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A.C.G.T.

| © 2014-2015
SPECIAL COMMERCIAL LAWS (MIDTERM)
HISTORY OF BANKS IN THE PHILIPPINES
During the Spanish era, organizations such as churches and hospitals engaged in lending activities so that the income would be used to
fund their respective activities. It was almost non-profit but to fund their operations, they needed income
Eventually came the Americans together with foreign banks. It was during this period where Bank of the Philippine Islands (BPI) and
Philippine National Bank (PNB) were established
1948: It was only much later that the government attempted to put a structure or regulate the banking system. This was in 1948 where
the Charter of the Central Bank of the Philippines was passed. This Charter took effect January 3, 1949.
Jan. 3, 1949: Coincidentally, this was also the same day that the General Banking Act (RA 337) was passed. The General Banking Act
attempted to regulate the establishment of domestic banks and entry of foreign banks; also to determine the powers of domestic banks
and their foreign counterparts. This was the first attempt to regulate the banking industry
1955: The law on Secrecy of Bank Deposits was passed. This was basically a law that was passed to entice people to deposit their money
with banks. Prior to this, there was no such rule, so each bank was not prohibited to divulge. So to prevent this and entice people, this
was passed. Currently, there are exceptions to this.
1963: The Charter of the Philippine Deposit Insurance Commission (PDIC) was passed. This was when deposits where subject to deposit
insurance, to further entice people to put their money in the bank
July 3, 1993: The New Central Bank Act (RA 7695) was passed. This is the Central Bank law that we have now. With this, all the powers of
the Central Bank, established in 1948, were given to what we now call the Bangko Sentral ng Pilipinas (BSP)
1994: RA 7721 was passed, liberalizing the entry of foreign banks in the Philippines. With this, from the 30% allowable shareholdings of
foreign banks, it was increased to 60%. So foreign banks can now own up to 60% shares of domestic banks. And in some exceptions, they
can also establish branches here fully owned by foreign banks, but only for a very limited period.
Atty G: It was only a limited period, I think it was around 7 years from the time of passage of the law
Recently, around May 2014: Congress passed RA 10641 which allows now the full entry of foreign banks in the Philippines. It now allows
100% ownership of foreign banks in domestic banks, as well as establishment of foreign branches without limitation
April 12, 2000: General Banking Law was passed. If you see GBL, it means the current law. If General Banking Act, that would be the law.
This is now repealed by the GBL. This was for recognition that the financial market was rapidly expanding and changing. They needed a
law that can adapt and at the same time, sustain the growth of the economy.
The declaration of policy of GBL actually recognizes 2 things about the banking system.

GENERAL BANKING LAW (RA 8791)


2 ASPECTS RECOGNIZED IN GBL
1. Vital role of banks in providing an environment conducive to the sustained development of the national economy
The law recognizes that banks play an important role for the development of the national economy

Roles of banks that are vital

a. As payment system
As a payment system, banks allow the efficient and effective consummation of commercial transactions
How? Allowing clearing of checks, or electronic transfers of money
It would be so difficult if you are Lucio Tan and you want to buy PAL. If you do it in cash, you will be bringing a truckload of
money. So with a bank, you just give a check or through a wire transfer
Also in case of foreign transactions. Example you have a supplier in Africa, you can do a bank-to-bank transfer of payment

b. Vital role in money supply


Example. It’s Christmas time and people now get their bonuses. They spend their money. When people spend, tendency is for
prices of goods to go up. There is inflation. BSP will now implement and tell banks that there is inflation. Now offer investment
products as higher interest rates. People take out their money and instead put it in the bank. This now causes less money in
circulation. With this, prices now go down. Inflation is controlled.
In this same way, if BSP determines there is less money circulating, so BSP will now tell banks to lower interest rates. Tendency
now is for people to cash in on their investments products; to get their money back from banks, thereby increasing money
circulation in public
The policies of banks can expand or contract circulation of money in the public

c. As financial intermediaries
Example. I am an inventor. I invent something that I think will benefit everyone. But to do that, I need a factory for
manufacturing. I don’t have money, so where will I go? Not to loan sharks. Go to banks. They will normally offer less
interest
In that way, the banks extend credit to investors/entrepreneurs. The bank gets the money from deposits. Someone
deposits with the bank some millions. Here comes the investor also wanting to borrow. Ordinarily, the millionaire and the
inventor would not have met. The inventor would not have availed of the former’s cash. But because of the bank, the
source and user of money come together
Banks bring together the source of the funds as well as the users of such funds.

Sec. 2. Declaration of Policy. The State recognizes the vital role of banks in providing an environment conducive to the sustained
development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In
furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive,
dynamic and responsive to the demands of a developing economy.
Again, these three roles are recognized as the roles of the bank which are essential to the development of the national economy.
And this is basically what this first sentence of the declaration of policy means. The second sentence on the other hand, basically
gives an overview of what the general banking law contains.

2. The State, through the GBL, shall promote and maintain a stable and efficient banking and financial system that is globally competitive,
dynamic and responsive to the demands of a developing economy

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So there are 3 things that GBL intends to establish with respect to the banking system:

a. There has to be a stable and efficient banking and financial system (Good corporate governance)
So how is this done? What kind of regulation? The GBL PROMOTES GOOD CORPORATE GOVERNANCE. If you go over the
provisions of GBL, you will see some restrictions with respect to the dealings between banks, directors, officers, and
shareholders. Like for one,

1) The GBL requires that a certain number of people must be independent directors.

Directors are people who make decisions for a corporation. As you will know in your corporation code, a director will
have to be a shareholder. A director that is not a shareholder is not qualified to act as such. Normally, directors are
people who have substantial interest in the corporation. INDEPENDENT directors are the opposite of this, these are
persons who are NOT substantial holders, NOT officers of the bank or any of its parent, affiliates or subsidiaries.

The law requires that the Board of Directors of a bank must include independent directors. Why? Because, in an
ordinary director sitting in the board, there will always be a conflict of interest between trying to earn as much for the
bank to the detriment of the public. You have a vested interest in the good performance of your company. So what
the law says that at the very least, the BOD of the bank must include independent directors who have no interest. It
means that they will not benefit regardless of how the bank will perform. Why? These are the people that the law
expects will look out for the benefit of the public rather than the performance of the bank. So GBL requires that a
certain percentage must be independent directors.

2) Limitation on DOSRI transactions or lendings.


DOSRI – means Directors, Officers, Shareholders and Related Interest. This is to prevent a situation where for example,
I am a president and a director. The bank basically gets deposits from the public. I borrow all of the money that the
bank got from the public and I use it to fund my other companies which might not be profitable and the depositors can
lose their money. So to prevent this, the GBL sets limits on DOSRI lending.

So the GBL says that hey bank, you can only lend to your DOSRI up to 25% of your total loan portfolio. Anything in
excess of that will be invalid. So there’s a limitation of how much a bank can lend in its DOSRI for the protection of the
public.

3) Fit and proper rule


Under the Corporation Code, when the shareholders will elect their directors and officers, as long as those persons
have already qualified (meaning they already have their 1 share each), they can already start exercising their functions
as directors or officers. But that is NOT the case for banks. Because if you are elected as such, you have to be approved
by the Bangko Sentral.

The Bangko Central have this fit and proper rule. They have to ensure that the persons are fit and proper for their
positions. The moment that you are elected, you have to go through BSP approval, you CANNOT perform your
functions right away. This is also required in the GBL.

b. That which is globally competitive, dynamic and responsive (Market Discipline)


Through MARKET DISCIPLINE which is established in the GBL and which has two aspects namely:

1) Competitiveness
Through the GBL, the law or the state allows the easier entry of foreign banks into the Philippines, sets up the mode of
how banks can be established. Basically intending to increase the number of banks in the Philippines because the policy
of the state is that the more competition there is among banks, the better it is for the economy. They want to establish
and promote competition among banks.

2) Transparency
The GBL requires that financial statements of banks will have to be published because this allows the public to judge for
themselves whether or not they are willing to put their money on that particular bank. Financial Records of banks are
open to public access.

c. Promote and maintain (supervision and regulation/ external governance)


So it’s EXTERNAL GOVERNANCE by the Bangko Sentral. If you look at the law, there are many rules set out by the Bangko
Sentral in order to ensure the supervision and regulation.

THE BANKING BUSINESS IS FIDUCIARY IN NATURE BECAUSE IT IS IMBUED WITH PUBLIC INTEREST
CASE: EQUITABLE PCI VS TAN
Facts:
Tan had an account with PCI. On May 13, he issued a check postdated May 30 in favor of Sulpicio Lines. The latter deposited the check and
the amount was immediately debited by PCI. Tan thereafter issued 3 checks payable to ASELCO but such were dishonored for lack of sufficient
funds. As a result, the electric supply of the 2 power mills was cut off. Tan sued for payment of losses and damages by PCI.
Ruling:
A reading of the check would readily show that it was indeed postdated May 30. The date written clearly appears 5/30/1992. Therefore,
the appellee bank and its personnel erred in debiting the amount of the check even before the check’s due date.
The law imposes on banks high standards in view of the fiduciary nature of banking. The court finds that its negligence is the proximate
cause of respondent’s loss. Payment made before the date specified by the drawer is clearly against the drawee bank’s duty to its client. The
law allows the grant of exemplary damages to set an example for the public good. The banking system has become an indispensable
institution in the modern world and plays a vital role in the economic life of every civilized society. Banks have attained an ubiquitous
presence among our people, who have come to regard them with respect and gratitude and most of all, confidence. For this reason, banks
should guard against injury attributable to negligence or bad faith on its part. Since the banking business is impressed with public interest, of

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paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence is
expected, and high standards of integrity and performance are even required of it.

Discussion:
Post-dated check is one where the date of payment is subsequent to the issuance of the check. In this case, it was issued May 13 and it
was supposed to be paid on May 30. Since the bank immediately debited the account, Tan was then left with insufficient funds to cover
for the 3 subsequent checks he issued. As a result, his power was cut off. Bank’s contention was that they debited it immediately because
of the way he allegedly wrote the date “5/3/0/1992”. SC said it is absurd to write a slant between 3 and 0. We’ll go with the regular way.
Thus, the bank is liable.
The bank was also assessed for exemplary damages. This is usually awarded against businesses imbued with public interest
There is a recognition here that for the banking business to survive, there has to be the trust and confidence of the public
This is the reason why there is the FIDUCIARY NATURE banking nature, because the very survival of banks depends on whether or not
the public is willing to put their money in the bank. The bank needs the trust and confidence of the public. So that is why the bank should
act with the highest standard of integrity and performance is required

HIGH STANDARDS OF INTEGRITY AND PERFORMANCE ARE REQUIRED AS TO:


1. Treatment of the accounts of depositors/customers

CASE: CENTRAL BANK VS. CITYTRUST


Facts:
One of Central Banks’ tellers, Flores, presented for payment to petitioner’s senior teller Iluminada 2 Citytrust checks, payable to Citytrust,
both signed and indorsed by Citytrust’s authorized signatory-drawers. The signatures were verified against the specimen signatures. Flores
signed as “Cayabyab”. The cash transfer slip was approved and paid. More than a year and 9 months later, CItytrust demanded Central Bank
to restore the amounts alleging that the checks were already cancelled because they were stolen.
Ruling:
Central Bank is the government body mandated to supervise and regulate banking and other financial institutions. The law imposes on
banks high standards in view of the fiduciary nature of banking. The bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship.
This fiduciary relationship means that the bank’s obligation to observe high standards of integrity and performance is deemed written into
every deposit agreement between a bank and its depositor.

Discussion:
The SC here cited the case of Simex vs CA, wherein it was ruled that the bank is under obligation to treat the accounts of its depositors
with meticulous care. So even if that person is a long-time contact of the bank, it does not excuse the bank’s negligence in making sure
he signed under the correct name
Central Bank said that you can’t fault us because you authorized this person who’s worked with you for 5 years. We already know him.
But SC said that does not excuse you. No matter how long you transacted with this person, each transaction will still have to be
meticulously examined. This is under the fiduciary nature of banking.
So one aspect of fiduciary nature of banking is that the bank will have to observe the highest integrity and performance with respect to
treatment of accounts of its depositors

2. Hiring, selection and supervision of employees

CASE: WESTMONT BANK VS. RAMOS


Facts:
Ramos had an account with a bank and got acquainted with Tan, the bank’s signature verifier. Tan offered her a special arrangement
wherein he would place sufficient funds in her account whenever there would be an overdraft to make sure the checks she would issue would
not be dishonored. To guarantee payment for such funding, Ramos issued postdated checks. One was a stale guarantee check where the date
was altered. This and other checks were dishonored.
Ruling:
Considering that banks can only act through their officers and employees, the fiduciary obligation necessarily extends to their
employees. Banks must ensure that their employees observe the same high level of integrity and performance for it is only through this that
banks may meet and comply with their own fiduciary duty. A bank’s liability as an obligor is not merely vicarious, but PRIMARY since they are
expected to observe equally high degree of diligence, not only in the selection, but also in the supervision of employees. Thus, even if it is the
employee who is negligent, the bank’s responsibility to its client remains paramount making its liability to be a direct one.
The Bank avers that Ramos acquiesced to the change of date. It argues that her continued acts of dealing and transacting with the Bank
are tantamount to her giving consent. The Bank has not taken to heart its fiduciary responsibility to its clients. The more paramount issue is
why the bank, through several of its competent officers and employees, did not double check the genuineness of the date of the check.

Discussion:
Note that: The arrangement was not sanctioned by the bank. It was a private arrangement between Ramos and Tan.
Note that: the check deposited was a stale check. This is one which has not been enchased within 6 months from its issuance. When a
check is stale, the drawee bank is not supposed to accept the check anymore. However, Tan was able to encash it. He changed the date
of the check to make it current. Ramos questioned it because she did not consent to the change of date.
The bank said that the arrangement was between Tan and Ramos, the bank had nothing to do with it. This is actually against the rules of
the bank. Tan was guilty of misconduct, but the bank is still responsible.
The fiduciary nature is also with respect to hiring and supervision of employees, because banks can only act through its officers and
employees. Necessarily, the fiduciary nature extends to them. The bank, then, must make sure that in the hiring, selection and
supervision, it must also exercise a high standard.

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KEY POINTS
The banking business is fiduciary nature because according to Equitable vs. Tan, the bank operates with PUBLIC INTEREST. It has a vital
role in the economy which can only be fulfilled if the bank has the trust and confidence of the public. And this is why the banks will have
to exercise highest standards of integrity and performance
This high standard will reflect not only on treatment of accounts of its depositors, but also with hiring and supervision of employees. This
is because banks can only act through them. Even if it is the fault of the employee, the bank can still be held liable.
If the mistake is made by the depositor himself? (see case below)

CASE: TAN VS CA
Facts:
Tan was travelling to Manila, and to avoid carrying cash, he secured a cashier’s check from PCIB Puerto Princesa branch and
deposited the check with his account in RCBC Binondo. It was an out-of-town check. When he deposited it, he used a local deposit slip, which
resulted to the check being sent to the clearing house. A local check is one issued and deposited in the same territory. It was returned for
being “missent”. RCBC debited the amount from account of Tan without informing him. Believing that the check was deposited, he issued 2
checks which were returned for insufficiency of funds. Tan alleged to have suffered humiliation and loss of face.
Ruling:
Respondent bank cannot exculpate itself from liability by claiming that the depositor “impliedly” instructed it to clear his check by
filing a local deposit slip. In Citytrust vs. IAC, it was ruled that depositors are not concerned with banking procedure. That is the responsibility
of the bank and its employees. Bank clients are supposed to rely on the services extended by the bank, including assurance that their deposits
will be credited to them as soon as they are made.

Discussion:
SC said in the first place, the teller should not have accepted it because your teller is expected to know the internal rules. The client is not
expected to know the same.
The client was not held at fault and the bank was held liable for damages
A mistake made by the client does not necessarily mean that the bank can be exempted from liability
This is still because of the fiduciary nature of banking. They are expected to exercise a high degree of diligence

SECTION 3. Definition and Classification of Banks. —


3.1. "Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits.(2a)
3.2. Banks shall be classified into:
(a) Universal banks;
(b) Commercial banks;
(c) Thrift banks, composed of: (i) Savings and mortgage banks, (ii) Stock savings and loan associations, and (iii) Private development banks,
as defined in Republic Act No. 7906 (hereafter the "Thrift Banks Act");
(d) Rural banks, as defined in Republic Act No. 7353 (hereafter the "Rural Banks Act");
(e) Cooperative banks, as defined in Republic Act No. 6938 (hereafter the "Cooperative Code");
(f) Islamic banks as defined in Republic Act No. 6848, otherwise known as the "Charter of Al Amanah Islamic Investment Bank of the
Philippines"; and
(g) Other classifications of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas. (6-Aa)

CLASSIFICATION OF BANKS
1. UNIVERSAL BANKS
Sundiang: Banks that have authority to exercise, in addition to the powers and functions of commercial banks, powers of an
investment house and the power to invest in non-allied enterprises
Can act as an investment house unlike a commercial bank, which is different from setting up investments
Investment house: an entitiy which undertakes to sell the securities of the issuing companies. What sets it apart is that it guarantees
the sale of these securities. It acts as an underwriter of these securities. They guarantee that these securities will be sold.
Example. San Miguel will want to issue 1M worth of shares. They won’t just sell it to the public because they don’t have the capacity.
It will contact a bank that has an investment house and the bank will undertake to sell these securities with a promise that if not all
are sold, they will pay the remainder. It undertakes to sell and is also allowed to guarantee the sale of those securities. Only a
universal bank can do this. Commercial banks cannot
Banks can invest in allied enterprises, which can be financial or non-financial; or non-allied enterprises.
Non-allied means that the operation is not related to banking at all, like a real estate company, or construction
Only universal banks can invest in non-allied enterprises
Basically, a universal bank is like a commercial bank with greater powers. So it is called expanded commercial bank
Under the General Banking Act, it was just commercial bank. When BSP gave out additional powers, they were then known as
expanded commercial bank. But now with GBL, they are now known as universal banks

2. COMMERCIAL BANKS
Sundiang: Banks that are given all such power necessary to engage in commercial banking in addition to general corporate powers;
commercial banking includes the power to accept drafts, issue letters of credits, discounting and negotiation of negotiable
instruments and evidence of debt, accept and create demand deposits and the like
They perform ordinary banking functions such as deposits, loans, opening accounts, granting letters of credits. Universal banks can
also do these.

3. THRIFT BANKS
Sundiang: Include savings and mortgage banks, private development banks, and stock savings and loan associations
They are geared towards small and medium entrepreneurs- the middle class. Those who do not need much capital can instead go to
a thrift bank instead of universal banks

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4. RURAL BANKS
Banks which are usually found in the provinces for promotion of rural development

5. COOPERATIVE BANKS
Primarily provide financial, banking and credit services to cooperative organizations and their members.

6. ISLAMIC BANKS
Made in accordance with RA 6848
Why is there a need to set up a bank based on religion?
Because there are certain regular banking rules that which are considered as unfit to some religious teachings e.g. :
Interest
When you borrow from the bank, they will always impose interest. In fact, when you
deposit, there is also an interest which means the Muslims cannot go to a regular bank. So a
special bank must be created to meet their requirements which would be consistent with their
belief.

These banks are necessary to make sure that all banking needs of the public are addressed. That is why there are classifications.

ORGANIZATION OF BANKS
An ordinary corporation has 1 franchise from the SEC- the certificate of registration that is basically a document that proves that it
is a juridical person that which is alive. But how many franchise/es does a bank require?
2 franchises
1) Primary –Certificate of registration of SEC
2) Secondary- banking license, Certificate of authority to operate

1. CERTIFICATE OF AUTHORITY TO ORGANIZE / ESTABLISH (Sec. 8 of the GBL)

You apply first to the BSP. What is needed before the monetary board issues this certificate? Applicant must first
intend to organize a stock corporation (meaning the capital is divided into shares and can distribute surplus profits as
dividends pursuant to Sec. 3 of the Corporation Code) because at this point, there is no corporation yet. Second, it
intends that its funds are obtained from the public (which shall mean 20 or more persons). Third, the minimum
capital requirement prescribed by the Monetary board for each category of banks are satisfied (which means the
paid-up capital stock). The authorized capital stock is the maximum, the portion of the authorized capital owned by
the stockholders is the subscribed capital stock and the portion of the subscribed capital which is actually paid is the
paid up capital stock.

Aside from these things, the BSP shall also assess the banks’ ownership structure, directors and senior management,
its operating plan and internal controls as well as its projected financial condition and capital base. If it finds
everything in order, all the requirements under section 8, the bank will then issue the certificate.

2. CERTIFICATE OF AUTHORITY TO REGISTER (Sec. 14 of the GBL)

In your application, you must submit your organizational documents. These are the AOI, the by-laws and treasurer’s
affidavit the documents that you need to organize a corporation. The BSP through the Monetary Board will examine
these organizational documents and once it finds that everything is in order based on Sec.14, it will issue the
certificate of authority to register.

3. CERTIFICATE OF INCORPORATION OR REGISTRATION – PRIMARY FRANCHISE ***

Take note that the SEC is mandated both under the Corporation code and the General Banking law not to approve
the application of an entity which will engage in banking functions without a certificate of authority to register from
the Bangko Sentral. Once the SEC finds that everything is in order, it will then issue the certificate of registration or
certificate of incorporation.

4. CERTIFICATE OF AUTHORITY TO OPERATE – SECONDARY FRANCHISE *** (Sec. 6 of the GBL)

The moment that you have your certificate of incorporation from the SEC, now you go back to the Bangko Sentral
and now you apply for the authority to operate pursuant to Sec 6. Take note that the certificate of incorporation
issued by the SEC is your PRIMARY franchise, this is your authority to say that “I am now a corporation a juridical
entity”. But this alone will not allow you to operate your business, it’s not enough because Sec 6 requires that you
need the certificate of authority to operate which in turn will now be your secondary license.

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But what happens if a corporation without getting this certificate of authority to operate will start
accepting deposits? Who is authorized to determine WON entity is engaged in banking functions? Take note
that a corporation without a banking license cannot operate as a bank, but it does not really stop people
from acting as banks even without license. So the monetary board can determine, and if it finds that a
certain entity is engage without license, it can go to court and penalize that person/entity. The power of the
monetary board is ONLY TO DETERMINE whether or not a person/ entity is engaged in banking functions. If
it determines that is a violation of GBL and Central Bank Act for which there are penalties, of course the
Monetary board CANNOT IMPOSE THESE PENALTIES - so the Monetary board will have to go to COURT to
get the sanctions.

Take note under Sec. 6, the Monetary Board is also authorized to:
examine, inspect, or investigate the books and records of any such person or entity,
administer oaths
compel the presentation and production of books, documents, papers or records

SHAREHOLDINGS OF THE BANK


Foreign
Bank – Sec11 does NOT APPLY; RA 10641 applies (Foreign Bank Act)
Non-Bank- Sec 11 applies
Individual
Corporation
Filipino
Bank –Sec 11 does NOT apply; GBL(certain provisions apply)
Non-Bank- Sec 11 applies
Individual
Corporation

For Foreign Nonbank Individual and Corporation its 40%. What do you mean by a domestic bank?
It is a bank incorporated in the Philippines. It does not say anything that it is Filipino or Foreign owned. It
simply means it is incorporated under Philippine laws.

For Filipinos, 40%. So for example Mr. A is a foreigner owning 40% of the share of XY Bank, then here comes Z corporation which is
another foreign corporation wanting to own 40%, allowed? BOTH are foreign. Another example- all Domestic B corporation & P
corporation, both each 40% of 123 Bank. Allowed? The basis will now be Section X126.1 of the Manual of Regulation for Banks (MORB).

For foreign Individuals & Nonbank Corporation, each may own or control 40% of a Universal (UB), Commercial (KB) & Thrift (TB) Banks.
Provided that the aggregate shall NOT exceed 40% of the UB/KB & 60% of TB. For non Filipino citizens, each/in aggregate may own 60%
(Sec X126.1a).

For Filipino individual &domestic nonbank corporation may each own up to 40% of UB, KB or TB and up to 60% of RB. No ceiling on
aggregate ownership by such in a domestic bank (Sec X126.1c). So Mr. B can own up to 40% and another Filipino corporation can get to
own another 40%. Together, there can be 80% because there is no limit in their aggregate shareholdings.

How can you determine that it is a foreign nonbank corporation?


It is important to know WON corporation is foreign or Filipino because if it is foreign, there is an aggregate limit. But if it is Filipino, it has
no aggregate limit. According to Section X126.1 i(2) the citizenship of the corporation, which is a stockholder of a bank shall follow the
citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation.

What do you mean by controlling or how much is controlling?


Section X126.1 i(2) says further that the term controlling stockholders shall refer to stockholders holding more than 50% of the voting
stock of the corporate stockholders of the bank. Take note that this is quite peculiar because in other laws, particularly in the Foreign
Investment Act, limit is 60% for a corporation to be considered as Filipino. So in the MORB, if Filipino ownership is more than 50% let’s say
51%, that will qualify and will not require them to have an aggregate limit. If foreign shareholding is more than 50%, that corporation will
be subject to an aggregate limit.

If Z corporation, take a look at who are the shareholdings of Z, if shareholders of Z is more than 50% foreigners, Z is a foreign shareholder
and subject to the aggregate limit. If P corporation has a shareholding of 51% Filipinos, it is a Filipino citizen, not a foreign corporation and
is not subject to the aggregate limit.

What about stockholdings within family groups or related interest?


If B is married to C, can B own 40% of a bank? Yes. Can C own another 40% even if they are related to each other? Yes. According to Section
X126.1f, individuals related to each other within the 4th degree of consanguinity or affinity, whether legitimate, illegitimate or common
law, shall be considered family groups or related interests but may each own up to 40% of the voting stock of a UB, KB or TB and up to
60% of the voting stock of RB. Provided that said relationship must be fully disclosed in all transactions by such individuals or family
groups or related individuals.

Situation 1. Corporation X owned by A & B, another Corporation Y, also owned by A & B, can corp X own 40%? Yes. Can corp Y own also
40%?
Pursuant to X126.1g, Two or more corporations owned or controlled by the same family group or same group of persons shall be
considered related interest but may each own up to 40% of the voting stock of a UB, KB or TB and up to 60% of a RB. Provided that said
relationship must be fully disclosed in all transactions by such corporation or related groups of persons with the bank.

Situation 2. A owns 40% of a bank, A fully owns X corporation, and X corp wants 40% again of the same bank. Can this be done?

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Pursuant to X126.1d, an individual and a corporation or corporations which are wholly-owned or majority of the voting stock of which is
owned, by him, may own only up to a combined 40% of the voting stock of a UB, KB, or TB, and up to a combined 60% of the voting stock
of a RB.

What’s the difference between the first situation and the second?
In the 1st situation, corporations are owned by groups of persons although they are considered as related interests, there is still a group
and not just one individual. In the 2nd situation, we are only talking about 1 individual and a corporation wholly owned by him. In which
case, the law considers them as one, with a combined limit of 40%.

STOCKS ISSUED BY THE BANK


Banks can issue any kind of stocks authorized by the Monetary Board. The Monetary Board does not set any kind of prohibition. It can be
common, preferred, redeemable, convertible, etc. The only requirement under the GBL is that the stock must be a par value stock which
means that the value of the stock must be stated in the articles of incorporation of the bank.
What are Treasury stocks?
These are stocks that have been issued and fully paid for but then are reacquired by the bank.
Are banks allowed to reacquire their own shares? Create treasury shares?
The general rule is NO, they aren’t allowed. But they can do it with the authority of the Monetary Board. But if in fact they do have
treasury shares, they must dispose them within 6 months from the time of its purchase or acquisition, be sold or disposed of at a public
or private sale (Section 10 GBL).

DIRECTORS AND OFFICERS


Under the Corporation law, the directors of a corporation will exercise the powers of the corporation granted through its articles, they
will conduct the business of the corporation, and hold the properties of the corporation. Basically, a corporation acts through its
directors.

Directors are at least 5 and a maximum of 15 except when there is a merger or consolidation in which case, not more than 21. A merger
happens when 2 corporations combine or 1 is absorbed by another. Why does the law want to entice corporations to merge? (Section 15 &
17)
Because the policy of the law is that these smaller banks if they get together- they merge or consolidate, they will become stronger and
they will have more assets. So the policy is to promote merger or consolidation of banks. But the law recognizes that the limit on the
number of directors can be a hindrance because obviously, the directors of both banks would want to maintain their own position. So to
allow for these mergers or consolidations to actually happen, the law says okay there’s a merger or consolidation, the bank can have 21
directors. So this is the purpose of the exception.

Of the BOD, how many should be independent?


The law says 2, but the MORB says at least 20% but not less than 2. So if the bank has 5 directors, 20% of that is 1, but the minimum is 2, so
there should be 2 independent directors. If the bank has 15 directors, 20% of that is 3, minimum is 2, so there should be 3 independent
directors. It can’t have 2 because the limit is at least 20%. Can it have 4? Yes, because the 20% is just the minimum.

When can you consider one as an independent director?


The general rule under Section 15 of the GBL is that it shall mean a person other than an officer or employee of the bank, its subsidiaries
or affiliates, or related interests. However, this is expanded under the MORB, a person who will be elected as an independent director
must not be retained as a professional adviser, consultant, agent of the bank or of the related companies of the bank (For full definition
See X141.2b of the MORB)
Moreover, a shareholder with shares of stock sufficient to elect 1 seat in the board of directors of the institution, or in any of its related
companies or of its majority corporate stockholders shall NOT be qualified to be an independent director pursuant to X141.2b (3). For
example, I am a shareholder of a bank with such number of shares that I can elect myself to the bank to be a director then I am NOT
qualified to be an independent director. In your Corporation law, you will learn how voting of directors is done, it is through what we call
as a cumulative voting which means the number of shares you have multiplied by the number of seats in the board. So if that number of
votes will allow you to vote yourself at least 1 seat in the BOD, you are not allowed to be a director. Meaning your shareholdings must
NOT qualify you as a director.

What’s the term of an independent director?


They shall only serve for ONE term. The term of an independent director is 1 year, you have to be elected again for another year. But an
independent director can be elected for 5 consecutive years. If he has been elected for 5 consecutive years, he CANNOT be elected on the
6th year, or 7th year. On the 8th year he CAN after what we call the 2 years cooling off period, and can serve for another 5 years, so a total
of 10 years of service. However, to be allowed another 5 years, you must not have done something during the 2 year cooling off period
that would disqualify you from being an independent director.
For example, after you have served full 5 years, you have acted as an adviser to the bank during the cooling off period, you will no longer
be qualified for the next 5 years. Moreover, if an independent director has elected and served for only 1 year, then after that he has not
been elected the 2nd year, then in the 3rd he CAN be elected subsequently or thereafter. There’s no prohibition. Since what the law
requires is when an independent director has served for 5 consecutive years, then there’s the cooling off period. If you serve for every
other year, the cooling off period will NOT be required. But you can only serve a total of 10 years but no cooling off period.

The fit and proper rule as discussed earlier is part of the corporate governance requirements for banks under the GBL. The Monetary
Board is given the power to prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed
as bank directors or officers. And disqualify those found unfit. As mentioned before, in an ordinary corporation, once you elect your
directors and officers- that’s it. No other act is required. But for banks, once elected they have to submit their bio data and resume of all
their elected directors to the Bangko Sentral who will say whether or not such are qualified are disqualified. So without approval of the
Monetary Board, the directors or officers cannot start their duties as such.

The QUALIFICATIONS of the director as found in X141.2a include:


o At least 25 years of age at time of election or appointment
o At least a college graduate or have at least 5 years of experience in business

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o Have attended a special seminar on corporate governance
o Must be fit and proper
DISQUALIFICATIONS
o Permanent- Basically, grounds are the same as the temporary. Permanent is if the conviction or if found
guilty by final judgment.
o Temporary- If there’s a pending appeal.
o If there’s a criminal case for estafa filed against Mr. A, he CAN be qualified as a director because there is NO
JUDGMENT yet. But the moment he is found guilty, he becomes temporarily disqualified. If he appeals during
the duration of his appeal, his disqualification will remain. If the ruling is affirmed by the appellate court, once
the ruling becomes final because it’s affirmed, his disqualification becomes permanent. But if he is acquitted,
then his disqualification is removed. So the mere filing of a criminal case will not disqualify.
Take note that public officials are NOT allowed to become directors or officers of the bank except as stated in section
19- where such service is incident to financial assistance given by the government.

BANK BRANCHES
Pursuant to Section 20, Bank branches are allowed to be used as outlets for the presentation or sale of the financial products of its allied
undertaking or of its investment house units.
Allied Undertakings are those enterprises which are related to the operations of the bank such as credit card companies, insurance
companies, lending institutions and finance companies.
The rule is that these allied enterprises or allied undertaking of banks can present their products within the banking premises or within
the bank office. It has to be an allied undertaking – an affiliate or subsidiary of the bank.
For example, X bank. Can it sell the products of its affiliate finance company of car loans? Can car loans be presented in X bank offices?
Yes, because it is a product of an allied undertaking of the bank. The finance company is related to the bank, an affiliate of the bank.
What if the finance company is not related or is a third person in relation to the bank, can it sell its product within bank premises? No.
If there’s an Insurance Co. and it’s an affiliate of the bank, it can sell its product within bank premises. If the insurance company is a third
person, not related to the bank, it CAN sell pursuant to Sec. 375 of the Insurance Code (R. A. 10607).

Section 375. The term bancassurance shall mean the presentation and sale to bank customers by an insurance
company of its insurance products within the premises of the head office of such bank duly licensed by the Bangko
Sentral ng Pilipinas or any of its branches under such rules and regulations which the Commissioner and the Bangko
Sentral ng Pilipinas may promulgate. To engage in bancassurance arrangement, a bank is not required to have equity
ownership of the insurance company. No insurance company shall enter into a bancassurance arrangement unless it
possesses all the requirements as may be prescribed by the Commissioner and the Bangko Sentral ng Pilipinas.

"No insurance product under this section, whether life or non-life, shall be issued or delivered unless in the form
previously approved by the Commissioner.

Take note that under this rule, it states ‘any insurance company’ so an insurance company is allowed even if
it’s not an allied enterprise or undertaking.
But of course, subject to the rules and regulations which the Commissioner and the Bangko Sentral ng
Pilipinas may promulgate but no such rule has been promulgated yet. So this provision is not yet in effect.
But technically, this Section 375 amends Section 20 of the General Banking Law. But we don’t know yet the
rules that will be set by the Commissioner and the Bangko Sentral.

Cross-Selling is the process of selling or presenting the financial products within the banking premises. It’s when you
present the products of the allied undertaking or investment house within bank premises.
Bancassurance if presenting insurance products.

BASIC FUNCTIONS OF BANKS: 1. DEPOSIT FUNCTION

Contract of Deposit (legal definition from the Civil Code)


A contract whereby a person receives from another a specific thing with the obligation of safely keeping it and returning the same
There is no definition of deposit in the GBL but it is in the Civil Code. However, the transaction with the bank is not really deposit but a
SIMPLE LOAN or MUTUUM.
The definition of DEPOSIT is not found in the GBL but in the Charter of the PDIC, paragraph F:
“The term “deposit” means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for
which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account, or issued in accordance
with Bangko Sentral rules and regulations and other applicable laws, together with such other obligations of a bank, which, consistent
with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the
bank: Provided, That any obligation of a bank which is payable at the office of the bank located outside of the Philippines shall not be a
deposit for any of the purposes of this Act or included as part of the total deposits or of insured deposit: Provided, further, That,
subject to the approval of the Board of Directors, any insured bank which is incorporated under the laws of the Philippines which
maintains a branch outside the Philippines may elect to include for insurance its deposit obligations payable only at such branch.”
Even PDIC here does not define deposit as a contract. It is defined as an OBJECT – an unpaid balance of money. The definition itself
does not say it’s a contract. Technically, deposit is the transaction and the contract entered into is the contract of loan.
SO when you talk about contract of deposit, it’s not the same as used in banking practice

CASE: CONSOLIDATED BANK VS CA


Facts:
LC Diaz instructed its messenger Calapre to deposit money with Solidbank along with the passbook. Calapre went to Solidbank,
made the deposit, and the teller acknowledged it. Since it took time, he left the passbook with Solidbank as he had to make another deposit
with Allied Bank. When he returned, the teller told him somebody else got the passbook. LC Diaz learned of an unauthorized withdrawal on
that same day. LC Diaz filed Recovery of a Sum of Money against Solid Bank.
Ruling:

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Solidbank is liable for breach of contract due to negligence or culpa contractual. The contract between the bank and its depositor is
governed by the provisions of the Civil Code on SIMPLE LOAN. There is a debtor-creditor relationship between the bank, the debtor, and the
depositor who is the creditor. The depositor lends the bank the money and the bank agrees to pay the depositor on demand. The savings
deposit agreement between the bank and depositor is the contract that determines the rights and obligations of the parties. The law imposes
high standards of integrity and performance in view of the fiduciary nature of banking. However, the fiduciary nature of banking does not
convert the contract between the bank and depositors from a simple loan to a trust agreement. Failure of the bank to pay the depositor is
failure to pay a simple loan, and not a breach of trust.

Discussion:
The basis of imposing damages against the bank is breach of contract/culpa contractual. SC said there was breach of contract of loan.
However, this is not an ordinary contract of loan. The rule in Obligations and Contracts is that the parties are only bound by the
stipulations of the contract.
Are banks required to stipulate on the fiduciary nature and high standard of diligence in the contract? SC said they are not. The
declaration of policies under the GBL is deemed written into the contract. There is no need for an express stipulation.
However, this fiduciary duty does not change or transform the nature. The relationship is still a debtor-creditor relationship. Even if the
fiduciary nature is deemed written into the contract, it does not convert it to trust agreement.
Failure of the bank to comply with the contract which is to allow the client to withdraw the money from the bank does not result in a
breach of trust. It is merely a breach of an obligation to pay.

CASE: GUINGONA VS CITY FISCAL


Facts:
The instant petition filed by Guingona, president of the bank involved, seeks to prohibit public respondents from proceeding with
the preliminary investigation of I.S. No. 81-31938, in which petitioners were charged with estafa and violation of Central Bank Circular No. 364
on the ground of jurisdiction in that the allegations showed that petitioner’s obligations were civil in nature.
Ruling:
There is merit in the contention that their liability is civil in nature and thus, public respondents have no jurisdiction over the charge
of estafa. It must be pointed out that when private respondent David invested his money on time and savings deposits with the aforesaid
bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. Bank deposits are in the nature
of irregular deposits. They are really loans because they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be
treated as loans and are to be covered by the law on loans. Current and savings deposits are loans to a bank because it can use the same.
Hence, the relationship between the private respondent and Nation Savings and Loan Association is that of creditor and debtor;
consequently, the ownership of the amount deposited was transmitter to the bank upon the perfection of the contract and it can make use
of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the bank has the
obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the
failure of the bank to return the amount deposited will not constitute estafa but only give rise to a civil liability over which public respondents
have no jurisdiction.

Discussion:
Estafa here was allegedly committed through violation of paragraph 1(b) Article 315 of the RPC: “By misappropriating or converting, to
the prejudice of another, money, goods, or any other personal property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of or to return the same, even though such obligation
be totally or partially guaranteed by a bond; or by denying having received such money, goods, or other property.”
So for example, if it is a contract of deposit and you failed to return the very same thing under the contract f deposit, then you can be
liable for estafa under 315 (b), because you have to return the very same thing you received. So this was the basis of the case filed by the
depositor against Guingona and the rest
When the time comes to repay, the bank does not have to return the exact same bills and coins. It only needs to repay the same amount
3 consequences of declaring that a deposit is a contract of loan:
a. The moment you deposit the funds, there is transfer of ownership
b. The bank can now use the funds in any way it sees fit. As owner, it can keep it or lend it
c. When it comes for repayment, it is obligated to return the same amount
Thus, there is no criminal consequence/liability in failure to return the money. This is simply a civil matter: non-payment of loan, and not a
breach of trust or failure to return the money received in trust

CASE: ASSOCIATED BANK VS TAN


Facts:
Tan deposited with the bank a check. Upon advice and instruction of the bank that the check was already cleared and backed by
sufficient funds, Tan withdrew the sum. He then issued several checks to his business partners. However, the latter went back to him alleging
the checks he issued bounced because of lack of sufficient funds. Tan then filed for damages against the bank for he allegedly had sufficient
funds in his account. The bank argues that its right to debit the amount of the dishonored check from the account of respondent is clear and is
immediately enforceable even assuming it did not give him notice that the check has been dishonored.
Ruling:
A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals on the part of a depositor. The
right of a collecting bank to debit a client's account for the value of a dishonored check that has previously been credited has fairly been
established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that "fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the provisions concerning simple loan."
Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal compensation
under Article 1278 of the Civil Code may take place "when all the requisites mentioned in Article 1279 are present," as follows:
"(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)That both debts consist 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;

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(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."
Nonetheless, the real issue here is not so much the right of petitioner to debit respondent's account but, rather, the manner in which
it exercised such right. The Court has held that even while the right of setoff is conceded, separate is the question of whether that remedy has
properly been exercised.
Discussion:
What happened here was that Tan deposited a check in the bank. Before that check cleared, the bank allowed him to withdraw a certain
portion, but he still believed he had sufficient funds so he issued still several checks. However, the first check bounced. When it did, the
bank compensated it. They owed Tan money, the amount in his account. Now, Tan owed them money because the check he deposited
bounced and he withdrew it already. Now, the bank and Tan became creditors and debtors of each other
SC ruled that undoubtedly, the bank has a right of set-off (legal compensation). It is a right recognized for banks because the
relationship/contract between the parties is that of debtor and creditor, or a contract of loan. It is a mode of extinguishing an obligation.
This happens when two parties are both creditors and debtors of each other
When all the elements (above) are present, compensation takes place by operation of law. This rule on compensation will apply to banks
because banks and depositors are debtors and creditors of each other
The problem in this case was how that right was exercised because according to the SC, Hey bank, this is your long-term creditor. You
should have informed him that you already debited his account, so it was held liable for damages. But it was only in the manner of setting
off since banks have that right

CASE: CENTRAL BANK VS MORFE


Facts:
Private respondents secured against Savings Bank, after the same had been declared insolvent, final judgments for the recovery of
the balance of their time deposits. Payment of the same as preferred credits evidenced by final judgments in accordance with Article 2244 (14)
(b) of the Civil Code was directed by the liquidation court. From this order, the Central Bank appealed by certiorari.
Ruling:
It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are not true deposits. They are
considered simple loans and, as such, are not preferred credits. Evidently, one purpose in prohibiting the insolvent bank from doing business
is to prevent some depositors from having an undue or fraudulent preference over other creditors and depositors.
We are of the opinion that such judgments cannot be considered preferred and that article 2244(14)(b) does not apply to judgments
for the payment of the deposits in an insolvent savings bank which were obtained after the declaration of insolvency. A contrary rule or
practice would be productive of injustice, mischief and confusion.
And with respect to a national bank under voluntary liquidation, the court noted in the Rohr case that the assets of such a bank
"become a trust fund, to be administered for the benefit of all creditors pro rata, and, while the bank retains its corporate existence, and may
be sued, the effect of a judgment obtained against it by a creditor is only to fix the amount of debt. He can acquire no lien which will give him
any preference or advantage over other general creditors."

Discussion:
Preference of credit comes into play only upon insolvency or liquidation of a corporation. If it is an ongoing concern, or it has the ability to
meet its debts as they become due, there is no such thing as preference of credits. They only come in when the assets of the corporation
are no longer sufficient to meet its liabilities. When this happens, there is preference as to who gets paid first over the insufficient assets.
The spouses claim they are preferred creditors because of the judgment they secured.
SC said deposits are only ordinary credit and do not enjoy any preference. Being ordinary credit, the depositors will have to wait until all
the preferred credits have been paid. If there are still assets left, the depositors will now share in those assets in proportion to their
deposit amounts. No preference with respect to other credits; no preference with respect to each other. They share equally in their
rights in proportion to the amount of their deposits.
When you deposit with a bank, you are merely an ordinary creditor of the bank. You do not acquire any lien on the properties of the bank,
like the chairs or table. You only have an ordinary loan, there is no lien on specific credits. Remember, the nature of a preferred credit is
that it creates a lien on a specific property of the insolvent corporation. That’s why if you have a mortgage, that becomes a preferred
credit because the mortgage creates a lien over the property. A deposit does not doe that because it is a simple loan, it does not have a
security. So a depositor cannot convert his ordinary credit to a preferred credit
As a depositor, you can file a case (even after the corporation is declared insolvent) but only if your claim is disputed and only for the
purpose of fixing the amount of the claim. However, this judgment will not make your credit a preferred credit if your judgment is still
that you are a depositor of the bank. It will just say this is the amount you are entitled to recover. It doesn’t create any preference, you
are still an ordinary creditor of the bank. As long as judgment will just establish that you are a depositor of the bank, that will not create
any preference because the concept of a deposit really is just a simple loan, thus it does not create any lien.

