or representation as to any compensation paid or
received or claim for any benefit, or application for loan with the SSS, shall suffer the penalties
provided for in Art. 172 of the Revised Penal Code.
b. Whoever shall obtain or receive any money or check without being entitled with intent to
defraud any covered employee, employer or the SSS, shall be fined not less than (500) pesos nor more
than (5K) pesos and imprisoned for not less than (6) months nor more than (1) year.

c. Whoever buys, sells, offers for sale, uses, transfers, takes or gives in exchange, or pledges
or gives in pledge, any stamp, coupon, ticket, book or other device, for the collection or payment of
contributions required herein, shall be fined not less than (500) pesos nor more than (5K) pesos, or
imprisoned for not less than (6) months nor more than (1) year, or both.
d. Whoever, with intent to defraud, alters, forges, makes or counterfeits any stamp, coupon,
ticket, book or other device for the collection or payment of any contribution required herein, or uses,
sells, lends, or has in his possession any such altered, forged, or counterfeited materials or imitation
of it shall be fined not less than (1K) pesos nor more than (10K) pesos or imprisoned for not less than
(1) year nor more than (5) years, or both.
e. Whoever fails or refuses to comply with the provisions of this Act, shall be punished by a fine
of not less than (500) pesos nor more than (5K) pesos, imprisonment for not less than (6) months nor
more than (1) year, or both. Provided, That where the violation consists in failure or refusal to register
employees or himself, in case of the covered self-employed or to deduct contributions from
employee's compensation and remit the same to the SSS, the penalty shall be a fine of not less than
(500) pesos nor more than (5K) pesos and imprisonment for not less than (6) months nor more than
(1) year.
f. Any employee of the System who receives or keeps funds or property belonging, payable or
deliverable to the System and who shall appropriate the same, or shall take or misappropriate or shall
consent, or through abandonment or negligence shall permit any other person to take such property
or funds, wholly or partially, or shall otherwise be guilty of misappropriation of such funds or property,
shall suffer the penalties.
g. Any employer who after deducting the monthly contributions or loan amortizations from his
employee's compensation; fails to remit the said deductions to the SSS within thirty days from the
date they became due shall be presumed to have misappropriated such contributions or loan
amortizations and shall suffer the penalties.
MULTIPLE CHOICE QUESTIONS
1.0 Law on Business Transactions
1. The following are the requisites of an obligation, except:

a. Passive and active subject
b. Demand
c. Prestation
d. Efficient cause
CORRECT ANSWER: B
2. In order that reformation may be availed or as remedy, the following requisites must be present,
except
a. Meeting of the minds of the parties to the contract;
b. Public instrument does not express the true agreement or intention of the parties;
c. Failure to express the true intention is due to mistake, fraud, inequitable conduct (i.e., any act or
omission which is unjust or unfair), or accident;
d. Facts upon which relief by way of reformation of the instrument is sought are put in issue by the
pleadings
CORRECT ANSWER: B
3. In case of the loss or deterioration of the thing pledged due to a fortuitous event, the pledgee
a. Can be held responsible but he is liable for loss or deterioration by reason of fraud, negligence, delay
or violation of the termccontract.
b. Canheld responsible but he is not liable for loss or deterioration by reason of fraud, negligence, delay
or violation of the terms of the contract.
c. Cannot be held responsible but he is liable for loss or deterioration by reason of fraud, negligence,

d. Cannot be held responsible but he is not liable for loss or deterioration by reason of fraud, negligence,
CORRECT ANSWER: C
4. Stage of contract of sale where the performance of undertaking happens

