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Cont. . .

Obligation Notes

Version 2013.1
Atty. Bernadette C. Mendoza
November 2013
“Running into debt isn’t so
bad. It’s running into
creditors that hurts.”
– Jacob M. Braude
Review of Pertinent Provisions
and Principles
• Art. 1176:
“The receipt of the principal by the creditor without
reservation with respect to the interest, shall give
rise to the presumption that said interest has
been paid. . .

D borrowed from C P100k at 12%/yr interest. Upon

maturity, D paid C and C issued a receipt stating:
‘Received from D P100k in payment of his obligation.
(Sgd) C’
Legal presumption: interest was already paid as
payment is applied first to cover interest, then
the principal obligation.
To dispute presumption, receipt shld state
reservation, such as:
‘Received from D P100k in payment of his
obligation. Interest unpaid. (Sgd) C’
Review of Pertinent Provisions
and Principles

• Art. 1176:
. . .The receipt of a later installment of
a debt without reservation as to
prior installments, shall likewise
raise the presumption that such
installments have been paid.”

- can be controverted by proof to the

- Presumption does not apply to the
payment of taxes because the tax
for one year is independent from
taxes for other years.
Review of Pertinent Provisions
and Principles
In re Doctrine of Comparative
– In case both parties have committed a
breach of the obligation (ex.
Negligence) and it cannot be
determined which of the parties first
violated the contract, the same shall
be deemed extinguished, and each
shall bear his own damages.

In re Doctrine of Contributory Negligence:

– In case both parties have committed a
breach of the obligation and the party
who first violated the contract can be
determined, the liability of the first
infractor shall be equitably tempered
by the courts.
In re Payment of
Monetary Obligations
• Art. 1249, 2nd paragraph:
“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

In the meantime, the action derived

from the original obligation shall be
held in the abeyance.”
Mercantile Documents

Mercantile = Commercial
For a document to be commercial, it
must be defined and regulated by
the Code of Commerce or any
Commercial Law.
-used by merchants or businessmen to
promote or facilitate trade or credit
- documents that acquire their validity
from the signature of the person
who issues them (arising from
commercial transactions)
Mercantile Documents

Portions of the Code of Commerce

(1888) still in force, partly or in

Ex. Merchants, Books of Merchants

and General Provisions on
Contracts (Arts. 1-63)
Mercantile Documents

Special Commercial Laws

1. Corporation Code
2. Negotiable Instruments Law
3. Insurance Code
4. Public Service Lw
5. General Banking Law
6. Securities Regulation Code
7. Insolvency Law
8. Retail Trade Nationalization Law
9. Chattel Mortgage Law
10.Warehouse Receipts Law
*list not exclusive.
Mercantile Documents

1. Check
No. 141992-B
Manila, P.I.
Official Depository of the Phil. Govt.

Feb. 17, 1921

Pay to Portador _____ or bearer ______ Ochenta y cuatro
solamente…….. Pesos P84.00, Phil. Currency.
(Fdo.) Abdon Yacon Paradero
Mercantile Document

“A check, whether a manager’s

check or ordinary check, is not legal
tender, and an offer of a check is not
legal tender and that a creditor may
validly refuse payment by check,
whether it be a manager’s, cashier’s
or personal check.” - PAL v CA

“We are not, by this decision,

sanctioning (authorizing/allowing)
the use of a check for the payment
of obligations over the objection of
the creditor.” – Fortunado vs CA
Mercantile Document

2. Letter of Credit
- Letter issued by one merchant to
another for the purpose of
attending to a commercial

- In banking practice, request by

one bank to another bank to
advance or to give money to a
third person on the basis of the
letter and on the credit of the
person issuing it.
3. Warehouse Receipts (Quedans)
- A written acknowledgement by a
warehouseman that he has received and holds
certain goods in the warehouse for the person
to whom the document is issued. (a document
of title)