TYPES OF ACCOUNTS and DEPOSITS


A. Depositors
1. Natural Persons
I. Qualifications
i. Legal age
ii. Legal capacity to enter into contracts – this is needed because deposit is a contract of loan
Not disqualified by law
Minors
Exception: PD 734 provides that minors can deposit in their own name with the bank provided:
they are at least 7 years of age
able to read and write
have sufficient discretion
not otherwise disqualified by any other incapacity

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o They can only enter into savings deposit and time deposit. So, they cannot enter into demand
deposits
Insane/demented
With civil interdiction
Deaf-mutes who cannot read or write
II. Kinds of accounts natural persons can enter into
i. Individual account
One person opens an account
ii. Joint account
Kinds:
And/or account – only one signature of any of the depositors is necessary for withdrawal
And account – all signatures of the depositors are necessary
They are owned by more than 1 depositor, not just limited to two persons.
2. Juridical Persons
iii. Corporate accounts
Accounts entered into by corporations, partnership, associations; by juridical persons
B. Types of Deposits
1. Demand Deposit
They are normally not interest bearing because when you maintain a demand deposit from a bank, there is no certainty as
when you will withdraw the money. So the bank will be forced to keep a certain amount of money to make sure that when
you withdraw it, they can provide you. In other words, when the bank is required to keep the money, it cannot use the
money for any other purposes- it cannot lend or invest the money. So the money does not earn for the bank and in turn, it
will not earn for you.

Pursuant to Section 33, the a bank other than a universal or commercial bank cannot accept or create demand deposits
except upon prior approval and subject to such conditions and rules as may be prescribed by the Monetary Board. So
ordinarily, ONLY Universal and Commercial banks can create demand deposits or checking accounts, the other banks should
get special authority from the Monetary Board.
2. Savings Account
Interest bearing; most common type usually evidenced by a passbook.
3. Negotiable Order of Withdrawal Account (NOW)
A combination of both demand and savings deposit. It is interest-bearing that combine the payable on demand feature of
checks and investment feature of savings account.
4. Time Deposits
An account with fixed term

The interest in banks will depend on the commitment of the depositor on how long he will maintain the deposit with the bank. The longer
the commitment, the higher the interest because in that case, the bank can use it for long term investments thus earning higher income
for the bank.

INSURED DEPOSITS refer to the amount deposited in the bank which upon insolvency of the bank which the deposit was made, the
depositor may recover up to P500,ooo. So the maximum insured deposit is 500k.

Section 4 (g) of RA 3591 as amended by Section 3 of RA 9576.


“Insured deposit” means the amount due to any bona fide depositor for legitimate deposits in an insured bank net of any obligation of
the depositor to the insured bank as of date of closure, but not to exceed Five hundred thousand pesos (P500,000.00)
1) A has a deposit of 300k, he can recover 300k.
2) If A’s deposit is 800k, he can recover 500k (only maximum account)
3) If A&B has a joint account of 400k, each can recover 200k
4) If A&B has a joint account of 900k, each can recover 250k
(500k maximum divided by no. of depositors)
If it is a joint account, the insured amount is 500k. How much is the share of each
depositor? 250k each. What is divided is NOT the amount of deposit but the law says the
maximum insured amount is to be divided equally based on the number of depositors.
5) If A has 300k in his individual acct,
He has a 900k joint acct with B
A can recover 300k from individual, and 250k from joint acct. = 550k
A joint account shall be insured separately from any individual-owned account (Section4)
6) If A has 300k in his savings, 300k in time, and 200kin his demand deposit; he can recover ONLY 500k.
It is treated as a single account. Only 500k maximum for his individual account regardless
of the classification of said individual account.
If one account is in branch 1, the other is in branch 2, and so on, still ONLY 500k for all three
because it is considered still as one and what is insured separately is joint and individual.
7) If A has 300k in his individual acct
He has 900k joint acct with B,
He has 900k joint acct with C &
He has 200k joint acct with D
That the aggregate of the interests of each co-owner over several joint accounts, whether
owned by the same or different combinations of individuals, juridical persons or entities,
shall likewise be subject to the maximum insured deposit of Five hundred thousand pesos
(P500,000.00) pursuant to Section 4 (g) of RA 3591 as amended by Section 3 of RA 9576.
A can recover 300k for his individual account and 500k as aggregate interest
But of course, you are more protected if you separate your deposits into two since per
account, it is considered one 500k. But all in all, you can never recover in excess of 500k.
8) If A has 600k in his individual acct
He has 400k with B

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He has 800k with C
For A - 500k for his individual, 200k for joint w/ B & 250k for joint w/ C = 950k
For B – 200k
For C – 250k
9) If A has 500k in his individual acct
He has 600k with B (A&B)
He has 500k with C (A&C)
He has 450k with B & C. (A, B &C)
For A - 500k for individual, 650k for joint but since it can never exceed 500k for joint, so = 1Million
For B – 400k (250 + 150)
For C – 400k (250 + 150)
Pursuant to Section 4 (g) of RA 3591 as amended by Section 3 of RA 9576.

SECRECY OF BANK DEPOSITS: A. R.A. 1405 BANK SECRECY LAW


Bank Secrecy Law was passed on September 9, 1955.

Section 2. 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. (R.A. 1405)

Why? Because deposits are absolutely confidential in nature.


R.A. 1405 provides for exceptions:
written permission of the depositor,
cases of impeachment,
upon order of a competent court in cases of bribery or dereliction of duty of public officials, or
cases where the money deposited or invested is the subject matter of the litigation

CASE: BSB VS GO
Facts:
Ricardo Bangayan (husband of Sally) as president of BSB Group, Inc. filed a complaint for estafa and qualified theft against Sally Go.
Sally Go allegedly indorsed check amounting to P1, 534,135.50 to her personal banking account at Security Bank instead of being turned over to
the company’s coffers. Sally Go filed a motion to quash noting that in the complaint affidavit, there was no mention of the said bank account.
Bangayan opposed on the ground that the complaint showed that there were two checks which she allegedly deposited. Sally Go filed a
supplemental motion and then invoked the privilege of confidentiality under R. A. 1405. BSB contended that the account contains the
proceeds of the check and thus falls among the exception in Section 2 of R.A. 1405 that money deposited or invested is the subject matter of
the
Ruling:
The subject matter of the action in the case at bar is to be determined from the indictment that charges Sally Go with the offense,
and not from the evidence. In the criminal information, Sally Go was charged with qualified theft. The information makes no factual allegation
that in some material way involves the checks sought to be suppressed neither do the allegations make mention of the supposed bank
account in which the funds represented by the checks have allegedly been kept. In other words, it can hardly be inferred that the account is
the subject of the inquiry. Moreover, should there be doubts in upholding the absolutely confidential nature of bank deposits against authority
to inquire, such doubts must be resolved in favor of the former.
Discussion:
Section 1. It is hereby declared to be the policy of the Government 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. (R. A. 1405)
Two allied purposes of the Bank Secrecy Law
1) To discourage private hoarding
2) Encourage the people to deposit their money in banking institutions
The BSB contended that the subject money is among the exception, specifically the fourth exception which is case where the money
deposited or invested is the subject matter of the litigation
There was no mention of the checks allegedly stolen neither was there any mention of the accounts where the checks were
supposedly deposited in the information. The accounts and the money deposited therein were no longer subjects of the litigation.
You can consider it to be subject of litigation only when you look at the pleading and it is part of the allegations there that the issue is
considered to be that money in that particular account identified in the pleading. Therefore, it must be alleged in the pleading.
In the case at bar, there was never any allegations in the complaint and just said in general terms that she stole money in the amount
of 1 million plus and that was it. So the SC said, this account and the money deposited therein cannot be considered as subject matter
of litigation.

CASE: PNB VS GANCAYCO


Facts:
Special Prosecutors from the DOJ required PNB to produce records of bank deposits of Ernesto Jimenez former administrator of the
Agricultural Credit and Cooperative Administration for unexplained wealth particularly in connection with Section 8 of R. A. 3019 or the Anti-
Graft and Corrupt Practices Act regarding the dismissal due to unexplained wealth. The PNB refused to reveal citing the absolutely confidential
nature of deposits pursuant to R.A. 1405. Lower court ruled and sustained the power to compel the disclosure and said that Congress clearly
intended to provide additional grounds for the examination of bank deposits.
Ruling:
Section 8 is intended to amend Section 2 of R.A. 1405, providing additional exception to the rule against the disclosure of bank
deposits. Moreover, while Section 2 of R.A. 1405 declares bank deposits to be absolutely confidential, it nevertheless allows such disclosure in
the following instances (1) written permission of the depositor, (2) in cases of impeachment, (3) upon order of a competent court in cases of
bribery or dereliction of duty of public officials, or (4) in cases where the money deposited or invested is the subject matter of the litigation.

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Cases of unexplained wealth are similar to cases of bribery and dereliction of duty and no reason is seen why these two classes of cases
cannot be excepted from the rule making bank deposits confidential. Therefore, the DOJ may look into such deposit of Jimenez.

Discussion:
The bank, PNB itself was the one who invoked the secrecy of bank deposits and it said that it is not allowed to divulge the records of
the depositors because of R.A. 1405.
The DOJ invoked the last part of Section 8 of R.A. 3019 which states that “bank deposits shall be taken into consideration in the
enforcement of this section, notwithstanding any provision of the law to the contrary”.
Section 8 does not expressly provide that in cases of unexplained wealth, the deposits of the person under investigation can be
inquired upon. There was nothing there.
The Supreme court said that the last phrase of Section 8 of Anti Graft and Corrupt Practices Act is actually sufficient to constitute
an exception to the bank secrecy law such that it went on to say that this basically amends R.A. 1405.
Other than that, if such Section is not sufficient, the cases of unexplained wealth can be considered as similar to cases of bribery and
dereliction of duty which is expressly allowed under R.A. 1405 for the deposit to be inquired into.
So Anti Graft and Corrupt Practices Act is among the exceptions to the Bank Secrecy Law and the basis for that is PNB vs Gancayco
because the law is not really clear on it. So the real basis is this case, PNB vs Gancayco.

B. R.A. 6426 “FOREIGN CURRENCY DEPOSIT ACT OF THE PHILIPPINES”


Section 8. Secrecy of foreign currency deposits. – All foreign currency deposits authorized under this Act, as amended by PD No. 1035, as well
as foreign currency deposits authorized under PD No. 1034, are hereby declared as and considered of an absolutely confidential nature and,
except upon the written permission of the depositor, in no instance shall foreign currency deposits be examined, inquired or looked into by
any person, government official, bureau or office whether judicial or administrative or legislative, or any other entity whether public or
private; Provided, however, That said 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.
R. A. 1405 has four exceptions, while R. A. 6426 has only one exception.

CASE: GSIS vs CA
Facts:
A surety agreement was made between Domsat and GSIS where the former obtained a security bond from the latter to secure the
payment of the loan from the banks. Domsat failed to pay the loan and GSIS refused to comply with its obligation reasoning that Domsat did
not use the loan proceeds for the payment of the rental. GSIS alleged that Domsat transferred 11 Million U.S. dollars from Korea, to New York
and from there to Binondo Branch of Westmont Bank. The Banks filed a complaint against Domsat and GSIS. GSIS requested Westmont Bank
through a subpoena to produce documents saying that it is among the exceptions and invoked R.A. 1405. RTC quashed such subpoenas and
ruled the absolute confidentiality of foreign currency deposits and may be examined only when there is written permission from the
depositor. CA declared that Domsat’s deposits is covered by R. A. 6426 and such testimony of incumbent president of Westmont Bank is not
the written consent contemplated in law however, production of some documents does not involve the examination of Domsat’s account
since it will never be known how much money was deposited into. The Bank maintains that R. A. 1405 is not applicable.
Ruling:
The two laws R.A. 1405 & R. A. 6426 both support the confidentiality of bank deposits. There is NO conflict between them. R. A. 1405
covers all bank deposits in the Philippines and no distinction was made between domestic and foreign deposits. Thus, it is a law of general
application. On the other hand, R. A. 6426 is a special law designed especially for foreign currency deposits. Applying Sec. 8 of R. A. 6426,
absent the written permission of Domsat, Westmont Bank cannot be legally compelled to disclose the bank deposits of Domsat, otherwise it
might expose itself to criminal liability.

Discussion:
GSIS invoked R.A. 1405 or the Bank Secrecy Law, GSIS is saying that the money deposited in the account is the subject matter of litigation
and so under R.A. 1405, it is exempt from the confidential nature of bank deposits.
Westmont Bank invoked R. A. 6426.
There is no conflict between the two laws since R. A. 1405 applies to all types of deposit in the Philippines in general while R. A. 6426
applies specifically to foreign currency deposits.
If it is a foreign currency deposit account, apply Foreign currency deposit law.
If it is any other account, apply R. A. 1405.
Since R. A. 6426 has one exception, you cannot apply the exceptions in R. A. 1405.
Unless you get the written permission of the depositor, you cannot look into the foreign currency deposit.

CASE: INTENGAN VS. CA


Facts:
Citibank filed a complaint against 2 of its officers who appeared to have been actively engaged in business endeavors in conflict with
the business of the bank, specifically with the use of 2 companies which they have personal financial interest, they caused existing bank clients
to divert their money from the former. These bank clients include Carmen Intengan, Rosario Neri and Rita Brawner known as the petitioners.
The disclosure of the said petitioners’ deposits was necessary to establish the allegation. Petitioners assert that the disclosure of their bank
recordswas unwarranted and illegal in blatant violation of R. A. 1405.
Ruling:
The provincial prosecutor, the DOJ, the SolGen and CA – all appear to have overlooked a single fact that the accounts in question are
U.S. Dollar deposits. Consequently, the applicable law is R.A. 6426 and under such law, there is only one exception that the disclosure is
allowed upon written permission of the depositor. A case for violation of R.A. 6426 should have been the proper case brought.

Discussion:
Even when the DOJ Secretary Franklin Drilon was involved, the Supreme Court sarcastically said that hey you great minds or the finest
legal minds of the country, you did not even know what law you should be applying. You are all talking about R.A. 1405 but take a look,
this deposit account is a foreign currency deposit.

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So you don’t apply R. A. 1405, you apply R. A. 6426 which there is only one exception and without complying, you cannot examine the
account of the persons involve.

C. ANTI-MONEY LAUNDERING ACT


This act gives two exceptions. These are found under Section 9 and Section 11.
Section 9. (c) When reporting covered transactions to the AMLC, covered institutions and their officers, employees, representatives,
agents, advisors, consultants or associates shall not be deemed to have violated Republic Act No. 1405, as amended; Republic Act No.
6426, as amended.
In other words, this is an exception of the Bank Secrecy Law and Foreign Currency Deposit.
So if your transaction falls under covered or suspicious transactions, whether your account is Philippine currency or foreign currency,
you can be reported under this Section 9 and the person reporting is exempt from liability.
What is this covered transaction? (We will discuss more on AMLA later, and let’s just focus on exemptions).
These are transactions which are more than 500 thousand pesos in one banking day. The law says that if you
transact with the bank, and your transaction covers more than 500 thousand pesos, the bank is obligated to
report you to the AMLC. Now, that should not be done because your transaction should be confidential but the
law says nevermind, this is an exemption notwithstanding or shall not be deemed to have violated R. A. 1405 and
R. A. 6426.
Section 11. Authority to inquire into Bank Deposits. – Notwithstanding the provisions of Republic Act No. 1405, as amended; Republic Act No.
6426, as amended; Republic Act No. 8791, and other laws, the AMLC may inquire into or examine any particular deposit or investment with
any banking institution or non-bank financial institution upon order of any competent court in cases of violation of this Act when it has been
established that there is probable cause that the deposits or investments involved are in any way related to a money laundering offense:
Provided, That this provision shall not apply to deposits and investments made prior to the effectivity of this Act.

CASE: REPUBLIC VS EUGENIO


Facts:
Several investigations were conducted by the Ombudsman concerning the award of NAIA Airport 3 to PIATCO. Among the persons
investigated was Pantaleon Alvarez, a chairman of the PBAC Technical Committee NAIA-IPT3 Project and Cheng Yong. Investigation revealed
that Alvarez maintained 8 bank accounts with 6 different banks. To fully inquire into such deposits, AMLC filed for issuance of a bank inquiry
order. The RTC issued orders ex-parte. Upon motion by Alvarez, the orders were lifted, refraining AMLC to inquire. Lilia Cheng who is the wife
of Cheng Yong with whom she jointly owns a bank account filed a TRO and argued that ex-parte bank inquiry orders violated her right.
Moreover, she argued that under the AMLA, such order can only be granted in connection with violations of the AMLA and that the AMLA can
not apply to bank accounts opened and transactions entered into prior to the effectivity of the AMLA.
Ruling:
The AMLA also provides exceptions to the Bank Secrecy Act. Under Section 11, the AMLC may inquire into a bank account upon order of
any competent court in cases of violation of the AMLA, it having been established that there is probable cause that the deposits or
investments are related to unlawful activities as defined in Section 3(i) of the law, or a money laundering offense under Section 4 thereof.
There is also no need for the AMLC to obtain a court order before it could inquire into such accounts. Further, a bank inquiry order may not
be availed of ex parte.

Discussion:
2 issues of the AMLA (1) The interpretation of the phrase “in cases of violation of this Act” (2) Can the AMLC file ex-parte
The contention of the persons being investigated is that the phrase “in cases of violation of this Act” means that before the AMLC can
look into the deposit accounts, there has to be first an actual case filed for violation of the AMLA. They took the term literally.
The SC said the contention is wrong since what it simply means is ‘in the event of’ or in the event there are violations of the AMLA and it
is NOT required for there to be actual cases pending for violation of the AMLA. So you don’t need to file a case to look into the bank
deposits.
On the second issue of ex-parte, meaning on application of one party and the other party will not be allowed to contest. In this case the
SC said that you compare Section 10 and Section 11. Section 10 expressly provides that it is an ex-parte application for a freeze order. But
the phrase is NOT repeated on Section 11 and so obviously, the intention of Congress is for it to be NOT ex-parte. So it’s not allowed. You
cannot do it ex-parte.
Upon learning of the decision in the case of Eugenio, Congress amended Section 11.

Section 2. Section 11 of the same Act is hereby amended to read as follows:


"SEC. 11. Authority to Inquire into Bank Deposits. – Notwithstanding the provisions of Republic Act No. 1405, as amended; Republic Act No.
6426, as amended; Republic Act No. 8791; and other laws, the AMLC may inquire into or examine any particular deposit or investment,
including related accounts, with any banking institution or non-bank financial institution upon order of any competent court based on an ex
parte application in cases of violations of this Act, when it has been established that there is probable cause that the deposits or investments,
including related accounts involved, are related to an unlawful activity as defined in Section 3(i) hereof or a money laundering offense under
Section 4 hereof; except that no court order shall be required in cases involving activities defined in Section 3(i)(1), (2), and (12) hereof, and
felonies or offenses of a nature similar to those mentioned in Section 3(i)(1), (2), and (12), which are Punishable under the penal laws of other
countries, and terrorism and conspiracy to commit terrorism as defined and penalized under Republic Act No. 9372."
"The Court of Appeals shall act on the application to inquire into or examine any deposit or investment with any banking institution or non-
bank financial institution within twenty-four (24) hours from filing of the application."
In the new section 11 (Sec.2 of R.A. 10167 amending Sec. 11 of R.A. 9160), it says ex-parte application. Now it is allowed. Congress is
now saying to the Supreme Court that the SC’s interpretation is wrong. The intention is for there to be an ex-parte application.
You apply to the Court of Appeals.
Just take note that Section 9 and Section 11 are exceptions to the Secrecy of Bank Deposits covering Philippine and foreign currency
deposits.

D. RA9372 Human Securities Act

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SEC. 27. Judicial Authorization Required to Examine Bank Deposits, Accounts, and Records. - The provisions of Republic Act No. 1405 as
amended, to the contrary notwithstanding, the justices of the Court of Appeals designated as a special court to handle anti-terrorism cases
after satisfying themselves of the existence of probable cause in a hearing called for that purpose that: (1) a person charged with or suspected
of the crime of terrorism or, conspiracy to commit terrorism, (2) of a judicially declared and outlawed terrorist organization, association, or
group of persons; and (3) of a member of such judicially declared and outlawed organization, association, or group of persons, may authorize
in writing any police or law enforcement officer and the members of his/her team duly authorized in writing by the anti-terrorism council to:
(a) examine, or cause the examination of, the deposits, placements, trust accounts, assets and records in a bank or financial institution; and
(b) gather or cause the gathering of any relevant information about such deposits, placements, trust accounts, assets, and records from a
bank or financial institution. The bank or financial institution concerned, shall not refuse to allow such examination or to provide the desired
information, when so, ordered by and served with the written order of the Court of Appeals.
But the exception in this law is for Philippine Deposits ONLY- because it only mentions R.A. 1405 and no mention of R.A. 6426.
If it’s a foreign currency deposit, you cannot use the Human Security Act to look into the deposit.
Again, the requirement is upon court order-Court of Appeals.

E. R.A. 10168 ANTI-TERRORISM


Section 10. Authority to Investigate Financing of Terrorism. …For purposes of this section and notwithstanding the provisions of Republic Act
No. 1405, otherwise known as the "Law on Secrecy of Bank Deposits", as amended; Republic Act No. 6426, otherwise known as the "Foreign
Currency Deposit Act of the Philippines", as amended; Republic Act No. 8791, otherwise known as "The General Banking Law of 2000” and
other laws, the AMLC is hereby authorized to inquire into or examine deposits and investments with any banking institution or non-bank
financial institution and their subsidiaries and affiliates without a court order.
The 3rd paragraph states that both Philippine and Foreign currency deposits may be looked into.
And the last statement states “without court order”, so there’s no need for a court order because this involves national security.
NIRC
SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional Requirements for Tax Administration and Enforcement.
(F) Authority of the Commissioner to inquire into Bank Deposit Accounts. - Notwithstanding any contrary provision of Republic Act No. 1405 and
other general or special laws, the Commissioner is hereby authorized to inquire into the bank deposits of:

(1) a decedent to determine his gross estate; and


(2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204 (A) (2) of this Code by reason of financial
incapacity to pay his tax liability.

In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a
clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic
Act No. 1405 or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the
bank deposits of the taxpayer.
Under the old provisions of Section 6 of the NIRC the BIR Commissioner can look into bank accounts of the decedent to determine
the gross estate. So when you settle an estate of the decedent, you can go to the bank and ask for certification of the bank accounts
because the BIR will look into that, that is exempt because it is NOT covered under the secrecy law and R. A. 6426.
Again BOTH foreign and Philippine currency.
Also, when you file compromise with the BIR, but in this case you are required to waive the secrecy of bank deposits. So you have to
do it voluntarily- forced voluntary.

F. R. A. 10021 EXCHANGE OF INFORMATION ON TAX MATTERS LAW


Recently, this R. A. 10021 amended Section 6 above, and added number (3) it states that (3) A specific taxpayer or taxpayers subject
of a request for the supply of tax information from a foreign tax authority pursuant to an international convention or agreement on
tax matters to which the Philippines is a signatory or a party of: Provided, That the information obtained from the banks and other
financial institutions may be used by the Bureau of Internal Revenue for tax assessment, verification, audit and enforcement
purposes.
So when a foreign tax authority inquires with respect to deposit accounts or information of a certain depositor, BIR commissioner
can look into the account of that depositor without violation of R.A. 1405 and 6426.

G. PDIC CHARTER R.A. 9576


Unsound or unsafe Banking practice also an exception
BOTH R.A 1405 & R. A. 6426
As you will notice, the exceptions under R.A. 1405 & R. A. 6426 have been expanded. Aside from the original 4 exceptions under R. A. 1405, and
the original 1 exception in R. A. 6426, you will now have several under different laws.
Key points:
Deposits are only contracts of simple loan, NOT a trust
Failure to pay the bank is NOT a criminal obligation but a CIVIL obligation
But deposits are considered as absolutely confidential, they cannot be looked into except in cases provided by law
Even if there are several exceptions, the general rule is still to uphold the secrecy of bank deposits, hence exceptions are
strictly construed against the applicants.

1. LOAN FUNCTION

GENERAL GUIDELINES
SECTION 39. Grant and Purpose of Loans and Other Credit Accommodations — A bank shall grant loans and other credit accommodations
only in amounts and for the periods of time essential for the effective completion of the operations to be financed. Such grant of loans and
other credit accommodations shall be consistent with safe and sound banking practices.

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The purpose of all loans and other credit accommodations shall be stated in the application and in the contract between the bank and the
borrower. If the bank finds that the proceeds of the loan or other credit accommodation have been employed, without its approval, for
purposes other than those agreed upon with the bank, it shall have the right to terminate the loan or other credit accommodation and
demand immediate repayment of the obligation.

1. The amount and period of the loan have to be such that they will be for the effective completion of the operations to be financed
The purpose of the loan will have to be disclosed by the borrower to the bank in the application and has to be incorporated in the
loan document
The purpose needs to be expressly stated. The reason is that the amount and the period of the loan are determined by the purpose
of the loan. The amount and period have to be such that will make effective the completion of the operations to be financed. This
means they have to be such amount and period that the purpose can be completed
Thus, it is important to disclose the purpose for the bank to know if the amount given is enough, or that it can know the period for
the payment of the loan. The purpose will determine how much can be granted and for how long the term of payment will be
If the proceeds of the loan are used differently, the bank has the right to terminate the loan agreement and immediately demand
payment

2. The grant of loans shall be consistent with safe and sound banking practices
For the bank, the board of directors (BOD) establishes and provides the specific rules to enforce these safe and sound banking
practices so that the officers will not just grant loans to anyone. They have to establish specific guidelines pursuant to the general
guidelines under the law
The BOD then will specify who can avail such loans, how much, what are the collateral required, the term of the loan, the
documentary requirements; or the specifics, such that in granting loans, the bank will have to comply with its own internal
procedure. If it does not comply with its own procedure, then that is not compliant with safe and sound banking practices

3. The bank must ensure that the would-be borrower would be able to pay the loan in the time stipulated
This is dictated by the fiduciary nature of banking. Remember that the funds used by the banks to grant loans are not its own money
but also borrowed from its depositors. So the bank has this obligation of making sure that the persons to whom they lent money can
also repay them. If such persons cannot repay, the bank cannot also repay the depositors
If the basis of the grant of the loan is a fraudulent financial statement or untrue ITRs, the bank has the right to terminate the loan

LIMITATIONS ON THE GRANT OF LOANS: 1. SINGE BORROWER LIMIT (SBL)


Example. You place all your money in one business. If that fails, all your money will be gone. If you put it in 2 separate businesses, you
have the risk of losing 50% of your money only. You are basically spreading the risk exposure of your investment.
There is also this mechanism in the GBL in section 35 known as THE SINGLE BORROWER LIMIT (SBL)
SECTION 35. Limit on Loans, Credit Accommodations and Guarantees —
35.1. Except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit
accommodations and guarantees as may be defined by the Monetary Board that may be extended by a bank to any person,
partnership, association, corporation or other entity shall at no time exceed twenty percent (20%) (now 25%) of the net worth of
such bank. The basis for determining compliance with single-borrower limit is the total credit commitment of the bank to the
borrower. xxxx

SBL says that the bank cannot grant loans to a single individual or corporation more than 20% of the net worth of the bank. However, the
MORB has already increased this to 25% of the total net worth of the bank.

SUBJECT TO THE SBL:


1. Loans
Those amounts granted to the borrowers which are covered under the bank’s loan portfolio. This will be accounted for as
loans from the bank

2. Credit accommodations
These are different from a loan. It’s buying a negotiable instrument which will probably be booked as an investment. The
bank gave you money, and later on you will have the obligation of paying the bank if the borrower or maker defaulted. You, probably
as guarantor of that note, will be liable to the bank. However, there is no loan by the bank to you.
So these are transactions not booked as loans but technically, there is still money given by the bank and there is an
expectation of liability on the part of the person being given the money. Example is when the bank buys receivables. Another is X
Corporation issuing bonds, and the bank buys the bonds. The bank gave X Corp money, and X Corp will repay the bank upon maturity
of the bond. This is not a loan, but this will be booked as investment by the bank. But, this is akin to a loan because there is giving of
money and there is expectation of return of money. This is a commitment on the part of the bank to give certain credit to a person
but these credits are not booked as loans but rather as investments.

3. Guarantee
This is not just an irrevocable assurance on the part of the bank to pay money in case of non-payment. This is more general
in as much as it is an irrevocable assurance on the part of the bank to pay money in case another person defaults on a contract
Example I am a contractor. I have been engaged to build a power plant. This will take billions of pesos. Me as contractor to
be assured of payment, I will require the owner of the power plant to better get a bond in the form of a stand-by letter of credit with
the bank. That bond will say that if he cannot pay me the obligation under the contract, I can go after the bank
Another situation then is I am now the owner of the power plant. I want to be assured that you will really construct the
power plant according to our contract. How do I make sure you will comply? I will also ask for a bond, and this can be in the form of
stand-by letter of credit with the bank. So if you breach the contract, I can go after the bank and ask for payment of damages.

BASIS FOR DETERMINING THE SBL:


Situation: The bank bought bonds from X Corp worth 100M. Then it guarantees the obligation of X Corp to construct the power plant
worth 500M. The SBL is 20% (but she said previously that it has been amended to 25%..) of the net worth of the bank, so let’s say that is
600M. At this point, X Corp wants to apply for another loan worth 100M. Can the loan be granted?

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Take note the bank did not pay anything. There is just a guarantee, and the bank will not pay unless there is breach of contract. In
this case, the obligation is not yet mature because this is a long-term bond. Until the bond matures, there is really no obligation on your
part to repay. Technically, you don’t owe the bank anything yet.
The law says that the basis for determining compliance is the total credit commitment of the bank to the borrower.
Thus, in this situation, the bank cannot grant the loan anymore even if technically the bank has not lent you any money yet. This is
because you don’t base it on actual loan given but base it on what has been committed by the bank. If the loan is still granted, it will now
exceed the 600M limit.

LIABILITIES TO DETERMINE THE SBL:

35.3. The above prescribed ceilings shall include: (a) the direct liability of the maker or acceptor of paper discounted with or sold to
such bank and the liability of a general indorser, drawer or guarantor who obtains a loan or other credit accommodation from or
discounts paper with or sells papers to such bank; (b) in the case of an individual who owns or controls a majority interest in a
corporation, partnership, association or any other entity, the liabilities of said entities to such bank; (c) in the case of a corporation,
all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and (d) in the case of a
partnership, association or other entity, the liabilities of the members thereof to such bank.

(b) in the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the
liabilities of said entities to such bank
Example: A is a natural person who owns 100% of the shares of X Corp. Can he still avail personally of the 100M loan? NO. This is
because he bank will aggregate all their liabilities
(c) in the case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest
Example: Parent corporations and their subsidiaries. If they all owe money to the bank, the bank will aggregate all their liabilities
35.4. Even if a parent corporation, partnership, association, entity or an individual who owns or controls a majority interest in such
entities has no liability to the bank, the Monetary Board may prescribe the combination of the liabilities of subsidiary corporations
or members of the partnership, association, entity or such individual under certain circumstances, including but not limited to any
of the following situations: (a) the parent corporation, partnership, association, entity or individual guarantees the repayment of
the liabilities; (b) the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the
partnership or association or entity or such individual; or (c) the subsidiaries though separate entities operate merely as
departments or divisions of a single entity.
This enumerates basically the same persons. The difference with this and 35.3 is that the latter applies when the corporation itself
and the individuals are the borrowers of the bank. Their liabilities will be aggregated. In 35.4, the parent or individual is not the
borrower of the bank. Ordinarily if the parent or individual owning majority of the shares of a corporate borrower are not debtors
personally of the bank, their liabilities will not be aggregated except for the circumstances in 35.4. Under the exceptions, even if the
parent corporation or individual stockholder does not owe the bank any money, the bank will still aggregate in these 3 situations.

INCREASE IN THE TOTAL AMOUNT OF LOANS, CA and GUARANTEES:


35.2. Unless the Monetary Board prescribes otherwise, the total amount of loans, credit accommodations and guarantees
prescribed in the preceding paragraph may be increased by an additional ten percent (10%) of the net worth of such bank provided
the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or
other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully
covered by insurance.
Take note that 35.2 provides that the SBL can be increased by additional 10% of the net worth but only if there are securities which
are the negotiable documents of title covering readily marketable non-perishable goods covered by insurance
Readily marketable means there is already somebody waiting to buy it
Non-perishable means it will not perish lol. If something perishes, it deteriorates and rots. So this means not agricultural.
Examples: Gold, silver, similar metals. These are commodities traded in a ready market. If you have negotiable documents of title,
you can avail of an increase. The total will now be 35% but the additional 10% must be secured with negotiable documents of title

EXCLUDED FROM DETERMINATION:


This then means that if the loan falls under 35.5, you can have as much loan as you want. No limit.

35.5. For purposes of this Section, loans, other credit accommodations and guarantees shall
exclude:
(a) loans and other credit accommodations secured by obligations of the Bangko Sentral or of the Philippine Government;
(b) loans and other credit accommodations fully guaranteed by the government as to the payment of principal and interest;
(c) loans and other credit accommodations covered by assignment of deposits maintained in the lending bank and held in the
Philippines;
(d) loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits; and
(e) other loans or credit accommodations which the Monetary Board may from time to time, specify as non-risk items.

(a) loans and other credit accommodations secured by obligations of the Bangko Sentral or of the Philippine Government;
These are non-risk securities. This is because the only time the government will not be fulfilling its obligation to pay its securities
is when there is total anarchy and in which case the SBL does not really matter. Under normal circumstances, the government
will pay. So if your loan is secured by BSP notes or treasury bills, this will not be part of your SBL and you can borrow whatever
amount you want. The government wasn’t you to invest more in government securities
(b) loans and other credit accommodations fully guaranteed by the government as to the payment of principal and interest
This will normally happen in BOT transactions (Build Operate Transfer) or in PPP transactions (Public Private Partnership). This is
when the government will contract with a private person to build an infrastructure for public purpose like skyways, NLEX, SLEX
or the 3rd Mactan Bridge they’re contemplating. This will take a lot of capital so the government will have the guarantee
payment of this.
(c) loans and other credit accommodations covered by assignment of deposits maintained in the lending bank and held in the Philippines
Example. The bank will lend you 100M but it will also require you to deposit 100M in the bank. Why is this exempt? Because the
bank has the right to offset. This is fully secured. It can offset at any time.
(d) loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits

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Margin deposits are pursuant to some undertaking by a bank. Going back to the example, the contractor will tell the owner that
he does not trust the owner. He says, hey I don’t trust you better get a letter of credit to make sure I’m covered in case you
don’t pay. So the owner goes to the bank which also says, I don’t trust you. I will issue this 2B worth letter of credit but you have
to put in deposits here so that when the letter is called for, there is a deposit we can use to pay.
This is the margin deposit, this is like a guarantee for a guarantee to be given by the bank. The letter of credit is the guarantee to
the contractor from the bank. And the bank will also require you to maintain a margin deposit. So this is not subject to any risk
because of the margin deposit.

2 LOANS AND OTHER CREDIT ACCOMODATIONS AGAINST REAL ESTATE

SECTION 37. Loans and Other Credit Accommodations Against Real Estate. — Except as the Monetary Board may otherwise prescribe,
loans and other credit accommodations against real estate shall not exceed seventy-five percent (75%) of the appraised value of the
respective real estate security, plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may be
made to the owner of the real estate or to his assignees.
If improvements are not insured, they have no loan value
Appraised value: the fair market value of the property made by the bank. The bank cannot just rely on the appraisal of the borrower.

CASE: CENTRAL BANK VS CA


Facts:
Island Savings Bank approved the loan application of Tolentino, who, as security for the loan, executed a real estate mortgage over
his 100-hectare property. Island Savings later allegedly discovered that there was overvaluation of the loan collateral.
Ruling:
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from complying with its
reciprocal obligation to furnish the entire P80,000.00 loan. This Court previously ruled that bank officials and employees are expected to
exercise caution and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation
of the bank's officials and employees that before they approve the loan application of their customers, they must investigate the existence
and valuation of the properties being offered as a loan security. The recent rush of events where collaterals for bank loans turn out to be non-
existent or grossly over-valued underscore the importance of this responsibility. The mere reliance by bank officials and employees on their
customer's representation regarding the loan collateral being offered as loan security is a patent non-performance of this responsibility. If
ever, bank officials and employees totally rely on the representation of their customers as to the valuation of the loan collateral, the bank shall
bear the risk in case the collateral turn out to be over-valued. The representation made by the customer is immaterial to the bank's
responsibility to conduct its own investigation.

Discussion:
The bank is not bound by whatever appraisal given by the borrower. The bank has the obligation to conduct its independent appraisal.

JUNIOR ENCUMBRANCE
Can a JUNIOR ENCUMBRANCE be constituted over real property?
Yes. A senior encumbrance is the first obligation whereas a junior encumbrance is the subsequent obligation. For REAL ESTATE
mortgage the bank is allowed to be a junior mortgagee. Provided that the sum total of the loan covered by the senior mortgage
and loan to be granted does not exceed the loan able amount which is the 75% ceiling. So senior loan and junior loan taken together
must NOT EXCEED the loan able value of the property.

X311.1 Loans secured by junior mortgage on real estate. Banks may also grant loans on the security of junior mortgages on real estate:
Provided, That for such loans to be considered as adequately secured under Sections 37 and 38 of R.A. No. 8791, the sum total of the loans to
be granted and the outstanding balance of the loan granted on the senior mortgage shall not, at any time, exceed the loan value of subject
real estate security based on the appraisal of the real estate by the junior mortgagee.
A certified latest statement of account showing the outstanding balance of the loan including interest and arrearages, from the senior
mortgagee shall be presented to the bank.
In case several loans are granted on the security of the same property, the total amount of the loans shall not, at any time, exceed the total
loan value of the said property.

Can a real property secure FUTURE OBLIGATIONS?


Yes. This is termed as the DRAGNET CLAUSE/ BLANKET MORTGAGE CLAUSE.

CASE: REPUBLIC PLANTERS BANK “MAYBANK” VS SARMIENTO


Facts:
Respondents spouses Vivencio and Jesusa Sarmiento with son Jose and spouse Elizabeth executed (1.) promissory note obligating
themselves to pay the amount of P80,000 secured by real estate mortgage. Such mortgage secured the payment of the principal loan and
all other obligations, overdrafts and other credit accommodations obtained and those that may be obtained in the future from Maybank.
Such was amended changing the consideration from P80,000 to P100,000. Vivencio as sole proprietor in his business also incurred (2) loan
obligations for his export advances amounting to P1, 281,748. Thereafter, a (3) suretyship agreement was executed for the payment of
P100,000 plus all obligations which the latter incurred and would incur from Maybank. They defaulted payment for such and as a result
Maybank executed an extrajudicial foreclosure. Action for specific performance was filed to redeem the property and tendered to Maybank
the redemption price of P312,000.
Ruling:
The deposits amounting to P312,000 did not constitute a valid tender of the redemption price. The real estate mortgage provides for
a blanket mortgage clause also knows as the dragnet clause, one that is specifically phrased to subsume all debts of past and future origins.
It operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute
additional security documents. In accordance with Section 78 of General Banking Act, redemption may only be made by paying the amount

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due under the mortgage deed within one year from the sale of the property. Since respondents failed to satisfy the full amount of the
indebtedness to Maybank, the bank was justified in refusing to grant the demand for redemption.

Discussion:
There were 3 obligations: (1.) promissory note obligating themselves to pay the amount of P80,000 secured by REM, (2) loan
obligations for his export advances amounting to P1, 281,748, and a (3) suretyship agreement was executed for the payment of
P100,000 plus all obligations which the latter incurred and would incur from Maybank
There was a redemption offer of P312,000
The issue in this case whether or not the deposits made by the obligors constituted a valid tender of the redemption price
In order to know WON this is a valid redemption price, there’s a need to know how much is the total obligation first.
Because there was a dragnet clause in the real estate mortgage, so the SC said that ALL the obligations of the debtor-mortgagors
are covered by the real estate mortgage which includes the security agreement and the export advances.
In the part of the export advances the SC said that your business is a sole proprietorship, if it is such then it means that there is no
separate and distinct personality unlike a corporation which has a separate and distinct personality from its stockholders, directors
and its officers. So the debt and obligation of the business is the obligation of the proprietor.
In this case, since this is a sole proprietorship then the obligation of the company is the obligation of the proprietor. And the
proprietor is covered by the dragnet clause. So the obligation was more than 1million pesos therefore, the payment is not sufficient
to effect a valid redemption.
The reason why people would enter in this dragnet clause is that it operates as a convenience and accommodation to the borrowers
as it makes available additional funds without their having to execute additional security documents thereby saving time, travel, loan
closing costs, cost of extra legal services, recording fees, etc. This being the case, a dragnet clause benefits the borrower and as
such, it is a valid stipulation. Being a valid stipulation, it can be upheld and in this case, it was.
But this dragnet clause is actually strictly construed by the courts because in the first place, the loan documents are prepared by the
bank, so this is a contract of adhesion which you cannot really negotiate to the bank regarding the terms of the loan.

CASE: PRUDENTIAL BANK VS ALVIAR


Facts:
The spouses Don & Georgia Alviar are the registererd owners of a land. This case involves 3 promissory notes secured by different
securities namely (1) P250, 000 REM with a blanket mortgage clause, (2) P2,640,000 secured by a hold out foreign currency deposit and (3)
P544, 000 secured by Clean Phase out or temporary overdraft to be converted into an ordinary loan. Subsequently, these were secured by
chattel mortgage and a deed of assignment of certain promissory notes. For failure to pay, Prudential Bank foreclosed the property covered
by the P250, 000. Prudential Bank contended that the dragnet clause expressly covers not only the P250,000 but also the two other
promissory notes, that regarding the second promissory note there is no law which prohibits an obligation form being covered by more than
one security and that since the third promissory note was obtained by the corporation, the corporate veil should be pierced because such
was used for personal purposes or household construction. The Sps Alviar contended on the other hand that dragnet clause cannot be
applied to subsequent loans since these are covered by separate promissory notes and provide for a different form of security.
Ruling:
It was improper for the petitioner to seek foreclosure of the mortgage property because of nonpayment of these promissory notes.
While the existence of a dragnet clause cannot be denied, there is a need to respect the existence of other security given. The foreclosure of
the property should only be for the P250, 000 and for any amount not covered by the security for the second promissory note.

Discussion:
The Supreme court made a test to determine whether or not subsequent loans are covered by the dragnet clause.
There were 3 issues raised in this case (1) the validity of the dragnet clause, (2) coverage of the dragnet clause & (3) propriety of
seeking foreclosure of the mortgaged property for the nonpayment of the three loans.
For our purposes, the issue relevant is the coverage of the dragnet clause. In connection with this, our real question or our 1st issue is
1.) whether or not the dragnet clause can cover obligations secured or incurred by third persons or persons other than the debtor
which was first covered by the initial REM, 2.) whether or not the dragnet clause can cover obligations secured by other collaterals.
For our 1st issue- The difference between that Sarmiento case is that what was involved there is Sole proprietorship which would
entail that there was no separate and distinct personality, while in this Alviar case, this involves a corporation and the rule is that it
has a separate and distinct personality from its directors or officers. So the loan of the corporation is NOT the personal loan of their
stockholders, while the loan of the sole proprietor business is a loan of the sole proprietor himself. In that Sarmiento case, SC said
yes you can add the loan. In this Alviar case, no you cannot because debtor here is the corporation and not the mortgagor in the
REM.
For our second issue- The SC described the dragnet clause as a continuing offer by the mortgagor to the bank, that if I have
subsequent loans or I borrow some more money, here is this property, continue to use this as the security for my other loans. So it is
an offer by the mortgagor. A sign that the bank did NOT accept such offer is when the bank requires additional security on top of
the REM, thereby rejecting the offer of a continuing security. It rejects the offer because it did not want to rely on such security and
instead wanted a new security. The test espoused is the “RELIANCE ON THE SECURITY TEST”, whether the second loan was made in
reliance on the original security. Because the bank did not rely on the 1st security, the extent of the loan covered by another security
cannot be touched or cannot be covered by the dragnet clause. The bank needs to exhaust first the security covering the second
loan before it can resort to the dragnet clause.
For example, if the hold out agreement is P1.5 Million, the bank needs to get or exhaust the hold out agreement first. You have to
compensate or offset the deposit of P1.5 Million, the balance of P500,000 that is now the time you will have to get it through the
foreclosure mortgage. In other words, you cannot foreclose if you do not exhaust the 2nd security first.
In the 2011 bar, the question of what a dragnet clause is was asked. The thing with Commercial law bar, the examiners are fond of
having the examinees define terms. You have to be vigilant on these terms- dragnet clause/ blanket mortgage clause and reliance on
security test.
Take note that the Blanket Mortgage clause is subject to the rule on junior encumbrances. The total loan that can be covered by the
property should never exceed 75% of the appraised value of the property. This is subject to the loan able amount limit.