a. Perfection
b. Consummation
c. Negotiation
d. Performance
CORRECT ANSWER: B
5. Statement 1: There is no mistake if the party alleging it knew the doubt, contingency or risk affecting
the object of the contract.
Statement 2: In order that mistake may invalidate consent, it should refer to the substance of the thing
which is the consent of the contract.
a. Only Statement 1 is ttrue.
b. Only Statement 2 is ttrue.
c. Statements 1 and 2 are true.
d. Statements 1 and 2 are false
CORRECT ANSWER: A
6. Statement 1 : A third person who is a party to the principal obligation may secure the latter by pledging
his own property. The law grants him the same rights as a guarantor and he cannot be prejudiced by any
waiver of defense by the principal debtor.
Statement 2 : The right of choice given to the pledgee as to which of the things pledged he shall cause
to be sold is limited only by stipulation. After insufficient property has been sold to satisfy the
obligation plus interests and expenses, no more shall be sold.
a. Only Statement 1 is true.
b. Only Statement 2 is true
d. Statements 1 and 2 are false.
CORRECT ANSWER: D
7. Statement 1: In contract of Piece of Word, the goods are manufactured for the general public.
Statement 2: In contract of Sale, the goods are manufactured upon special request of a person
b. Statements 1 and 2 are true.
c. Statements 1 and 2 are false.
CORRECT ANSWER: D
8. Ordinary diligence is
a. Diligence of a good father of a family
b. Diligence of a father of a good family
c. Diligence of a father of a family
d. Diligence required by law
CORRECT ANSWER: A
9. The creditor has the right to the fruits of the thing

a. From the time the fruits have been delivered.
b. From the time there is meeting of the minds
c. From the time the obligation to deliver it arises
d. From the perfection of the contract
CORRECT ANSWER: C
10. Statement 1: Things subject to a suspensive condition may be the object in contract of sale
Statement 2: Things having potential existence may be the object in contract of sale
b. Only Statement 2 is true.

d. Statements 1 and 2 are false.
CORRECT ANSWER: B
2.0 Bouncing Checks
1. It means an arrangement or understanding with the bank for the payment of such a check.
a. Check
b. Deposit
c. Credit
d. Savings
CORRECT ANSWER: C
2. How much is the fine imposed to any person who makes and issues any check for value with
insufficient funds?
a. A fine not more than triple the amount of the check which is at least php 200,000
b. A fine of not less than and not more than double amount of the check which does not exceed php
200,000
c. A fine of at least php 200,000 and half the amount of the check
d. A fine of not less than or not more than double of the check only
CORRECT ANSWER: B
3. When is the making, drawing and issuance of a check out of insufficient funds presented to be deemed
as a prima facie evidence of knowledge of such insufficiency of funds or credit?
a. Within 90 days after the maturity of the check
b. Within 90 days from the date of the check
c. 5 banking days after receiving notice
d. 5 days from the date of the check
CORRECT ANSWER: B
4. For how long is the imprisonment imposed to any person who makes and issues any check for value
with insufficient funds?
a. Not less than 60 days but not more than 120 days
b. Not less than 30 days but not more than 90 days
c. Not less than 60 days but not more than 100 days
d. Not less than 30 days but not more than one year
CORRECT ANSWER: D
5. Who has the duty to write, print or stamp in plain language the reason for drawee’s dishonor or refusal
to pay a check, when he refuses to pay the check upon presentation?
a. Drawee
b. Drawer
c. Holder
d. Bank
CORRECT ANSWER: A
6. Who shall be liable for a check drawn by the corporation?

a. Corporation itself who signed the check
b. Drawer who signed the check
c. Holdersigned the check
d. Person/persons who signed the check on its behalf
CORRECT ANSWER: D
7. A penalty is imposed upon a person who, having no sufficient funds, issues a check if he fails to keep
sufficient to cover the full amount of the check within what period?
a. Within 90 days after receiving notice
b. Within 5 banking days after receiving notice
c. Within 90 days from the date appearing in the check