• Warehouse receipts needed not be in any
particular form, but every such receipt must
embody within its written or printed terms —
• (a) The location of the warehouse where the
goods are stored,
• (b) The date of issue of the receipt,
• (c) The consecutive number of the receipt,
• (d) A statement whether the goods received will
be delivered to the bearer, to a specified person,
or to a specified person or his order,
• (e) The rate of storage charges,
• (f) A description of the goods or of the packages
containing them,
• (g) The signature of the warehouseman, which
may be made by his authorized agent,
• (h) If the receipt is issued for goods of which the
warehouseman is owner, either solely or jointly
or in common with others, the fact of such
ownership, and
• (i) A statement of the amount of advances made
and of liabilities incurred for which the
warehouseman claims a lien. If the precise
amount of such advances made or of such
liabilities incurred is, at the time of the issue of
the receipt, unknown to the warehouseman or to
his agent who issues it, a statement of the fact
that advances have been made or liabilities
incurred and the purpose thereof is sufficient.
4. Trust Receipt
- A document executed by and between a person
referred to as the entruster, and another person
referred to as the entrustee, whereby the
entruster who owns or holds absolute title or
security interest over certain specified goods,
documents or instruments, releases the same
to the possession of the entrustee upon the
latter’s execution and delivery to the entruster
of a signed document called a trust receipt.

- Considered as a security transaction

intended to aid in financing importers and
retail dealers who do not have sufficient
funds or resources to finance the
importation or purchase of merchandise,
and who may not be able to acquire credit
except through utilization as collateral of
the merchandise imported or purchased.
5. Other types of PN like Certificate of
Time Deposit, Due Bill, Bonds and
Bank Notes
6. Postal Money Order
7. Treasury Warrants
8. Bills of Lading
9. coupon, voucher - a negotiable
certificate that can be detached and
redeemed as needed
10. ticket - a commercial document
showing that the holder is entitled to
something (as to ride on public
transportation or to enter a public
11. Gift certificates, etc. . .
Not Commercial Documents

Documents like invoices and “issue

vouchers,” even if prepared and
issued in connection with
mercantile transaction, are not
commercial documents. (Pp v. C
Beng, 1913)
-these commercial forms (receipts,
order slips and invoices) are
pieces of evidence of commercial
-written memorials of the details of
the consummation of contract
• IN Loan (Real Contract)
- It is only after the checks
(representing the amount of
principal being borrowed) have
produced the effect of payment
that the contract of loan may be
deemed perfected.
- Perfection Stage – when the
requisites of a contract are all
- Consequences: bound to the
fulfillment of what has been stipulated
to be complied with in GF + bound to
all natural consequences
Insolvency and Bankruptcy in
the Philippines
Applicable laws
1. Civil Code of the Philippines
• The Civil Code is the primary law governing
insolvency in the Philippines. Special laws
can govern insolvency as long as they are
not inconsistent with the code.

• Title XIX of Book IV of the Civil Code on

Preferences and Concurrences of Credits
– Art. 2241 credits on specific movables
– Art. 2242 credits on specific immovables
– Art. 2244 preferred credits over the free
property of the DR
– Art. 2247
– Art. 2249
Insolvency and Bankruptcy
in the Philippines
Applicable laws
2. Insolvency Law (yr 1909 – Act 1956) –
Suspension of Payments (ind’l), voluntary
dissolution, involuntary insolvency
(repealed after 101 yrs by FRIA)
3. PD 902-A, as amended by PD No. 1758 –
introduced corp. rehabilitation
4. Rules of Procedure on Corporate
Rehabilitation of 2008
5. RA 10142 Financial Rehabilitation and
Insolvency Act (FRIA) of 2010 – out-of-
court rehabilitation/restructuring
agreements, court-supervised
rehabilitation, pre-negotiated
6. UNCITRAL Model Law on Cross Border
*Policy: to encourage DRs and CRs to
collectively & realistically resolve &
adjust competing claims and property
*Salient Features: allows creditors’
committees a say in relevant decisions,
established or promoted reorganization,
liquidation or foreclosure proceedings
*What the rehabilitation plan may
-Means for the execution of the
rehabilitation plan, i.e., debt to equity
conversion, restructuring of the debts,
dacion en pago, or sale exchange or any
disposition of assets. . .
Insolvency systems policy
• – equitable distribution of the debtor’s
assets, insufficient as they are, among
the creditors, modified by PCC
• -to secure equality among creditors
through the ratable distribution of the
debtor’s assets

*Philippines insolvency regime:

one of the slowest (5.7 yrs) proceedings,
lowest recovery rate (4.7) – how many
cents on the dollar creditors recover
from an insolvent firm
• "Default" essentially means a debtor has
not paid a debt which he or she is required
to have paid.