2. SECURED BY CHATTELS AND INTANGIBLE PROPERTIES


X312 Loans and Other Credit Accommodations Secured By Chattels and Intangible Properties. Loans and other credit accommodations on

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the security of chattels and intangible properties, such as, but not limited to, patents, trademarks, trade names, and copyrights shall not
exceed seventy-five percent (75%) of the appraised value of the security, and such loans and other credit accommodations may be made to
the title-holder of the unencumbered chattels and intangible properties or his assignees: Provided, That in the case of intangible properties,
appraisal thereof shall be conducted by an independent appraiser acceptable to the BSP.
Junior encumbrances are NOT allowed. The GBL does not provide for it but the MORB provides that the chattel must be
unencumbered and in effect, it is saying that junior encumbrances are not allowed because as soon as a chattel is encumbered,
it has no more loan able value.
A dragnet clause is NOT allowed because the law on chattel mortgage requires that in the affidavit of good faith, you describe in
specific details the loan that will be covered by the chattel mortgage. So how can you describe a loan that does not exist yet?
The law on chattel mortgage even says that you have to incorporate the promissory note or details of the loan to the contract
itself and describe it in the affidavit of good faith. So the loan if it does not exist yet because it is a future loan, you cannot
include it in the affidavit of good faith. For REM, there is no prohibition but for chattel mortgage, the chattel mortgage law does
NOT allow it by the affidavit of good faith.

AMORTIZATION
SECTION 44. Amortization on Loans and Other Credit Accommodations. — The amortization schedule of bank loans and other credit
accommodations shall be adapted to the nature of the operations to be financed.
In case of loans and other credit accommodations with maturities of more than five (5) years, provisions must be made for periodic
amortization payments, but such payments must be made at least annually: Provided, however, That when the borrowed funds are to be
used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the
initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial
amortization date be later than five (5) years from the date on which the loan or other credit accommodation is granted.
In case of loans and other credit accommodations to microfinance sectors, the schedule of loan amortization shall take into consideration
the projected cash flow of the borrower and adopt this into the terms and conditions formulated by banks.
With regards to amortization, the loans shall be paid based on the amortization schedule of the bank. And the amortization schedule
will be based on the purpose. We shall remember that Section 39 states that the amount and the term of the loan will depend on the
operations to be financed or the purpose of the loan. So similarly, Section 24 says that the amortization schedule, meaning the
payment schedule will have to be based on the operations to be financed.
If the term of the loan is more than 5 years, you have to pay at least once a year or at least annually. So if it’s a long term loan -10
years, 30 years, you are required to pay the loan at least once a year. Can it be more than once a year? Every quarter? Yes. Every 2
years? No.
If the loan is for the purpose or is such that it will not generate income right away, the bank is allowed to impose a moratorium on
the payment for the first 5 years. So it’s an exemption to the rule that it shall be paid once a year. But not more than 5 years which
means that on the 6th year, you should start your annual payment.

PREPAYMENT
SECTION 45. Prepayment of Loans and Other Credit Accommodations. — A borrower may at any time prior to the agreed maturity date
prepay, in whole or in part, the unpaid balance of any bank loan and other credit accommodation, subject to such reasonable terms and
conditions as may be agreed upon between the bank and its borrower.
Prepayment is allowed. In your obligations and contracts, and under the civil code, if the obligation is one with the period, the period
is for the benefit of the borrower and the creditor such that the creditor cannot require the borrower to pay ahead of time and the
debtor cannot require the creditor to accept payment ahead of time especially if the loan is subject to interest. Because if the term is
ten years, you repay on the 6th year, that will make the creditor lose the interest for the remaining 4 years. So lugi. Now, there’s an
exception under the general banking law since the law expressly provides that the debtor is allowed to prepay the loan. So it is now
the lookout of the bank to ensure that the contract provides that if the borrower prepays, you will still pay interest for the remaining
period or even just a discounted interest. Because now, the debtor can force the bank to accept payment. You don’t apply the Civil
Code, you apply the GBL.
A bank CAN grant a loan with NO COLLATERAL subject to such regulations that the Monetary Board may provide.

FORECLOSURE OF REAL ESTATE MORTGAGE


SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on
real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold
for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by
paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses
incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at
the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such
property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in
court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon
the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer
by the enjoining or the restraint of the foreclosure proceeding.
Notwithstanding Act 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 shall retain their redemption rights until their expiration.
First you foreclose, next the public auction and then you get the certificate of sale issued by the judge.
After the certificate of sale, the redemption period starts.
FORECLOSURE as we learned in CREDIT TRANSACTIONS:
1) Extrajudicial – provided for in the contract, contract expressly provides. You file your petition with the clerk of court of the
executive judge. The clerk will publish, then public auction. No need for hearing.
Real Estate Mortgage Law
Right of Redemption 1 year from the time of foreclosure

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2) Judicial – file a complaint in court- this is an actual civil case. Court will conduct a hearing, and then judge will issue his
decision. The decision will be to foreclose, then there will be the public auction.
Apply Rules of Court – Rule 68
Period of equity of redemption- 90 days
In GENERAL BANKING LAW
Section 47 of GBL Only at the time of the registration of the certificate of sale but NOT more than 3 months whichever is
earlier

CASE: ASIA TRUST DEVELOPMENT BANK VS TUBLE


Facts:
Carmelo Tuble who served as the Vice President of Asia Trust acquired a Nissan Vanette through availing himself of the car incentive
plan and loan privileges offered by the bank. He obtained 3 separate loans namely (1) real estate loan, (2) consumption loan and (3) salaray
loan. Tuble resigned. Because of his obligation to the bank, and the bank’s obligation to Tuble, he claimed an offsetting of the loan.
Subsequently, bank finally allowed offsetting resulting to a reduction of Tuble’s liabilities amounting to P970,000 plus unreturned value of the
vehicle. Bank filed a complaint for Replevin to recover the car which was granted. Tuble redeemed such but questioned the foreclosure basis
and how such amount ballooned which made him file a complaint for recovery of sum of money and damages. RTC ruled in favor of Tuble. CA
affirmed. Bank argues that GBL should be applied to compute the redemption price and not the Rules of Court, and used the 18% interest rate.
Ruling:
Bank is correct. When the mortgagee is a bank, the amount to be paid in redeeming the property is determined by the General
Banking Act. On the issue of the interest, the applicable law is still the General Banking law. Despite the fact that the real estate mortgage
contract has been extinguished, Tuble had the right to redeem the security by paying the redemption price. The right of redemption of
foreclosed properties was a statutory privilege he enjoyed. The terms of this right based on Section 47 of the GBL are as follows:
1.) The redemptioner shall have the right within 1 year after the sale of the real estate, to redeem the property.
2.) The redemptioner shall pay the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the
costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom.
3.)In case redemptioners who are considered by law as juridical persons, they shall have the right to redeem not after the registration of
certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three months after foreclosure,
whichever is earlier.

Discussion:
The bank used 18% interest from the consumption loan basing from the General Banking Law. However, Tuble insisted on Act 3135 as
amended in relation to Section 28 of Rule 39 of the Rules of Court which allows an interest of 1% per month if the foreclosed property
is redeemed. The SC decided that the applicable law is the General Banking Law because the creditor is the bank, do NOT use the real
estate mortgage law, nor the Rules of Court.
However, Asia Trust was incorrect in applying the 18% interest because the GBL states that it should be the interest thereon that is
stipulated on the real estate mortgage. Since there was no interest agreed, there should be no interest imposed. Besides, when you
file the foreclosure, you are only claiming the real estate loan and you did not claim anything else so you cannot impose the
additional payments in the redemption price.
If the creditor/mortgagee is a bank, use the General Banking law.

When you come across a case, take a look at who creditor is. If the creditor is a bank, then apply Section 47. But the
question is, when will the period start running?
CASE: CIR vs UCPB
Facts:
UCPB granted loans to George C. Co, Go Tong Electrical Supply Co., Inc. and Tesco Realty Co. that caused to be secured by real estate
mortgages. They failed to pay causing UCPB to file a petition for extrajudicial foreclosure. The extrajudicial foreclosure specifically the public
auction happened on Dec 31, 2001. The executive judge approved it on March 1, 2002. UCPB paid creditable withholding tax and
documentary stamp tax only on July 5, 2002.The BIR contented that it was late in paying the taxes, they should have paid from the date of
the foreclosure sale on Dec 31, 2001 and further said that it lapsed three months after specifically on March 31, 2002. UCPB protested that
period lapsed on June 1, 2002 or 3 months after the executive judge approved the issuance of the certificate of sale.
Ruling:
The executive judge approved the issuance of the certificate of sale to UCPB on March 1, 2002. Consequently, the 3-month
redemption period ended only on June 1, 2002 and only on this date did the deadline for the payment of CWT and DST on the extrajudicial
foreclosure sale become due.

Discussion:
Take note here that the debtor/ mortgagor is a corporation or a juridical person.
The rule in terms of payment of CWT & DST is that Creditable Expanded Withholding Tax should be paid within 10 days following the
end of the month in which the redemption period expires, while Documentary Stamp Tax be paid within 5 days from the end of the
month when the redemption period expires.
The contention of the CIR is that the redemption period ends on March 31, 2002- so payment be made April 5/ April 10.

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The contention of UCPB is that the redemption period ends on June 1, 2002- so the payment be made July 5 / July 10. You don’t count it
starting June 1, you count it 5 days, 10 days after the end of the month of the transaction, so since the transaction occurred June 1, the
deadline would have been July 5 or 10.
The transaction here means the date when the sale of the bank was completed. It was completed when the owners of the property
could no longer redeem it. So basically, you base the payment of the taxes from the time when the period of the redemption expires.
The Supreme Court ruled that UCPB was correct. Count the redemption period NOT from the time of the auction sale but from the time
of the issuance of the certificate of sale.
You pay the mortgage loan, plus interest stated and the cost & expenses of the sale less the income from the transaction. Take note
that the redemption price is also different. If it is done by judicial foreclosure, the redemption price is based on the judgment debt- on
how much is the debt based on the order of the court. If it is done by extrajudicial foreclosure, the redemption price is based on the
purchase price during the auction sale with interest of 1% per month. But if the bank is the creditor, GBL law states that redemption
price is paying the mortgage loan, interest stated and the cost & expenses of the sale.

CASE: GC DALTON INDUSTRIES, INC. VS EQUITABLE PCI BANK


Facts:
Equitable PCI Bank extended a credit line to Camden Industries Inc. (CII) allowing the latter to avail of several loans. Camden
executed a hold out agreement in favor of the bank. To guarantee payment, GC Dalton executed a 3rd-party mortgage of its real property as
security for CII. CII did not pay its obligations. Consequently, bank filed a petition for extrajudicial foreclosure and a certificate of sale was
issued on August 3, 2004. On September 13, 2004, the bank filed the certificate of sale and consolidated its ownership. In view of the
foregoing, bank filed an ex parte motion for issuance of a writ of possession on June 10, 2005. Previously however, CII had filed an action for
specific performance and damages because it allegedly paid its obligation in full.
Ruling:
The issuance of a writ of possession to a purchaser in an extrajudicial foreclosure is summary and ministerial in nature as such
proceeding is merely an incident in the transfer of title. The trial court does not exercise discretion in the issuance thereof. For this reason, an
order for the issuance of the writ is not a judgment on the merits. Furthermore, the mortgagor loses all legal interest over the foreclosed
property after the expiration of the redemption period. Under Section 47, if the mortgagor is a juridical person, right to redeem is until but
not after the registration of the certificate, within 3 months after foreclosure whichever is earlier. The bank filed the certificate of sale and
affidavit of consolidation on Sept. 13, 2004 and this terminated the redemption period because consolidation of title becomes a right upon
expiration of the redemption period and thus, respondent became the owner of the foreclosed properties.

Discussion:
If you are not able to redeem, the mortgagor will lose all his interest to the property and the courts will issue its writ of possession
which becomes a ministerial duty.

OTHER BANKING FUNCTIONS

SECTION 53. Other Banking Services. — In addition to the operations specifically authorized
in this Act, a bank may perform the following services:
53.1. Receive in custody funds, documents and valuable objects;
53.2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and
all types of securities;
53.3. Make collections and payments for the account of others and perform such other services for their customers as are not
incompatible with banking business;
53.4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment
management/advisory/consultancy accounts; and
53.5. Rent out safety deposit boxes.
The bank shall perform the services permitted under Subsections 53.1, 53.2, 53.3 and 53.4 as depositary or as an agent. Accordingly, it
shall keep the funds, securities and other effects which it receives duly separate from the bank's own assets and liabilities.

The Monetary Board may regulate the operations authorized by this Section in order to ensure that such operations do not endanger
the interests of the depositors and other creditors of the bank. In case a bank or quasi-bank notifies the Bangko Sentral or publicly
announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days,
the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of
the Philippine Deposit Insurance Corporation.

1. Receive in custody funds, documents and valuable objects


Example. Escrow contract
A bank can be considered as an escrow agent. This is used in the purchase of shares of stocks. In Corpo Law, the transferee cannot
be considered as shareholder unless he is recorded as such in the transfer books. You also know under NIRC, the corporate secretary
has no authority to record in the books unless the buyer can present the certificate authorizing registration (CAR) from the BIR
proving that all taxes for the transfer of shares have been paid. From the time of the execution of the deed of assignment of shares
up to the time of recording of transfer, there might be a substantial amount of time, to secure the taxes and CAR. So there is a time
the transaction is already completed but you’re not yet a stockholder. To ensure that the seller will pay the taxes, what we normally
do is instead of giving the purchase price to the seller, we put it in escrow with the bank with a stipulation that the amount will only
be released upon presentation of the CAR.

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On the part of the buyer, you are assured that the seller will do his best to secure the CAR otherwise he cannot get the purchase
price. On the part of the seller, you are assured that the amount is just there. Once you get the CAR, you assured that you will get
paid.
In this case, the bank acts as a CUSTODIAN OF THE FUNDS
When you deposit money with the bank under an escrow agreement that is NOT A DEPOSIT TRANSACTION. The bank only acts as
custodian of the funds and will only release the funds upon compliance of certain conditions

2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all
types of securities

3. Make collections and payments for the account of others and perform such other services for their customers as are not
incompatible with banking business
Example. In Taxation Law, banks can be Authorized Agent Banks to receive payment of taxes
4. Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment
management/advisory/consultancy accounts

5. Rent out safety deposit boxes

Under the Deposit transaction, although it is a simple contract of loan, the fiduciary nature of banking is deemed written into the
contract. This is still governed by GBL Sec 2. What about sec 53? What is the nature of the obligation of the bank here?
Nos. 2, 3 & 4: Contract of Agency
A person who is the principal authorizes another person who is the agent within the authority given.
Nos. 1 & 5: Contract of Deposit
This is not the same as the deposit function. The bank acts as a DEPOSITARY. This is the deposit contract as defined under the Civil
Code where the bank will receive the funds or asset for the purpose of safekeeping and returning the same thing to the depositor
CONSEQUENCES OF THE NATURE OF SEC 53: (as agency contract and deposit contract)
1. They are governed by the Civil Code and not by the GBL
2. The bank has the obligation to segregate the funds received under sec 53 from its own funds. Thus, there is no transfer of
ownership unlike in a deposit transaction. Since there is no transfer of ownership, the bank cannot comingle the funds

LOANS BETWEEN BANKS AND ITS DOSRI

SECTION 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related Interests. — No director or officer
of any bank shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor shall he
become a guarantor, indorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual
liability to the bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned:
Provided, That such written approval shall not be required for loans, other credit accommodations and advances granted to officers
under a fringe benefit plan approved by the Bangko Sentral. The required approval shall be entered upon the records of the bank and a
copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko Sentral.

Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to
the bank than those offered to others. After due notice to the board of directors of the bank, the office of any bank director or officer
who violates the provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions of
the New Central Bank Act.

The Monetary Board may regulate the amount of loans, credit accommodations and guarantees that may be extended, directly or
indirectly, by a bank to its directors, officers, stockholders and their related interests, as well as investments of such bank in
enterprises owned or controlled by said directors, officers, stockholders and their related interests. However, the outstanding loans,
credit accommodations and guarantees which a bank may extend to each of its stockholders, directors, or officers and their related
interests, shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital
contribution in the bank: Provided, however, That loans, credit accommodations and guarantees secured by assets considered as non-
risk by the Monetary Board shall be excluded from such limit: Provided, further, That loans, credit accommodations and advances to
officers in the form of fringe benefits granted in accordance with rules as may be prescribed by the Monetary Board shall not be
subject to the individual limit.

The Monetary Board shall define the term "related interests."

The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to loans, credit accommodations and
guarantees extended by a cooperative bank to its cooperative shareholders.

DOSRI
1. Directors
These are those persons who have been elected by the stockholders and qualified by the Monetary Board under the fit and proper
rule

2. Officers
The office must be found in the by-laws (the internal laws). If your office is not found there, you are not a corporate officer but only
an employee, even if the President appointed you

3. Stockholders
Persons who have subscribed to the shares of the bank

4. Related Interests

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e. Related interest shall refer to any of the following:


(1) Spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of a director, officer or
stockholder of the bank;
xxx

VS. STOCKHOLDINGS OF A BANK

X126.1 (e). Stockholdings of family groups or related interests: Individuals related to each other within the fourth degree of
consanguinity or affinity, whether legitimate, illegitimate or common-law, shall be considered family groups or related interests
but may each own up to forty percent (40%) of the voting stock of a domestic bank: Provided, That said relationship must be fully
disclosed in all transactions by such corporations or related groups or persons with the bank.

When we were discussing stockholdings of a bank on related interests, this is not the same with that. For DOSRI purposes, it stops at
the 1st degree of consanguinity
Ex. Not related interests: your grandchildren, grandparents

Related interests (from 326.1 E MORB):


1. Spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of a director, officer or
stockholder of the bank

2. Partnership of which a director, officer, or stockholder of a bank or his spouse or relative within the first degree of consanguinity or
affinity, or relative by legal adoption, is a general partner
Partnerships where the DOSRI is a general partner. That partnership will also be a related interest to the DOS

3. Co-owner with the director, officer, stockholder or his spouse or relative within the first degree of consanguinity or affinity, or
relative by legal adoption, of the property or interest or right mortgaged, pledged or assigned to secure the loans or other credit
accommodations, except when the mortgage, pledge or assignment covers only said co-owner’s undivided interest
A is a stockholder of a bank. He is co-owner with B of a certain parcel of land. If this property co-owned by A and B is mortgaged
to secure an obligation with the Bank, B will become a related interest with the stockholder A
EXCEPT if what is mortgaged is only the interest of A. B will only become a related interest if the property is mortgaged as a
whole
The relationship is by co-ownership of the property. So when B applies for a loan in the bank and he uses the same property as
collateral, he will be subject to sec 36. But if B applies for a loan and uses another property, he will not be a related interest. The
relationship with only be with respect to the co-owned property

4. Corporation, association, or firm of which a director or officer of the bank, or his spouse is also a director or officer of such
corporation, association or firm, except (a) where the securities of such corporation, association or firm are listed and traded in the
big board or commercial and industrial board of domestic stock exchanges and less than fifty percent (50%) of the voting stock
thereof is owned by any one (1) person or by persons related to each other within the first degree of consanguinity or affinity; or (b)
where the director, officer or stockholder of the bank sits as a representative of the bank in the board of directors of such
corporation: Provided, That the bank representative shall not have any equity interest in the borrower corporation except for the
minimum shares required by law, rules and regulations, or by the by-laws of the corporation: Provided, further, That the borrowing
corporation is not among those mentioned in Items “e(5)”, “e(6)”, “e(7)” and “e(8)” of this Section

5. Corporation, association or firm of which any or a group of directors, officers, stockholders of the lending bank and/or their spouses
or relatives within the first degree of consanguinity or affinity, or relative by legal adoption, hold or own at least twenty percent
(20%) of the subscribed capital of such corporation, or of the equity of such association or firm

6. Corporation, association or firm wholly or majority-owned or controlled by any related entity or a group of related entities
mentioned in Items “e(2)”, “e(4)” and “e(5)” of this Section

7. Corporation, association or firm which owns or controls directly or indirectly whether singly or as part of a group of related interest
at least twenty percent (20%) of the subscribed capital of a substantial stockholder of the lending bank or which controls majority
interest of the bank pursuant to Subsec. X303.1

8. Corporation, association or firm which has an existing management contract or any similar arrangement with the parent of the
lending bank

SELF-DEALING TRANSACTIONS
SELF-DEALING TRANSACTIONS: Dealings between the bank and its directors, officers, stockholders and related interests
GR: Generally allowed provided you comply with the restrictions under Sec 36 which governs transactions between the bank and DOSRI
Transaction entered into must be ARMS-LENGTH transaction
It has to be made where parties negotiate on equal footing. One does not exert undue influence on the other
We don’t want these DOSRI to influence the bank to giving them more favorable terms than those given to the general public. The
transaction has to be arms-length so the terms will not be less favorable to the bank than those given to the public
“Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less
favorable to the bank than those offered to others.”
Policy is DOSRI transactions are allowed when they comply with sec 36 and done in an arms-length manner

REQUIREMENTS UNDER SEC 36


1. Approval/Procedural requirement: The account should be upon written approval of the majority of ALL the directors of the lending bank
excluding the director concerned

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A.C.G.T. | © 2014-2015
Example. There are 15 directors of the bank. In that meeting where they are to approve the loan, 8 are present. How many are
required to approve? Majority of all, not majority of the present. We need 8 votes here, but exclude the vote of the self-dealing
director
Thus, if the 8 include the self-dealing director, there is no valid approval.
The approval must be in writing

2. Reportorial requirement: The resolution approving the loan shall be entered in the records of the bank and a copy of the entry shall be
transmitted forthwith to the Supervising and Examination Sector of the BSP
Transmit a copy the resolution, not the contract, approving the transaction
3. Ceilings (under the MORB)
A. Aggregate Ceiling
15% of the total loan portfolio of the bank or 100% of the combined capital accounts whichever is lower

B. Individual Ceiling
Amount equivalent to the DOSRI’s respective unencumbered deposits and book value of their paid-in capital contribution in the bank
Example. A is a stockholder of a bank and has paid-in capital of 50M, and deposits of 0.
He has no unencumbered deposits, so base it on his paid-in capital of 50M, which is the limit
Ex 2. A has loan from bank – 30M; housing loan under Fringe benefit plan of bank – 30 M
We are within the limit. According to the law, excluded are loans, credit accommodations and advances:
i. to officers in the form of fringe benefits granted in accordance with rules as may be prescribed by the Monetary Board
shall not be subject to the individual limit
ii. extended by a cooperative bank to its cooperative shareholders
iii. covered by non-risk securities
Ex 3. A has 50M unencumbered deposit and 50M paid-up. What’s the limit? 100 M
A has unsecured loan- 30M; loan secured by REM- 50M; fringe benefit plan/housing loan- 20M; loan secured by non-risk
security- 30M.
Is he within the limit? How much? This is 80M composed of unsecured loan and loan with REM. Exclude the others. He is
within limit of 100M. REM is not non-risk collateral. Non-risk collaterals are those we took up in SBL: government securities,
cash deposits, margin deposits, etc. Non-risk do not include REM or chattel mortgages.

CASE: GO vs BSP
Facts:
The offense allegedly committed by Go was “the said accused, being then the Director and the President and Chief Executive Officer
of the Orient Bank unlawfully borrow the deposits or funds of the said banking institution and/or become a guarantor, indorser or obligor for
loans from the said bank to others, knowing fully well that the same has been done without the written approval of the majority of the Board
of Directors.”
Go argued that the charge was not only vague, but also did not constitute an offense. He posited that Section 83 of RA 337 penalized
only directors and officers of banking institutions who acted either as borrower or as guarantor, but not as both. Go also argued his limit was
not even shown as DOSRI
Ruling:
Under Section 83, RA 337, the following elements must be present to constitute a violation of its first paragraph:
1. the offender is a director or officer of any banking institution;
2. the offender, either directly or indirectly, for himself or as representative or agent of another, performs any of the following
acts:
a. he borrows any of the deposits or funds of such bank; or
b. he becomes a guarantor, indorser, or surety for loans from such bank to others, or
c. he becomes in any manner an obligor for money borrowed from bank or loaned by it;
3. the offender has performed any of such acts without the written approval of the majority of the directors of the bank, excluding
the offender, as the director concerned.
A simple reading of the above elements easily rejects Go's contention that the law penalizes a bank director or officer only either for
borrowing the bank's deposits or funds or for guarantying loans by the bank, but not for acting in both capacities. The essence of the crime is
becoming an obligor of the bank without securing the necessary written approval of the majority of the bank's directors.

Discussion:
Each violation of the requirements is a separation offense. His charge was that he did not secure the approval. He cannot put up the
defense that they did not put his ceiling limitation because that is different.
There are 3 requirements under the law: approval requirement, reportorial requirement, and ceiling requirement. These are different
requirements and all of them have to be complied with. You do not have to violate all of them, violation of one is sufficient because they
are different violations.
So showing the limit is not necessary because the charge was a separate violation
As to the 2nd issue, he said his charge was vague because of the use of and/or. SC said it does not matter as long as you oblige yourself
with the bank, you have to secure approval. It does not matter if direct or indirect manner, whether as guarantor or not
Important thing here is that the 3 requirements are different and separate offenses
Sec 36 says “No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others, borrow
from such bank nor shall he become a guarantor, indorser or surety for loans from such bank to others…” So it does not matter if you are
just surety/guarantor; still comply with sec 36.
The reason for Sec 36 is protection to the public especially to the depositors. This is where the bank gets their money and the bank
cannot just give the money to the DOSRI without limitations. This is to prevent fraud.
RULES FOR INVESTMENT OF BANKS IN REAL ESTATE

SECTION 51. Ceiling on Investments in Certain Assets. — Any bank may acquire real estate as shall be necessary for its own use in the
conduct of its business: Provided, however, That the total investment in such real estate and improvements thereof, including bank
equipment, shall not exceed fifty percent (50%) of combined capital accounts: Provided, further, That the equity investment of a bank in
another corporation engaged primarily in real estate shall be considered as part of the bank's total investment in real estate, unless
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otherwise provided by the Monetary Board.
A.C.G.T. | © 2014-2015

Sec 51 sets out the rule that a bank cannot engage in real estate business. When it acquires real estate, it can only hold such real estate for
the purpose of the conduct of its own operations/business. It cannot lease out or enter into sale and resale of real estate. However, the
ownership of real properties is also subject to the limitation that the total value of these investments should not exceed 50% of the
combined capital accounts of the bank
The investments in real estate that are covered by this limitation are the actual investment in real property or the land, improvements
thereon, office equipment, and even the equity investment, which means the investment in shares of the bank in a company engaged in
real estate business. This means all your investments in real estate which includes all these mentioned is subject to the limitation of not
exceeding 50% of the combined capital accounts

EXCLUSUION FOR THE FIRST FIVE YEARS

SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. —


Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following
circumstances:
52.1. Such as shall be mortgaged to it in good faith by way of security for debts;
52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or
52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to
secure debts due it.
Any real property acquired or held under the circumstances enumerated in the above paragraph shall be disposed of by the bank within
a period of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period,
continue to hold the property for its own use, subject to the limitations of the preceding Section.

Sec 52 says that when a bank acquires property that was mortgaged to it, or transferred to it in dacion, or acquired by it in a judicial sale,
these properties for the 1st five years are not included in determining whether or not the bank has reached its limit. It does not mean
these properties will be excluded from the limit because the limit is not based on the value of the investments, it is based on your
combined capital accounts.
Example. The 50% of your combined capital accounts is 800M. You have real property that you use in business is 500M. You are within the
limit here.
Ex 2. In addition to the 500M, you also acquired properties that were mortgaged to you by 400M. This is still within the limit because you
don’t include this amount in the 500M for comparing with the limit of the 50%. You don’t really include the value of the real property in
determining the limit. In determining the limit, you only use the combined capital accounts. But in comparing whether or not you have
exceeded the limit, you exclude the 400M but only for the first 5 years from the time that these properties were acquired by the bank.
After 5 years, if you still have not gotten rid of these properties, they will now be included in determining whether or not you have
reached the limit
Ex. 3. What is now your total investment? 900M. You have now reached the limit because your limit remains at 800M and now your
investment is 900M. So you don’t use the value of investment to determine the limit but use it to determine if you have complied with the
limit. Again, the limit is not based on your investment but on the combined capital accounts.

CASE: UNION BANK vs. SPS. TIU


Facts:
The spouses loaned from the bank and had an agreement for dacion en pago of the properties. When they were unable to pay, the
bank foreclosed the properties and entered into lease agreements for 2 years using the porperties. The Court of Appeals found the lease
contracts over the properties conveyed to Union Bank via dacion en pago to be void for being against public policy. The appellate court held
that since the General Banking Law of 2000 mandates banks to immediately dispose of real estate properties that are not necessary for its
own use in the conduct of its business, banks should not enter into two-year contracts of lease over properties paid to them
through dacion. The Court of Appeals thus ordered Union Bank to return the rentals it collected.
Ruling:
Section 52.2 contemplates a dacion en pago. Thus, Section 52 undeniably gives banks five years to dispose of properties conveyed to
them in satisfaction of debts previously contracted in the course of its dealings, unless another period is prescribed by the Monetary Board.
Furthermore, there appears to be no legal impediment for a bank to lease the real properties it has received in satisfaction of debts, within the
five-year period that such bank is allowed to hold the acquired realty.
We do not dispute the interpretation of the Court of Appeals that the purpose of the law is to prevent the concentration of land
holdings in a few hands, and that banks should not be allowed to hold on to the properties contemplated in Section 52 beyond the five-year
period unless such bank has exerted its best efforts to dispose of the property in good faith but failed. However, inquiries as to whether the
banks exerted best efforts to dispose of the property can only be done if said banks fail to dispose of the same within the period provided.
Such inquiry is furthermore irrelevant to the issues in the case at bar.

Discussion:
The CA said that the lease contract is against public policy because CA said under sec 52, the bank has to get rid of those properties in 5
years. By entering into lease contracts, the bank conveyed an intention of not disposing the properties for at least 2 years. It is indirectly
violating sec 52 which mandates that banks should dispose of the real property within 5 years.
SC said CA is wrong because banks have 5 years to dispose of the property. WON it had the intention or exerted best efforts to dispose of
the property, this is not the question that has to be answered within the first 5 years. Within that period, the bank can do whatever it
wants with the property. It is only after the lapse of the period will the question of best efforts arise. Within 5 years, you don’t look at the
intention of the bank. In can do whatever it wants provided after 5 years it has to dispose, and must show it exerted best efforts.
Here, the lease contract is valid because it is only for 2 years

PROHIBITIONS

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A.C.G.T. | © 2014-2015
1. Prohibition to act as insurer

SECTION 54. Prohibition to Act as Insurer. — A bank shall not directly engage in insurance business as the insurer.

Does this contradict our discussion on cross-selling? Or even with the provision under the Revised Insurance Code on bancassurance?
It does not conflict because bancassurance provides representation by any insurance company even if the bank has no equity in that
company. (This revised the cross-selling rule)
There is no conflict because in sec 54 what is prohibited is that the bank itself will act as insurer. In sec 365 of the Insurance Code, a
3rd party insurance company WON it is allied with the bank will go to bank premises and sell their insurance products there. The bank
here is not the insurer. The company is just using the bank premises to sell.

2. Prohibited Transactions

SECTION 55. Prohibited Transactions. —


55.1. No director, officer, employee, or agent of any bank shall —
(a) Make false entries in any bank report or statement or participate in any fraudulent transaction, thereby affecting the financial
interest of, or causing damage to, the bank or any person;
(b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or
properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to
bank deposits, the provisions of existing laws shall prevail;
(c) Accept gifts, fees or commissions or any other form of remuneration in connection with the approval of a loan or other credit
accommodation from said bank;
(d) Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank; or
(e) Outsource inherent banking functions.
55.2. No borrower of a bank shall —
(a) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank;
(b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan
or other credit accommodation or extending the period thereof;
(c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or
(d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to
influence such persons into approving a loan or other credit accommodation application.
55.3. No examiner, officer or employee of the Bangko Sentral or of any department, bureau, office, branch or agency of the
Government that is assigned to supervise, examine, assist or render technical assistance to any bank shall commit any of the acts
enumerated in this Section or aid in the commission of the same. (87-Aa)
The making of false reports or misrepresentation or suppression of material facts by personnel of the Bangko Sentral ng Pilipinas shall
constitute fraud and shall be subject to the administrative and criminal sanctions provided under the New Central Bank Act.
55.4. Consistent with the provisions of Republic Act No. 1405, otherwise known as the Banks Secrecy Law, no bank shall employ casual
or nonregular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits.

Three persons are prohibited here, or may violate this section:


a. Officer/director/employee/agent of the bank
b. Borrow of the bank
c. Officer/ employee/agent of the BSP
55.1 B says it Is prohibited “(b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any information
relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided,
That with respect to bank deposits, the provisions of existing laws shall prevail”
Is this the Bank Secrecy Law? No because this talks about the other banking services in sec 53. This is not pertaining to deposit
transaction because sec 55.4 talks about the prohibition with respect to deposit transactions. 55.1 pertain to those funds or assets
acquired by the bank under sec 53 or in its custodian function
This means even sec 53 are covered by confidentiality. But the bank can be compelled to divulge based on a court order
55.1 E says it is prohibited to “(e) Outsource inherent banking functions”
The inherit banking functions are loans and deposits. You cannot outsource any transaction of the bank relating to loans and deposit
Under the old MORB, 2012 version, it will provide the functions which a bank can outsource. Under the 2013 MORB, what is provided
there are the inherent functions of the bank which cannot be outsourced. Other than those functions, the bank can already
outsource those.
162.2. Prohibition against outsourcing of inherent banking functions. No bank shall outsource inherent banking
functions such as:
a. Services normally associated with placement of deposits and withdrawals including the recognition based on
recording of movements in the deposit accounts;
b. Granting of loans and extension of other credit exposures;
c. Position-taking and market risk-taking activities;
d. Managing of risk exposures; and
e. Strategic decision-making

Appraisal of loans or when you value the collateral, that can be outsourced because that s not related to granting loans
Credit card services, collection of loans, ATM maintenance, book keeping functions can be outsourced. SO anything not found in the
enumeration can be outsourced because they are not considered inherent

CASE: BPI EMPLOYEES UNION vs. BPI


Facts:
Certain functions of BPI were outsourced to a 3rd party entity- BOMC: check clearing, delivery of bank statements, fund
transfers, card production, operations accounting and control, and cash servicing; also cashiering functions and bookkeeping functions

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A.C.G.T. | © 2014-2015
after there was consolidation. This was questioned by the labor union saying the CBA was violated by the company with respect to
membership.
Ruling:
From the very definition of "banks" as provided under the General Banking Law, it can easily be discerned that banks
perform only two (2) main or basic functions — deposit and loan functions. Thus, cashiering, distribution and bookkeeping are but
ancillary functions whose outsourcing is sanctioned under CBP Circular No. 1388.

Discussion:
SC said this is a management prerogative to outsource banking functions, and even then, this is allowed by the BSP because the
functions outsourced are not inherent banking functions.
Example. We had a client who wanted to put up a Point-Of-Sale system (POS). They wanted to put in their stores a POS system
where you can pay with your debit card and the clerk of the store can just give you money as change. You have 5K in your debit card
and your purchase is only 3K. You can tell the store clerk give me the 2K change in cash. They asked if they can do it. We said NO
because that is TELLERING function. You are basically withdrawing from your account. That’s a debit card, thus a savings account.
When you asked the clerk to give you your money, she is acting as a bank teller because you are withdrawing from her. They did not
believe us so they went to BSP. BSP also said they cannot do that because that is an inherent banking function. Apparently, that’s
done in other countries but not here. Such functions have to be done within bank premises.

EQUITY INVESTMENTS
INVESTMENT is when you acquire something with the intention of keeping it for the long term either for the purpose of control or
income
You want to control, so you buy equity securities and keep it for the long term, or you want to earn from that investment for the long
term or you want regular income from that asset

1. UNIVERSAL BANKS (UB)


They are allowed to have investments. They can invest in the equities of allied enterprises, which can be financial allied enterprise and non-
financial allied enterprise; and also in non-allied enterprise

Allied enterprises include financing companies, credit card companies; or companies whose operations are similar or related to banking
operations
Non-allied enterprises are not related to banking operations such as agriculture, manufacturing. They basically change their output; this is
not related to banking at all
Under sec 23, only UB can invest in non-allied enterprise. Sec 24 says UB can invest in both allied enterprises (AE) and non-allied
enterprises (NAE) subject to limitations

SECTION 23. Powers of a Universal Bank. — A universal bank shall have the authority to exercise, in addition to the powers
authorized for a commercial bank in Section 29, the powers of an investment house as provided in existing laws and the power to
invest in non-allied enterprises as provided in this Act.
SECTION 24. Equity Investments of a Universal Bank. — A universal bank may, subject to the conditions stated in the succeeding
paragraph, invest in the equities of allied and non-allied enterprises as may be determined by the Monetary Board. Allied
enterprises may either be financial or non-financial.
Except as the Monetary Board may otherwise prescribe:
24.1. The total investment in equities of allied and non-allied enterprises shall not exceed fifty percent (50%) of the net worth of the
bank; and
24.2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-five percent (25%) of the net
worth of the bank.
As used in this Act, "net worth" shall mean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings
and undivided profit, net of valuation reserves and other adjustments as may be required by the Bangko Sentral.
The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate
appropriate guidelines to govern such investments.
SECTION 25. Equity Investments of a Universal Bank in Financial Allied Enterprises. — A universal bank can own up to one
hundred percent (100%) of the equity in a thrift bank, a rural bank or a financial allied enterprise.
A publicly-listed universal or commercial bank may own up to one hundred percent (100%) of the voting stock of only one other
universal or commercial bank. (21-B; 21-Ca)
SECTION 26. Equity Investments of a Universal Bank in Non-Financial Allied Enterprises. — A universal bank may own up to one
hundred percent (100%) of the equity in a non-financial allied enterprise. (21-Ba)
SECTION 27. Equity Investments of a Universal Bank in Non-Allied Enterprises. — The equity investment of a universal bank, or of
its wholly or majority-owned subsidiaries, in a single non-allied enterprise shall not exceed thirty-five percent (35%) of the total
equity in that enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise. (21-B)
SECTION 28. Equity Investments in Quasi-Banks. — To promote competitive conditions in financial markets, the Monetary Board
may further limit to forty percent (40%) equity investments of universal banks in quasi-banks. This rule shall also apply in the case of
commercial banks.

LIMITATIONS
1. Investor Limitation – when you base it on the net worth of the bank, that is an investor limitation because that is based on the investor
itself, the bank
a. Aggregate investment: Total investment in AE and NAE does not exceed 50% of the net worth of the bank
b. Single enterprise AE or NAE: not exceed 25% of net worth of the bank
Basis: sec 24.1 and sec 24.2

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2. Investee Limitation
a. Allied enterprise
i. Financial allied enterprise
100% of the equity in a thrift bank, a rural bank or other financial allied enterprise (sec 25)
Another UB/KB
1. Publicly-listed: 100% of the voting stock
2. Not publicly-listed: 49% minority interest
ii. Non-financial allied enterprise - 100% of the equity (sec 26)
b. Non-allied enterprise
Not exceeding 35% of the total equity in that enterprise nor shall it exceed 35% of the voting stock in that enterprise
Equity is different from voting stock. Equity is the total capital which can be voting or non-voting

2. COMMERCIAL BANKS (KB)

SECTION 29. Powers of a Commercial Bank. — A commercial bank shall have, in addition to the general powers incident to
corporations, all such powers as may be necessary to carry on the business of commercial banking, such as accepting drafts and issuing
letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or
creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or
silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board
may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities
and aggregate amount of such investment. (21a)
SECTION 30. Equity Investments of a Commercial Bank. — A commercial bank may, subject to the conditions stated in the succeeding
paragraphs, invest only in the equities of allied enterprises as may be determined by the Monetary Board. Allied enterprises may either
be financial or non-financial.
Except as the Monetary Board may otherwise prescribe:
30.1. The total investment in equities of allied enterprises shall not exceed thirty-five percent (35%) of the net worth of the bank; and
30.2. The equity investment in any one enterprise shall not exceed twenty-five percent (25%) of the net worth of the bank.
The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate
guidelines to govern such investments. (21A-a; 21-Ca)
SECTION 31. Equity Investments of a Commercial Bank in Financial Allied Enterprises. — A commercial bank may own up to one
hundred percent (100%) of the equity of a thrift bank or a rural bank.
Where the equity investment of a commercial bank is in other financial allied enterprises, including another commercial bank, such
investment shall remain a minority holding in that enterprise. (21-Aa; 21-Ca)
SECTION 32. Equity Investments of a Commercial Bank in Non-Financial Allied Enterprises. — A commercial bank may own up to one
hundred percent (100%) of the equity in a nonfinancial allied enterprise.

KB can only invest in allied enterprises, divided into financial allied enterprises and non-financial allied enterprises
So a KB cannot invest in a mining company, agriculture or manufacturing company; only to related enterprises

LIMITATIONS (ONLY ALLIED ENTERPRISES)


1. Investor Limitation
a. Aggregate investment: total investment in equities of allied enterprises shall not exceed 35% of the net worth of the bank
b. Single enterprise: not exceed 25% of the net worth of the bank

2. Investee Limitation
a. Financial Allied Enterprise
i. Thrift bank or rural bank: 100% of the equity
ii. Other financial allied enterprise: 49% of the equity; minority interest (MORB, 378)
So this is different from the limit in UB because TB, RB and other FAE have the same limit for UB
iii. Another UB/KB
Publicly-listed: 100% of the voting stock
Not publicly-listed: 49% minority interest

b. Non-financial Allied Enterprise


100% of the equity in a nonfinancial allied enterprise (sec 32)

ATTY: So this is actually VERY EASY to remember. Basta allied, it’s just 100 or 49. 49 lang ang UB with respect to another UB/KB if it’s not
publicly-listed. All the rest, 100. Ang KB, mu 49 lang with respect to another UB/KB if it’s not publicy-listed, same rule sa UB. It will also be
40 with respect to other FAE which are not TB or RB.

EXAMPLES: Net worth is 1B. 50% is 500M; 25% is 250M. Assuming we meet with investee limitations, let’s figure out investor limitations of UB
1. You have investment in 3 companies. A- 100M; B- 100M; C- 250M. We meet the limitation here. For individual limitation, nothing exceeds
250M. For aggregate limitation, we have 450M. We meet both limitations
2. Investment in A- 250M; B- 250M. Single limitation and aggregate limitation (500M) are met.
3. Investment in A- 200M; B- 300M. We meet the aggregate of 500M, but we don’t meet single limitation FOR B ONLY because investment
in B is 300M and the limit is 250M.