d. Within 3 days from the date appearing in the check
CORRECT ANSWER: C
8. A maker or drawee who makes arrangements for payment in full by the drawee of a check within _____
that such check has not been paid by the drawee, is not an evidence of insufficiency of funds.
a. 3 banking days after receiving notice.
b. 90 banking days after receiving notice.
c. 5 banking days after receiving notice.
d. 10 banking days after receiving notice
CORRECT ANSWER: C
9. Notwithstanding the receipt of an order to stop payment, who shall state in the notice that there were
no sufficient funds in credit with a bank for the payment in full of a check?
a. Holder
b. Bank
c. Drawee
d. Drawer
CORRECT ANSWER: C
10. Batas Pambansa Blg. 22 is an act penalizing the making or drawing and issuance of a check without
sufficient funds or credit and for other purposes. Which of the following statements is incorrect?
a. The introduction in evidence of any unpaid and dishonored check, having the drawee’s refusal to pay
stamped or written attached thereto, shall be a prima facie evidence of the making or issuance of said check.
b. A fine, imprisonment, or both is imposed at the discretion of the court upon any person who makes or
draws and issues any check with insufficient funds.
c. The making, drawing, and issuance of a check payment out of insufficient funds is deemed as a prima
facie evidence of knowledge of such insufficiency of funds or credit if presented within 90 days from the date
of the check.
d. It shall be the duty of the holder of any check, when refusing to pay the check upon presentment, to
cause to be written, printed, or stamped in plain language thereon, the reason for the drawee’s dishonor or
refusal to pay the same.
CORRECT ANSWER: D
3.0 Consumer Protection Act
1. Statement 1: The Department may not prohibit a manufacturer from stockpiling consumer products to
prevent them from circumventing.
Statement 2: Stockpiling means manufacturing or importing a product between the date of
promulgation and its effective date at a rate significantly greater than the rate during a base period.
a. Statement 1 is True, Statement 2 is false
b. Both statement are false
c. Both statement are true
d. Statement 1 is false, Statement 2 is true
CORRECT ANSWER: D
2. Statement 1: Consumers may invoke their rights under the Lemon Law if at least five repair attempts
by the same manufacturer, distributor, authorized dealer or retailer remain unresolved.
Statement 2: The repair may not include replacement of parts components, or assemblies.
CORRECT ANSWER: B
3. Statement 1: The Consumer Protection Act shall not apply to the professional services
Statement 2: The Consumer Protection Act shall not apply to the professional services except for
CPA's services

CORRECT ANSWER: A
4. Statement 1: The consumer has an option to notify the manufacturer, distributor, authorized dealer or
retailer of the unresolved complaint and their intention to invoke their rights under the Lemon Law within the
rights period.
Statement 2: Name tags must clearly indicate the price per unit in pesos and centavos.
CORRECT ANSWER: B
5. Statement 1: The purpose of Consumer Protection Act is to develop and provide safety and quality
standards for consumer products, as well as the performance and the use of the products.
Statement 2: It may also assist the consumer in evaluating the quality, including safety, performance
and comparative utility of consumer products.
CORRECT ANSWER: C
6. Statement 1: Consumer product standards and safety rules must take effect within 105 days of
promulgation.
Statement 2:Consumer product standards and safety rules must take effect within 90 days of
promulgation.
CORRECT ANSWER: D
7. Statement 1: The labels and packaging must have the correct brand name or registered name.
Statement 2: The labels and packaging must enlisted the active ingredients.
CORRECT ANSWER: C
8. Statement 1: Any consumer product offered for importation into the customs of the Philippine territory
shall be refused admission if such product has a material defect.
Statement 2: Any consumer product offered for importation into the customs of the Philippine territory
shall be refused admission if such product is determined safe.
CORRECT ANSWER: A
9. Statement 1: The manufacturer, distributor, authorized dealer or retailer is liable to pay a minimum of
P500,000.00 in damages to the aggrieved party without prejudice to any civil or criminal liability under Lemon
law
Statement 2: The violation of Price tag act shall be punished by imprisonment of not more than six
months or a fine of not more than two hundred pesos, or both such fine and imprisonment in the
discretion of the court.

CORRECT ANSWER: D
10. Statement 1: The Department must declare any sales act, practice or technique deceptive before due
notice and hearing.
Statement 2: Sales generated from home solicitation sales shall be properly receipted as per existing
laws, rules and regulations on sale transactions.
CORRECT ANSWER: D
4.0 Final Rehabilitation and Insolvency
1. It shall refer to either:

1. The financial condition of a debtor that is generally unable to pay its or his liabilities as they
fall due in the ordinary course of business or
2. Financial condition of a debtor when he has liabilities that are greater than its or his assets.
a. Liquidity
b. Profitability
c. Insolvency
d. Flexibility
CORRECT ANSWER: C
2. What court has original jurisdiction to entertain cases in relation to Financial Rehabilitation and
Insolvency Act?
a. Court of Appeals
b. Regional Trial Court
c. Court of Tax Appeals
d. Municipal Trial Court
CORRECT ANSWER: B
3. It refers to a petition filed by an individual debtor who has sufficient properties to cover his liabilities
but he foresees the impossibility of meeting when they respectively fall due in order to exempt his property
from execution or attachment to be filed by his creditors.
a. Petition for declaration of statement of suspension of payments
b. Petition for voluntary liquidation of insolvent individual debtor
c. Petition for rehabilitation
d. Petition for involuntary liquidation of insolvent individual debtor
CORRECT ANSWER: A
4. Statement 1: Parent has more than 1/2 of the voting power constitutes control to its affiliates.
Statement 2: Parent has 1/2 or less of the voting power does not constitute control to its affiliates.
a. Both statement are true
c. Statement 1 is true; Statement 2 is false
d. Statement 1 is false; Statement 2 is true
CORRECT ANSWER: A
5. Rehabilitation Plan is a plan wherein the insolvent debtor can be restored, except:
a. Debt forgiveness
b. Debt rescheduling
c. Reorganization or quasi-organization
d. Debt have been forgotten
CORRECT ANSWER: D