• "Insolvency” is a legal term meaning that a

debtor is unable to pay his or her debts;
inability to pay one’s debts as they fall due.
– Insolvent- financial condition of a debtor that
is generally unable to pay its or his liabilities
as they fall due in the ordinary course of
business or has liabilities that are greater than
its or his assets. (FRIA)

• “Bankruptcy" is a legal finding that imposes

court supervision over the financial affairs
of those who are insolvent or in default
Remedies of a Financially
Distressed Entities

1. Corporate Rehabilitation
• Entails radical measures such as
changes in organization, management,
and/or strategy
• Temporary protection vs both secured
and unsecured creditors
• Corporate DR (CPA) foresees the
impossibility of meeting its debts when
they fall due
• Voluntary or involuntary (at least 25%
of liabilitites-CR)
Effects of issuance of stay
order by court after filing of
• Stays the enforcement of all claims vs
debtor including monetary obligations
• Prohibits the DR from disposing
properties not in the ordinary course of
• Prohibits the DR from making any
payment of its liabilities
• Stay order applies to both secured and
unsecured CRs

*stay order & an approved

rehabilitation plan merely suspends the
enforcement of the O and do not
prejudice the status of CRs
2. Insolvency Proceedings
• If debtor is no longer capable of or
interested in maintaining its business
• Assets distributed accordingly among
its various creditors
• Applies to both individual and juridical
• Proceedings may be voluntary or
involuntary (3 or + CRs)
• Debts exceeds P1k
Effects of Insolvency: upon filing of
petition and issuance of order of

• Voluntary Insolvency
– DR Declared insolvent (upon filing
of petition)

• Involuntary Insolvency:
– Suspends all civil proceedings
pending vs the DR (Upon order of
– Property and assets shall be
distributed to the creditors.

• No discharge is granted to a corp

that is declared insolvent.

Art. 1198. “The DR shall lose every

right to make use of the period:
(1) when after the O has been
contracted, he becomes
insolvent, unless he gives a
guaranty or security for the
- What is extinguished is the
benefit of the term, the O
becomes demandable and there
is no need to wait for the period
to come

Art. 1198. “The DR shall lose every right to

make use of the period: (1) when after
the O has been contracted, he becomes
insolvent, unless he gives a guaranty or
security for the debt;…”
*Insolvency here means the liability
exceeds his capital and there is no need
for a judicial declaration.
- What is extinguished is the benefit of
the term, the O becomes demandable
and there is no need to wait for the
period to come
NOTE: In a CPA exam, this question was
paraphrased: “When can the creditor
demand payment of the O even if such
O is not yet due?”

Art. 1217: 3rd paragraph

“When one of the solidary debtors
cannot, because of his insolvency,
reimburse his share to the debtor
paying the obligation, such share
shall be borne by all his co-
debtors, in proportion to the debt
of each.”
• Insolvency of the DR is required in payment by
cession. (Art. 1255)

Requisites of cession in payment:

a. More than one debt
b. More than one creditor
c. Complete or partial insolvency of the DR
d. Abandonment of all DR’s properties not exempt
from execution

Effects of Cession or Assignment

a. The CRs do not become the owners, they are
assignees with power to sell the property
b. The DR is released from his O to the extent of
the net proceeds of the sale
c. CRS will collect credits in the order of
preference as agreed upon, or else in the order
established by law

Art. 1294: “If the substitution is

without the knowledge or against
the will of the DR, the new DR’s
insolvency or non-fulfillment of
the obligations shall not give rise
to any liability on the part of the
original DR.”
- A case of expromission
- FACTS: D owes C P10k due on
Nov. 15. X goes to C and assumed
the O of D to C. C consented.
• Consequences:
– D’s O to C is extinguished because C
consented to the novation.
– Supposing X becomes insolvent, C
cannot proceed against D to collect
the P10k because the moment the
C consented to the novation, the O
is totally extinguished as to original

Art. 1295: “The insolvency of the new

debtor, who has been proposed by
the original debtor and accepted by
the creditor, shall not revive the
action of the latter (CR) against the
original obligor (DR), except when
said insolvency was already existing
and of public knowledge, or known
to the (original) debtor, when he
delegated his debt.”
- A case of delegacion

- FACTS: D owes C P10k due on Nov.

15. Before due date, D delegated
his obligation to X, consented by C.