ATTY: No need to memorize, just familiarize yourselves with these (di ba na pareha ra? O.O)

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QUASI BANKING FUNCTIONS


Section 6. Authority to Engage in Banking and Quasi-Banking Functions. No person or entity shall engage in banking operations or quasi-
banking functions without authority from the Bangko Sentral: Provided, however, that an entity authorized by the Bangko Sentral to perform
universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions.
Any person or entity who wants to engage in quasi-banking function has to get an authority or secure a license from the Bangko Sentral.
Take note that the Bangko Sentral is different from the Monetary Board in the sense that the monetary board is the governing body.
Except: Universal Banks and Commercial Banks, not required because once you have a UB or KB license, that automatically includes quasi-
banking license.
How can a UB/ KB undertake a quasi-banking functions directly?
They can do it by themselves or by a different department but only one entity- the same Universal or Commercial bank. They can engage
in quasi-banking function by direct authority from Section 6.
How else, this time indirectly?
They can exercise it indirectly through equity investment. Pursuant to Section 25, a quasi-bank is considered a financial allied enterprise,
so a UB can invest up to 100% and a KB can invest up to 49% this time pursuant to Section 31 because it says 100% but as to allied
enterprise, they will only be minority so 49%. Is there another limitation? MORB Section 28. 40%. Rule also applies to Commercial Bank.
So UB & KB can either directly or indirectly engage in quasi-banking functions. Directly by themselves, and indirectly by investing in the
equity of a quasi-bank. So if it is done indirectly, that quasi-bank entity will have to secure a license because this is a separate entity from
the universal or commercial bank and they are not covered by the UB or KB’s license. They will have to secure its own license pursuant to
Section 6.
What is a quasi-bank? Section 4 of the GBL provides that
"Quasi-banks" shall refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse
or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the "New Central Bank Act") for
purposes of re-lending or purchasing of receivables and other obligations.

ESSENTIAL ELEMENTS for an entity to be considered engaging in Quasi-banking function


1. Borrow money for their own house
This means under your own name and not acting as a representative or an agent of another person.

2. From the public


Public means 20 or more persons (whereas if you borrow money from 19 or less people it’s considered private placement).

3. The mode of borrowing is through issuances, endorsement or assignment with recourse or acceptance of deposit substitutes.
Deposit substitutes are mere debt instruments and what makes it a deposit substitute is that the debt instrument has to be with recourse
-which means in case of dishonor of the instrument, the holder can go back to the seller. It has a recourse against the seller. The seller
guarantees the performance of the instrument. If the issuance is without recourse, then it falls out of the definition of quasi-banking
function. But if the instrument is silent, it is presumed to be with recourse.

4. For purposes of re-lending or purchasing of receivables and other obligations.


There’s a corporation who wants to get more capital for the purpose of expanding, it issues promissory notes borrowing money from 20
persons. Can that be considered a quasi-banking function? NO because it is only for the purpose of financing their own, it is for a private
purpose and not for re-lending. Section 95 last paragraph of the NCBA says that deposit substitutes of commercial, industrial and other
non-financial companies for the limited purpose of financing their own needs or the needs of their agents or dealers shall NOT be covered
by the provisions of Section 94 of this Act.

These four elements must exist before there can be a quasi-banking function. You are not supposed to borrow from the public under
a quasi-banking function unless you are authorized by the Bangko Sentral. If you do borrow without authority, that is a violation of
the New Central Bank Act and there are penalties.

We have this client engaging in retail trade. They have this team and they would get several buyers or clients to post cash bond and
earn interest, in return of the cash bond, they can sell what they want. The persons depositing money can sell the notes and the
person who buys the notes can go to the grocery of the retailer and they can buy items on credit. Now, this retailer wanted to
regularize all their transactions because they want to sell their shares into the stock exchange, to do initial public offering. They were
basically borrowing money from the public, persons who deposited are more than 20 in number. We were asked whether it is a
violation. So we have to discuss the elements:
1. Is there borrowing? There was no loan, it was given in a form of security
2. From the public? Yes.
3. Issuing deposit substitutes? No. it has to be debt instruments. When it is rendered to you, there’s money. Here, it’s not
money, but grocery items.
4. Purpose of relending? No. It was basically to secure payment of the goods bought on credit.

So NO. You make sure that you comply with the Philippine Consumer Act because although this is not a quasi-banking
function, it is a form of a sale on credit transaction.
TRUST
It is defined as a written relationship between a person having an equitable ownership in a property (Trustor) and another person who
owns the legal title (Trustee) with the equitable ownership of the former entitling him to require the performance of certain duties and
the exercise of certain powers from the latter which performance can be compelled by the courts.
Under the Civil Code, there is express and implied trust. We are to discuss express trust and not implied because under the GBL, trust
operations are always express, the activities are always done by professional trust entities.
Law says

Section 79. Authority to Engage in Trust Business. - Only a stock corporation or a person duly authorized by the Monetary
Board to engage in trust business shall act as a trustee or administer any trust or hold property in trust or on deposit for the
use, benefit, or behoof of others. For purposes of this Act, such a corporation shall be referred to as a trust entity.

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In order to be able to engage, you need to have the authority from the Monetary Board.
If I have the client who wants me to manage his share and he gives me a voting trust, is there a trust relationship?
Yes. Legal ownership is transferred, and beneficial ownership remains to the trustor.
But does this mean I have to secure an authority from the Monetary Board?
No, since it is only a one time transaction. In order to say that you are engaged in the trust business, there must be a
recurring activity resulting from a trustor and a trustee involving the appointment of a trustee for the admistration,
holding, and management of funds and property for the use, advantage and benefit of the trustor.
Who can engage? Is it limited to banks?
No. Under the old banking act, the requirement to secure was only limited to banks. So non-bank entitites were running
amok, no one was regulating them. So now, other persons can.

CONSEQUENCES OF TRUST RELATIONSHIP


1. Single property has DOUBLE OWNERSHIP
Splitting of ownership. Legal title also referred to as naked ownership.
2. A trust is FIDUCIARY in nature that is why section 80 says there are 2 cardinal principles of a trust entity:

1) The PRUDENT MAN RULE


A trust entity shall administer the funds or property under its custody with the diligence that a prudent man would exercise in the
conduct of an enterprise of a like character and with similar aims. Based on American Jurisprudence, the prudent man rule says that
the prudence, diligence, care and the skill of a trustee is that of an expert professional trustee.

2) Prohibition AGAINST SELF-DEALING


No trust entity shall, for the account of the trustor or the beneficiary of the trust, purchase or acquire property from, or sell, transfer,
assign, or lend money or property to, or purchase debt instruments of, any of the departments, directors, officers, stockholders, or
employees of the trust entity, relatives within the first degree of consanguinity or affinity, or the related interests, of such directors,
officers and stockholders, unless the transaction is specifically authorized by the trustor and the relationship of the trustee and the
other party involved in the transaction is fully disclosed to the trustor of beneficiary of the trust prior to the transaction.

If you are under a trust, you are not allowed to use the money to deal with yourself or your related interest. (i.e. buy your own
property, lend it to your wife) even if it is beneficial to the trustor. Why? This is to avoid conflict of interest. Getting advantage for
yourself to the detriment of the trustor.

3. The funds or property of the trust will be kept from the general funds or property of the trustee. (Section 87 of GBL)
In relation to section 92, no assets held by a trust entity in its capacity as trustee shall be subject to any claims other than those of the
parties interested in the specific trusts. So if the trustee cannot pay his obligations and here comes his creditor wanting to garnish
the trustee’s funds or property, that creditor cannot garnish the property of the trust even if technically, it belongs to the trustee.
But if the trustee did not comply and he made, kept the properties as his own, there is the chance that property may be garnished or
attached. In which case, trustee can be liable civilly or criminally- that is estafa.

POWERS OF THE TRUSTEE:

Section 83. Powers of a Trust Entity. - A trust entity, in addition to the general powers incident to corporations, shall have the power to:
83.1 Act as trustee on any mortgage or bond issued by any municipality, corporation, or any body politic and to accept and execute any trust
consistent with law;
83.2 Act under the order or appointment of any court as guardian, receiver, trustee, or depositary of the estate of any minor or other
incompetent person, and as receiver and depositary of any moneys paid into court by parties to any legal proceedings and of property of
any kind which may be brought under the jurisdiction of the court;
83.3. Act as the executor of any will when it is named the executor thereof;
83.4 Act as administrator of the estate of any deceased person, with the will annexed, or as administrator of the estate of any deceased
person when there is no will;
83.5. Accept and execute any trust for the holding, management, and administration of any estate, real or personal, and the rents, issues and
profits thereof; and
83.6. Establish and manage common trust funds, subject to such rules and regulations as may be prescribed by the Monetary Board.

In reality, the last one–to establish and manage common trust funds has been abolished by the Bangko Sentral. The purpose of
this common trust funds is to pull your resources. Now it is replaced by Unit Investment Trust Funds (UITF)- investments that
you can buy from trust entities, pulling money together and bank will manage it. The one who can sell must be a trust entity. If a
bank sells a UITF, you have to make sure it is a licensed trust entity since this is a separate license from your banking license. This
is different from quasi-banking functions since even the UB and KB needs to secure another license to engage in trust functions.
The mutual fund on the other hand is a trust but not registered as a trust entity.

FOREIGN BANKS

Banks formed, organized and existing under the laws other than the laws of the Republic of the Philippines.
A domestic bank is a bank which is organized, formed and existing under the laws of the Philippines.
The test that we follow with respect to the nationality of the bank is the Nationality test – the place where it is incorporated.
A bank is considered a citizen where it is incorporated. If you are incorporated under the Philippine laws, regardless of who your
stockholders are, you are considered a domestic bank, whereas if it is incorporated under the laws outside the Philippines, even if bank is
100% Filipino owned, it is a foreign bank.
How can foreign bank enter or get a license in the Philippines?
Under R.A. 7721, the modes of entry are -you acquire the shares of an existing bank up to 60%, invest on a new subsidiary up to 60% or
open a bank in the Philippines. But this law has already been amended. The first amendment is Section 72 of the GBL which states that for
the first seven years from the time of the enactment of the GBL, FB are allowed to own up to 100% of the equity of a domestic bank. But
only for that seven year period. And after the lapse of the seven year period, you cannot acquire 100%, only the 60% going back to RA 7721.
But those who acquired 100% under the seven year rule, they are allowed to continue their 100% shareholding. But they are not allowed to
dispose of it. Because if they dispose it with another foreign bank, the 7 year period has already lapsed. So that other foreign bank will

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have to comply with the 60%. So again, this is Section 72 of the GBL reconciling R.A. 7721. But this has become moot because of R.A. 10641
which allows full entry of foreign banks in the Philippines- now 100%. So:

Of the three, in the first two you have a domestic bank or have already been incorporated under the law of the Philippines. Going back to
section 11 of the GBL, Domestic Banks can be owned by foreign individuals and nonbank corporations both in individual and aggregate
limit only up to 40%. If the shareholder is a banking corporation, the limit is 100%. Section 11 made a reservation that stockholders are
nonbank individuals or nonbank corporations . Why the reservation? Because the law has a different rule for foreign banks – they are
allowed to own 100% shares of domestic corporation. So with domestic banking corporations, if the shareholder of a domestic bank is a
Filipino either individual or nonbank corporation- subject to 40% limit except that there is no aggregate limit. If it’s a domestic corporation,
you go back to allowable investments of UB & KB- you can own 100% of a TB or RB. If you’re a UB or KB, you are still allowed to own
another domestic bank (UB or KB) but only minority shareholdings (49%) except if you are publicly listed in which case you can own 100%.
So same with Foreign banks, they can own 100% of the domestic bank.

Can you relate everything class? It’s very simple to remember (*everyone laughed). Domestic banks, who are allowed to be shareholders?
It could be foreign or Filipino. If Foreign, consider if it is a bank (100% pursuant to R.A. 10641) or nonbank (40% pursuant to Section 11 of
the GBL). If Filipino, consider if it is a bank or nonbank- if it is a bank then under the investments of banks, the UB or KB can own 100% of a
TB or RB and only minority shareholdings if it is for another UB or KB unless publicly listed (in which case it can be 100%) and if it is
nonbank then it’s 40% individual limitation only pursuant to Section 11.

So specifically when we say foreign banks license to do business in the Philippines, what are we really talking about? It is the 3rd one. We
can’t include the first two since they are considered as domestic banks and therefore covered by the GBL. The third is your foreign bank
license to do business in the Philippines pursuant to the Foreign bank law or R.A. 7721 as amended by R.A. 10641- an act allowing the full
entry of Foreign banks in the Philippines. So R.A. 7721 as amended by R.A. 10641 primarily will govern and suppletory by the GBL or NCBA.

Section 77. Laws Applicable. - In all matters not specifically covered by special provisions applicable only to a foreign bank or its
branches and other offices in the Philippines any foreign bank licensed to do business in the Philippines shall be bound by the
provisions of this Act, all other laws, rules and regulations applicable to banks organized under the laws of the Philippines of the
same class, except those that provide for the creation, formation, organization or dissolution of corporations or for the fixing of the
relations, liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other or to the
corporation

“except those that provide for the creation, formation, organization or dissolution of corporations or for the fixing of the relations,
liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other or to the corporation”
It will now be governed by the laws of the country of the bank’s nationality.
Foreign Banks:
a) As far as OPERATIONS are concerned- it will be governed by R.A. 7721 as amended by R.A. 10641, GBL and NCBA
b) As far as their CREATION, FORMATION, DISSOLUTION, RELATIONSHIP, etc. – law of bank’s nationality.

PRINCIPLES GOVERNING OPERATIONS OF FOREIGN BANKS


1. ONE UNIT rule (Section 74 of GBL)
Section 74. Local Branches of Foreign Banks. - In the case of a foreign bank which has more than one (1) branch in the Philippines, all such
branches shall be treated as one (1) unit for the purpose of this Act, and all references to the Philippine branches of foreign banks shall be
held to refer to such units.

This has another similar provision under Section 20 which provides that the head office and the branches of the head office are
considered as one – the One unit rule for domestic banks. For Foreign banks, branches within the Philippines are considered as one.

2. HEAD OFFICE GUARANTEE (Section 75 of GBL)


Section 75. Head Office Guarantee. - In order to provide effective protection of the interests of the depositors and other creditors of
Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its
Philippine branch. (69) Residents and citizens of the Philippines who are creditors of a branch in the Philippines of a foreign bank shall
have preferential rights to the assets of such branch in accordance with the existing laws.

If the head office in another country has creditors, and it has become insolvent, can the creditors proceed against the assets of the
branch? NOT until all the depositors or creditors in the Philippines have been paid. They have a preference with respect to the branch
assets.

CASE: CITYBANK vs SABENIANO


Facts:
Respondent Sabeniano was a client of petitioners. She had several deposits and market placements with petitioners, among which
were her savings account with the local branch of petitioner Citibank (Citibank-Manila3 ); money market placements with petitioner FNCB
Finance; and dollar accounts with the Geneva branch of petitioner Citibank (Citibank-Geneva). Respondent filed a complaint against
petitioners claiming to have substantial deposits, the proceeds of which were supposedly deposited automatically and directly to
respondent’s account with the petitioner Citibank and that allegedly petitioner refused to despite repeated demands. Petitioner alleged that

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respondent obtained several loans from the former and in default, Citibank exercised its right to set-off respondent’s outstanding loans with
her deposits and money. RTC declared the act illegal, null and void and ordered the petitioner to refund the amount plus interest, ordering
Sabeniano, on the other hand to pay Citibank her indebtedness. CA affirmed the decision entirely in favor of the respondent.
Ruling:
Section 20 applies to a universal or commercial bank, duly established and organized as a Philippine corporation in accordance with
Section 8 of the same statute, and authorized to establish branches within or outside the Philippines. Moreover, what Section 74 of the said
law provides is that in case of a foreign bank with several branches in the country, all such branches shall be treated as one unit. As to the
relations between the local branches of a foreign bank and its head office, Section 75 of the General Banking Law of 2000 and Section 5 of the
Foreign Banks Liberalization Law provide for a "Home Office Guarantee," in which the head office of the foreign bank shall guarantee prompt
payment of all liabilities of its Philippine branches. While the Home Office Guarantee is in accord with the principle that these local branches,
together with its head office, constitute but one legal entity, it does not necessarily support the view that said principle is true and applicable
in all circumstances.
The Home Office Guarantee is included in Philippine statutes clearly for the protection of the interests of the depositors and other
creditors of the local branches of a foreign bank. If a client obtains a loan from the foreign bank’s Philippine branch, it does NOT absolutely
and automatically make the client a debtor, not just of the Philippine branch, but also of the head office and all other branches of the foreign
bank around the world.
Discussion:

Citybank Manila attempted to say that under the one unit rule, we are considered as one with all other branches. Because we are one, if
you owe us money and you have a deposit in our branches, then legal compensation takes place. It used Section 20, 74 & 75 of the GBL to
foster its claim
SC said that with respect to Section 20, you cannot use it since it only refers to a domestic bank, refers to the head office and the
branches of a domestic bank-a universal or commercial bank established in the Philippines.
With respect to Section 74, SC said that it is also not applicable because you are talking about the branch outside the Philippines- the
Geneva branch. This only applies to branches of the Foreign bank within the Philippines.
Citybank was saying, hey SC look at Section 75, this is one example or one embodiment that we are one unit with our head office with all
the branches around the world because it provides that we require head office to guarantee all our branches here in the Philippines.
However, with respect to Section 75, SC said that the Home Office Guarantee only applies for the protection of the depositors in the
Philippines. In case of a foreign bank, the head office is located outside our jurisdiction, outside the Philippines. So we needed Section 75
in order to make the head office liable here and to hold them answerable. It is for the purpose of protecting the depositors in the
Philippines, you CANNOT use it in reverse, that is not what the law contemplates. You cannot use it to make the depositor liable for
something outside of the Philippines.
Citybank was not allowed to compensate because the other branch in Geneva is not considered as one unit with the local branch.
In the loan-you are the debtor and Citybank is the creditor, while in the deposit- you are the creditor and Citybank Manila is the debtor.
An essential element for legal compensation is that the parties must be mutually creditors and debtors to each other. In this case, they
are not. So you and Citybank Manila are not mutually creditors and debtors of each other.

SEC. 5. Section 8 of Republic Act No. 7721 is hereby amended to read as follows:
“SEC. 8. Equal Treatment. – Foreign banks authorized to operate under Section 2 of this Act, shall perform the same functions, enjoy
the same privileges, and be subject to the same limitations imposed upon a Philippine bank of the same category. The single
borrower’s limit of a foreign bank branch shall be aligned with that of a domestic bank.
“The foreign banks shall guarantee the observance of the rights of their employees under the Constitution.
“Any right, privilege or incentive granted to foreign banks or their subsidiaries or affiliates under this Act, shall be equally enjoyed by
and extended under the same conditions to Philippine banks.” (R.A. 10641)

If the branch is licensed to a Universal bank, it has all the powers of a Domestic Universal bank. If it is licensed as a Commercial
bank, it has all the powers of a Commercial bank.
Can foreign bank be allowed as a mortgagee for a real property? (Remember that foreigners aren’t allowed to own land in the
Philippines.) YES.

SEC. 6. A new provision in Section 9 is hereby inserted in the same Act, in lieu of the original provisions of Section 9 repealed by
Section 11 of Republic Act No. 10000. Section 9 shall now read as follows:

“SEC. 9. Participation in Foreclosure Proceedings.—Foreign banks which are authorized to do banking business in the Philippines
through any of the modes of entry under Section 2 hereof shall be allowed to bid and take part in foreclosure sales of real property
mortgaged to them, as well as to avail of enforcement and other proceedings, and accordingly take possession of the mortgaged
property, for a period not exceeding five (5) years from actual possession: Provided, That in no event shall title to the property be
transferred to such foreign bank. In case said bank is the winning bidder, it shall, during the said five (5)-year period, transfer its rights
to a qualified Philippine national, without prejudice to a borrower’s rights under applicable laws. Should the bank fail to transfer such
property within the five (5)-year period, it shall be penalized one half (1/2) of one percent (1%) per annum of the price at which the
property was foreclosed until it is able to transfer the property to a qualified Philippine national.”

So again, take note:

1. GBL applies to Domestic Banks i.e. Universal and Commercial Banks


2. Thrift Banks, Rural Banks , Cooperative Banks and Islamic Banks have their own law. Whatever is not in conflict, GBL can be
applied but they are generally governed by their own law

THE NEW CENTRAL BANK ACT (RA 7653)


IN GENERAL
The law creating the Central Bank, the General Banking Act, was passed in 1948 but it took effect in 1949.
Subsequently, Congress seeing the need for reform and to update the central monetary authority passed RA 7653 which is the New
Central Bank Act. This was in June 14, 1993

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Under this new law, all the powers, obligations, assets and liabilities of the Central Bank was transferred to BSP. We now call it BSP.

POLICY
The BSP is a central monetary authority which has fiscal and administrative autonomy

SECTION 1. Declaration of Policy. - The State shall maintain a central monetary authority that shall function and operate as an
independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit.
In line with this policy, and considering its unique functions and responsibilities, the central monetary authority established under this
Act, while being a government owned corporation, shall enjoy fiscal and administrative autonomy.

o Establish an independent and accountable body corporate through fiscal and administrative autonomy
1. Fiscal autonomy – being financially independent from other government agencies
a. Creation of their own source of income
Examples:
BSP can create its own sources of income through imposition of fines and fees
It can buy and sell government securities (only)
It can also give out loans to banking institutions and they can also earn interest
b. Ability or right to allocate resources with wisdom and dispatch as their needs may require
Aside from creating their own income, they also have the right to determine where they will spend that income
These 2 principles must be met. They are able to create their own income and are able to dispose of that income in the way
they see fit
Examples
It can determine the salaries of its officers and employees. This is one of the powers of the Monetary Board (MB)
under sec 15
It can create its own annual budget without interference from other government agencies (sec 15)

2. Administrative autonomy – operational independence; the BSP can determine how it will run its own operations without
interference from other government agencies
It is allowed to issue rules and regulations for banks
Under sec 50, BSP through MB is also allowed to issues rules and regulations for its own internal operations
MB has the power to govern BSP without interference from the government’s executive branch

RESPONSIBILITIES OF THE BSP

SEC. 3. Responsibility and Primary Objective. – The Bangko Sentral shall provide policy directions in the areas of money, banking, and
credit. It shall have supervision over the operations of banks and exercise such regulatory powers as provided in this Act and other
pertinent laws over the operations of finance companies and non-bank financial institutions performing quasi-banking functions,
hereafter referred to as quasibanks, and institutions performing similar functions.
The primary objective of the Bangko Sentral is to maintain price stability conducive to a balanced and sustainable growth of the
economy. It shall also promote and maintain monetary stability and the convertibility of the peso.

GENERAL RESPONSIBILITY
The Bangko Sentral shall provide policy directions in the areas of money, banking, and credit

OBJECTIVES OF THE BSP


1. Maintain price stability
Price stability pertains to the purchasing power of the peso in relation to the domestic market. It can be measured by the
consumer price index or inflation rates
Price stability is the changes in the price level or the domestic inflation rate. The goal of the BSP is to ensure that any changes in
the value of the peso or purchasing power should be minimal
Inflation rate can never be zero because of factors that are based on the market and cannot be controlled. But the goal is that if
there are changes in the price stability, the changes must be minimal and must not be eratic
Minimal: It can’t happen that this week you can buy 1 sack of rice for 2,500 then next week it’s 5K already. Changes should only
be minimal
Eratic: It can’t also happen that this week it’s 2,500/sack, next week it’s 3K/sack, next week it’s 1,500/sack. So that’s being eratic;
you can’t predict it. The price keeps going up then down then up again. There should be a trend and it should be predicted.
The importance of maintaining price stability is so you can predict the price of goods. This is more for budgeting of industries
and business. If they do not know how much rice their 1K can buy next year or next month, they cannot project how much their
business will need. This is important for the economy to help businesses project their expenditures

2. Promote and maintain monetary stability and convertibility of the peso


Monetary stability is international while price stability is domestic
Monetary stability is basically the value of the peso compared to other foreign currencies
Convertibility of the peso means the capacity or the ability of the Phil peso to be converted to a foreign currency
This is important for investment purposes. Remember the case when the loan was denominated in dollars but then the Asian
financial crisis happened so they had to convert it to peso. The exchange rate started at 20 pesos per 1 dollar. Then next week it
was 40 pesos per 1 dollar. Then it became 50. The changes now are in terms of cents. But it happened before that there were 5-
10 peso increments. So when you borrow $1,000 and you brought it here, convert it using Php20, its value is Php20,000. You
have to pay the loan in dollars also. So you want to acquire dollars now to pay it. The value of the dollar now is Php40, the peso
you have to convert now is 40K, whereas the peso you received was just 20K. This happened in one of the cases we discussed (I
think Union Bank vs. Sps Tiu)
Similar with price stability, this helps business plan for their expenditures. We had one case and the same thing to them
happened (above situation). The Asian financial crisis hit and the bank told them to convert their loan to peso. But of course, the
conversion rate is at the time you actually converted it. They went to court and they finally had to file rehabilitation.
It’s also important to maintain convertibility because if you can’t convert the peso, you cannot purchase foreign currency. No
one will accept your peso.

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3. Supervise and regulate the operations of banks and other financial institutions
We had this under GBL in sec 4

SECTION 4. Supervisory Powers. — The operations and activities of banks shall be subject to supervision of the Bangko Sentral.
"Supervision" shall include the following:
4.1. The issuance of rules of conduct or the establishment of standards of operation for uniform application to all institutions or
functions covered, taking into consideration the distinctive character of the operations of institutions and the substantive
similarities of specific functions to which such rules, modes or standards are to be applied;
4.2. The conduct of examination to determine compliance with laws and regulations if the circumstances so warrant as determined
by the Monetary Board;
4.3. Overseeing to ascertain that laws and regulations are complied with;
4.4. Regular investigation which shall not be oftener than once a year from the last date of examination to determine whether an
institution is conducting its business on a safe or sound basis: Provided, That the deficiencies/irregularities found by or discovered
by an audit shall be immediately addressed;
4.5. Inquiring into the solvency and liquidity of the institution (2-D); or
4.6. Enforcing prompt corrective action. (n)
The Bangko Sentral shall also have supervision over the operations of and exercise regulatory powers over quasi-banks, trust
entities and other financial institutions which under special laws are subject to Bangko Sentral supervision. (2-Ca)
For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the borrowing of funds through the issuance,
endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653
(hereafter the "New Central Bank Act") for purposes of relending or purchasing of receivables and other obligations.

Based on these objectives, we now have the BSP’s basic functions

BASIC FUNCTIONS OF THE BSP

1. Maintain price stability


Money supply affects price stability. The more money circulating in the economy, the lesser its purchasing power, the higher the
prices of goods. If there’s more money, there’ more demand. So the prices of supply go up. If there is less money, less demand,
prices of supply tend to go down. Which is good for us, up or down? Neither. You might say going down is better because you are a
consumer; but you also have to think of the businessmen. If they go down because no ne is buying from them, economy goes down.
The job of the BSP is to balance supply and demand so prices don’t get too high or low. Since prices are affected by money supply,
the first basic function in obtaining price stability is currency issue

a. Currency issue
This is the 1st basic function.

i. The BSP has the sole power to issue currency.

SEC. 50. Exclusive Issue Power. _ The Bangko Sentral shall have the sole power and authority to issue currency, within the
territory of the Philippines. No other person or entity, public or private, may put into circulation notes, coins or any other
object or document which, in the opinion of the Monetary Board, might circulate as currency, nor reproduce or imitate the
facsimiles of Bangko Sentral notes without prior authority from the Bangko Sentral.
The Monetary Board may issue such regulations as it may deem advisable in order to prevent the circulation of foreign
currency or of currency substitutes as well as to prevent the reproduction of facsimiles of Bangko Sentral notes.
The Bangko Sentral shall have the authority to investigate, make arrests, conduct searches and seizures in accordance
with law, for the purpose of maintaining the integrity of the currency.
Violation of this provision or of any regulation issued by the Bangko Sentral pursuant thereto shall constitute an offense
punishable by imprisonment of not less than five (5) years but not more than ten (10) years. In case the Revised Penal
Code provides for a greater penalty, then that penalty shall be imposed.

You know under the RPC, anyone who makes money without authority from BSP will be held liable for falsification or
forgery. That is a crime.

ii. Notes and coins issued by BSP are its liabilities


BSP cannot indiscriminately issue money because that is the liability of the BSP. The money that it issues is its liability so it
has to make sure it will not issue beyond its assets. If it does, it will now have liabilities more than its assets. It will go
bankrupt, which cannot happen.

SEC. 51. Liability for Notes and Coins. _ Notes and coins issued by the Bangko Sentral shall be liabilities of the Bangko
Sentral and may be issued only against, and in amounts not exceeding, the assets of the Bangko Sentral. Said notes and
coins shall be a first and paramount lien on all assets of the Bangko Sentral.
The Bangko Sentral's holdings of its own notes and coins shall not be considered as part of it's currency issue and,
accordingly, shall not form part of the assets or liabilities of the Bangko Sentral.

iii. Guaranteed by the government


SEC. 52. Legal Tender Power. _ All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the
Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and
private: Provided, however, That, unless otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not
exceeding Fifty pesos (P50) for denominations of twenty-five centavos and above, and in amounts not exceeding Twenty
pesos (P20) for denominations of ten centavos or less.
The government fully guarantees the notes and coins issued by the BSP and such are legal tender
BSP has its own rules and regulations on how much it can issue. It doesn’t just end with its assets; there are many factors to
consider

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iv. Legal Tender


The form of payment where the creditor is compelled to accept. If you pay by check, the creditor is not compelled to
accept. In fact in your Obligations and Contracts, payment by check will not extinguish your obligation until it is encashed.
Unlike cash, it is legal tender, the creditor will be compelled to accept.
Limitations (can be amended by the MB, they can issue regulations on this):
- denominations of 25 centavos and above, legal tender for 50 pesos
- denominations of 10 centavos or less, 20 pesos

b. Liquidity management
o Under this function, the BSP formulates and implements monetary policy aimed at influencing money supply consistent with its
primary objective to maintain price stability
o Other than currency issue, you can influence money supply by:

i. Set interest rate policy


They cannot fix interest rates because that depends on the banks but they can set the policy as to how the banks will
determine their interest rates
If there is too much money circulating in the economy, the BSP will set a higher interest rate so that people will want to
deposit their money because it will earn more and it will be a deterrent from borrowing money, because if you borrow
money the interest rate is high. It has the effect of lessening the money circulating in the economy
When the BSP finds that inflation is too low, or inflation rate is going down to the extent that it isn’t desirable anymore, the
BSP can reduce interest rates. People will want to take out their money from banks and instead use it or invest it where it
can earn more. People will be induced to borrow also because the rates they will pay are low.
Through its interest rates policy, BSP can influence money supply

ii. Open market operations


This was discussed in BOC vs Planters Bank
BSP is authorized to issue, buy and sell government securities
Instead of buying goods, you buy investment or securities from the government. If the BSP finds that there is too much
money circulating, they will CB bills, in which case the money will go to the BSP and out of circulation. If it finds that there is
too few, it will repurchase the securities, or it will buy them at a discount. The money goes out to the circulation again. That
is open market operation
Sec 61 provides the guiding principle of liquidity management.

SEC. 61. Guiding Principle. _ The Monetary Board shall endeavor to control any expansion or contraction in monetary
aggregates which is prejudicial to the attainment or maintenance of price stability.

If the BSP finds there is too much money, prices are going up, it will want to contract the money supply. If there is too little
money circulating, it will want to expand money supply. This is done through interest rates policy and open market
operations

c. Lender of last resort


o If banks need money and they cannot borrow from each other, their last resort is to borrow from the BSP. Sec 82, 83, and 84 of
the NCBA provides the instances when the BSP can lend money to banks
o Sec 82 describes the normal credit operations of banks; the day-to-day ordinary loans given by BSP to banks

o NORMAL CREDIT OPERATIONS


SEC. 82. Authorized Types of Operations. _ Subject to the principle stated in the preceding section of this Act, the Bangko Sentral
may normally and regularly carry on the following credit operations with banking institutions operating in the Philippines.
(a) Commercial credits. - The Bangko Sentral may rediscount, discount, buy and sell bills, acceptances, promissory notes and
other credit instruments with maturities of not more than one hundred eighty (180) days from the date of their rediscount,
discount or acquisition by the Bangko Sentral and resulting from transactions related to:
(1) the importation, exportation, purchase or sale of readily saleable goods and products, or their transportation within the
Philippines; or
(2) the storing of nonperishable goods and products which are duly insured and deposited, under conditions assuring their
preservation, in authorized bonded warehouses or in other places approved by the Monetary Board.
(b) Production credits. - The Bangko Sentral may rediscount, discount, buy and sell bills, acceptances, promissory notes and
other credit instruments having maturities of not more than three hundred sixty (360) days from the date of their
rediscount, discount or acquisition by the Bangko Sentral and resulting from transactions related to the production or
processing of agricultural, animal, mineral, or industrial products. Documents or instruments acquired in accordance with this
subsection shall be secured by a pledge of the respective crops or products: Provided, however, That the crops or products need
not be pledged to secure the documents if the original loan granted by the Bangko Sentral is secured by a lien or mortgage on
real estate property seventy percent (70%) of the appraised value of which equals or exceeds the amount of the loan granted.
(c) Other credits. - Special credit instruments not otherwise rediscountable under the immediately preceding subsections (a)
and (b) may be eligible for rediscounting in accordance with rules and regulations which the Bangko Sentral shall prescribe.
Whenever necessary, the Bangko Sentral shall provide funds from noninflationary sources: Provided, however, That the
Monetary Board shall prescribe additional safeguards for disbursing these funds.
(d) Advances. - The Bangko Sentral may grant advances against the following kinds of collaterals for fixed periods which, with
the exception of advances against the collateral named in clause (4) of the present subsection, shall not exceed one hundred
eighty (180) days:
(1) gold coins or bullion;
(2) securities representing obligations of the Bangko Sentral or of other domestic credit institutions of recognized solvency;
(3) the credit instruments to which reference is made in subsection (a) of this section;

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(4) the credit instruments to which reference is made in subsection (b) of this section, for periods which shall not exceed three
hundred sixty (360) days;
(5) utilized portions of advances in current account covered by regular overdraft agreements related to operations included
under subsections (a) and (b) of this section, and certified as to amount and liquidity by the institution soliciting the advance;
(6) negotiable treasury bills, certificates of indebtedness, notes and other negotiable obligations of the Government maturing
within three (3) years from the date of the advance; and
(7) negotiable bonds issued by the Government of the Philippines, by Philippine provincial, city or municipal governments, or by
any Philippine Government instrumentality, and having maturities of not more than ten (10) years from the date of the advance.
The rediscounts, discounts, loans and advances made in accordance with the provisions of this section may not be renewed or
extended unless extraordinary circumstances fully justify such renewal or extension. Advances made against the collateral
named in clauses (6) and (7) of subsection (d) of this section may not exceed eighty percent (80%) of the current market value
of the collateral.

o (Those underlined) the BSP has authority to lend money to banks for these purposes

o We also have special credit operations, which are loans for liquidity purposes. Liquidity means your liquid assets or your current
assets are less than your current liabilities. You cannot pay your obligations as they become due, although you have sufficient
assets to pay up your liabilities. It’s just that your assets are not liquid, not cash. So you need more time to convert to cash. You
are not insolvent or bankrupt. If a bank is suffering from liquidity problems, it has sufficient assets but more people are
withdrawing. Then they can borrow from the BSP for 7 days. This will grant them the time to at least convert their non-current
assets into liquid assets or to cash

C. SPECIAL CREDIT OPERATION


SEC. 83. Loans for Liquidity Purposes. _ The Bangko Sentral may extend loans and advances to banking institutions for a
period of not more than seven (7) days without any collateral for the purpose of providing liquidity to the banking
system in times of need.

o There are also emergency credit operations.

D. EMERGENCY CREDIT OPERATION


SEC. 84. Emergency Loans and Advances. _ In periods of national and/or local emergency or of imminent financial panic
which directly threaten monetary and banking stability, the Monetary Board may, by a vote of at least five (5) of its
members, authorize the Bangko Sentral to grant extraordinary loans or advances to banking institutions secured by
assets as defined hereunder: xxxx

When the BSP gives loans to these financial institutions, the loans will ultimately go to the public thereby increasing monetary
supply. And when the BSP demands payment, it will also contract the monetary supply. So its role as a lender of last resort
affects price stability

d. Banker/financial advisor and official depositary of the government


o The BSP keeps the government’s money
o Now, the BSP allows also the government to deposit in ordinary UBs and KBs subject to compliance with rules and regulations
issued by the BSP

Through these 4 basic functions (a, b, c, d), the BSP tries to maintain price stability. These are the tools used by the BSP

2. Promote and maintain monetary stability and convertibility of the peso

Convertibility: international. Exchange peso with another foreign currency.


Interconvertibility: local (provided under Section 55). When one denomination is exchange with another denomination but same
currency

Section 55. Interconvertibility of Currency. - The Bangko Sentral shall exchange, on demand and without charge, Philippine currency of
any denomination for Philippine notes and coins of any other denomination requested. If for any reason the Bangko Sentral is temporarily
unable to provide notes or coins of the denominations requested, it shall meet its obligations by delivering notes and coins of the
denominations which most nearly approximate those requested.
The Bangko Sentral is obliged to exchange one denomination of any other because the currency is the liability of the Bangko Sentral
so you can go there and have the BSP exchange it same goes with bank. Unless the money is a counterfeit.

How do you promote and maintain monetary stability and convertability of the peso?

a. Management of Foreign Exchange Reserves


Buy and sell foreign exchange under Section 70 which states that the Bangko Sentral may buy and sell foreign notes and coins,
and documents and instruments of types customarily employed for the international transfer of funds. The Bangko Sentral may
engage in future exchange operations.
If the BSP has foreign exchange reserves, you don’t need to look outside the country to look for foreign currency so it helps
stabilize the peso.
BSP is also authorized to purchase and sell Gold- the ultimate currency. Since under the international currency market, your
currency is worthless if not backed up with gold.

b. Determine the Foreign exchange rate policy


Currently using the open market approach/ market-oriented exchange rate policy- letting market factors determine exchange
rates- make sure it’s not too high or low.

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Section 74. Exchange Rates. - The Monetary Board shall determine the exchange rate policy of the country.
The Monetary Board shall determine the rates at which the Bangko Sentral shall buy and sell spot exchange, and shall
establish deviation limits from the effective exchange rate or rates as it may deem proper. The Bangko Sentral shall not collect
any additional commissions or charges of any sort, other than actual telegraphic or cable costs incurred by it.
The Monetary Board shall similarly determine the rates for other types of foreign exchange transactions by the Bangko
Sentral, including purchases and sales of foreign notes and coins, but the margins between the effective exchange rates and the
rates thus established may not exceed the corresponding margins for spot exchange transactions by more than the additional
costs or expenses involved in each type of transactions. (NCBA)

3. Financial supervision

Section 4. Supervisory Powers. The operations and activities of banks shall be subject to supervision of the Bangko Sentral. "Supervision"
shall include the following:
4.1. The issuance of rules of, conduct or the establishment standards of operation for uniform application to all institutions or functions
covered, taking into consideration the distinctive character of the operations of institutions and the substantive similarities of specific
functions to which such rules, modes or standards are to be applied;
4.2 The conduct of examination to determine compliance with laws and regulations if the circumstances so warrant as determined by the
Monetary Board;
4.3 Overseeing to ascertain that laws and regulations are complied with;
4.4 Regular investigation which shall not be oftener than once a year from the last date of examination to determine whether an
institution is conducting its business on a safe or sound basis: Provided, That the deficiencies/irregularities found by or discovered by an
audit shall be immediately addressed;
4.5 Inquiring into the solvency and liquidity of the institution (2-D); or
4.6 Enforcing prompt corrective action. (n)
The Bangko Sentral shall also have supervision over the operations of and exercise regulatory powers over quasi-banks, trust entities and
other financial institutions which under special laws are subject to Bangko Sentral supervision. (GBL)

Aspects of supervision:
1. Examination- can look into the documents; active power
2. Oversight- report to you; passive power (Banks are required to report to the BSP in relation to election of BOD, loan, stretch SBL)
3. Investigation- aside from looking at documents, you make verbal inquiries or interviews
4. Enforcing prompt corrective action- if BSP finds that bank is about to breach limits, enforce to comply remedies

How does BSP enforce/ carry out supervision of banks?


Pursuant to Section 25:
1.) BSP can administer oaths so that investigatory power of BSP can be coupled with criminal liability. They can make inquiry through a sworn
affidavit which can make affiant liable for perjury.
2.) Power to issue subpoena

CASE: BANK OF COMMERCE vs PLANTERS BANK


Facts:
7 Central Bank bills was owned by RCBC and subsequently, sold these to Bank of Commerce. The latter delivered Detached
Assignments to the PDB and in turn, PDB sold BOC treasury bills. Instead of delivering treasury bills, it delivered the CB bills to BOC.
Nevertheless, PDB retained possession of the Detached Assignments. There was the motion to interplead. BOC prayed for it to be declared
the rightful owner and to deliver sales transactions. Since it was filed in the RTC, there was the issue of WON RTC has jurisdiction over the
case.
Ruling:
As aptly observed by the CA, the BSP Monetary Board is an independent central monetary authority and a body corporate with fiscal
and administrative autonomy, mandated to provide policy directions in the areas of money, banking and credit. It has power to issue
subpoena, to sue for contempt those refusing to obey the subpoena without justifiable reason, to administer oaths, and compel
presentation of books, records and others, needed in its examination, to impose fines and other sanctions and to issue cease and desist
order. Section 37 of R.A. 7653, in particular explicitly provides that BSP Monetary Board shall exercise its discretion in determining whether
administrative sanctions should be imposed on banks and quasi banks, which necessarily implies that the BSP Monetary Board must conduct
some form of investigation or hearing regarding the same. Moreover, the grant of quasi-judicial authority to the BSP cannot possibly extend to
situations which do not call for the exercise of its supervisory or regulatory functions over entities within its jurisdiction.

Discussion:
According to PDB, they had no intention of selling, in effect saying that they are still owners of the bills
The CB bills was negotiated PDB to BOC, BOC in turn negotiated it to several others but ultimately, BOC reacquired all and was holding the
CB Bills
When BSP filed interpleader, it told court that it has nothing to do with it, let other parties decide and court allowed such.
The BOC prayed that it be declared the owner of the bills and the money put in escrow be paid to BOC
PDB said that RTC has no jurisdiction, and it lies with BSP since it has power to adjudicate the claim- quasi judicial power
Thus, BSP has quasi-judicial power (See Ruling above for instances when it can exercise such, the entire ruling above-the whole
paragraph was recited by Maam so just be familiar with it)
But of course, if BSP wants to impose a criminal penalty it has to go to court. However, fines, sanctions- the BSP can do them by itself.
The issuance of CB Bills is in accordance to open market operations which is part of the objective to maintain price stability. BSP’s quasi-
judicial power does NOT include the adjudication of ownership of the CB bills
There are 7 basic functions but are grouped into 3 and these are- The objective of –
1.) Price Stability,
2.) Monetary Stability &
3.) Supervision
However, the quasi judicial power is limited only to its SUPERVISORY AND REGULATORY powers. Meaning, no quasi-judicial power if
it’s not within your supervisory power.
So RTC has jurisdiction and thus, may continue hearing the case.

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SUMMARY OF THE BASIC FUNCTIONS
1. Currency issue
2. Liquidity management
3. Lender of last resort
4. Banker/financial advisor and official depositary of the government
5. Foreign reserves
6. Determination of foreign exchange rate policy
7. Financial supervision

MONETARY BOARD
The Monetary Board is composed of 7 members:
1 of whom is the Governor of BSP,
another is a member of the Cabinet (which does not exactly say who but normally, the Secretary of Finance but law does not
specifically state it should be the SOF),
5 members of private sector which must serve full time so as to avoid conflict of interest.
Limitations to avoid conflict of interest:
1) Anyone who has been affiliated with a bank under the supervisory and regulatory power of the Bangko Sentral cannot join the
Monetary Board for 1 year from the time of his termination with the bank.
2) After you stopped being a member of the MB, you have to wait for 2 years before going back to a banking institution.

Powers of Monetary Board


The powers can be exercised through a group- just like the BOD. So 7, in order to have a valid quorum of 4. Among the 4 must always
be the Governor. But Section 19 is the exception:

Section 19. Authority of the Governor in Emergencies. - In case of emergencies where time is sufficient to call a meeting of the Monetary Board,
the Governor of the Bangko Sentral, with the concurrence of two (2) other members of the Monetary Board, may decide any matter or take
any action within the authority of the Board.

The Governor shall submit a report to the President and Congress within seventy-two (72) hours after the action has been taken.
At the soonest possible time, the Governor shall call a meeting of the Monetary Board to submit his action for ratification.

Section 15. Exercise of Authority. - In the exercise of its authority, the Monetary Board shall:

(a) issue rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the powers vested upon
the Monetary Board and the Bangko Sentral. The rules and regulations issued shall be reported to the President and the Congress within
fifteen (15) days from the date of their issuance;

(b) direct the management, operations, and administration of the Bangko Sentral, reorganize its personnel, and issue such rules and
regulations as it may deem necessary or convenient for this purpose. The legal units of the Bangko Sentral shall be under the exclusive
supervision and control of the Monetary Board

(c) establish a human resource management system which shall govern the selection, hiring, appointment, transfer, promotion, or dismissal of
all personnel. Such system shall aim to establish professionalism and excellence at all levels of the Bangko Sentral in accordance with sound
principles of management.