6. Order issued by the court which retroacts the date of the filing of the petition.
a. Rehabilitation Order
b. Suspension Order
c. Commencement Order
d. Advancement Order
CORRECT ANSWER: C
7. An officer appointed by the court which would maximize the value of the debtor's assets during the
rehabilitation proceedings.
a. Management Committee
b. Rehabilitation Receiver
c. Rehabilitation Sender
d. Organization Committee
CORRECT ANSWER: B
8. Composed of persons, natural or juridical, appointed by the court to supervise the rehabilitation.
a. Management Committee
b. Rehabilitation Receiver
c. Rehabilitation Sender
d. Organization Committee
CORRECT ANSWER: A
9. Statement 1: Voluntary liquidation is initiated by 3 or more creditors.

Statement 2: Involuntary proceedings is initiated by an insolvent debtor.
d. Statement 1 is false; Statement 2 is true
CORRECT ANSWER: B
10. What are the roles of liquidator?

1. To sue and recover all the assets, debts and claims, belonging or due to the debtor.
2. To disregard all property-related of the debtor.
3. To take possession of all the property of the debtor except property exempt by law
from execution.
4. To sell, with the approval of the court, any property of the debtor which has come into
his possession or control.
a. i,ii, and iii
b. ii, iii, and iv
c. i, iii, and iv
d. All of these
CORRECT ANSWER: C
5.0 Philippine Competition Act
1. Statement 1: This Act shall not apply to the combinations or activities of workers or employees that are
designed solely to facilitate collective bargaining in respect of conditions of employment.
Statement 2: This act only applicable within the Philippines
CORRECT ANSWER: B
2. Statement 1: This Act shall not be enforceable against any person or entity engaged in any trade,
industry and commerce in the Republic of the Philippines.
Statement 2: This Act shall be enforceable against any person or entity engaged in any trade, industry
and commerce in the Republic of the Philippines.

CORRECT ANSWER: D
3. Statement 1: It shall be prohibited for one or more entities to abuse their dominant position by engaging
in conduct that would substantially prevent, restrict or lessen competition
Statement 2: This act also prohibit acquisition, maintenance and increase of market share through
legitimate means.
CORRECT ANSWER: A
4. Statement 1: Fixing price at an auction or in any form of bidding in Anti Competitive agreements is
prohibited.
Statement 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 is also prohibited.
CORRECT ANSWER: C
5. Statement 1: Acquisition of stock or other share capital for investment and not to prevent, restrict, or
lessen competition in the relevant market shall be prohibited.
Statement 2: One of the prohibition in Mergers and acquisitions is 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.
CORRECT ANSWER: B
6. In thresholds for compulsory notification, what is not on the stipulation regarding on publishing
regulations?
a. The transaction value threshold and such other criteria subject to the notification requirement;
b. The information that must be supplied for notified merger or acquisition;
c. Exceptions or exemptions from the notification requirement; and
d. Other rules not relating to the notification procedures.
CORRECT ANSWER: D
7. Statement 1: Entity's transaction that exceeds 1,000,000 pesos are prohibited from consummating their
agreement until thirty (30) days after providing notification to the Commission.
Statement 2: Entity's transaction that is lesser than 1,000,000 are prohibited from consummating their
agreement until thirty (30) days after providing notification to the Commission.
d. Statement 2 is true; Statement 1 is false
CORRECT ANSWER: C
8. Documents and information shall be subject to confidentiality, unless there is:

a. Consent
b. Meeting of the minds
c. Written document
d. Notification

CORRECT ANSWER: A
9. The extension of the period within which the agreement may not be consummated.
a. Thirty (30) days
b. Sixty (60) days
c. Fifty (50) days
d. Ninety (90) days
CORRECT ANSWER: B
10. The total review should not exceed for review of initial notification by the Commission of the subject
agreement:
a. Thirty (30) days
b. Sixty (60) days
c. Fifty (50) days
d. Ninety (90) days
CORRECT ANSWER: D
6.0 Government Procurement Law
1. Statement 1: the term "Bid" shall be equivalent to and be used interchangeably with "Proposal" and "Edible"
Statement 2: Consulting Services are services that the GoP may need to undertake for infrastructure
projects.
a. Statement 1 is True
b. Statement 2 is False
c. Statement 1&2 is True
d. Statement 1&2 is False
CORRECT ANSWER: A
2. The Government Procurement Law shall apply to all procurement of any branch in GOP, it can be also
apply in Non Government Organizations?
a. True
b. False
CORRECT ANSWER: B
3. How many percent of the capital or interest that owned by citizens of the Philippines?
a. 50%
b. 80%
c. 60%
CORRECT ANSWER: C
4. Acquisition of real property which shall be governed by

a. R. A 10752
b. R. A 8555
c. R. A 8182
CORRECT ANSWER: A
5. Refer of non procurement activities?

a. Dissemination of Job Order Workers
b. Lease of non government-owned property as lessor for private use
c. Disposal of Property and Other Assets of the Government
CORRECT ANSWER: C
6. It should be prepared in accordance with the Procuring Entity's documentation, which should contain
all the information
a. Procurement Process
b. Bidders Document
c. Executive Agreement
CORRECT ANSWER: A

7. This are examples of non-expandable supplies
a. Stationary
b. Furnitures and Equipment
c. Medicine
CORRECT ANSWER: B
8. A contract between the GoP and another government or international financing institution
a. International Agreement
b. Executive Agreement
c. Biding documents
CORRECT ANSWER: A
9. This is example of Expandable Supplies

a. Fixtures
b. Stationary
c. Land
CORRECT ANSWER: A
10. Statement 1: If the bid is submitted after the deadline will it still be accepted
Statement 2: If the bid is submitted after 3 days of the deadline will it still be accepted
a. statement 1 is True
b. statement 2 is False
c. statement 1&2 are True
d. statement 1&2 are False
CORRECT ANSWER: D
7.0 Law on Business Organizations
1. Statement 1: One person may constitute partnership;

Statement 2: One person may constitute a corporation
a. Statement 1 is true; Statement 2 is false
b. Statement 1 is false; Statement 2 is true
c. Both statements are true
d. Both statements are false
CORRECT ANSWER: B
2. A partnership is a consensual, principal and bilateral/multilateral contract. It is also the following,

except that it is not:
a. a preparatory contract
b. a nominate contract
c. an onerous contract
d. an aleatory contract
CORRECT ANSWER: D
3. When, as a rule, does a partnership begin to exist?

a. On the date of the recording of the partnership agreement with the Securities and Exchange
Commission.
b. Upon the execution of the partnership agreement by the partners.
c. On the date when all the capitalist partners have delivered their contributions to the partnership.
d. On the date when the partnership agreement is acknowledged before a notary public.
CORRECT ANSWER: B
4. In which of the following cases is there a prima facie evidence that one is a partner in a
business?
a. His receipt of a share in the gross returns derived from a property where he has a joint or common
interest with another.
b. His receipt of a share of the profits from an interest on a loan.
c. His receipt of a share of the net profits of a business.
d. His receipt of share of the profits realized from the use of a property that he co-possesses therewith.

CORRECT ANSWER: C
5. In a corporation, two or more positions may be held concurrently by the same person except that no
one person shall act as:
a. President and Chairman of the board
b. Secretary and Treasurer
c. Treasurer and Director
d. President and Secretary
CORRECT ANSWER: D
6. Statement 1. Well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation;
Statement 2. It is a basic principle in Corporation Law that a corporation has a personality which is
the same as the officers or members who compose it
a. Statement 1 is true; Statement 2 is false
b. Statement 1 is false; Statement 2 is true
c. Both statements are true
d. Both statements are false
CORRECT ANSWER: A
7. Three years ago, Benjamin and Bienvenido, brothers, inherited a five-floor commercial building and
the lot on which it was constructed, from Facundo, their father, who died without a will. For the past three
years, the brothers have divided between the two of them the profit on the rental of the property. Are Benjamin
and Bienvenido partners?
a. Yes, because of their receipt of the profit from the use of the property.
b. No, they are merely co-owners of the whole property.
c. No, each one is a sole proprietor of one-half of the whole property.
d. No, they are considered as stockholders of the whole property.
CORRECT ANSWER: B
8. Which of the following may not be a partner in a partnership?