A compensation structure, based on job evaluation studies and wage surveys and subject to the Board's approval, shall be instituted as an
integral component of the Bangko Sentral's human resource development program: Provided, That the Monetary Board shall make its own
system conform as closely as possible with the principles provided for under Republic Act No. 6758: Provided, however, That compensation
and wage structure of employees whose positions fall under salary grade 19 and below shall be in accordance with the rates prescribed under
Republic Act No. 6758.

(d) adopt an annual budget for and authorize such expenditures by the Bangko Sentral as are in the interest of the effective administration
and operations of the Bangko Sentral in accordance with applicable laws and regulations; and

(e) indemnify its members and other officials of the Bangko Sentral, including personnel of the departments performing supervision and
examination functions against all costs and expenses reasonably incurred by such persons in connection with any civil or criminal action, suit
or proceedings to which he may be, or is, made a party by reason of the performance of his functions or duties, unless he is finally adjudged in
such action or proceeding to be liable for negligence or misconduct.

(a) issue rules and regulations- MORB and BSP circulars


(b) direct the management, operations, and administration – this is a manifestation of administrative autonomy, internal operations
(c) establish a human resource management system– this is a manifestation of administrative autonomy
(d) adopt an annual budget for and authorize such expenditures- fiscal autonomy
(e) indemnify- fiscal autonomy

The 2nd paragraph regarding the compensation structure of the -Salary Standardization Law as discussed in the case of:

CASE: CENTRAL BANK (BSP) Employees Association, Inc. vs BSP


Facts:
On July 1993, The New Central Bank Act (R.A. 7653) took effect, abolishing the Old Central Bank of the Phil and created a new BSP.
Almost 8 years after, petitioner BSP Employees Association filed a petition for prohibition to restrain BSP from implementing the last proviso
of Section 15 (c) Article II of R.A. 7653 constitutes discrimination on the 2,994 rank-and-file employees of the BSP on the ground that it is
unconstitutional.
Ruling:

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The passage of subsequent laws amending the charter of 7 other governmental financial institutions (GFI’s), the continued operation
of the last proviso of Section 15 (c) Article II of R.A. 7653 constitutes discrimination on the 2,994 rank-and-file employees of the BSP.
Discussion:
As is, this law is valid because there is substantial distinction of employees and R.A. 7653 alone is valid. The problem is when
subsequently, Congress passed laws for some government agencies exempting employees- all their employees.
So the Sc said that it is indeed a violation of equal protection and thus, the BSP employees- officers to its rank-and-file are now
exempt. So no more Salary Standardization.

THE GOVERNOR

Section 17. Powers and Duties of the Governor. - The Governor shall be the chief executive officer of the Bangko Sentral. His powers and duties
shall be to:
(a) prepare the agenda for the meetings of the Monetary Board and to submit for the consideration of the Board the policies and measures
which he believes to be necessary to carry out the purposes and provisions of this Act;
(b) execute and administer the policies and measures approved by the Monetary Board;
(c) direct and supervise the operations and internal administration of the Bangko Sentral. The Governor may delegate certain of his
administrative responsibilities to other officers or may assign specific tasks or responsibilities to any full-time member of the Monetary Board
without additional remuneration or allowance whenever he may deem fit or subject to such rules and regulations as the Monetary Board may
prescribe;
(d) appoint and fix the remunerations and other emoluments of personnel below the rank of a department head in accordance with the
position and compensation plans approved by the Monetary Board, as well as to impose disciplinary measures upon personnel of the Bangko
Sentral, subject to the provisions of Section 15(c) of this Act: Provided, That removal of personnel shall be with the approval of the Monetary
Board;
(e) render opinions, decisions, or rulings, which shall be final and executory until reversed or modified by the Monetary Board, on matters
regarding application or enforcement of laws pertaining to institutions supervised by the Bangko Sentral and laws pertaining to quasi-banks,
as well as regulations, policies or instructions issued by the Monetary Board, and the implementation thereof; and
(f) exercise such other powers as may be vested in him by the Monetary Board.

There are 3 Deputy Governors:


2. Deputy for Monetary Stability
3. Deputy for Supervisory and Examination
4. Deputy for Resource Management Sector- Internal Operations Of BSP

The place/bldg where money is printed- Security Plant Complex (just in case this is asked in the bar)

CONSERVATORSHIP

SEC. 29. Appointment of Conservator. _ Whenever, on the basis of a report submitted by the appropriate supervising or examining
department, the Monetary Board finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a
condition of liquidity deemed adequate to protect the interest of depositors and creditors, the Monetary Board may appoint a
conservator with such powers as the Monetary Board shall deem necessary to take charge of the assets, liabilities, and the
management thereof, reorganize the management, collect all monies and debts due said institution, and exercise all powers necessary
to restore its viability. The conservator shall report and be responsible to the Monetary Board and shall have the power to overrule or
revoke the actions of the previous management and board of directors of the bank or quasi-bank.
The conservator should be competent and knowledgeable in bank operations and management. The conservatorship shall not exceed
one (1) year. The conservator shall receive remuneration to be fixed by the Monetary Board in an amount not to exceed two-thirds (2/3)
of the salary of the president of the institution in one (1) year, payable in twelve (12) equal monthly payments: Provided, That, if at any
time within the one-year period, the conservatorship is terminated on the ground that the institution can operate on its own, the
conservator shall receive the balance of the remuneration which he would have received up to the end of the year; but if the
conservatorship is terminated on other grounds, the conservator shall not be entitled to such remaining balance. The Monetary Board
may appoint a conservator connected with the Bangko Sentral, in which case he shall not be entitled to receive any remuneration or
emolument from the Bangko Sentral during the conservatorship. The expenses attendant to the conservatorship shall be borne by the
bank or quasi-bank concerned.
The Monetary Board shall terminate the conservatorship when it is satisfied that the institution can continue to operate on its own and
the conservatorship is no longer necessary. The conservatorship shall likewise be terminated should the Monetary Board, on the basis of
the report of the conservator or of its own findings, determine that the continuance in business of the institution would involve
probable loss to its depositors or creditors, in which case the provisions of Section 30 shall apply.

Conservatorship is a set of procedure or measure undertaken to restore the viability of the bank
It is an administrative measure: “to take charge of the assets, liabilities, and the management”
Organizational in nature: “reorganize the management”
Financial: “collect all monies and debts due said institution”
Thus, Conservatorship is an organizational, financial and administrative measures which are undertaken in order to restore the viability
of a bank, or to address a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect
the interest of depositors and creditors
If there is an indication that a bank cannot maintain that percentage of liquidity that is sufficient to protect its depositors or creditors,
conservatorship is undertaken to address the situation
It is very comprehensive: administrative, organizational and financial
LIQUIDITY: the ability to pay your liabilities as they become due. Although your assets are enough, you cannot pay your liabilities as they
become due because your assets are not liquid enough; you do not have enough cash. You still have to convert your assets to cash.
Insolvency is different because our assets really are not sufficient to pay your liabilities even if you convert your assets to cash
Conservatorship applies only when there is an issue on liquidity. However, conservatorship is not the only measure. BSP can give out
emergency loans, or they require more capital infusion. This latter power is (as stated under sec 4 of GBL) the power to enforce prompt
corrective action. This is one of the supervisory powers of the BSP. This was undertaken by BSP in that (?) case where the BSP required
the shareholders of the bank to infuse more capital to the bank

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IOW, if a bank is experiencing liquidity problems, conservatorship is not the only measure. Normally, there will be less drastic measures
like emergency loans, like in the cases assigned. The emergency loan is under the function as lender of last resort and also to enforce
prompt corrective action

REQUISITES FOR CONSERVATORSHIP


1. Report from the supervising and examining department (SED) of the BSP

2. Finding by the MB that the bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed
adequate to protect the interest of depositors and creditors
The liquidity status is not sufficient to protect the interest of the depositors and creditors
Even if the bank is still liquid but its liquidity status is very low, the BSP can already enforce the order of conservatorship. The law
says “sufficient to protect”. So the liquidity must not only be present but also sufficient

3. MB must provide the BOD of the bank of the copy of the order of conservatorship
This order contains the finding of the MB that the ground for conservatorship exists. Once that finding is made, the MB will issue an
order declaring conservatorship and that order must be provided to the BOD of the bank
This requirement is found under sec 30 because if you read that carefully, you will see it does not only apply to receivership but also
to conservatorship

POWERS AND DUTIES OF THE CONSERVATOR


1. To take charge of the assets, liabilities, and the management of the bank
2. Reorganize the management
3. Collect all monies and debts due said institution
4. Exercise all powers necessary to restore its viability
5. Power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank
By looking at the enumeration, one can say the powers are all-encompassing.

CASE: FIRST PHIL BANK vs. CA


Facts:
Demetria and Janolo negotiated with Rivera for the sale of land. River approved the sale when the bank was under
conservatorship. When a new conservator took over, he revoked the power of Rivera to make a binding offer.
Ruling:
In the third place, while admittedly, the Central Bank law gives vast and far-reaching powers to the conservator of a bank, it
must be pointed out that such powers must be related to the "(preservation of) the assets of the bank, (the reorganization of) the
management thereof and (the restoration of) its viability." Such powers, enormous and extensive as they are, cannot extend to the post-
facto repudiation of perfected transactions, otherwise they would infringe against the non-impairment clause of the Constitution. 44 If
the legislature itself cannot revoke an existing valid contract, how can it delegate such non-existent powers to the conservator under
Section 28-A of said law?
Obviously, therefore, Section 28-A merely gives the conservator power to revoke contracts that are, under existing law,
deemed to be defective — i.e., void, voidable, unenforceable or rescissible. Hence, the conservator merely takes the place of a bank's
board of directors. What the said board cannot do — such as repudiating a contract validly entered into under the doctrine of implied
authority — the conservator cannot do either. Ineluctably, his power is not unilateral and he cannot simply repudiate valid obligations of
the Bank. His authority would be only to bring court actions to assail such contracts — as he has already done so in the instant case. A
contrary understanding of the law would simply not be permitted by the Constitution. Neither by common sense. To rule otherwise
would be to enable a failing bank to become solvent, at the expense of third parties, by simply getting the conservator to unilaterally
revoke all previous dealings which had one way or another come to be considered unfavorable to the Bank, yielding nothing to perfected
contractual rights nor vested interests of the third parties who had dealt with the Bank.

Discussion:
Does the conservator have the power to repudiate or revoke previous acts of the management of the bank? Yes, he has the power
under sec 29
In this case however , the conservator cannot revoke it because the contract was already declared to be a valid contract
Thus, the power can only apply with respect to defective contracts. SC said even Congress cannot repudiate perfected contracts
which are valid because that will violate non-impairment clause of the Constitution. If congress itself cannot repudiate, all the more it
cannot grant that power to the conservator.
This power is limited to revocation of acts/contracts which are defective: void, voidable, unenforceable, rescissible
Even this power is not unilateral; he has to follow the procedure in the Civil Code. If you want to rescind a contract, you have to go to
court to annul it. His authority will only be to bring court actions to assail the contract. He cannot unilaterally revoke it

PRE-TERMINATION OF CONSERVATORSHIP
He cannot serve for more than 1 year
Pre-termination
1. If there is a finding of the conservator as approved by the MB that the bank can continue its operations on its own and that
conservatorship is no longer necessary
Bank can now continue its normal operations free from the conservator and BSP

2. If there is a finding of the inability of the bank to continue its operations without probable loss to its depositors and creditors
Sec 29: “The conservatorship shall likewise be terminated should the Monetary Board, on the basis of the report of the
conservator or of its own findings, determine that the continuance in business of the institution would involve probable loss to
its depositors or creditors, in which case the provisions of Section 30 shall apply.”
Receivership now will take place and sec 30 will be applied
If conservatorship is terminated based on the 2nd ground, we now go to status of receivership

RECEIVERSHIP
It is a condition or a status whereby a receiver is assigned for the purpose of protecting the assets of the bank
Differences between conservatorship and receivership
1. Purpose: In receivership, it is to protect the assets of the bank. In conservatorship, it is to restore the viability of the bank

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2. Grounds: There is only 1 ground for conservatorship which is when the bank is in a state of continuing inability or unwillingness to
maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors. In receivership, there are 4
grounds under sec 30
SEC. 30. Proceedings in Receivership and Liquidation. _ Whenever, upon report of the head of the supervising or
examining department, the Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not
include inability to pay caused by extraordinary demands induced by financial panic in the banking community;
(b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable losses to its depositors or creditors; or
(d) has willfully violated a cease and desist order under Section 37 that has become final, involving acts or transactions
which amount to fraud or a dissipation of the assets of the institution; in which cases, the Monetary Board may
summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate
the Philippine Deposit Insurance Corporation as receiver of the banking institution.

Another ground is in sec 36 NCBA

Sec 36: xxx


Whenever a bank or quasi-bank persists in carrying on its business in an unlawful or unsafe manner, the Board may,
without prejudice to the penalties provided in the preceding paragraph of this section and the administrative sanctions
provided in Section 37 of this Act, take action under Section 30 of this Act.

Another ground in sec 53 GBL

Sec 53: xxx


In case a bank or quasi-bank notifies the Bangko Sentral or publicly announces a bank holiday, or in any manner
suspends the payment of its deposit liabilities continuously for more than thirty (30) days, the Monetary Board may
summarily and without need for prior hearing close such banking institution and place it under receivership of the
Philippine Deposit Insurance Corporation.

There are 6 grounds for receivership

3. Term: Conservator has not more than 1 year. In receivership, there are only 90 days

REQUISITES FOR RECEIVERSHIP


1. Report from SED
Report is something which gives information

CASE: RBSM vs MB
Facts:
The comptroller submitted her report and on the basis of the report, SED in turn submitted a report to the MB which issued
a resolution placing RBSM under receivership.
Ruling:
Petitioners' contention has no merit. Banco Filipino and other cases petitioners cited were decided using Section 29 of the
old law (RA 265). Thus in Banco Filipino, we ruled that an "examination [conducted] by the head of the appropriate supervising or
examining department or his examiners or agents into the condition of the bank" is necessary before the MB can order its closure.
However, RA 265, including Section 29 thereof, was expressly repealed by RA 7653 which took effect in 1993. In RA 7653, only a
"report of the head of the supervising or examining department" is necessary. The word "report" has a definite and unambiguous
meaning which is clearly different from "examination." A report, as a noun, may be defined as "something that gives information" or "a
usually detailed account or statement." On the other hand, an examination is "a search, investigation or scrutiny."
Using the literal meaning of "report" does not lead to absurdity, contradiction or injustice. Neither does it defeat the intent
of the legislators. The purpose of the law is to make the closure of a bank summary and expeditious in order to protect public interest.
This is also why prior notice and hearing are no longer required before a bank can be closed.
Laying down the requisites for the closure of a bank under the law is the prerogative of the legislature and what its wisdom
dictates. The lawmakers could have easily retained the word "examination" but they did not and instead opted to use the word "report."
The insistence on an examination is not sanctioned by RA 7653
The absence of an examination before the closure of RBSM did not mean that there was no basis for the closure order. But
it is clear under RA 7653 that the basis need not arise from an examination as required in the old law. We thus rule that the MB had
sufficient basis to arrive at a sound conclusion that there were grounds that would justify RBSM's closure. It relied on the report of Mr.
Domo-ong, the head of the supervising or examining department, with the findings that: (1) RBSM was unable to pay its liabilities as they
became due in the ordinary course of business and (2) that it could not continue in business without incurring probable losses to its
depositors and creditors. The report was a 50-page memorandum detailing the facts supporting those grounds, an extensive chronology
of events revealing the multitude of problems which faced RBSM and the recommendations based on those findings.
MB and BSP complied with all the requirements of RA 7653. By relying on a report before placing a bank under receivership,
the MB and BSP did not only follow the letter of the law, they were also faithful to its spirit, which was to act expeditiously.

Discussion:
It was the comptroller who examined RBSM. SED never made its examination, but MB based its order on the SED report
Bank argued an examination must be made pursuant to Banco Filipino case. Here it was only based on a report, not an examination.
SED must be required to examine.
SC said they cannot cite Banco Filipino because that was decided under the old law. SC also said if examination was still required,
Congress could have retained “examination” in the law than just putting there “report”
Before, examination was required, but under the new law, only a report is required. That ruling in Banco Filipino no longer applies

2. Finding from MB that grounds for receivership exist


Grounds for Receivership:

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Under Section 30 of NCBA
1. Unable to pay its liabilities as they become due in the ordinary course of business
- Which is called as “failure to maintain liquidity”. Bangko Sentral has actually has the option of either enforcing Section
29 or Section 30 since this also a ground for receivership. You can go directly to receivership without first going to
conservatorship. This is also called the EQUITY TEST.

2. Insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities
- This is a situation of “ insolvency”. This is also called the BALANCE SHEET TEST since you are only to look at the
balance sheet, assets minus liabilities. If asset is more than liability, you are solvent. If it is less, you are insolvent. In
determining the accounts of the bank, the Bangko Sentral normally has set a technical definition of these accounts.
The Bangko Sentral normally will dictate what could be included in its assets, or liabilities. In applying this test, do we
aply Bangko Sentral’s technical definition or the layman’s definition?

CASE: BANCO FILIPINO vs MB


Facts:
Monetary Board issued a resolution based on the old law R.A. 265, from a series of reports. The bank assailed the resolution to
close because according to the report, during the time of the examination, it was not really clear that the bank was insolvent. The assets
amounted to 4.9 billion but the liabilities amounted to 5.2 million. So liabilities were higher than the assets. The reports regarding the
insolvency was not clear since it was partial and incomplete.
Ruling:
Valuation reserves can not be legally deducted as there was no truthful and complete evaluation thereof as admitted by the
Tiaoqui report itself, then an adjustment of the figures show that the liabilities of P5, 282.1 million will not exceed the total assets which
will amount to 5, 595.4 if the 612.2 million allotted to valuation reserves will not be deducted from the assets. There can be no basis
therefore for both the conclusion of insolvency and for the decision of the respondent board to close petitioner bank and place it under
receivership.
Discussion:
Valuation reserves- when a bank has certain amount of deposits, it is required to keep a certain percentage of that deposit or the
amount of such deposits be posted with the Bangko Sentral in reserve. Basically an asset of the bank segregated and deposited with
the Bangko Sentral to protect the depositors.
When the BSP requires the bank to report its financial condition, it requires that the valuation reserves be taken out of the financial
statements of the bank. So it is not part of the assets of the bank.
So when the report of Tiaoqui was made, he said that we have assets of 5.5 million but we take out valuation reserve because based
from the rules and procedures, it should not be shown in the financial statements of the bank. So only an amount of 4.9 assets
remain. And the liabilities amounted to 5.2 million.
The BSP said that your rules are only applicable if the bank is a growing/going concern. Based on the assumption that the bank will
continue in operation. But this is not the case at present since the bank is already closed. So you do not apply the technical rules
anymore.
In order to determine WON bank is insolvent, Section 29 is very simple and clear. It just says that when the realizable assets of the
bank or nonbank financial intermediary performing QB are insufficient to meet its liability, basically the same wording as Section 30.
The SC went on further to say that the test of insolvency is measured by determining WON realizable assets of the bank are less than
its liabilities. Hence, a bank is solvent if the fair cash value of all is assets, realizable within a reasonable time by a reasonable prudent
person would equal or exceed its total liabilities exclusive of its stock liability but if such fair cash value so realizable is not sufficient
to pay such liabilities within a reasonable time, the banks is insolvent.
The SC said for purpose of determining solvency, take a look at actual assets of the bank, how much is its assets, and take a look at
its liabilities. Never mind the technical requirements, since that only applies to one with continuing operation.
So assets are 5.5 and liability is 5.2. So there are more assets.
But take a look at the dissenting opinion- that the body how has more knowledge is the Bangko Sentral so we should not meddle
with the determination of the Bangko Sentral WON bank is solvent or insolvent, which I agree since the bank is virtually insolvent
already. For me, the SC with its layman’s understanding should not have ruled that way and allowed determination of Bangko
Sentral. But take note, it also said that BSP did not follow due process since the requisite for ordering receivership is not clearly a
report but an examination.
Since this case has not been overturned, then we follow the simplistic view of the SC- simply FMV of assets minus FMV of liabilities.

3. cannot continue in business without involving probable losses to its depositors or creditor
-this is related to conservatorship. The second ground for terminating conservatorship is a ground for receivership. But it
maybe, that there is no more conservatorship based on the equity test.
4. willfully violated a cease and desist order under Section 37 that has become final, involving acts or transactions which
amount to fraud or a dissipation of the assets of the institution

Section 36 of NCBA

5. whenever a bank or quasi-bank persists in carrying on its business in an unlawful or unsafe manner

Section 53 of GBL

6. In case a bank or quasi-bark notifies the Bangko Sentral or publicly announces a bank holiday, or in any manner suspends
the payment of its deposit liabilities continuously for more than thirty (30) days.
-Based on the report of the SED, that any of the grounds exist not all but any one.

3. Decision of Monetary Board to forbid the Bank or Quasi Bank from conducting business in the Philippines
- This is summary in nature, the decision doesn’t need prior notice and hearing. This step is not found under conservatorship and does
not apply to conservatorship. This is another difference between a receivership and conservatorship. When the conservator is
assigned, the bank will continue with its operations to restore viability. But when a receiver is assigned, the bank will stop operations.

CASE: RURAL BANK OF BUHI vs CA


Facts:

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An examination of the books of Buhi was ordered – a general examination of the bank’s affairs and operations found massive
irregularities of loans to unknown and fictitious borrowers. Respondent Odra submitted a recommendation to the Monetary Board of the
placing of Buhi under receivership. The monetary board issued Resolution no 583. Petitioner Bank’s petition is to the effect that due
process was not observed since it was not given the chance to deny and disprove such claim of insolvency.
Ruling:
The closure and liquidation may be considered an exercise of police power. The appointment of a receiver may be made without
notice and hearing but its action is subject to judicial inquiry to insure the protection of the banking institution. Due process does not
necessarily require a prior hearing; a hearing or opportunity to be heard may be SUBSEQUENT to the closure. One can just imagine the
dire consequences of a prior hearing: bank runs would be the order of the day, resulting in panic and hysteria.

Discussion:
Bank said the you did not give us the chance to present evidence that we are not insolvent. You have to allow us to show. So you
have no basis, you should’ve given us prior notice and opportunity to be heard before actual finding of insolvency and actual order of
receivership
There should be no notice since the moment depositors hear such news, everyone will go to the bank and get their money- bank run.
Even if the bank had sufficient money to pay off withdrawals in the normal course of business, now all their liquid assets will be gone.
Or make them all the more unliquid.
The SC said that you don’t give them the chance to be heard because if you weigh the prejudice against the bank and the prejudice
against the public and depositors, the latter should win out.
In any case SC said that due process is sufficient if opportunity to be heard is given subsequently.

4. Furnish a copy of the order of receivership to the Board of Directors of the Bank
- Under Section 30, the majority of the stockholders of the bank may file a petition for Certiorari.

CASE: CENTRAL BANK vs CA


Facts:
Based on examination reports submitted by SES, the Monetary Board issued Resolution no. 596 ordering the closure of Triumph
Savings Bank (TSB), placing it under receivership. TSB file d a complaint to annul said resolution challenging the constitutionality of Sec.
29 of R.A. 269 insofar as it authorizes Central Bank to take over even if its not charged with violation of any law or regulation, much less
found guilty thereof.
Ruling:
Previous hearing is nowhere required in Section 29, it is enough that subsequent judicial review be provided. This “close now and
hear later” scheme is grounded on practical and legal considerations to prevent unwarranted dissipation of bank’s assets and as a valid
exercise of police power to protect depositors, creditors, stockholders and the general public.

Discussion:
Same issue as Rural Bank of Buhi
It mentioned the “close now and hear later” scheme which also used in section 53 of the GBL.
The scheme is actually steps 3 and 4 of the order of receivership which means that when BSP finds that there’s ground for
receivership and orders receivership, it also automatically orders the closure of the bank.
This order doesn’t require hearing. Hear later within 10 days after the copy of the order.
There is also the issue of who has authority to question, since the BSP said the BOD no longer has authority because of receivership
and so all the actions may be brought by me as the receiver. So TSB said that’s absurd since of course, you will not file a case against
yourselves questioning the validity of your order.
SC upheld neither. The action can only be brought by the stockholders holding the majority of the outstanding capital stock of the
bank.
In all eventuality, it maybe that the BOD are the ones dissipating the assets, so it is elf-serving of you to question. The person whose
rights need to be protected are the real owners, the stockholders and only they have the personality to question.
The rule of filing of a case by the stockholders is an amendment to the old central bank law.

Effect of Declaration of Receivership

Assets of the bank are deemed to be in custodia legis. Receiver will now have the authority to gather and take charge of all the
assets, administer the same for the benefit of the creditors and exercise the general powers of the receiver under the rules of
court. Basically, the receiver then replaces the BOD and the officers of the bank.

CASE: VILLANUEVA vs. CA


Facts:
The disputed lots are originally owned by Sps Villanueva. There was an offer to purchase. Ong made an offer and went to the States.
Bank accepted his offer when he was in the States. Subsequently, the bank became insolvent. Ong came bank and learned about the
acceptance of the offer. Now, he filed an action for specific performance to compel the bank to sign the deed of sale.
Ruling:
The insolvency of the bank and the consequent appointment of a receiver restrict the bank’s capacity to act, especially in relation to
its property. Applying Art 1323 of the NCC, Ong’s offer to purchase the subject lots became ineffective because PVB became insolvent
before the bank’s acceptance of the offer came to his knowledge. Hence, the purported contract of sale between them did not reach the
stage of perfection.

Discussion:
There was no perfected contract of sale- knowledge of acceptance came after PVB was now under receivership.
Remember, the Civil Code states that an offer becomes ineffective if one of the parties becomes insolvent prior to perfection of
contract.

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The SC said that where upon the insolvency of a bank a receiver has been appointed, the assets of the bank pass beyond its control
into the possession and control of the receiver whose duty is to administer the assets for the benefit of the creditors of the bank.
Thus , the appointment of a receiver operates to suspend the authority of the bank and of its directors and officers over its property
and effects, such authority being reposed in the receiver and in this respect, the receivership is equivalent to an injunction to
restrain the bank officers from intermeddling with the property of the bank in any way.
The assets of the bank is deemed in custodia legis

What about if the receiver sells the property?

CASE: ABACUS vs MANILA BANKING CORP


Facts:
Bangko Sentral ordered the closure of Manila bank and placed it under receivership. There was the contention that the receiver approved the
sale, there was the lease with option to purchase that was entered into after the bank has been declared insolvent. The bank’s president
entered into this contract of lease and buyer contended that the receiver approved of the contract.

Ruling:

The receiver appointed by the Central Bank to take charge of the properties ONLY had the authority to administer the same for the benefit
of the creditors. Granting or approving an “exclusive option to purchase” is not an act of administration, but an act of strict ownership,
involving the disposition of property of the bank. Not being an act of administration, the so-called “approval” of Atty. Renan Santos amounts
to no approval at all.

Discussion:

The SC said the hey you officers, you no longer have the authority to bind the bank.
Here, there was such an approval of the receiver, unlike in the case of Villanueva where there is none. However, it doesn’t matter
because the power of a receiver is only of administration and NOT of strict ownership.

OTHER POWERS OF THE RECEIVER

Section 30. Proceedings in Receivership and Liquidation.


The receiver shall immediately gather and take charge of all the assets and liabilities of the institution, administer the same for the benefit of
its creditors, and exercise the general powers of a receiver under the Revised Rules of Court but shall not, with the exception of administrative
expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution: Provided, That the receiver may
deposit or place the funds of the institution in non-speculative investments. The receiver shall determine as soon as possible, but not later
than ninety (90) days from take over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be
permitted to resume business with safety to its depositors and creditors and the general public: Provided, That any determination for the
resumption of business of the institution shall be subject to prior approval of the Monetary Board.
If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in accordance with the next
preceding paragraph, the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with
the liquidation of the institution.

Found under Section 30 and you take note of Banco Filipino case where the powers of the receiver are outlined. And there is the issue
that there was this TRO given over the liquidation proceedings, but the receiver continued to file cases against the borrowers of the bank.
So those borrowers said that there’s already a TRO so receiver no longer has authority.
The SC said this is NOT true. There was a TRO only on the liquidation proceedings, the receiver can still do all his other task.
So from receivership, you have 90 days and at the end of such, receiver will determine WON bank will be rehabilitated. If based on Section
30, the bank is on the condition that it can be permitted to do business- then rehabilitate. Or if receiver cannot be rehabilitated, the
Monetary Board shall notify the BOD.
Take note that rehabilitation and liquidation is EXCLUSIVE. You cannot have one if you also have the other. Such is in the case of PNB vs
Vega

CASE: PVB vs VEGA


Facts:
Central Bank in year 1985 filed a Petition for Assistance in the Liquidation of the Philippine Veterans Bank (PVB). Subsequently in
1992, Congress enacted R.A. 7169 providing for the rehabilitation of the PVB. Petitioners argue that with the passage of this law, the
liquidation court became functus officio and no longer has authority to continue with the liquidation proceedings.
Ruling:
R.A. 7169 provides in part for the reopening of the PVB and likewise provides for the creation of a rehabilitation committee. Clearly,
the enactment of such law has rendered the liquidation court functus officio. Consequently, the respondent judge has been stripped off the
authority to issue orders involving acts of liquidation. Liquidation connotes a winding up and on the opposite end of the spectrum is
rehabilitation which connotes reopening or reorganization. It is crystal clear that the concept of liquidation is diametrically opposed or
contrary to the concept of rehabilitation, such that both cannot be undertaken at the same time.

Discussion:
The SC said when you liquidate, you convert the assets into cash and you pay off all the creditors. On the opposite end, rehabilitation
which connotes reorganization.
It is similar when you are operating a person, you put him in the ICU- that’s rehabilitation. When he’s in there, you do not cut him out to
donate his organ and give to other persons- that’s liquidation. They cannot exist at the same time.

DIFFERENCE BETWEEN A RECEIVER AND LIQUIDATOR:

1. Appointing Authority
Receiver- appointed by the Monetary board, recommended by SED

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Liquidator- appointed by the Monetary board, recommended by the receiver
2. Grounds
Receiver- 6 grounds
Liquidator- only 1 (cannot resume business with the safety to its depositors)
3. Term
Receiver- 90 days
Liquidator- indefinite, for as long as it will take convert all assets to cash and pay put liabilities
4. Purpose
Receiver- administer assets
Liquidator- convert assets to cash
5. Sequence
Receiver- always comes first before liquidation
Liquidator- always comes after
Note: Unlike in conservatorship and receivership
6. Nature of proceeding/action
Liquidation- special proceeding

CASE: PACIFIC BANKIG CORP EE’S ORG vs CA


Facts:
Pacific Banking Corporation was placed under receivership by the Central Bank of the Philippines. Central Bank filed a petition for
assistance in the liquidation. The liquidator received a copy of the order on September 16, 1991 and filed a Motion for Reconsideration and
Clarification order on October 16,1991. The lower court judge denied such motion which order was received on Dec 9. Following day, he filed a
notice of appeal. Respondent judge disallowed the liquidator’s notice of appeal on the ground that such was more than 15 days after the
receipt of such decision.
Ruling:
A petition for liquidation of an insolvent corporation should be classified as a special proceeding and NOT an ordinary action. Such
petition does not seek an enforcement or protection of a right nor prevention or redress of a wrong. What it seeks is merely a declaration so
that its creditors may file their claims. The liquidator filed within 30 days, the respondent judge thus erred in disallowing the appeal.

Discussion:
The SC described liquidation as having 2 phases
1.) Case is filed in court as stated in Section 30. Upon filing, there’s publication and everyone who has a claim in the bank will file the claim
in the liquidation court and such court will determine their claims one by one. There will be as many rulings as there are claims. If there are
1000 creditors, the court will issue 1000 orders. And because each claim is a ruling in itself, the SC said that this is a special proceeding and
therefore, you appeal by records on appeal. How come? Because it maybe that you have one case decided already so you go up but the
records will remain in the trial court because there are still other claims to be adjudicated.

2.) Approval of the rehabilitation plan and actual conversion of the assets into cash and payment of the creditors in the order of
preference as stated in the Civil code. Remember class, deposits are ordinary debts and not preferred so the preferred obligations of the
bank are claims where there’s mortgage or other security, those that will be preferred than the claims of the depositors.

Special proceeding because you don’t adjudicate a right and you don’t declare a status. You merely state what has already been
determined. Because the Bangko Sentral already determined that the bank is insolvent. So the court doesn’t need to make that ruling and
will just confirm the ruling of the Bangko Sentral.
And you have 10 days to question the order of liquidation. The 10 days applies to receivership, liquidation, and conservatorship.

SPECIAL COMMERCIAL LAWS (FINALS)

ANTI-MONEY LAUNDERING ACT as amended

January 29, 2015

AMLA is a fairly recent law. This was brought about because we were blacklisted by the IMF. We were considered as one of the biggest
sites for money laundering
The 1st AMLA was passed in 2001 but it has gone several amendments, the latest one being RA 10365 enacted on March 2013
These amendments were brought about because we always do minimum compliance. Every time there are requirements by the IMF, we
only do the minimum compliance just to escape the blacklist. Even now, we’re still in the gray list because there is one person which
should be included in the covered persons but never is: the casino
BSP wants to include the casino but Congress always takes it out (probably because Congress is number 1 there)
AMLA is criminal law but it is included in the coverage in the Bar for mercantile law (for mercantile law aspect only)

MONEY LAUNDERING

MONEY LAUNDERING is the process by which money that originates from an illegal source is converted or “cleaned” to make it appear it
comes from a legitimate source
So prior to AMLA, people from other countries can just come here to Philippines, deposit their money here, create corporations then
declare dividends for themselves. In that way, it appears money comes from a legitimate source.
IMF insisted Philippines should pass the Anti-Money Laundering Act.
Take note the definition is not found in the law. It is found in the case of Eugenio:
“Money laundering has been generally defined by the International Criminal Police Organization (Interpol) as "any act or attempted act
to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources."

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POLICY

SECTION 2. Declaration of Policy. — It is hereby declared the policy of the State 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. Consistent with its foreign policy, the State shall extend cooperation in transnational investigations and
prosecutions of persons involved in money laundering activities wherever committed.||| (Anti-Money Laundering Act of 2001, REPUBLIC
ACT NO. 9160 [2001])

PERSONS COVERED BY AMLA

(a)'Covered persons', natural or juridical, refer to:

(1) Banks, non-banks, quasi-banks, trust entities, foreign exchange dealers, pawnshops, money changers, remittance and transfer companies
and other similar entities and all other persons and their subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng
Pilipinas (BSP);

(2) Insurance companies, pre-need companies and all other persons supervised or regulated by the Insurance Commission (IC);

(3) (i) securities dealers, brokers, salesmen, investment houses and other similar persons managing securities or rendering services as
investment agent, advisor, or consultant, (ii) mutual funds, close-end investment companies, common trust funds, and other similar
persons, and (iii) other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable
objects, cash substitutes and other similar monetary instruments or property supervised or regulated by the Securities and Exchange
Commission (SEC);

Under number 3, these are not your ordinary corporations. Just because you’re a corporation registered with the SEC does not
automatically subject you to the AMLA.
It has to be a financial institution. Those under number 3 are entities holding a secondary license. The primary license is your
certificate of incorporation. The secondary franchise allows you to engage in specific activities. An ordinary corporation only has
1 franchise. Banks require a secondary franchise. Others such as investment companies also require secondary license from the
SEC

(4) Jewelry dealers in precious metals, who, as a business, trade in precious metals, for transactions in excess of One million pesos
(P1,000,000.00);

(5) Jewelry dealers in precious stones, who, as a business, trade in precious stones, for transactions in excess of One million pesos
(P1,000,000.00);

(6) Company service providers which, as a business, provide any of the following services to third parties: (i) acting as a formation agent of
juridical persons; (ii) acting as (or arranging for another person to act as) a director or corporate secretary of a company, a partner of a
partnership, or a similar position in relation to other juridical persons; (iii) providing a registered office, business address or accommodation,
correspondence or administrative address for a company, a partnership or any other legal person or arrangement; and (iv) acting as (or
arranging for another person to act as) a nominee shareholder for another person; and

Formation agents also refer to the promoters who incorporate companies. They are covered persons

(7) Persons who provide any of the following services:

(i) managing of client money, securities or other assets;

(ii) management of bank, savings or securities accounts;

(iii) organization of contributions for the creation, operation or management of companies; and

(iv) creation, operation or management of juridical persons or arrangements, and buying and selling business entities.

"Notwithstanding the foregoing, the term 'covered persons' shall exclude lawyers and accountants acting as independent legal professionals
in relation to information concerning their clients or where disclosure of information would compromise client confidences or the attorney-
client relationship: Provided, That these lawyers and accountants are authorized to practice in the Philippines and shall continue to be subject
to the provisions of their respective codes of conduct and/or professional responsibility or any of its amendments."

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Example. Me as a lawyer is asked by a client to provide corporate secretarial services. Am I now a covered person?
Not covered if acting as independent legal professional
However, if you are employed by the company as an internal counsel, you cannot be considered as independent legal professional.
So if you are acting as corporate secretary, or director, you may be considered as covered person

Significance of being included in the term “covered person”


AMLA has required certain obligations from a covered person

(3) OBLIGATIONS OF A COVERED PERSON

Sec 9. Prevention of Money Laundering; Customer Identification Requirements and Record Keeping

a) Customer Identification – Covered institutions shall establish and record the true identity of its clients based on official documents.
They shall maintain a system of verifying the true identity of their clients, and in case of corporate clients, require a system of
verifying their legal existence and organizational structure, as well as the authority and identification of all persons purporting to act
on their behalf. The provisions of existing laws to the contrary notwithstanding, anonymous accounts, accounts under fictitious
names, and all other similar accounts shall be absolutely prohibited. Peso and foreign currency checking non-checking numbered
accounts shall be allowed. The BSP may conduct annual testing solely limited to the determination of the existence and true identity
of the owners of such accounts.

b) Record Keeping — All records of all transactions of covered institutions shall be maintained and safely stored for five (5) years from
the dates of transactions. With respect to closed accounts, the records on customer identification, account files and business
correspondence, shall be preserved and safely stored for at least five (5) years from the dates when they were closed.|||

c) Amended by RA 9194
Reporting of Covered and Suspicious Transactions — Covered institutions shall report to the AMLC all covered transactions and
suspicious transactions within five (5) working days from occurrence thereof, unless the Supervising Authority prescribes a longer period
not exceeding ten (10) working days.

Should a transaction be determined to be both a covered transaction and a suspicious transaction, the covered institution shall be
required to report the same as a suspicious transaction.

When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees shall not be
deemed to have violated Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791 and other similar
laws, but are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person, the fact that a covered
or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. In case of violation thereof,
the concerned officer and employee of the covered institution shall be criminally liable. However, no administrative, criminal or civil
proceedings, shall lie against any person for having made a covered or suspicious transaction report in the regular performance of his
duties in good faith, whether or not such reporting results in any criminal prosecution under this Act or any other law.

When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees are prohibited
from communicating directly or indirectly, in any manner or by any means, to any person or entity, the media, the fact that a covered or
suspicious transaction report was made, the contents thereof, or any other information in relation thereto. Neither may such reporting be
published or aired in any manner or form by the mass media, electronic mail, or other similar devices. In case of violation thereof, the
concerned officer and employee of the covered institution and media shall be held criminally liable."

1. Customer Identification
This is to ensure that customers are properly identified
The covered person must develop certain procedures so that its customers are identified and known
Banks have a KYC system: Know Your Client – including your name, you salary (filled up when you apply)
Stricter when the customer is a corporation

2. Record-keeping

3. Reporting of covered and suspicious transactions


a. Covered Transaction
(b) 'Covered transaction' is a transaction in cash or other equivalent monetary instrument involving a total amount in excess of
Five hundred thousand pesos (P500,000.00) within one (1) banking day.
Regardless of the circumstance of the deposit, the covered person is required to report it to the AMLC. It is a ministerial duty
the moment you reach the threshold amount
It is IN EXCESS of Php500,000 within 1 banking day

b. Suspicious Transaction
(b-1) 'Suspicious transaction' are transactions with covered institutions, regardless of the amounts involved, where any of the
following circumstances exist:

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1. There is no underlying legal or trade obligation, purpose or economic justification;


Example: You opened an account in the bank. Someone deposited 400k in your account. The bank is not required to
report it since it is not a covered transaction.
The following week, somebody deposited another 400k. Still not required.
Next week, another 400k, and so on. It depends now because when the bank sees that there was no basis for anyone
to deposit in your account 4ook every week because you had no contract with that person transferring money, the
bank can actually inquire what the basis is. Is there a contract or sale?
If the bank is satisfied, there is no suspicious transaction. If the bank is not satisfied with your reason, the bank can
report you. You just receive money out of the blue. Bank senses something fishy going on.

2. The client is not properly identified;

3. The amount involved is not commensurate with the business or financial capacity of the client;

Bank will ask you what the source of your income is when you open an account. If you put there your compensation is
20k every month, then 1 day you deposit 450k, and the next day another 450k and so on, it is not commensurate with
your financial capacity
Again, if the bank is not satisfied with your explanation, the bank can report you to the AMLC for suspicious
transaction

4. Taking into account all known circumstances, it may be perceived that the client's transaction is structured in order to avoid
being the subject of reporting requirements under the Act;
When it is a covered transaction, the bank is required to report it. Example you deposited 450k today and another
450k tomorrow, that is a suspicious transaction because you might have received 900k and it would then have been
subject to reporting requirement but you deposited them in two to avoid being considered a covered transaction
So it is not covered but as a mode to avoid, you did it. This could be a suspicious transaction.

5. Any circumstance relating to the transaction which is observed to deviate from the profile of the client and/or the client's past
transactions with the covered institution;
So if you deposit 20k per day the suddenly you’re depositing 300k, or 400k, that is a deviation so the bank will ask you
why you are depositing suddenly a different account
Banks are strict with this. They will really ask you.

6. The transaction is in any way related to an unlawful activity or offense under this Act that is about to be, is being or has been
committed; or SEIDAC

7. Any transaction that is similar or analogous to any of the foregoing.

If a transaction is a covered or suspicious transaction, it does not mean you are already violating the AMLA. There is nothing wrong being
reported because the reporting requirement is automatic when you transact with more than 500k. However, the AMLC will not
automatically charge you with violation of the AMLA.

Since they are not violations, they are only circumstances which would require a covered person to make a report to the AMLC. These
transactions will trigger an obligation on the part of the covered person.

We said before that lawyers and accountants acting in their independent capacity do not fall under the term covered person. However,
the actual interpretation of the BSP is this:
“Lawyers and accountants acting in an independent capacity are considered covered persons as far as the first 2 obligations are
concerned.”
So they are still required to set up a system to identify the clients and to retain records of the transaction but they are not required to
report covered or suspicious transactions.

UNLAWFUL ACTIVITIES

Section 3B-1 says when the transaction is in any way related to an unlawful activity or offense under this Act that is about to be, is being or
has been committed, it is required to be reported as suspicious transaction

(From RA 10365) NOTE: Those numbers with specific offenses under them, and laws in BOLD are the ones Atty G. emphasized

Section 3(i) of the same Act is further amended to read as follows:

(i) 'Unlawful activity' refers to any act or omission or series or combination thereof involving or having direct relation to the following:

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(1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended;

(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic Act No. 9165, otherwise known as the Comprehensive Dangerous Drugs Act of 2002;
a. Sec 4 – Importation of Dangerous Drugs and/or Controlled Precursors and Essential Chemicals|||
b. Sec 5 - Sale, Trading, Administration, Dispensation, Delivery, Distribution and Transportation of Dangerous Drugs and/or Controlled
Precursors and Essential Chemicals|||
c. Sec 6 - Maintenance of a Den, Dive or Resort|||
d. Sec 8 - Manufacture of Dangerous Drugs and/or Controlled Precursors and Essential Chemicals|||
e. Sec 9 - Illegal Chemical Diversion of Controlled Precursors and Essential Chemicals||
f. Sec 10 - Manufacture or Delivery of Equipment, Instrument, Apparatus, and Other Paraphernalia for Dangerous Drugs and/or
Controlled Precursors and Essential Chemicals
g. Sec 12 - Possession of Equipment, Instrument, Apparatus and Other Paraphernalia for Dangerous Drugs|||
h. Sec 13 - Possession of Dangerous Drugs During Parties, Social Gatherings or Meetings|||
i. Sec 14 - Possession of Equipment, Instrument, Apparatus and Other Paraphernalia for Dangerous Drugs During Parties, Social
Gatherings or Meetings|||
j. Sec 15 - Use of Dangerous Drugs|||
k. Sec 16 - Cultivation or Culture of Plants Classified as Dangerous Drugs or are Sources Thereof

So not all offenses under the Dangerous Drugs Act are considered unlawful activities. Only those specified

(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended, otherwise known as the Anti-Graft and Corrupt Practices Act;
a. Par B - Directly or indirectly requesting or receiving any gift, present, share, percentage, or benefit, for himself or for any other
person, in connection with any contract or transaction between the Government and any other party, wherein the public officer in
his official capacity has to intervene under the law.|||

b. Par C - Directly or indirectly requesting or receiving any gift, present or other pecuniary or material benefit, for himself or for another,
from any person for whom the public officer, in any manner or capacity, has secured or obtained, or will secure or obtain, any
Government permit or license, in consideration for the help given or to be given, without prejudice to Section thirteen of this Act|
||
c. Par E - Causing any undue injury to any party, including the Government, or giving any private party any unwarranted benefits,
advantage or preference in the discharge of his official administrative or judicial functions through manifest partiality, evident bad
faith or gross inexcusable negligence. This provision shall apply to officers and employees of offices or government corporations
charged with the grant of licenses or permits or other concessions

d. Par G - Entering, on behalf of the Government, into any contract or transaction manifestly and grossly disadvantageous to the same,
whether or not the public officer profited or will profit thereby

e. Par H - Director or indirectly having financing or pecuniary interest in any business, contract or transaction in connection with which
he intervenes or takes part in his official capacity, or in which he is prohibited by the Constitution or by any law from having any
interest

f. Par I - Directly or indirectly becoming interested, for personal gain, or having a material interest in any transaction or act requiring the
approval of a board, panel or group of which he is a member, and which exercises discretion in such approval, even if he votes
against the same or does not participate in the action of the board, committee, panel or group

(4) Plunder under Republic Act No. 7080, as amended;

(5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended;
297 and 298 are not included, which refer to attempted robbery. Only consummated robbery are included because if it’s just
attempted, there is nothing to launder there
a. Art 294 - Robbery with Violence Against or Intimidation of Persons|
b. Art 295 - Robbery with Physical Injuries, Committed in an Uninhabited Place and by a Band
c. Art 296 - Definition of a Band and Penalty Incurred by the Members Thereof
d. Art 299 - Robbery in an Inhabited House or Public Building or Edifice Devoted to Worship|||
e. Art 300 - Robbery in an Uninhabited Place and by a Band|||
f. Art 301 - What is an Inhabited House, Public Building or Building Dedicated to Religious Worship and Their Dependencies
g. Art 302 - Robbery in an Uninhabited Place or in a Private Building|||

(6) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602;

(7) Piracy on the high seas under the Revised Penal Code, as amended and Presidential Decree No. 532;

(8) Qualified theft under Article 310 of the Revised Penal Code, as amended;

(9) Swindling under Article 315 of the Revised Penal Code, as amended;
RP vs Glasgow Credit: The crime here was estafa, so that is included under unlawful activities

(10) Smuggling under Republic Act Nos. 455 and 1937; SEID

a. RA 455- Revised Administrative Code

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b. RA 1937 – Tariff and Customs Code

(11) Violations under Republic Act No. 8792, otherwise known as the Electronic Commerce Act of 2000;

All violations of E-Commerce Act are unlawful activities

(12) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as
amended, including those perpetrated by terrorists against non-combatant persons and similar targets;

(13) Terrorism and conspiracy to commit terrorism as defined and penalized under Sections 3 and 4 of Republic Act No. 9372 or The Human Security
Act
(14) Financing of terrorism under Section 4 and offenses punishable under Sections 5, 6, 7 and 8 of Republic Act No. 10168, otherwise known as the
Terrorism Financing Prevention and Suppression Act of 2012:

(15) Bribery under Articles 210, 211 and 211-A of the Revised Penal Code, as amended, and Corruption of Public Officers under Article 212 of the
Revised Penal Code, as amended;

(16) Frauds and Illegal Exactions and Transactions under Articles 213, 214, 215 and 216 of the Revised Penal Code, as amended;

(17) Malversation of Public Funds and Property under Articles 217 and 222 of the Revised Penal Code, as amended;

(18) Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169 and 176 of the Revised Penal Code, as amended;

(19) Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise known as the Anti-Trafficking in Persons Act of 2003;

(20) Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No. 705, otherwise known as the Revised Forestry Code of the Philippines,
as amended;

a. Section 78 – Unlawful occupation or destruction of forest or grazing lands


b. Section 79 – Pasturing livestock
If you pasture livestock land considered as forest land, that is violation of sec 79. Any money that you profit from such act if you
attempt to launder it is a violation of the AMLA

(21) Violations of Sections 86 to 106 of Chapter VI, of Republic Act No. 8550, otherwise known as the Philippine Fisheries Code of 1998;

a. SECTION 86. Unauthorized Fishing or Engaging in Other Unauthorized Fisheries Activities

b. SECTION 87. Poaching in Philippine Waters|||

c. SECTION 88. Fishing Through Explosives, Noxious or Poisonous Substance, and/or Electricity|||

d. SECTION 89. Use of Fine Mesh Net||

e. SECTION 90. Use of Active Gear in the Municipal Waters and Bays and Other Fishery Management Areas|||

f. SECTION 91. Ban on Coral Exploitation and Exportation

g. SECTION 92. Ban on Muro-Ami Other Methods and Gear Destructive to Coral Reefs and Other Marine Habitat

h. SECTION 93. Illegal Use of Superlights

i. SECTION 94. Conversion of Mangroves

j. SECTION 95. Fishing in Overfished Area and During Closed Season|||

k. SECTION 96. Fishing in Fishery Reserves, Refuge and Sanctuaries|||

l. SECTION 97. Fishing Or Taking of Rare, Threatened or Endangered Species

m. SECTION 98. Capture of Sabalo and Other Breeders/Spawners|||

n. SECTION 99. Exportation of Breeders, Spawners, Eggs or Fry|||

o. SECTION 100. Importation or Exportation of Fish or Fishery Species

p. SECTION 101. Violation of Catch Ceilings||

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q. SECTION 102. Aquatic Pollution

r. SECTION 103. Other Violations: failure to comply with minimum safety standards; failure to conduct yearly report on fishponds; gathering
and marketing shell fishes; obstruction to navigation or flow and ebb of tide in any stream, river, lake or bay; construction and operation of
fish corrals/traps, fish pens and fish cages

s. SECTION 104. Commercial Fishing Vessel Operators Employing Unlicensed Fisherfolk or Fishworker or Crew|||

t. SECTION 105. Obstruction of Defined Migration Paths

u. SECTION 106. Obstruction to Fishery Law Enforcement Officer

(22) Violations of Sections 101 to 107, and 110 of Republic Act No. 7942, otherwise known as the Philippine Mining Act of 1995;

a. SECTION 101. False Statements|||

b. SECTION 102. Illegal Exploration

c. SECTION 103. Theft of Minerals|||

d. SECTION 104. Destruction of Mining Structures|||

e. SECTION 105. Mines Arson|||

f. SECTION 106. Willful Damage to a Mine

g. SECTION 107. Illegal Obstruction to Permittees or Contractors|||

h. SECTION 110. Other Violations. — Any other violation of this Act and its implementing rules and regulations

(23) Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act No. 9147, otherwise known as the Wildlife Resources Conservation and
Protection Act;

(24) Violation of Section 7(b) of Republic Act No. 9072, otherwise known as the National Caves and Cave Resources Management Protection Act;

Sec 7b - Gathering, collecting, possessing, consuming, selling, bartering or exchanging or offering for sale without authority any cave
resource

(25) Violation of Republic Act No. 6539, otherwise known as the Anti-Carnapping Act of 2002, as amended;

(26) Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as amended, otherwise known as the decree Codifying the Laws on
Illegal/Unlawful Possession, Manufacture, Dealing In, Acquisition or Disposition of Firearms, Ammunition or Explosives;

(27) Violation of Presidential Decree No. 1612, otherwise known as the Anti-Fencing Law;

(28) Violation of Section 6 of Republic Act No. 8042, otherwise known as the Migrant Workers and Overseas Filipinos Act of 1995, as amended by
Republic Act No. 10022;

Sec 6 – Illegal recruitment

(29) Violation of Republic Act No. 8293, otherwise known as the Intellectual Property Code of the Philippines;

All violations
(30) Violation of Section 4 of Republic Act No. 9995, otherwise known as the Anti-Photo and Video Voyeurism Act of 2009;

Sec 4 – take photo or video coverage; copy or reproduce; sell or distribute; publish or broadcast persons performing sexual acts

(31) Violation of Section 4 of Republic Act No. 9775, otherwise known as the Anti-Child Pornography Act of 2009;

Sec 4 – Unlawful or prohibited acts (e.g. hire a child to perform pornography; produce or direct; publish or offer; possess; provide a
venue; to lure a child; to conspire to commit any of the unlawful acts)

(32) Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of Republic Act No. 7610, otherwise known as the Special Protection of Children
Against Abuse, Exploitation and Discrimination;

a. SECTION 5. Child Prostitution and Other Sexual Abuse

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b. SECTION 7. Child Trafficking

c. SECTION 8. Attempt to Commit Child Trafficking|||

d. SECTION 9. Obscene Publications and Indecent Shows|||

e. SECTION 10(c). Any person who shall induce, deliver or offer a minor to any one prohibited by this Act to keep or have in his company a
minor|||

f. SECTION 10(D). Any person, owner, manager or one entrusted with the operation of any public or private place of accommodation,
whether for occupancy, food, drink or otherwise, including residential places, who allows any person to take along with him to such
place or places any minor herein described

g. SECTION 10(E). Any person who shall use, coerce, force or intimidate a street child or any other child to: beg or use begging for a
living; act as conduit or middlemen in drug trafficking or pushing; conduct any illegal activities

h. SECTION 11. Sanctions for Establishments or Enterprises which Promote, Facilitate, or Conduct Activities Constituting Child Prostitution
and Other Sexual Abuse, Child Trafficking, Obscene Publications and Indecent Shows, and Other Acts of Abuse|||

i. SECTION 12. Employment of Children|||

j. SECTION 14. Prohibition on the Employment of Children in Certain Advertisements|||

(33) Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the Securities Regulation Code of 2000; and

(34) Felonies or offenses of a similar nature that are punishable under the penal laws of other countries.”

If the covered person can determine that the transaction REGARDLESS of amount is related to these unlawful activities, that will be a
suspicious transaction and automatically reported to the AMLA

MONEY LAUNDERING OFFENSES

SEC. 4. Money Laundering Offense. – Money laundering is committed by any person who, knowing that any monetary instrument or
property represents, involves, or relates to the proceeds of any unlawful activity:

(a) transacts said monetary instrument or property;

(b) converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or property;

(c) conceals or disguises the true nature, source, location, disposition, movement or ownership of or rights with respect to said monetary
instrument or property;

(d) attempts or conspires to commit money laundering offenses referred to in paragraphs (a), (b) or (c);

(e) aids, abets, assists in or counsels the commission of the money laundering offenses referred to in paragraphs (a), (b) or (c) above; and

(f) performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in paragraphs (a),
(b) or (c) above.

Money laundering is also committed by any covered person who, knowing that a covered or suspicious transaction is required under
this Act to be reported to the Anti-Money Laundering Council (AMLC), fails to do so.

Take note that your transaction even if it is a covered or suspicious transaction, that is not an offense. It is only a money laundering
offense if there is KNOWLEDGE that the money is related to an unlawful activity and you attempt to transact it, convert it, etc.
Also, a covered person who knows of a covered or suspicious transaction but does not do his duty to report it is also an offense
The covered or suspicious transaction by itself is not a violation. The violation is when there is an unlawful activity and there are proceeds
and you attempt to transact, convert, or possess them (etc.)

CRIMINAL PROSECUTION
Prosecution for violation of the AMLA is different from the prosecution of the unlawful activity itself.

SEC. 6. Prosecution of Money Laundering –

a) Any person may be charged with and convicted of both the offense of money laundering and the unlawful activity as herein defined.

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(b) The prosecution of any offense or violation under this Act shall proceed independently of any proceeding relating to the unlawful
activity.

You don’t need to be convicted of the unlawful activity before you can be convicted of violation of AMLA
It may be that you are not yet convicted of estafa but you are already convicted of trying to convert the proceeds of estafa to legitimate
funds. Prior conviction is not an element of the crime
Question: Client asks you how to avoid these offenses?

Atty G: You don’t advise them to do anything illegal. If your client did do something illegal, it’s your duty as lawyer to defend him. That’s now a
legal ethics question.

THE ANTI-MONEY LAUNDERING COUNCIL (AMLC)

Members:

SEC. 7. Creation of Anti-Money Laundering Council (AMLC). – The Anti-Money Laundering Council is hereby created and shall be composed
of the Governor of the Bangko Sentral ng Pilipinas as Chairman, the Commissioner of the Insurance Commission and the Chairman of the
Securities and Exchange Commission, as members.

Powers:

SEC. 7. – xxx

The AMLC shall act unanimously in the discharge of its functions as defined hereunder:

(1) to require and receive covered or suspicious transaction reports from covered institutions;

(2) to issue orders addressed to the appropriate Supervising Authority or the covered institution to determine the true identity of the
owner of any monetary instrument or property subject of a covered transaction or suspicious transaction report or request for
assistance from a foreign State, or believed by the Council, on the basis of substantial evidence, to be, in whole or in part, wherever
located, representing, involving, or related to, directly or indirectly, in any manner or by any means, the proceeds of an unlawful
activity.

(3) to institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General;

(4) to cause the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money laundering
offenses;

(5) to investigate suspicious transactions and covered transactions deemed suspicious after an investigation by AMLC, money laundering
activities, and other violations of this Act;

(6) to apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or property alleged to be laundered,
proceeds from, or instrumentalities used in or intended for use in any unlawful activity as defined in Section 3(i) hereof

(7) to implement such measures as may be necessary and justified under this Act to counteract money laundering;

(8) to receive and take action in respect of, any request from foreign states for assistance in their own anti-money laundering operations
provided in this Act;

(9) to develop educational programs on the pernicious effects of money laundering, the methods and techniques used in money
laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders;

(10) to enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the government, including
government-owned and -controlled corporations, in undertaking any and all anti-money laundering operations, which may include
the use of its personnel, facilities and resources for the more resolute prevention, detection and investigation of money laundering
offenses and prosecution of offenders; and SEIDAC

(11) to impose administrative sanctions for the violation of laws, rules, regulations and orders and resolutions issued pursuant thereto.

(12) to require the Land Registration Authority and all its Registries of Deeds to submit to the AMLC, reports on all real estate
transactions involving an amount in excess of Five hundred thousand pesos (P500,000.00) within fifteen (15) days from the date of
registration of the transaction, in a form to be prescribed by the AMLC. The AMLC may also require the Land Registration
Authority and all its Registries of Deeds to submit copies of relevant documents of all real estate transactions.

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Number 12 is the latest development. Take note that even if the Registry of Deeds is not a covered person, AMLC now requires them to
report any transaction of 500k. Of course if you buy a house, it exceeds 500k. So any transaction now with the Registry of Deeds is
reported to the AMLC.
Supposedly Registry of Deeds is not a covered person. They are only private persons. However, they are still required to report
Registration process now is more stringent since the Registry of Deeds will now look at the basis of the transfer

REMEDIES AVAILABLE TO THE AMLC


1. Freezing of Monetary Instrument or Property
SEC. 10. Freezing of Monetary Instrument or Property. – Upon a verified ex parte petition by the AMLC and after determination that
probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in Section 3(i)
hereof, the Court of Appeals may issue a freeze order which shall be effective immediately, and which shall not exceed six (6) months
depending upon the circumstances of the case: Provided, That if there is no case filed against a person whose account has been frozen
within the period determined by the court, the freeze order shall be deemed ipso facto lifted: Provided, further, That this new rule shall
not apply to pending cases in the courts. In any case, the court should act on the petition to freeze within twenty-four (24) hours from
filing of the petition. If the application is filed a day before a nonworking day, the computation of the twenty-four (24)-hour period shall
exclude the nonworking days.

“A person whose account has been frozen may file a motion to lift the freeze order and the court must resolve this motion before the
expiration of the freeze order.

“No court shall issue a temporary restraining order or a writ of injunction against any freeze order, except the Supreme Court.”

STEPS:
a. AMLC will file an ex parte petition for issuance of freeze order with the CA
Account holder need not be notified
b. If CA finds there is probable cause that the money subject of the petition is related to an unlawful activity, then the CA will issue the
freeze order
Effect: You cannot withdraw since the account is “frozen”

2. Inquire into Bank Deposits


SEC. 11. Authority to Inquire into Bank Deposits. – Notwithstanding the provisions of Republic Act No. 1405, as amended; Republic Act
No. 6426, as amended; Republic Act No. 8791; and other laws, the AMLC may inquire into or examine any particular deposit or
investment, including related accounts, with any banking institution or non-bank financial institution upon order of any competent
court based on an ex parte application in cases of violations of this Act, when it has been established that there is probable cause that
the deposits or investments, including related accounts involved, are related to an unlawful activity as defined in Section 3(i) hereof or
a money laundering offense under Section 4 hereof; except that no court order shall be required in cases involving activities defined in
Section 3(i)(1), (2), and (12) hereof, and felonies or offenses of a nature similar to those mentioned in Section 3(i)(1), (2), and (12), which
are Punishable under the penal laws of other countries, and terrorism and conspiracy to commit terrorism as defined and penalized
under Republic Act No. 9372.
The Court of Appeals shall act on the application to inquire into or examine any deposit or investment with any banking institution or
non-bank financial institution within twenty-four (24) hours from filing of the application.
To ensure compliance with this Act, the Bangko Sentral ng Pilipinas may, in the course of a periodic or special examination, check the
compliance of a Covered institution with the requirements of the AMLA and its implementing rules and regulations.
For purposes of this section, ‘related accounts’ shall refer to accounts, the funds and sources of which originated from and/or are
materially linked to the monetary instrument(s) or property(ies) subject of the freeze order(s).
A court order ex parte must first be obtained before the AMLC can inquire into these related Accounts: Provided,That the procedure for
the ex parte application of the ex parte court order for the principal account shall be the same with that of the related accounts."
The authority to inquire into or examine the main account and the related accounts shall comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution, which are hereby incorporated by reference.

CASE: RP vs EUGENIO

Facts:

A series of investigations concerning the award of NAIA 3 contracts to PIATCO were undertaken by the Ombudsman and
AMLC. AMLC issued resolution authorizing the Executive Director of AMLC to sign and verify an application to inquire into
and/or examine the deposits or investments of Alvarez, etc. (the persons involved). AMLC then applied to inquire into the
investments of Alvarez before the RTC which granted it being satisfied of existence of probable cause that the deposits were
related to the offense of violation of Anti-Graft and Corrupt Practices Act.

Ruling:

Still, even if the bank inquiry order may be availed of without need of a pre-existing case under the AMLA, it does not
follow that such order may be availed of ex parte. (This has now been changed by the subsequent amendment of the law)

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Discussion:

The issue here was that they filed an ex parte application but the SC said that is not allowed because the law does not
provide it. It even compared this with the Freeze
After the Eugenio case, Congress amended it. Now, ex parte is now allowed with the Court of Appeals.
Probable cause is required that the money is related to an unlawful activity
AMLA does not require a court order at all times:
a. Kidnapping for ransom
b. Offenses under Dangerous Drugs Act
c. Hijacking
If the AMLC suspects that the money is related to these, they can look into the accounts by themselves. For the rest
of the unlawful activities, they need a court order and can get it through a verified ex parte petition through the CA

3. Civil Forfeiture
Section 12 of the same Act is hereby amended to read as follows:
(a) Civil Forfeiture. – Upon determination by the AMLC that probable cause exists that any monetary instrument or property is in any
way related to an unlawful activity as defined in Section 3(i) or a money laundering offense under Section 4 hereof, the AMLC shall file
with the appropriate court through the Office of the Solicitor General, a verified ex parte petition for forfeiture, and the Rules of Court
on Civil Forfeiture shall apply.
The forfeiture shall include those other monetary instrument or property having an equivalent value to that of the monetary
instrument or property found to be related in any way to an unlawful activity or a money laundering offense, when with due diligence,
the former cannot be located, or it has been substantially altered, destroyed, diminished in value or otherwise rendered worthless by
any act or omission, or it has been concealed, removed, converted, or otherwise transferred, or it is located outside the Philippines or
has been placed or brought outside the jurisdiction of the court, or it has been commingled with other monetary instrument or
property belonging to either the offender himself or a third person or entity, thereby rendering the same difficult to identify or be
segregated for purposes of forfeiture.

(b) 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 defined under Section 4 of this Act, the offender or any other person claiming an
interest therein may apply, by verified petition, for a declaration that the same legitimately belongs to him and for segregation or
exclusion of the monetary instrument or property corresponding thereto. The verified petition shall be filed with the court which
rendered the judgment of forfeiture, within fifteen (15) days from the date of the finality of the order of forfeiture, in default of which
the said order shall become final and executor. This provision shall apply in both civil and criminal forfeiture.

(c) Payment in Lieu of Forfeiture. – Where the court has issued an order of forfeiture of the monetary instrument or property subject of
a money laundering offense defined under Section 4, and said order cannot be enforced because any particular monetary instrument
or property cannot, with due diligence, be located, or it has been substantially altered, destroyed, diminished in value or otherwise
rendered worthless by any act or omission, directly or indirectly, attributable to the offender, or it has been concealed, removed,
converted, or otherwise transferred to prevent the same from being found or to avoid forfeiture thereof, or it is located outside the
Philippines or has been placed or brought outside the jurisdiction of the court, or it has been commingled with other monetary
instruments or property belonging to either the offender himself or a third person or entity, thereby rendering the same difficult to
identify or be segregated for purposes of forfeiture, the court may, instead of enforcing the order of forfeiture of the monetary
instrument or property or part thereof or interest therein, accordingly order the convicted offender to pay an amount equal to the
value of said monetary instrument or property. This provision shall apply in both civil and criminal forfeiture.”
Money will be forfeited in favor of the government if there is probable cause that the money is related to an unlawful activity
CASE: RP vs. GLASGOW

Facts:

Republic filed a complaint in the RTC for civil forfeiture of assets against the bank deposits in the account maintained by Glasgow. It
opposed the motion to dismiss of Glasgow and asserted prior conviction for unlawful activity is not a precondition to the filing of a civil
forfeiture case.

Ruling:

The Court agrees with the Republic. Whether or not there is truth in the allegation that account no. CA-005-10-000121-5 contains the
proceeds of unlawful activities is an evidentiary matter that may be proven during trial. The complaint, however, did not even have to
show or allege that Glasgow had been implicated in a conviction for, or the commission of, the unlawful activities of estafa and violation
of the Securities Regulation Code.

A criminal conviction for an unlawful activity is not a prerequisite for the institution of a civil forfeiture proceeding. Stated
otherwise, a finding of guilt for an unlawful activity is not an essential element of civil forfeiture.

Discussion:

Conviction is not necessary for there to be forfeiture. It is actually a penalty but the SC said no need for conviction

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If you recall discussion on Bank Secrecy Law, when a covered institution makes a report under Sec 9, it is exempt from
the Bank Secrecy Law and the Foreign Currency Deposit Act. When AMLC makes an inquiry under Sec 11, it is again
exempt.
Take note also that even if it is not a breach of the Bank Secrecy Law, the covered person cannot disclose the fact that he
has made a report to any other person because such disclosure is a breach of confidentiality which is penalized under
Sec 14 of AMLA. If you make a malicious report, just to harass somebody, that is penalized under Sec 14
(a) Penalties for the Crime of Money Laundering. The penalty of imprisonment ranging from seven (7) to fourteen (14) years and
a fine of not less than Three million Philippine pesos (Php3,000,000.00) but not more than twice the value of the monetary
instrument or property involved in the offense, shall be imposed upon a person convicted under Section 4(a), (b), (c) and (d) of
this Act.

The penalty of imprisonment from four (4) to seven (7) years and a fine of not less than One million five hundred thousand
Philippine pesos (Php1,500,000.00) but not more than Three million Philippine pesos (Php3,000,000.00), shall be imposed upon
a person convicted under Section 4(e) and (f) of this Act.

The penalty of imprisonment from six (6) months to four (4) years or a fine of not less than One hundred thousand Philippine
pesos (Php100,000.00) but not more than Five hundred thousand Philippine pesos (Php500,000.00), or both, shall be imposed
on a person convicted under the last paragraph of Section 4 of this Act.

(b) Penalties for Failure to Keep Records. The penalty of imprisonment from six (6) months to one (1) year or a fine of not less
than One hundred thousand Philippine pesos (Php100,000.00) but not more than Five hundred thousand Philippine pesos
(Php500,000.00), or both, shall be imposed on a person convicted under Section 9(b) of this Act.|||

(c) Malicious Reporting. Any person who, with malice, or in bad faith, reports or files a completely unwarranted or false
information relative to money laundering transaction against any person shall be subject to a penalty of six (6) months to four
(4) years imprisonment and a fine of not less than One hundred thousand Philippine pesos (Php 100,000.00) but not more than
Five hundred thousand Philippine pesos (Php 500,000.00), at the discretion of the court: Provided, That the offender is not
entitled to avail the benefits of the Probation Law.

If the offender is a corporation, association, partnership or any juridical person, the penalty shall be imposed upon the
responsible officers, as the case may be, who participated in, or allowed by their gross negligence, the commission of the crime.
If the offender is a juridical person, the court may suspend or revoke its license. If the offender is an alien, he shall, in addition to
the penalties herein prescribed, be deported without further proceedings after serving the penalties herein prescribed. If the
offender is a public official or employee, he shall, in addition to the penalties prescribed herein, suffer perpetual or temporary
absolute disqualification from office, as the case may be. SIcTAC

Any public official or employee who is called upon to testify and refuses to do the same or purposely fails to testify shall suffer
the same penalties prescribed herein.

(d) Breach of Confidentiality. The punishment of imprisonment ranging from three (3) to eight (8) years and a fine of not less
than Five hundred thousand Philippine pesos (Php 500,000.00) but not more than One million Philippine pesos (Php
1,000,000.00) shall be imposed on a person convicted for a violation under Section 9(c). In the case of a breach of
confidentiality that is published or reported by media, the responsible reporter, writer, president, publisher, manager and
editor-in-chief shall be liable under this Act."

(e) The penalty of imprisonment ranging from four (4) to seven (7) years and a fine corresponding to not more than two
hundred percent (200%) of the value of the monetary instrument or property laundered shall be imposed upon the covered
person, its directors, officers or pesonnel who knowingly participated in the commission of the crime of money laundering.

(f) Imposition of Administrative Sanctions. The imposition of the administrative sanctions shall be without prejudice to the filing
of criminal charges against the persons responsible for the violation.

After due notice and hearing, the AMLC shall, at its discretion, impose sanctions, including monetary penalties, warning or
reprimand, upon any covered person, its directors, officers, employees or any other person for the violation of this Act, its
implementing rules and regulations, or for failure or refusal to comply with AMLC orders, resolutions and other issuances. Such
monetary penalties shall be in amounts as may be determined by the AMLC to be appropriate, which shall not be more than Five
hundred thousand Philippine pesos (P500,000.00) per violation.

The AMLC may promulgate rules on fines and penalties taking into consideration the attendant circumstances, such as the
nature and gravity of the violation or irregularity.

(g) The provision of this law shall not be construed or implemented in a manner that will discriminate against certain customer
types, such as politically-exposed persons, as well as their relatives, or against a certain religion, race or ethnic origin, or such
other attributes or profiles when used as the only basis to deny these persons access to the services provided by the covered
persons. Whenever a bank, or quasi-bank, financial institution or whenever any person or entity commits said discriminatory act,
the person or persons responsible for such violation shall be subject to sanctions as may be deemed appropriate by their
respective regulators.

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But the most interesting part is Sec 16


SECTION 16. Prohibitions Against Political Harassment. — This Act shall not be used for political persecution or harassment or as
an instrument to hamper competition in trade and commerce.
No case for money laundering may be filed against and no assets shall be frozen, attached or forfeited to the prejudice of a
candidate for an electoral office during an election period.
So remember the unlawful activities are plunder, bribery, malversation, violation of Anti-Graft and Corrupt Practices
Act, etc.
BUT during election season, you cannot file a case. AMLC is helpless against people running for office. So there’s
always a backdoor for politicians.

THINGS TO REMEMBER ABOUT AMLA


1. You don’t need to memorize but be familiar with the covered person, so that if there is a problem, you would know if he is
covered and if he is under the 3 obligations: customer identification, record keeping, and reporting of covered and suspicious
transactions. If you don’t report, it’s an offense.
2. AMLC has 3 remedies in case of violations of AMLA
a. Freeze order through CA
b. Bank inquiry through CA
Except for Kidnapping, dangerous drugs, and hijacking, in which case no court order is required
c. Civil forfeiture of the moneys related to the unlawful activity
No conviction required for forfeiture

RA 8799 – THE SECURITIES AND REGULATION CODE

February 5, 2015

This law was passed sometime in August 2000


Prior to the SRC, we had the Revised Securities Act, BP No. 178 which was passed in 1982
Before that, you had the Securities Act, Commonwealth Act No. 83 which was passed 1936
The very first investment protection law in the Philippines is Act No. 2581, known as “Blue Sky Law”. It was called as such based on old
jurisprudence, saying that these laws were passed in order to protect the public against speculative investments which have no basis
other than clean field of blue sky, in other words, no basis other than air.
Now, the blue sky laws are the generic terms used to describe the investment protection laws. The blue sky law was passed in 1916. It was
the first investment protection law in the Philippines. But at that point, it solely provided for regulations with respect to issuance of
securities, but it did not require registration for those securities. But when the Securities Act came in 1936, securities were now classified
into speculative and non-speculative securities.

Speculative Securities – required to be registered.

Non-speculative Securities – not required to be registered.

This practice was carried over until the Revised Securities Act until finally we have the Securities Regulation Code
The SRC provides that ALL securities that will be sold to the public within the Philippines will have to be registered with the Securities and
Exchange Commission. In fact this requirement of registration is the most basic requirement of the SRC which is aimed to protect the
investing public.

STATE POLICIES OF THE SRC LAW

2. Declaration of State Policy. – The State shall establish a socially conscious, free market that regulates itself, encourage the widest
participation of ownership in enterprises, enhance the democratization of wealth, promote the development of the capital market,
protect investors, ensure full and fair disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent or
manipulative devices and practices which create distortions in the free market. To achieve these ends, this Securities Regulation Code is
hereby enacted.

1. To establish a socially conscious, free market that regulates itself.


It will establish a market for stocks and securities. The market is the Philippine Stock Exchange. The relationship between the PSE
and SRC is that although PSE is a private corporation, it was established by law, provided by the Chapter 10 of the SRC Law. Chapter
10 of the SRC provides for the establishment and regulation for what we call the self-regulatory organization (SRO) and PSE is one
such SRO. The PSE is an SRO which is established pursuant to the SRC and it is also regulated based on the provisions of the SRC.
Technically, PSE is a private enterprise, a free market, and an SRO because this market regulates itself, free from interference from
the government.

So the first state policy here is achieved by virtue of Chapter X of the SRC which provides for the establishment and regulations of
the SROs which is the market for securities. In the Philippines, we only have one SRO, which is PSE.

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CHAPTER X
REGISTRATION, RESPONSIBILITIES AND OVERSIGHT OF SELF-REGULATORY ORGANIZATIONS
Section 39. Associations of Securities Brokers, and Dealers, and Other Securities Related Organizations. – 39.1. The Commission shall
have the power to register as a self-regulatory organization, or otherwise grant licenses, and to regulate, supervise, examine,
suspend or otherwise discontinue, as a condition for the operation of organizations whose operations are related to or connected
with the securities market such as but not limited to associations of brokers and dealers, transfer agents, custodians, fiscal and
paying agents, computer services, news disseminating services, proxy solicitors, statistical agencies, securities rating agencies, and
securities information processor which are engaged in business of: (a) Collecting, processing, or preparing for distribution or
publication, or assisting, participating in, or coordinating the distribution or publication of, information with respect to
transactions in or quotations for any security; or (b) Distributing or publishing, whether by means of a ticker tape, a
communications network, a terminal display device, or otherwise, on a current and continuing basis, information with respect to
such transactions or quotations. The Commission may prescribe rules and regulations which are necessary or appropriate in the
public interest or for the protection of investors to govern self-regulatory organizations and other organizations licensed or
regulated pursuant to the authority granted in Subsection 39.1 including the requirement of cooperation within and among, and
electronic integration of the records of, all participants in the securities market to ensure transparency and facilitate exchange of
information.

2. To encourage the widest participation of ownership in enterprises.


For example, the company will issue stocks for sale in the PSE. They will conduct a public offering. Individuals or other interested
parties can buy the shares and as an effect they can have their share in the ownership in the corporation.
This happens when the public holds shares in these corporations. Which is why the SEC requires when a corporation conducts a
public offering, a certain percentage of the shares to be offered to the public is granted to certain classifications. So only a certain
percentage will go to the qualified buyers and certain percentage will go to the ordinary investors. To make sure that the public, the
ordinary investors, will get to own shares in certain enterprises and not just the big investors.

3. Enhance the democratization of wealth

4. Promote the development of the capital market, protect investors, ensure full and fair disclosure about securities.
These four state policies are related to each other. The primary purpose of SRC is investor protection. This is achieved by the
provisions of the SRC. One such is the requirement for registration, which requirement for registration requires the full and fair
disclosure about securities. The thrust of the SRC is when you buy securities, you should be aware of the nature of these securities
and the nature of the company issuing the securities. To enable you to make the proper decisions on your investments. The thrust of
the SRC is full and fair disclosure.
Take note this is different from merit-based approach. Merit-based approach is that when you register your shares and once it passes
registration there is a presumption that your investment is meritorious meaning it is safe, it is protected and you will earn income.
That is NOT the purpose of registration of the SRC, because the purpose of the SRC is full and fair disclosure to let the public know
about the issuing company, about the shares and securities itself and it is now up to the public to make a decision, as long as you
make an informed decision.
Just because the share that you purchased is registered, that does not mean that you will earn income out of your investment. It is
not a guarantee and not an assurance. Full and fair disclosure only, to let the public know the truth about the securities and let them
decide and in that way the public is protected. And in that way, when the public feels secure about their investments, they will make
more investments and as an effect, the fourth state policy, the promotion of the development of the capital market is achieved. And
when we develop the capital market, will not kept at the higher levels but will trickle down to the investing public and it that way
there will be a democratization of wealth.
These four state policies are related. The full and fair disclosure which is the foremost mode of investment protection which the
purpose of which to have investor confidence in the capital market and as a result capital market will develop; and when there are
more investments, the presumption is that wealth will trickle down to the investing public and not just be kept by the majority
owners of the securities.

5. To minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create
distortions in the free market.
That is embodied under the Chapter 7 of the SRC. So when you take a look at Chapter 7, there are provisions on fraud, etc.

CHAPTER VII

Prohibitions on Fraud, Manipulation and Insider Trading

SECTION 24. Manipulation of Security Prices; Devices and Practices. — 24.1 It shall be unlawful for any person acting for himself
or through a dealer or broker, directly or indirectly:

(a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading
market (hereafter referred to purposes of this Chapter as "Exchange"):

(i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof;

(ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or
orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or
for the same or different parties; or

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(iii) By performing similar act where there is no change in beneficial ownership. CAcDTI

(b) To effect, alone or with others, a series of transactions in securities that: (i) Raises their price to induce the purchase of a
security, whether of the same or a different class of the same issuer or of a controlling, controlled, or commonly controlled
company by others; (ii) Depresses their price to induce the sale of a security, whether of the same or a different class, of the
same issuer or of a controlling, controlled, or commonly controlled company by others; or (iii) Creates active trading to induce
such a purchase or sale through manipulative devices such as marking the close, painting the tape, squeezing the float, hype
and dump, boiler room operations and such other similar devices.

(c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall
because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the
price of the security for the purpose of inducing the purchase or sale of such security.

(d) To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground 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. prcd

(e) To effect, either alone or others, 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 or by rules of
the Commission.

24.2. No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive
device or contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection with the
purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the protection of investors.

24.3. The foregoing provisions notwithstanding, the Commission, having due regard to the public interest and the protection of
investors, may, by rules and regulations, allow certain acts or transactions that may otherwise be prohibited under this Section.

SECTION 25. Regulation of Option Trading . — No member of an Exchange shall, directly or indirectly endorse or guarantee the
performance of any put, call, straddle, option or privilege in relation to any security registered on a securities exchange. The
terms "put", "call", "straddle", "option", or "privilege" shall not include any registered warrant, right or convertible security. DA

SECTION 26. Fraudulent Transactions . — It shall be unlawful for any person, directly or indirectly, in connection with the
purchase or sale of any securities to:

26.1. Employ any device, scheme, or artifice to defraud;

26.2. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact
necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading;
or

26.3. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon
any person.

SECTION 27. Insider's Duty to Disclose When Trading . — 27.1. It shall be unlawful for an insider to sell or buy a security of the
issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the
public, unless: (a) The insider proves that the information was not gained from such relationship; or (b) If the other party selling
to or buying from the insider (or his agent) is identified, the insider proves: (i) that he disclosed the information to the other
party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the information. A purchase or
sale of a security of the issuer made by an insider defined in Subsection 3.8, or such insider's spouse or relatives by affinity or
consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in
possession of material nonpublic information if transacted after such information came into existence but prior to dissemination
of such information to the public and the lapse of a reasonable time for the market to absorb such information: Provided,
however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was not aware of the
material nonpublic information at the time of the purchase or sale. HTCAED

27.2. For purposes of this Section, information is "material nonpublic" if: (a) It has not been generally disclosed to the public and
would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for
the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a security.

27.3. 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 as defined in Subsection 3.8, 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 while in possession

of such information.

27.4. a) It shall be unlawful where a tender offer has commenced or is about to commence for:

(i) Any person (other than the tender offeror) who is in possession of material nonpublic information relating to such tender
offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has

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reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror, those
acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer; and

(ii) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, and
any insider of such issuer to communicate material nonpublic information relating to the tender offer to any other person where
such communication is likely to result in a violation of Subsection 27.4 (a)(i). SCEHaD

(b) For purposes of this subsection the term "securities of the issuer sought or to be sought by such tender offer" shall include
any securities convertible or exchangeable into such securities or any options or rights in any of the foregoing securities.

POWERS OF THE SEC


The agency that is tasked with the job of interpreting and implementing the SRC is the Securities and Exchange Commission.
Section 5. Powers and Functions of the Commission.– 5.1. The commission shall act with transparency and shall have the powers and functions
provided by this code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses law, the Financing Company Act and other
existing laws. Pursuant thereto the Commission shall have, among others, the following powers and functions:
The corporations who are grantees with primary franchise holders are those which were granted with certificate of incorporation from
the SEC; those who submitted their articles with the SEC. All private corporations are holders or grantees of primary franchise.
Does it mean that the SEC has jurisdiction over ALL private corporations?
There are those corporations which are governed exclusively by other government agencies as expressly provided by law. For
example, Insurance Companies, they are governed by the Insurance Commission. Insurance companies have two franchisees, first is
the certificate of incorporation and the other is the license is the one that is issued by the Insurance Commission. Now, does the SEC
have jurisdiction over them? Distinguish. Can the SEC issue a secondary franchise?
The SEC can issue secondary franchise to financial companies, lending companies, investment houses which are not banks. Financial
institutions which are not governed by the BSP because they are not banks or quasi-banks, these are subject to the jurisdiction of the SEC.
1. Primary Franchise – All Corporations
2. Secondary Franchise – Some Corporations
So, all holders of secondary franchise are holders of primary franchise. But not all holders of primary franchise are holder of
secondary franchise. If you are holder of a secondary franchise, the latter can be issued by the SEC or other government agencies. Is
there any difference with respect to the jurisdiction and regulation that may be implemented by the SEC over these entities?
The law says jurisdiction and supervision over ALL corporations, partnerships who are grantees of primary franchises. That means all
of these! These are grantees of primary franchise does that mean that the SEC will be the one who would regulate over these
companies? What is the extent of jurisdiction that would be exercised by the SEC?
General Rule: The SEC over a memorandum circular has verified that if a corporation is a grantee of a secondary franchise from the
SEC itself those corporations are subject to a direct jurisdiction and supervision of the SEC. The other holders of secondary franchise
and those grantees of primary franchise sans secondary franchise are subject to supervision and monitoring of the SEC in so far as
compliance with the Corporation Code is concerned, with respect to the officers, the BODs, the reportorial requirements such as
general information sheets and the filing of your financial statements and others that are required by the Corporation Code.
Is there any exception to this rule when you are a holder of a secondary franchise or even just a primary franchise but you are subject
to the supervision of the SEC by a law other than the Corporation Code?

CASE: Philippine Veterans Bank vs SEC


Facts:
PVB was subjected to penalties by the SEC for failure to submit the reportorial requirements to the SEC based on the SRC.
SEC said, “Hey PVB! You failed to submit your reportorial requirements under the SRC! You are violating the SRC!” PVB is a holder of two
franchises from SEC and BSP. The SEC alleged that the PVB is a public company. PVB said that they are not a public company because
the ownership of the company shares is limited to the World War Veterans, their widows and heirs and also they are not listing their
shares in the stock exchange and therefore should not be submitted to penalties.
Issue: Whether or not the PVB is subject to companies?
Ruling:
SC ruled in favor of SEC. Rule 3 (1) (m) of the Amended Implementing Rules and Regulations of the SRC, which defines a
"public company" as "any corporation with a class of equity securities listed on an Exchange or with assets in excess of Fifty Million
Pesos (P50,000,000.00) and having two hundred (200) or more holders, at least two hundred (200) of which are holding at least
one hundred (100) shares of a class of its equity securities. Therefore, there are two kinds of public companies.Both kinds of public
companies are under the jurisdiction of the SEC as far as compliance with the provisions of the Corporation Code and SRC.
Discussion:
Take note, if you are a public company, basically you are a holder of a secondary franchise from the SEC because in order to
list in the stock exchange you need to register your shares. You need a license to sell your securities. So that would put you under the
jurisdiction of the SEC.
If you are public company even if your shares are not listed in the stock exchange, you can still be considered falling under
the jurisdiction of the SEC in so far as the provisions of the SRC are concerned.
All public corporations, both types are required to comply with the reportorial requirements under Section 17 of the SRC.
No need to register or secure a certificate saying that you are a public corporation; but the SEC upon determining that you’ve meet
the qualifications or criteria of a public corporation, they can require you to comply with the provisions of the SRC, in so far as the
reportorial requirements. No need to get a license to be public corporations.

(a) Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies
on all aspect of the securities market and propose legislation and amendments thereto;

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If there are laws being contemplated in Congress which concerns securities, the SEC will be part of the working group for the
drafting of those laws. Even for the IRR for securities law, the SEC will always be a part of that.
There was this law passed, PERA (about retirements). Then we (ACCRA Lawfirm?) were part of the technical working group for IRR,
we are working with SEC, BIR and BSP. SEC was part of the technical working group because it was securities law.
Similarly with the Real Estate Investment Trust Act, it was supposed to create a trust fund for buying real estate so that corporations
using the real estate will just lease from these public companies to generate wealth for the public. SEC and BSP were a part of the working
group.

(b) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications;
This is for the securities under Section 8 of the SRC Law.:

“SECTION 8. Requirement of Registration of Securities. — 8.1. Securities shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the
securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.”

(c) Regulate, investigate or supervise the activities of persons to ensure compliance;


(d) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs;
Such as the PSE. Under this supervision authority of the SEC, the SEC can penalize PSE because although PSE is a private corporation,
it is supposed to be regulated by the SEC. The problem of PSE was that the SRC provides a limit to ownership of brokers in the shares of the
PSE. It was supposed to be set at 20%. The brokers who incorporated the PSE did not want to let go of their shares. They wanted to keep the
control of the PSE. Because of that they violated the limit provided by the SEC. They were fined by the SEC at 100 pesos a day.The SEC has the
power to do that under the SRC.