a. Husband and wife
b. Partnership
c. Corporation
d. None of the above
CORRECT ANSWER: D
9. Which of the following is not a characteristic of an insurance contract?

a. Bilateral
b. Unilateral
c. Aleatory
d. Conditional
CORRECT ANSWER: A
10. It is when a corporation absorbs the other and remain in existing, the others are dissolved.
a. Consolidation
b. Constituent Corporations
c. Merger
d. Consolidated Corporations
CORRECT ANSWER: C
8.0 Law on Business Transactions
1. Statement 1: Sensitive personal information refers to any and all forms of data which under the Rules of
Court and other pertinent laws constitute privileged communication.
Statement 2: The Data Privacy Act applies to the processing of information about an individual who is/
was performing service under contract for a government institution.
a. All statements are True
b. All statements are False

c. Statement 1 is True; Statement 2 is False
d. Statement 2 is True; Statement 1 is False
CORRECT ANSWER: B
2. Statement 1: Heeseung and Jay have a joint account with a total of 1.5 million pesos deposits on Bite
Me Bank. Suppose the bank filed for bankruptcy, Heeseung and Jay would receive 500 thousand each.
Statement 2: Heeseung or Jay has a joint account with a total of 1.5 million pesos deposits on Bite Me
Bank. Suppose the bank filed for bankruptcy, Heeseung or Jay would receive 500 thousand each.
CORRECT ANSWER: A
3. Statement 1: A transaction in cash or other equivalent monetary instrument exceeding Php 250,000 is
required to be reported to Anti-Money Laundering Council (AMLC).
Statement 2: All records from AMLC shall be maintained and safely stored for (5) years from the date
of transactions.
CORECT ANSWER: D
4. Work may be performed beyond eight (8) hours a day provided that:
a. Employee is paid for overtime work an additional compensation equivalent to his regular wage plus
at least 25% thereof;
b. Employee is paid for overtime work an additional compensation equivalent to his regular wage plus
c. Employee is paid for overtime work an additional compensation equivalent to his regular wage plus
d. None of the above.
CORRECT ANSWER: A
5. The following are those considered “Dependents” except

a. Legitimate, legitimated, or legally adopted, and illegitimate child who is unmarried
b. Legitimate, legitimated, or legally adopted, and illegitimate child who is not gainfully employed
c. A child who has entered into a common-law relationship and h nas not attained the age of eighteen
d. All of the choices are correct
CORRECT ANSWER: D
6. Statement 1: Jake, a dog lover, experimented to breed his chihuahua and bulldog, the result of the
breeding is patentable.
Statement 2: TV 5 aired the same news of the day as TV 2. TV5 is guilty of copyright.
CORRECT ANSWER: B
7. Statement 1: Spouses Elizalde has an account with Pautang Bank. There is a system glitch happened,
the suppose 1,000,000 pesos to be credited to spouses Elizalde, became 1,000 pesos. Spouses Elizalde filed a
case against Pautang Bank to recover the balance amounting to 999,000. The court may order the examination
of Spouses Elizaldes’ bank account.
Statement 2: As a rule, dollar deposits may be subject to attachment, garnishment, or any other order
or process of any court.

CORRECT ANSWER: C
8. This Act shall apply to any kind of electronic data message and electronic document used in the context
of commercial and non-commercial activities to include domestic and international dealings, transactions,
arrangements, agreements, contracts and exchanges and storage of information.
a. Electric Commerce Act of 2000
b. Economic Commerce Act of 2000
c. Electronic Commerce Act of 2000
d. Economic Commerce Act of 2000
CORRECT ANSWER: C
9. Statement 1: The Anti-Red Tape Act of 2007 only applies to government offices and agencies located
in the Philippines.
Statement 2: All government agencies shall set up their respective most current and updated service
standards to be known as the Citizen’s Charter, which shall be posted at the main entrance of offices
or at the most conspicuous place.
CORRECT ANSWER: D
10. The following are the information needed to disclose under Truth in Lending Act, except:
a. Name of the lender
b. Address of the lender
c. Finance charge
d. Age of the lender
CORRECT ANSWER: D
REFERENCES
1.0 LAW ON BUSINESS TRANSACTIONS