(f) Impose sanctions for the violation of laws and rules, regulations and orders, and issued pursuant thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise
compliance with such rules, regulation and orders;
So this is the rule-making power of the SRC. Quasi-legislative power.Such rules are given great weight by the Courts.

(h) Enlist the aid and support of and/or deputized any and all enforcement agencies of the Government, civil or military as well as any
private institution, corporation, firm, association or person in the implementation of its powers and function under its Code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
(j) Punish for the contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties
prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its
supervision;
Not an amendment but an addition to the power of the SEC under the Corporation Code. Like the power of the SEC to call a meeting,
under the petition of a stockholder. The SEC can issue an order to have a meeting. But under the provisions of the Corporation Code, if there is
no petition of the stockholder, they cannot issue an order to have a meeting because there has to be an initiated petition by the stockholder.
Paragraph K now allows the SEC to compel even without a petition.

(l) Issue subpoena ducestecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order
the examination, search and seizure of all documents, papers, files and records, tax returns and books of accounts of any entity or person
under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws;
Does this include to subpoena bank accounts? It does not because of the term, subject to the provisions of existing laws which
would be your bank secrecy laws. This power is limited. So that phrase was intended to protect the bank accounts.

(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnership or
associations, upon any of the grounds provided by law; and
(n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or
incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws.

JURISDICTION OF CASES
SRC Section 5.2. The Commission’s jurisdiction over all cases enumerated under section 5 of Presidential Decree No. 902-A is hereby
transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise
of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over the cases. The Commission shall retain
jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1)
year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payment/rehabilitation cases
filed as of 30 June 2000 until finally disposed.
This section transferred ALL cases enumerated under section 5 of PD No. 902-A from the SEC to the RTC (including Commercial Courts). These
cases intra-corporate disputes, election over corporate officers, suspension of payments:

PD No. 902-A. Section 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall
have original and exclusive jurisdiction to hear and decide cases involving.

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a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partnership, amounting to
fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of
associations or organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates;
between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or
right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or
associations.

REGISTRATION REQUIREMENT
What is required before Securities can be sold? SRC requires that it must be registered.
CHAPTER III
REGISTRATION OF SECURITIES
Section 8. Requirement of Registration of Securities.– 8.1. Securities shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the
securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.

TYPES OF SECURITIES
What are securities?
Section 3. Definition of Terms. - 3.1. "Securities" are shares, participation or interests in a corporation or in a commercial enterprise or
profit-making venture and evidenced by a certificate, contract, instruments, whether written or electronic in character. It includes:
(a) Shares of stocks, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certifies of deposit for a future
subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments
(f) Proprietary or nonproprietary membership certificates in corporations; and
(g) Other instruments as may in the future be determined by the Commission.

Two major types of securities are:


1. Equity Securities
2. Debt Securities

Shares of Stocks are equity securities representing ownership in an enterprise.


Bonds, debentures, notes, evidences of indebtedness are debt securities. The difference between the bonds, debentures, notes, etc
is with respect to the term and as to the collateral because bonds are of the longest term. Bonds are generally backed by a real estate
mortgage. Debentures are medium-term. Notes which are shorter term debt securities.

1. ASSET-BACKED SECURITIES:
Asset-Backed Securities are defined under RA 9627 which means that certificates issued by an SPE (Special Purpose Entity), the
repayment of which shall be derived from the cash flow of the assets in accordance with the Plan. Under the Securitization Act of 2004,
these SPEs will buy receivables or bonds, basically debt securities. These debt securities have very large face amount, in millions. Ordinary
investors cannot really buy them. In turn, the SPE will turn around and issue securities. These securities issued by SPEs are Asset Back
Securities.
Why do you call them as Asset Back Securities?
They are backed up by these debt securities which are recognized as assets of these SPEs. Since these are debt securities, whatever
earnings from these debt securities like interests, discounting, these are the income which flows down to the holders the Asset Back
Securities. These debt securities are normally have very big face amounts so the ordinary investing public cannot buy them but when the
SPEs buy them in bulk, then, it will in turn create its own securities and distribute it to the public. These are smaller denomination
securities.
These debt instruments are assets of the SPE and they are the basis of the SPE in issuing the Asset Back Securities. For example they will
buy debt securities worth 20m pesos, in turn, this is one debt securities, the SPE then in turn divide this into several securities which
would be easily accessible or made more affordable to the investing public.

2. INVESTMENT CONTRACTS:
SRC Rule 3.1-1 - Definition of Investment Contract and Derivative
1. An investment contract means a contract, transaction or scheme (collectively “contract”) whereby a person invests his money in a
common enterprise and is led to expect profits primarily from the efforts of others.
a. A presumption that a contract is an investment contract arises whenever a person seeks to use the money of others on the promise
of profits.

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b. When two or more investors “pool” their resources, there is a common enterprise, even if the promoter does not do more than
receive a broker’s commission.
When do you have a common enterprise?
When two or more investors pool their resources, what they have is a common enterprise; which is an essential element of an investment
contract.
What is the test that is used to determine WON it is an investment contract? Howey Test (as discussed in the case below)

CASE: SEC vs Prosperity.com Incorporated


Facts:
There is this company which sells websites without providing internet service. At the same time, by referring to PCI his own down-
line buyers, a first-time buyer could earn commissions, interest in real estate in the Philippines and in the United States, and insurance
coverage worth P50,000.00. To benefit from this scheme, a PCI buyer must enlist and sponsor at least two other buyers as his own down-lines.
These second tier of buyers could in turn build up their own down-lines. For each pair of down-lines, the buyer-sponsor received a US$92.00
commission. The SEC, through its Compliance and Enforcement unit, issued a Cease and Desist Order against PCI. The SEC ruled that PCI's
scheme constitutes an Investment contract and, following the Securities Regulations Code, 2 it should have first registered such contract or
securities with the SEC.
Issue:
Whether or not PCI’s scheme constitutes an investment contract.
Ruling:

There was no investment contract. The Securities Regulation Code treats investment contracts as "securities" that have to be
registered with the SEC before they can be distributed and sold. An investment contract is a contract, transaction, or scheme where a person
invests his money in a common enterprise and is led to expect profits primarily from the efforts of others.

The United States Supreme Court held in Securities and Exchange Commission v. W.J. Howey Co. that, for an investment contract to exist, the
following elements, referred to as the Howey test must concur: (1) a contract, transaction, or scheme; (2) an investment of money; (3)
investment is made in a common enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts of others. Thus, to
sustain the SEC position in this case, PCI's scheme or contract with its buyers must have all these elements.
An example that comes to mind would be the long-term commercial papers that large companies, like San Miguel Corporation
(SMC), offer to the public for raising funds that it needs for expansion. When an investor buys these papers or securities, he invests his money,
together with others, in SMC with an expectation of profits arising from the efforts of those who manage and operate that company. SMC has
to register these commercial papers with the SEC before offering them to investors.
Here, PCI's clients do not make such investments. They buy a product of some value to them: an Internet website of a 15-MB
capacity. The client can use this website to enable people to have internet access to what he has to offer to them, say, some skin cream. The
buyers of the website do not invest money in PCI that it could use for running some business that would generate profits for the investors. The
price of US$234.00 is what the buyer pays for the use of the website, a tangible asset that PCI creates, using its computer facilities and
technical skills. Actually, PCI appears to be engaged in network marketing.
Discussion:
There was no investment. Instead what they paid is a purchase price for the product which is the website. In applying the Howey
test, it appears that not all the elements are present. This is not an investment contract; it is not a security. It does not need to be registered.

3. FRACTIONAL UNDIVIDED INTERESTS IN OIL, GAS OR OTHER MINERAL RIGHTS:


That is provided for under the Mining Act. Under the Regalian Doctrine, all resources are owned by the State; but the State can
explore and extract these resources in partnership with Filipino citizens. The Mining Act provides for two rights to extract resources. That
would be under:
1. MPSA – Mineral Production Share Agreement
2. FTAA – Financial and Technical Assistance Agreement
Which allows the private entity to partner with the government in extracting oil, minerals and gas. These rights under these
contracts are considered as securities. So if you sell them to the public, you have to register.

4. DERIVATIVES LIKE OPTION AND WARRANTS


Derivatives under the SRC Rules
Derivative with respect to equity securities, means a financial instrument, including options and warrants, whose value depends on the
interest in or performance of an underlying security, but which does not require any investment of principal in the underlying security.
Kinds of Derivatives:
a. Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying security at a predetermined
price, called the exercise or strike price, on or before a predetermined date, called the expiry date, which can only be extended in
accordance with Exchange rules.
Can be buy or sell.
b. Call options are rights to buy and put options are rights to sell.
c. Warrants are rights to subscribe or purchase new shares or existing shares in a company, on or before a predetermined date, called the
expiry date, which can only be extended in accordance with Exchange rules. Warrants generally have a longer exercise period than
options.
Warrants are only rights to buy
Warrants generally have a longer exercise period than options and are evidenced by warrant certificates.
Kinds of Warrants:

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1. “Detachable Warrant” – means a Warrant that may be sold, transferred or assigned to any person by the Warrantholder separate
from, and independent of, the corresponding Beneficiary Securities.
2. “Nondetachable Warrant” – means a Warrant that may not be sold, transferred or assigned to any person by the warrantholder
separate from, and independent of, the Beneficiary Securities.

Warrants allow you to buy the underlying shares at a predetermined price on a predetermined date. This is a kind of derivative because as
defined a derivative is a kind of security whose value varies depending on the value of the underlying security.
For example, you have a warrant which allows you to purchase a certain security at 100 per share not later than February 15, 2015. On
February 15, 2015, let’s say the shares are selling at 200 per share. Can I sell you the warrant? Are you willing to buy the warrant for 50
pesos?
Yes because it will allow me to buy the shares at a 50 pesos discount because I will pay 50 pesos for the warrant and I will pay 100
pesos for the share. I gain the difference of 50 pesos from my cost of 150 minus the 200 actual cost of the shares in the market.
I will sell it to you for 80 pesos, will you buy it? Yes. Because that is still a gain of 20 pesos. The actual cost of the warrant is 80 pesos
and the cost of the share is 100 pesos, so you have 180 but if I buy the shares without the warrant, I will be paying 200 pesos.
The value of the warrant fluctuates depending on the value of the underlying security. That is why it is called a derivative because its
value is derived from the value of the underlying security. Warrant itself is a security. It has to be registered. Derivatives are also
classified as securities.
5. CERTIFICATES OF ASSIGNMENTS, CERTIFICATES OF PARTICIPATION, TRUST CERTIFICATES, VOTING TRUST CERTIFICATES OR SIMILAR
INSTRUMENTS:
What is the difference between the certificates of assignments and certificates of participation?

Recalling the laws on sales, when you sell incorporeal rights, you don’t do a contract of sale, you execute a deed of assignment.

Certificates of assignments and certificates of participation are sales of incorporeal rights particularly debts, credit. If you sell the whole
credit, what you can have as a security is in the form of a certificate of assignment. If you sell a portion of the credit, is a certificate of
participation. Both embody a credit. Trust certificates are actually deposit certificates.

Voting Trust Certificates is when you give the person a right to vote their shares. This allows a third person to vote the shares. This is also
a security. Just the right to vote.

6. PROPRIETARY OR NONPROPRIETARY MEMBERSHIP CERTIFICATES IN CORPORATIONS:


Non-proprietary share or certificate is an evidence of interest or privilege over a certain property of a corporation in view
of the amount paid by the holder for the said share/certificate. While the holder is entitled to the use of the property, he has no right
over dividends or of the assets of the company upon liquidation thereof.
Proprietary share or certificate is an evidence of interest or participation or privilege in a corporation which not only entitles the holder to
enjoy the use of a specific property but also to dividends or earnings of said company. Upon liquidation of the company, a holder of a
proprietary share shall have proportionate ownership right over its assets.
You normally see this in sports clubs, where they issue these kinds of shares. If it is a non-proprietary, the holder of the share has the right
to use the facilities of the club but they cannot take part in the dividends and if the club is liquidated, they cannot share in the liquidation.
If proprietary shares, you can use the facilities, you have a share in the dividend distribution and upon liquidation, you can also get a share
in the liquidating dividends.

INSTANCES WHEN A SECURITY IS TO BE REGISTERED

CHAPTER III
REGISTRATION OF SECURITIES
Section 8. Requirement of Registration of Securities.– 8.1. Securities shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the
securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.
These are the securities that will have to be offered to the public in the Philippines.

We have a client who is intending to sell their shares in Korea. There is no need to register the shares because the SRC will only take place
when the shares are sold in the Philippines. Bahala na daw ang Pinoys na mopalit sa shares sa Korea. Wala nay paki ang SEC. But it has to be
offered to the public or public offering in the Philippines.

SRC Rules

Public Offering means a random or indiscriminate offering of securities in general to anyone who will buy, whether solicited or
unsolicited. Any solicitation or presentation of securities for sale through any of the following modes shall be presumed to be a public
offering:

i. Publication in any newspaper, magazine or printed reading material which is distributed within the Philippines or any part thereof ;
ii. Presentation in any public or commercial place;
iii. Advertisement or announcement in any radio or television, or in any online or e-mail system; or
iv. Distribution and/or making available flyers, brochures or any offering material in a public or commercial place, or mailing the same to
prospective purchasers.

Prior to registration, you cannot sell the securities in the Philippines.

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STAGES BEFORE THE SECURITIES ARE SOLD TO THE PUBLIC IN THE PHILIPPINES:

1. Pre-Filing Stage – you have not yet filed your registration with the SEC. At this point, you cannot sell securities in the Philippines; you
cannot disseminate information about your shares in the Philippines.
You cannot sell nor disseminate information.
This is a very long process. The issuer will need to find an underwriter, a legal team, a finance team.The legal team will
prepare the registration statement and preliminary prospectus and the finance team to check them under due
diligence.They will make some necessary corrections and the legal team will make final corrections.
2. Filing Stage
Under Section 8 of the SRC, before you can sell your securities, you need to file a registration statement and get the
approval by the SEC of that registration statement.
You need to file your application.
The documents required to be submitted to the SRC are the registration statement together with the preliminary
prospectus.
3. Pre-Offering Stage
This stage, the moment thatafter you file your registration statement and your preliminary prospectus with the SEC, it is
what we call, Pre-Offering Stage.
Section 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration
statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and
with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.
You cannot sell yet in this stage because they must also comply with the requirement of filing AND approval of the
registration statement by the SEC.
The basis for the submission of the registration statement together with the preliminary prospectus. BOTH.
SECTION 12. Procedure for Registration of Securities. — 12.1. All securities required to be registered under Subsection 8.1 shall be
registered through the filing by the issuer in the main office of the Commission, of a sworn registration statement with respect
to such securities, in such form and containing such information and documents as the Commission shall prescribe. The
registration statement shall include any prospectus required or permitted to be delivered under Subsections 8.2, 8.3 and 8.4.
During the pre-offering period, meaning after you already filed but before approval, we cannot sell securities yet.
You are only allowed to disseminate your preliminary prospectus to the public.
This preliminary prospectus is also known as red-herring prospectus. This term came from the USA. Preliminary prospectus
was actually required to be written in a red ink. And red-herring fishes are used to mislead the hounds. It is a false trail red-
herring. That prospectus has not yet been approved by the SEC so that prospectus is a false trail.
Take note under 8.1 the preliminary prospectus filed with the SEC will be circulated to potential investors prior to the
effectiveness of the registration statement. You can already disseminate your preliminary prospectus provided that it
contains a statement that the registration and the prospectus has not yet been declared effective. You have to put it in
bold print in your prospectus.
Rule 8.1.d. Allows the dissemination of the preliminary prospectus during the pre-offering period.
SRC Rule 8.3 also provides for certain written communications which are not deemed offers for sale. These written
communications can be disseminated during this stage. These are actually advertisements, notice,
circulars,letters,etcpublished or transmitted to any person after the registration statement has been filed and contains any
of the following information required. At this point, not yet approved.
You can only disseminate your preliminary prospectus and disseminate your advertisements.
These advertisements are also known as tombstone advertisements because you are just advertising but you are not
allowed to sell but this has not yet been approved by the SEC. Mura siya’gpatay. Walaygamit.
These are advertisements which are allowed to be circulated after a registration statement has already been filed with the
SEC but not yet been approved.
3.1 Payment of Filing Fees - Section 12.5. (a) Upon filing of the registration statement, the issuer shall pay to the Commission a fee of
not more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price at which such securities are proposed to be
offered.
3.2 Publication –Section 12.5 (b)Notice of the filing of the registration statement shall be immediately published by the issuer, at its
own expense, in two (2) newspapers of general circulation in the Philippines, once a week for two (2) consecutive weeks, or in such
other manner as the Commission by rule shall prescribe, reciting that a registration statement for the sale of such security has been
filed, and that the aforesaid registration statement, as well as the papers attached thereto are open to inspection at the Commission
during business hours, and copies thereof, photostatic or otherwise, shall be furnished to interested parties at such reasonable
charge as the Commission may prescribe.
3.3 Approval or Denial - The moment that the SEC will approve your shares, the SEC will issue an order declaring the registration
statement either effective or rejected. Or the SEC can allow you to amend your registration statement.
Section 12.6. Within forty-five (45) days after the date of filing of the registration statement, or by such later date to which the
issuer has consented, the Commission shall declare the registration statement effective or rejected, unless the applicant is allowed
to amend the registration statement as provided in Section 14 hereof. The Commission shall enter an order declaring the registration
statement to be effective if it finds that the registration statement together with all the other papers and documents attached
thereto, is on its face complete and that the requirements have been complied with.
3.4 Oath from the Issuer - Section 12.7 Upon effectivity of the registration statement, the issuer shall state under oath in every
prospectus that all registration requirements have been met and that all information are true and correct as represented by the
issuer or the one making the statement.
4. Offering Period –You can now sell your securities because you already filed your registration statement and it has already been
approved or made effective by the SEC.

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Take note that the SEC’s approval is not a stamp of merit of the security. It is just a statement that you have fully and fairly
disclosed all material information about the issuer and about the security. And it is still up to the investing public whether or
not they are going to invest. The SEC does not assure or guarantee returns or profits on the investment.
5. Notice of Completion
The period of offering is only for a limited period of time. SRC Rule 8.1 paragraph d provides that a written notification of
completion or termination of the offering shall be filed with the SEC within in three business days from such completion or
termination indicating therein the number of securities sold. What you have there is a notice of offering completion.

Review of the Stages of Registration:

1. Pre-filing Period – No Information, No Sale


2. Filing Stage
3. Pre-Offering Period – You already filed your registration statement and your preliminary prospectus and you are allowed to
disseminate information about your securities through your preliminary prospectus or through your tombstone advertisements.
You pay your filing fees.
You make a publication.
Then the SEC will either require to amend your registration statements or reject it right away or approve your registration
statement.
Once you are approved, you are now required to issue and oath that the requirements have been complied with to be
stated or stamped in the prospectus.
4. Offering Period – You are now allowed to sell your securities but only for a limited period of time allowed by the SEC.
5. Notice of Completion – Once that limited period of time lapses. A written notification of completion or termination of the offering
shall be filed with the SEC within in three business days from such completion or termination indicating therein the number of
securities sold.

SHELF REGISTRATION

What happens when your offering period is done but there are still unsold securities?
You will only need to update your registration statement and you can sell those securities again. This is a Shelf Registration.

Only an updated registration statement can be filed with the SEC then you can sell. There is no need to wait for an approval.

When a corporation needs huge amount of capital, it may resort to public offering of its shares. Hence the law requires those shares to be
registered before offered for sale for the protection of the investing public. So that before they can actually invest in a certain company
they know the material facts about those companies. So that they are assured that at the end of the day, you are not merely holding a
certificate with no basis other a clear field of a blue sky. To make sure that you have something like a basis for your investment.Public
offering is one of the sources of capital.

PUBLIC OFFERING

February 12, 2015

WHEN are securities required to be registered? (Does it involve any kind of sale? For example, if I offer you shares from my company- the
issuing company, does it mean that I need to register the securities first before I can offer it for you in particular? What is the requirement for
the sale of securities which would require that the securities should first be registered with the SEC?)

General rule: There has to be a public offering of the securities. The sale has to be a public sale.

What does “public offering” mean?

SRC Rule 3(N) Public Offering means a random or indiscriminate offering of securities in general to anyone who will buy, whether
solicited or unsolicited. Any solicitation or presentation of securities for sale through any of the following modes shall be presumed
to be a public offering:

i. Publication in any newspaper, magazine or printed reading material which is distributed within the Philippines or any part
thereof
ii. Presentation in any public or commercial place;
iii. Advertisement or announcement in any radio or television, or in any online or e-mail system; or
iv. Distribution and/or making available flyers, brochures or any offering material in a public or commercial place, or mailing
the same to prospective purchasers.

It is not targeted to one or specific persons but to the public as a whole. How is it done? You advertise in the newspapers, in the
radio, television, etc. or even if you do not advertise and you sell it to everyone. If you sell securities indiscriminately, or a public
offering of securities, that is the time that the securities in general are required to be registered. But the sale must occur in the
Philippines otherwise, if it’s not in the Philippines, there’s no need to register.

Is public offering synonymous with listing your shares in the stock exchange? And do you have to list your shares to the stock exchange
for the requirement of registration to take place? NO.

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CASE: POWER HOMES UNLIMITED CORP VS SEC
Facts:
Petitioner is a domestic corporation registered with SEC. Respondent Manero requested public respondent SEC to investigate
petitioner’s business as he attended a seminar conducted by such petitioner where it claimed to sell properties that were inexistent,
without any broker’s license and to inquire whether or not it involves “legitimate network marketing”. The relevant issue is whether
petitioner’s business constitutes an investment contract which should be registered with SEC before its sale or offer for sale or
distribution to the public.
Ruling:
An investment contract is defined in the amended IRR (R.A. 8799) as a “contract, transaction or scheme (collectively contract)
whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others”. One test to
determine whether a transaction falls as an investment contract is the Howey Test which requires a transaction whereby a person (1)
makes an investment of money, (2) in a common enterprise, (3) with the expectation of profits, (4) to be derived solely from the efforts
of others.

SEC found the petitioner as a marketing company that promotes and facilitates sales of real properties and other related
products of real estate developers through effective leverage marketing. SC ruled that the business operation of petitioners constitutes
an investment contract that is a security and as such, it must be registered with the SEC, otherwise SEC cannot protect the investing
public from fraudulent activities. The strict regulation of securities is founded on the premise that the capital markets depend on the
investing public’s level of confidence in the system.

Discussion:

In this case, the investment contract was NOT listed in the stock exchange, because it was like a networking scheme. It was just open
to the public and anyone who would put up their money would go in and invest then get your own down line.
The SEC ruled that this kind of arrangement qualifies as an investment contract.
Applying the Howey test, the SC said that this is an investment contract and being such, there is therefore a need to register the
securities.
When they sold these securities without registration, Power Homes was considered to be in violation of the SRC.
So you see class, the registration requirement will not only take place if the shares are being sold in the stock exchange, but it will
also take place if securities are sold to the public or there is public offering when you randomly, indiscriminately offer your
securities to the public and that is when registration requirement arise.

PROCESS OF REGISTRATION

What needs to be filed for the SEC to register the securities?


A registration statement + prospectus (preliminary prospectus or red herring prospectus). Before filing, no sale or information is
allowed. After filing- now termed as the pre-offering period, you have already filed but it is not yet approved by the SEC so you are
NOT allowed to sell but you are ALLOWED to disseminate information through tombstone advertisements or by disseminating the
preliminary prospectus itself.

So you go to the whole process of registration. You pay the fees. You do the publication. The SEC will evaluate. And then SEC
approves. If it approves, the issuer will have to make a sworn statement to be stated in the prospectus that he has complied with all
the registration requirements. After that, he can begin selling the securities and that is now what we call as the offering period. Once
the offering period has lapsed, or all the securities have been sold, you will now need to have a notice of confirmation of the closing
of the offering period.

Once that’s done, there’s no more sale of the shares. But if you have shares left over or securities leftover, and you want to resell
them, you can just do a shelf registration which means you just have to update your registration statement and file with the SEC and
so this time, there’s no need for SEC approval, just an updated registration statement.

While the General rule is that when you’re offering your shares to the public or you do a public offering of your shares, either by
listing it in an exchange or offering it to anyone who wants to buy- you REGISTER, there are exceptions:

Section 9 gives you Exempt Securities and Section 10 gives you Exempt Transactions.
What is the difference between exempt transactions and exempt securities?

If your securities are exempt, no matter how many times you transact it, it is always exempt. If it’s an exempt transaction, the
securities itself aren’t exempt. So if your circumstance fall under any kind of the exemptions in Section 10, no need to register. But if
it’s outside the exempt transaction, those securities will need to be registered.

EXEMPT SECURITIES

CODAL (SRC) REASON


Section 9. Exempt Securities 9.1 The
requirement of registration under
Subsection 8.1 shall not as a general rule
apply to any of the following classes of
securities: In (a), the securities issued by the Government are non-risk because it

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(a) Any security issued or guaranteed by can never go bankrupt. Because if it needs more money, it will just tax
the Government of the Philippines, or by any you more.
political subdivision or agency thereof, or by
any person controlled or supervised by, and
acting as an instrumentality of said
Government.
(b) Any security issued or guaranteed by In (b), based on the Comity of States. The same way you treat your own
the government of any country with which government, so should you treat the government of other countries.
the Philippines maintains diplomatic And of course, ordinarily no private individual will really buy securities
relations, or by any state, province or of a different government because these are issued in such big
political subdivision thereof on the basis of amounts. Ordinarily, only another government will buy the securities of
reciprocity: Provided, that the Commission a foreign government. The purchase of securities from a foreign
may require compliance with the form and government is considered a political decision and not subject to
content for disclosures the Commission may registration requirement.
prescribe.
(c) Certificates issued by a receiver or by a In (c), the reason is that before you sell, it has already been approved
trustee in bankruptcy duly approved by the by the proper adjudicatory body which is normally the courts.
proper adjudicating body.
(d) Any security or its derivatives the sale In (d), the contracts issued by the IC or Insurance Commission include
or transfer of which, by law, is under the insurance policies which need not be registered. Even if the insurance
supervision and regulation of the Office of have an investment portion- or a “variable insurance policy”
the Insurance Commisssion, Housing and (investment you got there is more than the coverage), you need NOT
Land Use Rule Regulatory Board, or the register it. So ALL types of policies issued by insurance companies even
Bureau of Internal Revenue. if they have investment aspects, are not subject to registration because
insurance companies are already supervised by the IC.

Pre-need plans (which are not issued by insurance companies and so


NOT supervised by the Insurance Commission i.e. CAP, Prudential, etc.)
are subject to registration requirement.
(e) Any security issued by a bank except its In (e), the securities here that are subject to the exemption are ONLY
own shares of stock. the debt securities issued by the banks (Remember that there are 2
types of securities in general the equity securities and debt securities).
So equity securities and shares of stock issued by banks are NOT
covered by the exemption.

The debt securities or evidence of indebtedness issued by quasi-banks


are covered by the exemption since quasi-banks are under the
supervision of the BSP and because of SRC rule 9.2 par.1

SRC Rule 9.2 – Exempt Securities 1. Any evidence of


indebtedness issued by a financial institution itself that has
been duly licensed by the Bangko Sentral ng Pilipinas to engage
in banking/quasi-banking activity shall be exempt from
registration under Section 8.1 of the Code; provided that the
purchase and sale of such security shall not be considered
exempt from the coverage of the provisions of the Code on
antifraud, civil liability or others.

EXEMPT TRANSACTIONS

CODALS (SRC) REASON


SEC. 10. Exempt Transactions. - 10.1. The
requirement of registration under Subsection
8.1. shall not apply to the sale of any security in
any of the following transactions:

(a) At any judicial sale, or sale by an executor, In (a), these generally require court orders and the law presumes that
administrator, guardian or receiver or trustee the court will not order the sale of it will not redound to the public
in insolvency or bankruptcy. good.
(b) By or for the account of a pledge holder, or
mortgagee or any other similar lien holder
selling or offering for sale or delivery in the In (b), same basis as the previous number- you get the supervision of
ordinary course of business and not for the the court (judicial- court; extrajudicial- clerk of court)
purpose of avoiding the provisions of this
Code, to liquidate a bona fide debt, a security
pledged in good faith as security for such debt.
(c) An isolated transaction in which any In (c), if for example I am the issuer and I sell it to you in a one-time
security is sold, offered for sale, subscription transaction, can I be exempt under this paragraph? No. My ordinary
or delivery by the owner thereof, or by his business is manufacturing and I am not regularly engaged in selling
representative for the owner’s account, such securities- I am not a finance company, etc. and then I issue shares, and
sale or offer for sale, subscription or delivery I sell it to you. Am I exempt? Who should be the seller? Can the issuer be
not being made in the course of repeated and considered the owner of the security? NO.
successive transactions of a like character by
such owner, or on his account by such So a corporation issuing stocks is the owner of the stocks? If you’re the
representative and such owner or owner, how will you record it? It records it as an asset. So does a
representative not being the underwriter of corporation record its shares as an asset? NO. It is considered as a

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such security. capital.

So the issuer is NOT considered the owner of the securities. The issuer
is merely the originator, maker or creator of these securities. So this
paragraph does not apply to an issuer of the security itself. The seller in
this case has to be the owner of the security- meaning he has already
purchased the security from the issuer and then he will sell it in an
isolated transaction not in the ordinary course of his business. The sale
will be exempt. But if I, the issuer will sell to you shares from my
authorized capital, I cannot use this section to be exempt. Because I am
not the owner of my own shares. It does not mean though that I cannot
be exempt, I can be exempt basing from another paragraph, but just
not this paragraph (c).
(d) The distribution by a corporation, actively In (d), the paragraph doesn’t talk about cash. When you own securities
engaged in the business authorized by its as an investment, as an asset, you use that to distribute to your
articles of incorporation, of securities to its shareholders in a form of a property dividend. So stock dividends,
stockholders or other security holders as a exempt. Property dividends in the form of securities- also exempt.
stock dividend or other distribution out of
surplus.
(e) The sale of capital stock of a corporation to In (e), when a corporation sells stocks to its stockholders- exclusively
its own stockholders exclusively, where no meaning no 3rd person buying the securities, it is exempt because the
commission or other remuneration is paid or guiding principle in requiring the registration of securities is “full and
given directly or indirectly in connection with fair disclosure” – to make sure that before the public buys your
the sale of such capital stock. securities, you have all the material and pertinent information about
that particular security or that particular issue. With that as basis for
registration, the Stockholders are presumed to know about the
corporation with whom they are already stockholders. If they buy
additional shares, it is now on their own lookout. Unlike a 3rd party who
knows nothing about the issuer.

What if for example, you have here a corporation and you want to
increase your shares by 10 million pesos. Increase will be subscribed by
the existing SHs- so 25% subscription. This particular issuance of stocks-
purchase by virtue of an increase, does this qualify as an exemption
under this paragraph (e)? NO. Paragraph (e) only pertains to an
issuance of stock from its authorized but unsubscribed or unissued
shares. The example given gives a situation where it’s not yet
authorized- no ACS yet. And thus, does not fall under the exemption
under (e). So again, this paragraph (e) only covers AUTHORIZED and
unissued shares.
(f) The issuance of bonds or notes secured by In (f), this is a sale to a single purchaser thus NOT making it a sale to the
mortgage upon real estate or tangible public. Does this pertain to a scenario where I offer the bond to
personal property, where the entire mortgage everyone, so I advertise and only 1 bought? Can I claim that my
together with all the bonds or notes secured transaction is exempt? NO.
thereby are sold to a single purchaser at a
single sale. The important thing here is that before you issue the security, you
already have that buyer in mind. And you issue the security particularly
for that buyer alone, and not just anyone.
(g) The issue and delivery of any security in So what do you call the securities with a right of conversion?
exchange for any other security of the same Convertibles shares so (g) talks about convertible shares. So you
issuer pursuant to a right of conversion convert these shares to some other type of stock provided that the
entitling the holder of the security surrendered conditions under (g) are met then your conversion is exempt- but only
in exchange to make such conversion: the converted share is exempt.
Provided, That the security so surrendered has
been registered under this Code or was, when Such as when you sell the converted share subsequently, that will NOT
sold, exempt from the provisions of this Code, be covered with this particular provision anymore.
and that the security issued and delivered in
exchange, if sold at the conversion price,
would at the time of such conversion fall
within the class of securities entitled to
registration under this Code. Upon such
conversion the par value of the security
surrendered in such exchange shall be deemed
the price at which the securities issued and
delivered in such exchange are sold.
(h) Broker’s transactions, executed upon The kind of transaction in (h) is involving listed shares. When you say
customer’s orders, on any registered Exchange listed shares, it means it’s being traded in the exchange, being listed in
or other trading market. the Stock Exchange.

So what’s the difference between a registered securities and listed


securities? So ALL listed securities are registered. BUT not all registered
securities are listed because even if you don’t list as long as you sell it
randomly to the public, you are required to be registered- any mode.
Here, listed securities are always required to be registered because
when you list, you are selling randomly to the public. The listing of your
securities is basically having a forum where you can sell your shares.
And the forum or the market is what we call the stock exchange or the

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PSE- market place people buy and sell market securities.

When you have an issuer, and he wants to list its shares in the PSE
obviously wanting to sell it to the public- he has to register under Sec
8.2. Then people will buy- this is the PRIMARY trading (you bought it
directly from the issuer/issuing entity). So these people who own shares
will have their own brokers- the stocks in the PSE aren’t kept but
traded. So now, the security holders are selling the shares that they
bought through the brokers- this is SECONDARY trading. So this
SECONDARY TRADING is EXEMPT.
However, you’re still offering these shares to the public- which means
there’s supposed to be a need to register. BUT why is this exempt?
Because if you require secondary trading to be registered, no one will
use the stock exchange anymore since the purpose of stock exchange
is to facilitate, hasten the buying and selling.

But take note that if it’s a sale, an off-market transaction, it is not


covered by this exemption because securities need to be registered in
an exchange. For example: If I advertise to the public- so this one needs
to be registered. If subsequently, I advertise to sell what I just
purchased from the advertisement- this 2nd transaction needs to be
registered.
(i) Subscriptions for shares of the capital stock In (i), when you subscribe during incorporation or in an increase, it is
of a corporation prior to the incorporation still exempt. The situation when you subscribe to an increase is NOT
thereof or in pursuance of an increase in its exempt under par (e) but it is EXEMPT under par (i). It maybe that
authorized capital stock under the Corporation you’re not exempt on this paragraph, but you may be exempt on
Code, when no expense is incurred, or no another.
commission, compensation or remuneration is
paid or given in connection with the sale or
disposition of such securities, and only when
the purpose for soliciting, giving or taking of
such subscriptions is to comply with the
requirements of such law as to the percentage
of the capital stock of a corporation which
should be subscribed before it can be
registered and duly incorporated, or its
authorized capital increased.
(j) The exchange of securities by the issuer In (j) this is different from conversion in (g) because in conversion there
with its existing security holders exclusively, is a convertible share- a built in conversion mechanism. For this one, it is
where no commission or other remuneration is simply an exchange.
paid or given directly or indirectly for soliciting
such exchange.
(k) The sale of securities by an issuer to fewer In (k), the sale of fewer than 20 is called private placement. So this is
than twenty (20) persons in the Philippines the issuer equivalent of an isolated transaction- in the situation where
during any twelve-month period. the issuer would sell directly to one person, can he fall under par. (c)? It
cannot. Issuer is not the owner. But can it call under par. (k)? YES.

Does this exemption apply where I advertise in the newspaper but only
15 bought? Does this situation fall under this paragraph? NO. By the
mere act of offering to the public indiscriminately, you are already
required to register no matter that only 15 or 1 bought. So when we talk
about private placement, before you actually issue the security, you
already have the 15 buyers in mind- or 19 or less persons. It’s not an
indiscriminate offer, but you already know who your buyers are.
(l) The sale of securities to any number of the Qualified buyers are those persons who are determined by the law to
following qualified buyers: already have knowledge, know-how and experience regarding
(i) Bank; investments so they do not need to be protected.
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by
the Government of the Philippines or any
political subdivision thereof or managed by a
bank or other persons authorized by the
Bangko Sentral to engage in trust functions;
(v) Investment company; or
(vi) Such other person as the Commission may by
rule determine as qualified buyers, on the basis
of such factors as financial sophistication, net
worth, knowledge, and experience in financial
and business matters, or amount of assets
under management.

Do you need to secure approval from the SEC before you undertake an exempt transaction?

o NO, you can issue your securities right away but it can always be questioned by anyone. So if anyone questions and it’s proven, you
may be subject to liabilities under SRC including criminal liability.

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What do you do to ensure that your transaction is really exempt?
10.3. Any person applying for an exemption under this Section, shall file with the Commission a notice identifying the exemption relied
upon on such form and at such time as the Commission by rule may prescribe and with such notice shall pay to the Commission a fee
equivalent to one-tenth (1/10) of one percent (1%) of the maximum aggregate price or issued value of the securities (SRC)

10.3 of the SRC says that you can actually ask the commission for a confirmation. Once SEC issues this confirmation, no one can
question the exemption of your securities from registration. But it’s not a requirement that you should get a confirmation. If
you’d rather risk being questioned than paying the 1/10th of 1%, then by all means you may do that, but EXCEPT for (k) and (l)
which requires notice of exemption (Rule 10.1) which is different from a confirmation. A notice of exemption only requires a
minimal fee and you need to have a letter notifying the purchaser that such transaction is exempt under (k) or (l) of Sec. 10, SRC.

SRC Rule 10.1 – Exempt Transactions


4. Application for Confirmation or Declaration of Exemption
B. In cases which involve distribution of securities by way of stock dividend, the Commission shall determine the sufficiency of the
retained earnings of the issuer company prior to issuing a confirmation thereto.

It looks like a harmless provision but SEC determined or interpreted this to mean that if you’re doing a stock dividend, you need
to get a confirmation. When you report stock dividend to the SEC, you need to pay the 1/10th of the 1% fee which is weird because
of all the transactions in section 10, stock dividend is the safest since in the 1st place, there’s no sale, the issuer is not receiving
money, in the 2nd place, it’s given only to the existing SHs but now this is the one which the SEC in practice requires
confirmation.

TENDER OFFER

SRC Rule 19 – Tender Offers

I. Tender offer means a publicly announced intention by a person acting alone or in concert with other persons (hereinafter referred to as
“person”) to acquire equity securities of a public company as defined in SRC Rule 3.

It is a public announcement of an intention to buy particular shares at a particular price. You do it in public- take out advertisements,
newspaper, tv, radio or even do it by letter to all of the stockholders as long as you make the offer public.

In general, when is a tender offer required?


It is required when you intend to buy shares in a public company. It is the 1st requirement. When the issuer is the public company and
you meet the required threshold level, you need to do a tender offer. So even if you want to buy 100% of the shares of stock of a
PRIVATE company, you need not do a tender offer.

When you say public company what does that mean?


Public Company means any corporation
with a class of equity securities listed on an Exchange or
with assets in excess of Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more holders, at least two
hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities (SRC Rule 3 M).

When is tender offer mandatory?


It becomes mandatory when you acquire in a one-time transaction 35% or more of the equity securities or even if you don’t acquire 35%
or more in a one-time transaction but you acquire 35% or more within a 1year or 12-month period which we call as a creeping
transaction (you spread out your transaction).

Instances when MANDATORY Discussion


A. Any person or group of persons acting in concert, The first one-no question about it. If I want to buy 36%
who intends to acquire thirty five percent (35%) or of the stocks of a particular company, I have to do a
more of equity shares in a public company shall tender offer.
disclose such intention and contemporaneously
make a tender offer for the percent sought to all
holders of such class, subject to paragraph (9)(E)
of this Rule.
In the event that the tender offer is
oversubscribed, the aggregate amount of
securities to be acquired at the close of such
tender offer shall be proportionately distributed
across both selling shareholder with whom the
acquirer may have been in private negotiations and
minority shareholders.
B. Any person or group of persons acting in concert, The 2nd one, this month I will buy 5% then next month,
who intends to acquire thirty five percent (35%) or another 5%. Do I need a tender offer? Not yet. Next,
more of equity shares in a public company in one or another 5%- until it reaches 35% or more within 12
more transactions within a period of twelve (12) months- so you may now do a tender offer-CREEPING
months, shall be required to make a tender offer to transaction.
all holders of such class for the number of shares

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so acquired within the said period.
C. If any acquisition of even less than thirty five If I already have 49% share in a particular public
percent (35%) would result in ownership of over company and I want to buy 5% more, it will not qualify
fifty one percent (51%) of the total outstanding under the 1st mandatory requirement. But it will now
equity securities of a public company, the acquirer qualify to another requirement. You now need to do a
shall be required to make a tender offer under this tender offer- let anyone know you want to buy.
Rule for all the outstanding equity securities to all
remaining stockholders of the said company at a
price supported by a fairness opinion provided by
an independent financial advisor or equivalent third
party. The acquirer in such a tender offer shall be
required to accept any and all securities thus
tendered.
D. In any transaction covered by this Rule, the sale of
the shares pursuant to the private transaction shall
not be completed prior to the closing and
completion of the tender offer. Transactions with
any of the seller/s of significant blocks of shares
with whom the acquirers may have been in private
negotiations shall close at the same time and upon
the same terms as the tender offer made to the
public under this Rule. For paragraph (2)(B), the
last sale meeting the threshold shall not be
consummated until the closing and completion of
the tender offer.

Take note: Whatever your intention is, will not matter. As long as within the 12-month period, it will bring your acquisition to
35% or more. Even if from the start you only wanted 5% and then eventually you need another 5% more.
What if you just tell yourself “Ah, I don’t want to do tender offer so I’ll just buy 5% every year”, are you now required to do
tender offer? NO. Because it will no longer fall under the requirement.
Remember that it is not counted using a calendar year. Any 12-month period. So an example:

Within any 12-month period kung asa musud imong 35%. This is a creeping transaction.

So what if for example, I want to buy 1,000 shares. So that is my offer. I will advertise- P5 per share:
Stockholder A has 1,000 shares
Stockholder B has 500 shares
Stockholder C has 500 shares
So a total of 2,000 shares now. How will you buy then? Pro rata.

SECTION 19 (d) Where the securities offered exceed that which a person or group of persons is bound or willing to take up and pay for,
the securities that are subject of the tender offer shall be taken up as nearly as may be pro rata, disregarding fractions, according to the
number of securities deposited by each depositor. The provisions of this subsection shall also apply to securities deposited within ten (10)
days after notice of an increase in the consideration offered to security holders, as described in paragraph (e) of this subsection, is first
published or sent or given to security holders.

Stockholder A has 1,000 shares → 500


Stockholder B has 500 shares → 250
Stockholder C has 500 shares → 250
1,000 shares
Is there an instance where you’re required to buy all? Yes.

Rule 19 C. If any acquisition of even less than thirty five percent (35%) would result in ownership of over fifty one percent (51%) of the total
outstanding equity securities of a public company, the acquirer shall be required to make a tender offer under this Rule for all the
outstanding equity securities to all remaining stockholders of the said company at a price supported by a fairness opinion provided by an
independent financial advisor or equivalent third party. The acquirer in such a tender offer shall be required to accept any and all
securities thus tendered.
If your tender offer would amount to ownership of over 51%, you are required to buy all that has been tendered. Even if you just
wanted to buy 1,000 then you’re required to buy all the 2,000.

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What if you wanted to buy 1,000 shares at P5 per share. You have offers 100, 500, 200, which are not enough. You need 200 more
and no one is offering. So you say, okay because no one wants to sell anymore, I will buy for P8 per share, increasing your price. And
now everyone wants to offer you. So you now bought the 200. What happens to the 800 that was already bought?

Section 19(e) Where any person varies the terms of a tender offer or request or invitation for tenders before the expiration thereof by
increasing the consideration offered to holders of such securities, such person shall pay the increased consideration to each security
holder whose securities are taken up and paid for whether or not such securities have been taken up by such person before the variation
of the tender offer or request or invitation.

If you increase your price to P8 to get the last 200 shares, you have to pay the same price for the first 800. If you vary your offer
subsequently, then you have to pay that increased price to the offerors whom you’d already taken up.

Why is there a need for you to do a tender offer?


It is an important protection mechanism for the minority shareholders because this will allow them to sell their shares at the price that
the majority shareholders are selling theirs because ordinarily, if I want to take over the corporation- I will buy from the majority
shareholders because that will give me control. So now that I have control, I can direct the operation, I can form the policy, I can say
whether or not dividends will be declared. In that way, if I’m already a controlling shareholder, I can squeeze out the minority so I can
make their shareholdings in the corporation so unprofitable that they would want to divest their shares. So they now want to divest their
shares- who would now buy it? No one. Because any one buying their shares would be in the same position- a minority shareholder so it
would drive down the prices of the minority shares. Now, when they are already selling for 1cent per share, I will swoop in and buy the
share. That is what the tender offer rule is trying to prevent.