De Leon, Hector., & De Leon, Hector Jr,. (2014). The Law on Obligation and Contract
De Leon, Hector., & De Leon, Hector Jr,. (2014). The Law on Sales, Agency, and Credit Transaction
Domingo, Andrix, (2021). Regulatory Framework and Legal Issue in Business
2.0 BOUNCING CHECKS

Wex definition Team. (2022, May). Cornell Law School.
https://www.law.cornell.edu/wex/drawee#:~:text=Drawee%20is%20the%20party%20that,Print%20Ser
vs.%2C%20707%20F
BATAS PAMBANSA BLG. 22. (2019). Supreme Court E-library.

https://elibrary.judiciary.gov.ph/thebookshelf/showdocs/2/24151
3.0 CONSUMER PROTECTION ACT

Republic Act 7394 Civil Code of the Philippines. (1992, April 13). The LAWPHiL Project.
https://lawphil.net/statutes/repacts/ra1992/ra_7394_1992.html
4.0 FINAL REHABILITATION AND INSOLVENCY

Republic Act 10142 Civil Code of the Philippines. (2010, July 18). Official Gazette of the Philippines.
https://www.officialgazette.gov.ph/2010/07/18/republic-act-no-10142/
5.0 PHILIPPINE COMPETITION ACT

Republic Act 10667 Civil Code of the Philippines. (2014, July 28). Official Gazette of the Philippines.
https://www.phcc.gov.ph/philippine-competition-law-r-10667/
6.0 GOVERNMENT PROCUREMENT LAW

Republic Act. No. 9184 THE 2016 REVISED I PLEASE RULES OF GOVERNMENT PROCUREMENT
LAW. (2016, August).
https://www.ps-philgeps.gov.ph/home/images/legalbases/RevisedIRR.RA9184.pdf
Republic Act No. 9184 | GOVPH. (2002, July 22). GOVERNMENT PROCUREMENT REFORM ACT.
https://www.gppb.gov.ph/laws/laws/RA_9184.pdf
7.0 LAW ON BUSINESS ORGANIZATIONS
Paper Piper Ph. (2023). Law on Partnership
Paper Piper Ph. (2023). Law on Corporation
Republic Act 11232 Revised Corporation Code. (2021, June 10). Securities and Exchange Commission.
https://www.sec.gov.ph/wp-content/uploads/2021/06/2021RCC_REVISED-CORPORATION-CODE_as-
of-June-102021.pdf
Republic Act 386 Civil Code of the Philippines. (1949, June 18). Official Gazette of the Philippines.
Revised Corporation Code of the Philippines - Title IX Merger and Consolidation. (2019, February 23).
https://taxacctgcenter.ph/revised-corporation-code-ra-11232-title-ix-merger-and-consolidation-
philippines/
Revised Corporation Code of the Philippines: Title XVI - Investigationsz Offenses, and Penalties. (2019,
February 23). https://taxacctgcenter.ph/revised-corporation-code-11232-title-xvi-investigations-
offenses-penalties/
Code of Corporate Governance Publicly Listed Companies. (2016, November 12).

https://www.sec.gov.ph/wpcontent/uploads/2019/11/2017_RTD_02CGFD_BoardG%C3%87%C3%96sGove
rnanceResponsibilities.pdf
R.A 8799 The Security Regulation Code. (2000, July 19).

https://lawphil.net/statutes/repacts/ra2000/ra_8799_2000.html
Sec.gov.ph SRC Rule 68, As amended. (2003, February 20). https://www.sec.gov.ph/wp-

content/uploads/2019/11/SRC-Rule-68-as-amended.pdf
Insurance Law (2013, August 15). https://lawphil.net/statutes/repacts/ra2013/ra_10607_2013.html
BATASnatin. (2023). https://batasnatin.com/law-library/mercantile-law/insurance/1582-

characteristics-of-an-insurance-contract.html
Cooperatives. (2008, July 28). https://cda.gov.ph/issuances/republic-act-

9520/#:~:text=%E2%80%9CART.%202.,economic%20development%20and%20social%20justice.

Revised Corporation Code: Title XIV Dissolution (2019, February 23) https://taxacctgcenter.ph/revised-
corporation-code-ra-11232-title-xiv-dissolution-philippines/
8.0 LAW ON BUSINESS TRANSACTIONS

Republic Act No. 9576 | GOVPH. (2009, April 29). Official Gazette of the Republic of the Philippines.
https://www.officialgazette.gov.ph/2009/04/29/republic-act-no-9576-2/
Republic Act No. 1405 | GOVPH. (1955, September 9). Official Gazette of the Republic of the Philippines.
Republic Act No. 3765 | GOVPH. (1963). Securities and Exchange Commission.
https://www.sec.gov.ph/wp-content/uploads/2019/11/1963Law_RA3765.pdf
2016 Revised Implementing Rules and Regulations of Republic Act No. 9160, as Amended. (2021,
February 3). http://www.amlc.gov.ph/laws/money-laundering/2021-02-03-14-02-32/2016-revised-
implementing-rules-and-regulations-of-republic-act-no-9160-as-amended
Republic Act No. 8293 | GOVPH. (1997, June 6). Official Gazette of the Republic of the Philippines.
https://www.officialgazette.gov.ph/2000/06/14/republic-act-no-8792-s-2000/
Republic Act No. 11032 | GOVPH. (2018, May 28). Official Gazette of the Republic of the Philippines.
Presidential Decree No. 442, s. 1974 | GOVPH. (1974, May 1). Official Gazette of the Republic of the
Philippines.https://www.officialgazette.gov.ph/1974/05/01/presidential-decree-no-442-s-1974
https://www.officialgazette.gov.ph/1954/06/18/republic-act-no-

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REGULATORY FRAMEWORK

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 1

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 2

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 2

1.1.2 Sources of obligations and their concepts

1.1.3 Kinds of Obligations

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 3

1.1.4 Specific circumstances affecting obligations in general

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 4

1.1.5 Nature and Effects of Obligations

Accessories vs. Accessions

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 5

1.1.5.2 Obligations to do or not to do

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 6

- That which a debtor may compel a creditor to accept in payment of debt.

1.1.6.3 Special forms or mode of payment

● ARTICLE 1245 – Dation in payment, whereby property is alienated to the creditor in

1.1.6.3.2 Application of payments

1. 1 debtor and 1 creditor only.

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 7

1.1.6.3.4 Tender of payment and consignation

Special Requisites of consignation:

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 8

Obligations may be modified by:

1. Changing their object or principal conditions;

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 9

1.2.1 General Provisions

a. NOMINATE - that which has a specific name or designation in law.

5. According to obligatory force

6. According to person obliged

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 10

10. According to dependence to another contract

a. PREPARATORY - when it is entered into as a means to an end. (agency, partnership)

11. According to dependence of part of contract to other parts

1.2.1.3 Stages of contract

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 11

1.2.1.5 Persons bound

a. By their nature (like a contract involving personal qualifications such as painting,

1.2.2 Essential requisites

1.2.2.1.2 Capacitated Person

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 12

1.2.2.2 Objects of Contracts (ARTICLES 1347 - 1349)

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 13

1.2.2.3 Cause of Consideration of Contracts (ARTICLE 1350)

● Lesion (ARTICLE 1535) – “Except in cases specified by law, lesion or inadequacy of

1.2.3 Forms of Contracts (ARTICLES 1356 - 1358)

The following must appear in the public document:

1.2.4 Reformation of Instrument/Contracts

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 14

1. Meeting of the minds of the parties to the contract;

Reformation distinguished from annulment

Principles of the general law on reformation (ARTICLE 1360)

NOTE: If the mutual mistake is of law, the remedy is annulment.

Cases when reformation is not allowed (ARTICLE 1366)

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 15

Interpretation of stipulation with several meanings (ARTICLE 1373) – When an agreement is

Interpretation of various stipulations of a contract (ARTICLE 1374) – A contract must be interpreted as

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 16

1. Gratuitous contract. If the doubts refer to incidental circumstances of a gratuitous contract,

The following contracts are rescissible:

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS 17

Ratification extinguishes action for annulment may be express or tacit.

➢ Tacit Ratification, the execution of an act which necessarily implies an intention to