When you do a tender offer, at least you offer it to everyone. So that if the minority could see that the majority stockholders are selling,
then it may also want to sell its shares. With the new controlling shareholder, there will be a change in management and they may not be
favourable to the minority. So the tender offer rule is designed to protect the shareholders to ensure that they can sell their shares at the
same rate that the majority shareholders are selling. In fact this is explained in the CEMCO case (this paragraph along with the 2 preceding
paragraphs basically constitutes Maam’s discussion as to what is relevant to the CEMCO case).

CASE: CEMCO Holdings, Inc. VS National Life Insurance Company of the Philippines
Facts:
Unit Cement Corporation (UCC) has 2 principal SHs- UCHC & petitioner CEMCO. Majority of UCHC’s stocks were owned by BCI &
ACC. CEMCO on the other hand, owned 9% of UCHC stocks. BCI informed the Philippines Stock Exchange (PSE) of its resolution and
subsidiary ACC to sell to CEMCO its stocks. CEMCO’s acquisition amounted to at least 53% of the shares of UCC, increasing by 36%. As a
consequence, the PSE inquired as to whether the Tender Offer Rule is not applicable to such purchase.
Ruling:
Tender Offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities
of a public company. It is in place to protect minority shareholders against any scheme that dilutes the share value of their investments.
It gives minority shareholders the chance to exit the company under reasonable terms, giving them opportunity to sell their shares at
the same price as those of the majority shareholders. Respondent CEMCO is hereby mandated to make a tender offer for UCC shares to
complainant and other holders of UCC shares similar to the class held by respondent UCHC, at the highest price it paid for the beneficial
ownership in respondent UCC, strictlyin accordance with SRC Rule 19, Section 9(e).

Are there any other modes of protecting minority shareholders other than the tender offer?
Yes, you can protect your clients if they are minority shareholders by having them execute a shareholder’s agreement with the majority.
And then in that shareholder’s agreement- this now is a purely contractual obligation. In that agreement, you can put in a “tag-along”
clause or “drag-along” clause. It works like a tender offer.

“Tag-along” clause means that if a majority shareholder sells his shares, the minority shareholder can compel the buyer to also
purchase his shares. Minority tags along with the majority.

“Drag-along” clause if the majority shareholder sells his shares, the minority shareholder also has to sell his shares. The majority will
drag along the minority.

You can use them if your client is a minority shareholder in a PRIVATE company because remember that tender offer rule will only apply to
public companies.

February 28, 2015

WHEN ARE TENDER OFFERS REQUIRED

1. In case of an acquisition of a share of a public company (2 types of public companies- a.) those that are listed and b.) those with assets
of at least 50 million pesos with 200 or more stockholders holding 100 or more shares each) and they reach the threshold level under
the law and the IRR
A tender offer is basically a public announcement that you intend to purchase the shares of a certain corporation. So you will say
in your announcement that whoever wants to sell their shares, I am willing to buy at this price.

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2. The law only provides for the limit of 15% but the IRR has increased it to 35 % whether it is a single transaction or a creeping
transaction over a 12 month period and
3. The IRR has also added another threshold that is any amount of acquisition wherein the ownership of the equity securities of a public
corporation will now exceed 51% of the total outstanding equity securities. So even if you’re just buying 1 share if that 1 share will
bring your ownership over the 51% limit, then you are required to do a tender offer.

MECHANICS OF THE TENDER OFFER: (BASIC RULES ON TENDER OFFER)

1. If there are more offers than what you want to acquire then you have to acquire pro rata.
2. If during the course of the tender offer you decide to increase your price, then you have to apply the increase retroactively. Even to
those shares you’ve already accepted.
3. If your acquisition will bring your shares to over 51% of the total equity securities you have to acquire all the shares offered.

CEMCO Holdings vs National Life Insurance

Facts:

Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders — UCHC, a non-listed company, with shares
amounting to 60.51%, and petitioner Cemco with 17.03%. Majority of UCHC's stocks were owned by BCI with 21.31% and ACC with 29.69%.
Cemco, on the other hand, owned 9% of UCHC stocks.

Union Cement Corporation (UCC)

-publicly listed company

UCHC (60.51%)
CEMCO (17.03%)
-non listed company

BCI (21.31%) CEMCO (9%) ACC (29.69%)

CEMCO thereafter acquired the shares of BCI (21.31%) and ACC (29.69%) in UCHC.

So total shares of CEMCO in UCHC = 60%. UCHC owns 60% of UCC.


Thus, indirect ownership of CEMCO in UCC = 36%
Direct ownership of CEMCO in UCC = 17%
Total ownership of CEMCO in UCC = 53%
Issue:

Whether or not the rule on mandatory tender offer applies to the indirect acquisition of shares in a listed company, in this case, the
indirect acquisition by CEMCO of 36% of UCC, a publicly-listed company, through its purchase of the shares in UCHC, a non-listed company?

Ruling:

Yes. The SEC and the Court of Appeals accurately pointed out that the coverage of the mandatory tender offer rule covers not only
direct acquisition but also indirect acquisition or "any type of acquisition".

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The legislative intent of Section 19 of the Code is to regulate activities relating to acquisition of control of the listed company and for
the purpose of protecting the minority stockholders of a listed corporation. Whatever may be the method by which control of a public
company is obtained, either through the direct purchase of its stocks or through an indirect means, mandatory tender offer applies.

The legislative intent behind the tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of
control of the listed company through the purchase of shares. Control may [be] effected through a direct and indirect acquisition of stock, and
when this takes place, irrespective of the means, a tender offer must occur. The bottomline of the law is to give the shareholder of the listed
company the opportunity to decide whether or not to sell in connection with a transfer of control.

Discussion:

Why did National Life contend that CEMCO had to do a tender offer?
With the acquisition by CEMCO of UCHC shares of BCI and ACC (21.39 + 29.69 + 9 of CEMCO). So CEMCO now owns 60% of UCHC
shares.
How is that relevant, UCHC is not a publicly listed company? You will only be required to do tender offer if you reach the threshold. And
the threshold limits are 35% for single or creeping transaction and over 51 %. So what threshold applies in this case?
CEMCO owns 60% of UCHC. UCHC owns 60% of UCC. So this is indirect ownership of 36% by CEMCO of UCC. Not to mention with its
own shares of 17%, so 36% indirect + direct of 17%, CEMCO now owns 53 %.
NILC was saying that CEMCO had to do a tender offer because it acquired indirectly more than the threshold amount, 36 and 53%.
CEMCO was saying that there is nothing in the law that says indirect acquisition requires tender offer. And that it was only acquiring
the shares of a non-publicly listed company.
SC explained in this case the reason behind the tender offer requirement:
Tender offer is in place to protect minority shareholders against any scheme that dilutes the share value of their investments. It gives the
minority shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the
same price as those of the majority shareholders.
Based on the deliberations in Congress for the SRC, tender Offer is basically for the protection of the minority shareholders; to prevent
the situation where the minority shareholders will be squeezed out of the public corporation through the manipulations of the majority
shareholders. This Tender Offer Rule allows the minority shareholders to exit the publicly listed company at the same price that the
majority shareholders command. So SC affirmed SEC en Banc and CA that tender offer is required in this case.
When this comes out in the exam, which it will, what I want you to answer, don’t just say that because the supreme court said that
indirect acquisition are covered by the tender offer rule, you have to state also why the tender offer rule is triggered. And it is triggered
because the thresholds were reached.
So in the case, the indirect acquisition triggered the mandatory offer threshold. So the issue is, there is a trigger, and this trigger is
reached, but it is an indirect acquisition, so is this covered by the mandatory tender offer rule? So SC said yes, it is covered by the
mandatory tender offer rule.
TIP from Atty G.: So, be very careful when you’re answering the exam. Make sure you answer properly and that all the elements are
there. Answer questions properly, as if we never discussed the case. Give the complete answer. Don’t just assume. THIS WILL COME OUT
IN OUR FINALS. This has been a Bar Exam question, 2010, 2011, 2012, 2013. So for the past several years this has come out in the Bar. This is
a very interesting case. It’s not even about the validity of the tender offer but if the tender offer will apply in indirect acquisitions. So, SC
said YES, it will apply.
Open market acquisition is not covered by Tender Offer Rule Because open market is basically a public acquisition. A tender offer
situation is like a private agreement between two parties to buy and sell. So you’re likely to agree on the price. An open market
transaction on the other hand, the price is dictated by the market. The price is already there. Meaning if you buy shares in an Exchange,
it’s an Open Market transaction so anyone who is offering in the exchange will have the same price. So there’s really no need to be
protected there. So this talks about a private sale, a negotiated sale between two parties. So if you’re buying from the PSE there is no
need for a tender offer because you don’t do a private negotiation on the price. You just pay whatever is the listed price of the share. And
anyone offering to sell at that listed price can sell to you. That’s one of the exceptions under the tender offer rule.
Question: For the first exception, purchases from unissued capital stock provided it will not exceed 50%. How about if its 50 % not 51%?
That’s really a policy issue of the SEC. So they set their limit for unissued share, actually there is a debate on this exception whether
or not the shares are shares which were previously offered or this is totally unissued shares. Based on the rules, it is UNISSUED
shares. So the limitation is set by the SEC. I am not really sure why they set it at 50 not 51. But you see the difference there class,
when you acquire unissued shares, you’re acquiring directly from the corporation, the issuer itself.
So as a general rule, there is a pre-emptive right of current stockholders. So their shareholdings has a chance of being not diluted.
Whereas here, you are buying from the holder of a share, so there is a chance that you can get more than the previous shareholdings
of each stockholder. Because they don’t have a pre-emptive right.

TENDER OFFER ALSO USED FOR BACK DOOR LISTING

BACK DOOR LISTING → This is when you want to list your shares but you don’t want the expense and the process of doing it because as we
know, it takes a long time and very expensive to list your shares. What some companies usually do is they have this dormant corporations
which are already listed, meaning their shares are not actively traded for a long time, so what they do is acquire control or shareholdings of
these dormant corporations. So in effect by acquiring control of a listed corporation, you also gain a source of capital from that listed
corporation. Because that listed corporation can sell its shares in the Stocks Exchange. You do a back door listing.

So for back door listing, tender offers are also required.

PROHIBITED ACTIVITIES
FIRST PROHIBITED ACTIVITY

24.1 It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly:
a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading
market (hereafter referred to purposes of this Chapter as “Exchange”):

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Other Trading Markets
Over the counter markets- a type of market but not available in the Philippines.
Although this is covered by the SRC and allowed but we have not utilized it.
Familiar with NASDAC? Its an over the counter trading market in the US. Not in the big board, as in the PSe where you see the
numbers, the price
All done by brokers but they do it by phone or by email
So over the counter meaning its “kaliwaan,” they do it personally, not thru a big board exchange
Most countries have both type of markets, they have the Exchange and they have the Over the counter Market (OTC)
In the Philippines we only have the Exchange, we have not yet developed the Over the counter market
Over the counter markets are also regulated, they are also required to be SRO’s as well (self regulatory organization)
Take Note:
In this case, if it is really as sale of a security which is not listed in an Exchange or in an OTC market, these violations will NOT apply.
Prohibitions will only APPLY to securities which are traded in an Exchange or other trading markets
Trading in an Exchange
A stock can be sold and purchased several times in one day. They are doing SCRIPLESS Trading. This means that the stock certificates
are deposited with a custodian corporation which is the Philippine Depository Corporation. So all stocks are deposited with the PDC.
Everything is done electronically. The stock certificates remain as is, it will not move. But everything is done electronically so there is
no need to issue stock certificates. And that is what is done in an Exchange. So all done through electronic recording in the broker’s
books.
How? (referring to first prohibited activity)

1. Wash Sale
(i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof;

So when you effect transaction in such security which involves no change in the beneficial ownership thereof. So you create two
accounts, one account owns the shares, the other account buys it. But in reality only one person owns the account. So there’s no
change in the beneficial ownership of the shares.
This is done by some people to raise awareness about that particular share or to give an impression that the shares are actively
trading. If people will see that this share is active, they might see that this is a very good investment because it is being actively
traded, the tendency is that they will buy the shares, or they will sell their shares. So if you do this for the purpose of affecting the
market, then that is what you call a Wash Sale, and that is prohibited under this paragraph i.
2. Improper Matched Orders

(ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of
substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or
different parties;

This is what we call as improper matched orders (referring to ii above)


This is basically the same as a wash sale but there is a change in beneficial ownership. There is change in the beneficial ownership it’s
just that the buyer and the seller are colluding with each other. So you have a separate buyer and a separate seller but they are in
collusion with each other. They agreed that for example seller will sell 10 000 shares at 5 pesos per share at 10 am Friday, the buyer
will also put up an order for 1000 shares 5 pesos per share on Friday at 10 am. So they colluded for the purpose of creating an illusion
of active trading.
3. Similar act

(iii) By performing similar act where there is no change in beneficial ownership.

SECOND PROHIBITED ACTIVITY

b) To effect, alone or with others, a series of transactions in securities that:

(i) Raises their price to induce the purchase of a security, whether of the same or a different class of the same issuer or of a
controlling, controlled, or commonly controlled company by others;
(ii) Depresses their price to induce the sale of a security, whether of the same or a different class, of the same issuer or of a
controlling, controlled, or commonly controlled company by others; or
(iii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close, painting the
tape, squeezing the float, hype and dump, boiler room operations and such other similar devices.

1. Marking the Close


SRC Rule 24.1 (IRR)
Buying and selling securities at the close of the market in an effort to alter the closing price of the security. (marking the close)
If you notice in the business news, they flash the prices of the shares. What they publish are the closing prices of each shares. So if
you want to manipulate the published price of the securities, you do your transactions towards the end of the closing date in order
to affect the price of the shares.

2. Painting the Tape


Engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a
security. (Painting the tape)
So basically painting an illusion about the securities in order to give an impression that these securities are being actively traded and
to influence the price.

3. Hype and Dump

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Engaging in buying activity at increasingly higher prices and then selling securities in the market at higher prices (hype and dump)
or vice versa (i.e. selling activity at lower prices and then buying at such lower prices)
For example: I will buy now at Php 5 per share 100 shares, 30 minutes after I will buy at Php 5.50 per share, then another 3 minutes at
Php 6 per share. So you increase the price, you hype up the price of the shares. Such that people become interested because they
can see that the price of the shares are increasing. They will think that these shares are good investments so they will also tend to
buy more of the shares at the higher price. Then at Php 10 you lump it all. So this is what you call hype and dump. So you can just
imagine the gain there because you’ve been buying it at lower prices, so when you sell it at Php 10, you have a gain.
You can also do it in the reverse class, if you want to acquire shares at lower prices, you start selling your shares at successively low
prices, so Php 5, 4.50, 3, 2.50. People will be scared why are these shares being sold at successively low prices. Something must be
going on. So people will panic and they will sell their investments. And then you come in at 1 peso per share and get it and buy it all.
So hype and dump. It can be done to increase or decrease the price.

4. Squeezing the Float


Taking advantage of the shortage of the securities in the market by controlling the demand side and exploiting market congestion
during such shortages in a way as to create artificial prices
You know that no one is selling but you keep on making demand, demand, demand. So if there is demand and there is no supply, the
prices will go up.

5. Boiler Room Operations


So this is basically a fraudulent device used by unscrupulous people. What they will do is they will rent out an apartment, they will
get internet, they will get landline, they will use the internet, the phone to call people to induce then to buy securities which are
inexistent or not registered with the SEC.
Why do you call it Boiler Room Operations? Because their tactics are pressure tactics. They keep calling every two hours for example
until such person being called will be induced to buy. But take note that such shares being sold are not existing or are not registered
with the SEC.
OTHER MANIPULATIVE DEVICES

c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of
manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the
security for the purpose of inducing the purchase or sale of such security.

d) To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground 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.

e) To effect, either alone or others, 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 or by rules of the
Commission.

SHORT SALE, STOP LOSS ORDER

24.2. No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or
contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection with the purchase or sale of any
security except in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors

SHORT SALE - It is a sale of securities which you do not own.

Short sale is done when you anticipate that the prices of the securities will go down. You don’t own the share but you sell it already. Let’s
say at Php 120 per share. But you don’t own it yet. Sure enough a few days after, the price went down to Php 100 per share. That’s the
time you bought the share and delivered it to the buyer. So in effect you gained Php 20 in the transaction of the security which you did
not own when you sold it.
It’s not prohibited. The law says in accordance with such rules and regulations as the Commission may prescribe. The SRC allows it under
Rule 24.2-2. So there is a regulation there.
General Rule: Short sales are allowed.
Exception: When it is done by the directors, officers, and principal stockholders of the issuing company.

Par.6 (SRC Rule 24.2-2)

No director, officer, or principal stockholder of a corporation shall make a short sale in securities of the corporation in which he is a
director, officer, or principal stockholder.

STOP LOSS ORDER → also not prohibited

It is basically when you instruct your broker that if the price now is Php 200 per share, if it goes down to Php 180, you sell because I want
to stop my loss at Php 20.

FRAUDULENT TRANSACTIONS

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SEC. 26. Fraudulent Transactions. - It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any
securities to:

26.1. Employ any device, scheme, or artifice to defraud;

26.2. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in
order to make the statements made, in the light of the circumstances under which they were made, not misleading; or

26.3. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any
person.

INSIDER TRADING

3.8. “Insider” means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the
issuer; (c) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the
issuer or the security that is not generally available to the public; (d) 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 (e) a person who learns such information by a communication from any of the foregoing insiders.

So even if you’re not any of the four, you’re not an officer, not the issuer, not a government employee, you’re not an officer of an
exchange, but you have been tipped by an insider that there is a particular material information, so you become a tippee because you
were tipped by the insider. So in that case, you also become an insider. So you are covered by the prohibition under Section 27.

Material information that makes you an insider:


SRC Rule 3
Material Information means any fact or information that could result in a change in the market price or value of any of the issuer’s
securities, or would potentially affect the investment decision of an investor.

If there is a material non-public information, does this mean that the information has not been given out to the public?
For example: The president of a publicly listed corporation dies. It’s in the front page of the newspaper this morning, if I sell my
securities this afternoon, does that mean that I’m not an insider anymore because the information has become public already?
Public information does not mean that the information is not available to the public. There must be a sufficient time in order for the
public to digest that information and to know the consequences of that information with respect to the securities involved. So it’s
not that the information has not been made public, even if the information has been made public but no sufficient time has lapsed
for the public to digest the information because the tendency class is if you are not really interested or you are not a seasoned
investor, the tendency is that you would not know how certain news would affect the value of your securities. It takes time before
the meaning of that information will sink in. So even if the information has gone public, it is still considered non-public if no sufficient
time has lapsed yet.
So an insider who is in possession of a material non-public information is presumed to be in violation of Section 27 of the SRC if he
transacts while in possession of that material non-public information. The moment you transact, you’re presumed to be in violation of
Section 27.
SEC. 27. Insider’s Duty to Disclose When Trading. -
27.1. It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to
the issuer or the security that is not generally available to the public, unless: (a) The insider proves that the information was not gained
from such relationship; or (b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (i)
that he disclosed the information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in
possession of the information. A purchase or sale of a security of the issuer made by an insider defined in Subsection 3.8, or such
insider’s spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to
have been effected while in possession of material non-public information if transacted after such information came into existence but
prior to dissemination of such information to the public and the lapse of a reasonable time for the market to absorb such
information: Provided, however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was not
aware of the material non-public information at the time of the purchase or sale.

27.2. For purposes of this Section, information is “material non-public” if: (a) It has not been generally disclosed to the public and
would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the
market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a security.

27.3. It shall be unlawful for any insider to communicate material non-public information about the issuer or the security to any person
who, by virtue of the communication, becomes an insider as defined in Subsection 3.8, 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 while in possession of such
information.

27.4. a) It shall be unlawful where a tender offer has commenced or is about to commence for:
(i) Any person (other than the tender offeror) who is in possession of material non-public information relating to such tender offer,
to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to
believe that the information is non-public and has been acquired directly or indirectly from the tender offeror, those acting on its
behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer; and

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(ii) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, and any
insider of such issuer to communicate material non-public information relating to the tender offer to any other person where such
communication is likely to result in a violation of Subsection 27.4 (a)(i).
(b) For purposes of this subsection the term “securities of the issuer sought or to be sought by such tender offer” shall include any
securities convertible or exchangeable into such securities or any options or rights in any of the foregoing securities.

Possible defenses also under Sec. 27:


1. If the insider proves that the information was not gained from such relationship
So if he proves that he did not get the information because he was an insider, then that is a possible acquittal under Sec. 27.
2. Or he can prove that he disclosed the information to the other party or that he had reason to believe that the other party already
knew or was in possession of the information.
Take Note: The presumption is if there is a material non-public information and you are an insider as defined under the SRC, you are
presumed to have violated Sec. 27.
Question: It says there that if you are able to show that such information was not gained from such relationship, so even if you are in
possession of that material information as long as you will show that you acquired it some other way, that’s still perfectly valid?
Yes. It’s a defense. If you prove sufficiently that you did not get that information thru your insider connections then that is a defense
against Sec. 27.
Question: As regards the other one, even if you acquired material information by virtue of your being an insider, you can sell your shares
provided you disclose it to the other party?
Still valid. As long as you disclose the information to the other party. In other words, as long as he makes an informed decision. The
law considers both of you to be at par already because the other party was informed and was in possession of information the same
as you.
So It’s basically selling with material non-public information when the other party did not know.
Question: Is it not a violation, that you are not supposed to disclose?
What is prohibited is when you disclose it and that person uses that information to do an insider trading himself. But if you do
disclose it because you are going to transact with that person, then that is a defense against sec. 27.
Under Sec. 27, the person, the tipper is not the one who is liable. Remember, it is the tippee who is liable. The person who was tipped
by the insider and the person who transacts. So it’s basically the act of transacting with the knowledge of that material non-public
information that you violate Sec. 27.
So the insider, in case of violation of Sec. 27, the insider who gave the information is not really liable here. But the person he tipped
can be held liable. Because he was the one who transacted with the material non-public information. The consequence here class is
that it’s not fair to the other party if you transact with him and he does not possess all the necessary information. Any information
that can affect his willingness to buy or sell the securities or even to buy and sell at a particular price.
Example: President of the issuer company died, and you wanted to sell your shares. And the other party did not know that the
president died. Or even if he knew but he does not realize that in case of the death of the president there can be possible problems
with the issuer company because now the directors will have to choose another president and that it may be that the president was
so good that he was the one who made billions for that issuer company. So knowing that information and you knew the
consequences, you would be in doubt if you would buy the shares. Or even if you buy the shares, you will be in doubt if you are
willing to pay so much for them. But because you did not know, you bought them and you paid so much. So in favor of the insider
who kept the information. But if you knew and the insider gave you that information and you knew of the possible consequences
and you made an informed decision, then there is no violation of Sec.27. Take note however that the presumption is that you have
already violated Sec.27, so the exceptions are now a matter of defense.

TRANSACTIONS OF DIRECTORS, OFFICERS, AND PRINCIPAL STOCKHOLDERS

SEC. 23. Transactions of Directors, Officers and Principal Stockholders.

23.1. Every person who is directly or indirectly the beneficial owner of more than ten per centum (10%) of any class of any equity security
which satisfies the requirements of Subsection 17.2, or who is a director or an officer of the issuer of such security, shall file, at the time
either such requirement is first satisfied or within ten days after he becomes such a beneficial owner, director, or officer, a statement with
the Commission and, if such security is listed for trading on an Exchange, also with the Exchange, of the amount of all equity securities of
such issuer of which he is the beneficial owner, and within ten (10) days after the close of each calendar month thereafter, if there has
been a change in such ownership during such month, shall file with the Commission, and if such security is listed for trading on an
Exchange, shall also file with the Exchange, a statement indicating his ownership at the close of the calendar month and such changes in
his ownership as have occurred during such calendar month.

23.2. For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or
officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any
equity security of such issuer within any period of less than six (6) months, unless such security was acquired in good faith in connection
with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding the security
purchased or of not repurchasing the security sold for a period exceeding six (6) months. Suit to recover such profit may be instituted
before the Regional Trial Court by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the
issuer shall fail or refuse to bring such suit within sixty (60) days after request or shall fail diligently to prosecute the same thereafter, but
no such suit shall be brought more than two (2) years after the date such profit was realized. This subsection shall not be construed to
cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of
the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not
comprehended within the purpose of this subsection.

23.3. It shall be unlawful for any such beneficial owner, director, or officer, directly or indirectly, to sell any equity security of such issuer
if the person selling the security or his principal: (a) Does not own the security sold; or (b) If owning the security, does not deliver it
against such sale within twenty (20) days thereafter, or does not within five (5) days after such sale deposit it in the mails or other usual

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channels of transportation; but no person shall be deemed to have violated this subsection if he proves that notwithstanding the exercise
of good faith he was unable to make such delivery or deposit within such time, or that to do so would cause undue inconvenience or
expense.

23.4. The provisions of Subsection 23.2 shall not apply to any purchase and sale, or sale and purchase, and the provisions of Subsection
23.3 shall not apply to any sale, of an equity security not then or thereafter held by him in an investment account, by a dealer in the
ordinary course of his business and incident to the establishment or maintenance by him of a primary or secondary market, otherwise
than on an Exchange, for such security. The Commission may, by such rules and regulations as it deems necessary or appropriate in the
public interest, define and prescribe terms and conditions with respect to securities held in an investment account and transactions made
in the ordinary course of business and incident to the establishment or maintenance of a primary or secondary market.

Deals with the two instances where the stockholders are required to report to the SEC. The other one is Sec. 18 of the SRC when your
stockholdings will reach 5% of the total outstanding shares.
Sec. 23 is when your shareholdings are each more than 10% of any class of equity securities. In this case class when you are a holder of
more than 10% of the equity securities of an issuer company you are considered a principal stockholder. So all reference under sec. 23 to
the beneficial owner actually refers to the principal stockholder who owns more than 10 % of the outstanding equity securities of the
issuer company.
Obligations of the principal stockholder under Sec. 23
1. Required to report to the SEC his ownership
2. Required to report to the Exchange his ownership of more than 10% of the equity securities
Sec. 23.2 tells you that if the principal stockholder, director or officer acquires any profit in a purchase and a sale transaction or a
sale and purchase transaction of the equity securities of the issuer corporation within a period of less than 6 months, so it’s a
combination, two transactions within a 6-month period, you purchase and then you sell, all done within 6 months or you sell and
then you buy it back, all within 6 months this is what we call as a Short Swing Profit.
Short swing profits
They are valid, but if you do this, any profit that you gain will belong to the issuer company. If the issuer company will not file the
case to recover the profit, any stockholder of that issuer company can file the case on behalf of the issuer company.
The profit gained belongs to the company because the law tries to prevent a danger where the principal stockholder, director or
officer who are intimately familiar with the operations of the corporation will take advantage of their familiarity of the operations of
the company. So any short swing profit that they gain will belong to the issuer company.
For example: As a principal stockholder or a director of the issuer company you predict that in 3 months’ time the company’s income
will go up because of a certain export contract that the company is negotiating with. So it’s not yet there, but there is a possibility
that in 3 months’ time the company’s sales will go up because of that contract. So what you do is you buy the shares now, let’s say at
Php 100 per share. And then when the price went up, you sold the shares at Php 120. So you have a gain there of Php 20. If the
transaction, the buying and selling occurs within 6 months, that is considered as short swing profit, and as such because of Sec. 23.2,
such profit goes to the issuer company.
Or the other way around you predict that the shares will go down. So you sell your shares now while the prices are still high, and in 3
months’ time when the prices went down, you bought them back. So again, you made a gain of Php 20. So Php 120 when you sold
them and when you bought them back only Php 100. Again the profit there is called a short swing profit.
So its any series of buying and selling or selling and buying within a 6 month period that secures profit for the principal stockholder,
director or officer, the profit goes to the issuer corporation.
Question: A president of a corporation exercises stock option to buy shares of the company at a time that prices are high then such
president sells such shares within a 6 month period, is it covered by the provision on short swing profits?
I think the purchase and sale here is purchase and sale to the public, not with respect to the issuer company. Because there is a
sense of taking advantage of the public. Making use of your familiar or intimate knowledge about the issuer company and you take
advantage of the public with that information.
There has been no case interpreting that. That is my own interpretation. Because the issuer company does not really need to be
protected because in any case, your option allows you to buy at a certain price, it affects the price. Because when you have an
option if affects the price. I don’t think that will be covered by this prohibition. But if you transact, buy and sell with the public, that
is the time that the limitation will come in.
Short Sale
The transaction under Sec. 23.3 (a)?
GR: Short Sales are allowed
Exception: If the person transacting is the director, officer, or principal stockholder.

So it’s not just in the IRR but also under SRC itself.
Sales against the box
Referring to 23.3 (b) → You own the security but you don’t deliver it within 20 days thereafter. Here, you make paper profit. You only
deliver it when the stock prices have gone low.
This is what we call Sales against the Box. As opposed to short sale where you did not own it, here, you owned it but you did not
deliver it immediately. It’s prohibited.
Take note SRC also requires that brokers and dealers should be registered with the SEC.
Broker - transacts not for his own account
Dealer - transacts for his own account
Both have to be registered with SEC.
If you also want to put up an exchange, you have to register that also with the SEC. It would be a self-regulating organization.
Meaning it can put up its own rules and regulations, which the PSE does.
Except that as I told you the PSE is in violation of the ceiling for broker ownership holdings. Under the SRC if you check the
ownership of an exchange not more than 20% of the voting stock should be owned by brokers. But currently, PSE brokers own
around 80% of the shares of PSE. They are being penalized daily by the SEC. The regulatory organization is itself being penalized by
the SEC.

MARGIN TRADING

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MARGIN TRADING → is when you borrowed money to buy shares and you borrow the money from your broker. So the broker supplies the
funds used to buy the shares of his principal. Basically it is buying shares on credit from the broker.

It is allowed but there is a limitation as to how much the broker can lend to his principal.
The total borrowings of the principal is being limited
In margin trading it is to the advantage of the broker to lend money to the principal. Because every time he transacts, he earns
commission. So even if it’s not advantageous to the principal already, he keeps advising his principal to buy the shares because he earns
commissions. So what the law seeks to prohibit is the over borrowing of the principal. So there’s a limit to the allowable margin trading.
Q&A side discussion:

Prosecutor’s Office files the case for insider trading because it’s a criminal case.
Question: If for example you were taken advantage of through insider trading, can you ask to void the sale?
If there are grounds to void the contract like fraud, mistake, but not on the ground of insider trading because it is not a ground.
It’s really not a personal protection but a public protection. What you are trying to prevent here are people who are taking
advantage of their intimate knowledge of the operations of the company.
If you will not protect the public no one will want to invest in securities anymore. Public interest requires that this people be
criminally prosecuted. But of course, if there is criminal prosecution, you can ask for damages.

RA 7042 (AS AMENDED) FOREIGN INVESTMENTS ACT

March 5, 2015

FIA has not been present in the BAR exams until recently because of the Gamboa and Bayantel Cases
One of the most important laws a lawyer needs to know for future practice
Situation: where foreign client comes to you saying that they have been advised they needed 60-40 in their corporation and since they did
not know any other Filipino, they gave their 60% to their, driver, gardener, etc. You ask what’s their business?And the business under the
FIA does not even require a 60-40 ownership, and now they don’t know where their gardener or driver has gone taking with them their
60% ownership certificate. So you see it’s really a big problem because the perception of most lawyers that when foreigners invest in the
Philippines automatically that foreigner can only invest up to 40% and whatever corporation that foreigner will put up will have to be
owned by Filipinos up to 60%, that is the most common understanding of most lawyers. But that is not the case.

WHO ARE CONSIDERED PHILIPPINE NATIONALS

1. Filipino citizens (natural person)


2. partnerships or associations wholly owned by Filipino citizens
3. domestic corporation where at least 60% of the outstanding capital stock entitled to voteis owned by Filipino citizens
4. foreign corporations wholly owned by Filipino citizens
5. trustee of funds for pension or other employee retirement benefits where the trustee is a Phil. National and at least 60% of the fund
will accrue to the benefit of Phil. nationals
Section 3. Definitions.- As used in this Act:
a) The term "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or association wholly owned
by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least
sixty (60%) of the fund will accrue to the benefit of the Philippine nationals: Provided, That where a corporation and its non-
Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent
(60%) of the capital stocks outstanding and entitled to vote of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors of both corporations must be citizens of
the Philippines, in order that the corporations shall be considered a Philippine national.

The importance of knowing who are Philippine nationals


1. It is important to know the entities who are considered as Philippine nationals because there are activities under the Constitution,
under the law, under administrative regulations which are only reserved for Philippine nationals and we call these types of activities
as nationalized activities.
2. Any activity where there is a limitation in the allowable shareholding of a foreign company or foreign entity, or foreigner are what we
call as nationalized activities.

NATIONALIZED ACTIVITIES

These are found in the Foreign Investment Negative List. (FINL)


The latest is No. 9, issued last 2012. Reissued every 2-3 years.
Description of the contents of the FINL:
There are two kinds of lists in the FINL. List A and List B.
List A provides for nationalized activities provided for in the constitution and specific statutes or laws.
List B contains defense-related activities, those which will have implications on public health and morals
In sum: It is important to know who are Philippine nationals because there are certain activities where foreign participation is limited and
the complete list of these nationalized activities you can find it in the FINL. FINL is issued pursuant to the FIA.
As stated in Sec. 8 of the FIA, FINL contains 2 lists. List A which describes or outlines the activities limited under the constitution and
special laws. And you also have List B which are defense or moral or public policy related activities.

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Section 8. List of Investment Areas Reserved to Philippine Nationals (Foreign Investment Negative List).- The Foreign Investment
Negative List shall have three (2) component lists: A and B:
a) List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws.
b) List B shall contain the areas of activities and enterprises regulated pursuant to law:
1) Which are defense-related activities, requiring prior clearance and authorization from Department of National Defense (DND) to
engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons, military
ordnance, explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically authorized, with a
substantial export component, to a non-Philippine national by the Secretary of National Defense; or
2) Which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all forms of
gambling; nightclubs, bars, beerhouses, dance halls; sauna and steambath houses and massage clinics.

In general, the types of businesses which a foreigner can own 100% are those relating to any activity which is not in the FINL
Under the FIA there are generally 2 KINDS OF ENTERPRISES
1. EXPORT MARKET ENTERPRISE
Section 3. Definitions.- As used in this Act: (e) The term "export enterprise” shall mean an enterprise wherein a manufacturer,
processor or service (including tourism) enterprise exports sixty percent (60%) or more of its output, or wherein a trader
purchases products domestically and exports sixty percent (60%) or more of such purchases

Take note that this is any type of enterprise including service, tourism oriented enterprise which exports at least 60% of its
output.

2. DOMESTIC MARKET ENTERPRISE?


The term “Domestic Market Enterprise” shall mean an enterprise which produces goods for sale, or renders services to the
domestic market entirely or if exporting a portion of its output fails to consistency export at least sixty percent (60%) thereof

Services to the domestic market entirely or exports less than 60% of its output

GENERAL RULE: For both types of enterprises (Export Market Enterprise and Domestic Market Enterprise) foreign ownership is
allowed up to 100% unless the activity it wants to engage in is considered a nationalized activity
Section 7. Foreign Investments in Domestic Market Enterprises. - Non-Philippine nationals may own up to one hundred percent
(100%) of domestic market enterprises unless foreign ownership therein is prohibited or limited by the Constitution and existing
law or the Foreign Investment Negative List under Section 8 hereof. (As amended by Republic Act No. 8179)

EXCEPTION: If it is a Small and Medium sized Domestic Enterprise


a. Small or Medium sized Domestic Enterprise
If it has a paid in capital of less than two hundred thousand dollars ($200 000) → can only be owned by Philippine nationals
So foreigners can only undertake domestic market enterprise if it is not a small and medium domestic market enterprise
Only Large Scale Domestic Market Enterprise can be allowed 100% foreign ownership
b. Large scale domestic market enterprise?
If the paid in capital is two hundred thousand US dollars or more
EXCEPTION TO THE EXCEPTION:
Small and Medium Domestic Market Enterprise that:
1. Involve advanced technology as determined by the Department of Science and Technology
2. Employ at least 50 direct employees
(1 &2 above) With a paid in capital of one hundred thousand US dollars ($100 000) → shall be allowed to non-Philippine nationals

Sec.8. par.6. Small and medium-sized domestic market enterprise with paid in equity capital less than the equivalent of two
hundred thousand US dollars (US $ 200 000) are reserved to Philippine nationals: Provided, That if: (1) they involve advanced
technology as determined by the Department of Science and Technology; or (2) they employ at least fifty (50) direct employees,
then a minimum paid in capital of one hundred thousand US Dollars (US $ 100 000) shall be allowed to non-Philippine nationals.

Simpler version: if it’s an export market enterprise, as long as it is not under the FINL, 100 % foreign ownership is ok.
For domestic market enterprise you have to ask is it large or small or medium. How much is the paid in capital?
If the paid in capital is 200 000 US dollars or more, 100% foreign ownership is allowed.
If the paid in capital is less than 200 000 USD then it has to be a Philippine national.
Exception is if that small and medium domestic enterprise makes investment in advanced technology or has at least 50 direct
employees, then it can have a paid up capital of 100 000 USD and still be 100% foreign owned

Situation: Foreigner approaches you and asks if he can own a business here in the Philippines 100%, what will you say?
Atty: What business do you intend to go into?

Client: Manufacturing Business

Atty: Manufacturing of what? Because certain manufacturing areas are covered by nationalized activities.

Client: Manufacturing of buttons

Atty: What is your market? Is it export or domestic?

Client: Export

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Atty: Then yes, you are allowed to own 100% of your business.

Atty: If client says the market is domestic, the next question is how much do you intend to pay up?

Client: Php 50 000 Paid Up capital

Atty: If you are going into wholesale you can own up to 40 % because that is considered a domestic market enterprise. And a domestic
market enterprise requires Philippine nationals. And Philippine nationals only require 60% Filipino ownership. The 40 % can be owned by
foreigners.

Client: If I go into retail can I still own a portion of my business?

Atty: Nothing at all because Retail Trade Law provides 100% Filipino ownership unless your paid in capital is 2.5 Million USD. That is in the
FINL.

(FINL) No Foreign Equity No. 3 Retail Trade Enterprises with paid up capital of less than US $ 2 500 000.

Service Export-100% foreign ownership is allowed. If domestic market enterprise that is the time you ask how much is your paid up capital?
For Button manufacturing example for domestic market enterprise, then let’s say I put in US$ 500 000 but I want to engage in retail, still
the foreigner cannot own because for retail the paid in capital is US $ 2.5 Million. So those are the things you have to take note, what is
the activity, is it export or domestic, how much is the paid up capital?
Atty. G.: So class if I ask you in the finals to identify whether a certain activity can be foreign owned you have to be able to at least
identify.
If you have here X corporation, 60% of which is owned by Filipino citizens (FC), and the other 40 % is owned by foreign or alien
nationals (A). In this case class, obviously, X corporation is a Philippine national.

But what if X corporation is also a shareholder of A corporation? X corporation is a Philippine national. But how would you classify A
corporation? When would it be considered a Philippine national? Or a non-Philippine national?

The basis is still in the Foreign Investments Act specifically in the definition of what is a Philippine National because the 2nd
paragraph of such definition outlines what we call as corporate layering.

Corporate layering is when a corporation owns shares in another corporation. So you have layers of corporations. And how
much is the ownership of a Philippine national in another corporation for that other investee corporation to be considered
as a Philippine national? It should be at least 60% of the stocks outstanding and entitled to vote. So if in this case, X
corporation owns 60% or more of A corporation then the latter will be considered as a Philippine national. And A
corporation can still be owned by 40% aliens and will still be considered as a Philippine national.

What do you call that test embodied in the 2nd paragraph under the definition of a Philippine national? Section 3(i) of the FIA?

It is the Control test which says that if the corporation is at least 60% Filipino owned, then it is considered to be 100%
Philippine national. The alien ownership disappears. Such that the 60% ownership of X corporation in A corporation shall be
considered as the share of a 100% Philippine national.

We call it the control test because we only look at the controlling stockholders. Control- by definition of the FIA, is 60% of
the outstanding capital stock entitled to vote. So 60% of the outstanding capital stock of X corporation is owned by
Filipinos, and 40% by aliens. X corporation owns 60% of A corporation, and by definition to be considered a Philippine
national, 60% of the outstanding capital stock has to be held by a Philippine national also. So X corporation is considered a
Philippine national by virtue of having 60% of Filipino citizens. This Philippine nationality of X corporation is considered as
100% Philippine national without distinction that its capital is 40% owned by aliens. This total shareholding is actually
considered as holdings of a Filipino citizen or Philippine national. SO the alien shareholdings basically disappears, you only
consider the 60% outstanding capital entitled to vote.

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The important thing to remember here, that under the control test normally the test will only be required if you undergo
corporate layering. Because if there’s no layering, if these are owned by individuals, no problem at all. Only when there is
corporate layering- when one corporation owns another corporation.

How do you determine that nationality of the investee corporation?

You only take a look at the controlling shareholdings of the investor corporation. If the investor corporation is owned by
60% Filipino citizens, then this shareholding of the investor corporation is considered as shareholding of a Filipino citizen
such that the investee corporation if it is 60% owned by Filipino citizen, is also a Philippine national.

So the fact that there is alien ownership does not matter if the shareholding of the alien is not the controlling shareholding.
X corporation is 100% Filipino citizen.

But there is also this other test- the grandfather rule. What does this mean?

The grandfather rule is in order to determine the nationality of the investee corporation, you NOT ONLY take a look at the
nationality of the investor corporation, but also the shareholders of that investor corporation. So you ‘grandfathered’ it.
Three layers- you consider the layers.

Under this rule, you trace back the nationality of an investee corporation up to the nationality of the shareholders of the
investor corporation. So in this case, your investor corporation has 40% foreign shareholdings, now this 40% alien
shareholdings owns 60% of A corporation, so alien shareholders owns 40% of 60% = (0.4 x 0.6) = 24%. So basically and
indirectly, the alien shareholdings own 24% of A corporation. So if it’s 24% INDIRECT alien shareholding, PLUS 40% DIRECT
alien shareholdings, is A corporation a Philippine national? NO, because more than 40% of its shares are owned by aliens.

So you see class, under the CONTROL TEST, the layer disappears completely- you DON’T look at the shareholdings of the
investor, you only take a look at the investor if it is controlled by Filipinos then it is already considered as 100% Filipino
owned, so that a 60% is complete Filipino ownership.

But under the GRANDFATHER RULE, you TAKE A LOOK at the citizenship of the grandfather, which is the investor of the
investor corporation and you take that into account in determining the nationality.

The FIA uses the CONTROL TEST. So does this mean that the grandfather rule is NO longer applicable?
NO. As stated in the case of Narra Nickel Mining and Dev. Corp. vs Redmont

CASE: NARRA NICKEL MINING AND DEV. CORP. vs REDMONT


Facts:
Respondent Redmont took interest in mining and exploring areas in Palawan and after inquiring, it learned that areas were already
covered by Mineral Production Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro & McArther. Petitioner McArthur through
its predecessor-in-interest Sara Marie Mining, Inc (SMMI) applied and was issued MPSA & Exploration Permit (EP). These were later on
transferred to Madridejos Mining Corp (MMC) and assigned to McArthur. Petitioner Narra acquired its MPSA from Alpha Resources & Devt
Corp and PLMDC which previously filed an application. Subsequently, PLMDC assigned its rights and interests over the MPSA application in
favour of Narra. Another application of SMMI was filed and assigned such to Tesoro.
Thereafter, Redmont filed before POA 3 separate petitions for denial of applications alleging that at least 60% of the capital stock of
McArthur, Narra & Tesoro are owned by MBMI- a 100% Canadian corporation. Thus, they were disqualified from engaging in mining through
MPSAs which are reserved only for Filipinos. For the petitioners, they averred that they were qualified pursuant to RA 7942 (Philippine Mining
Act of 1995). Respondent Redmont invoked the grandfather rule while the petioners Narra, Tesoro & McArthur invoked the control test.

Ruling:

The "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the
ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of
the Philippines. When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40

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Filipino-equity ownership in the corporation, then it may apply the "grandfather rule. Petitioners McArthur, Tesoro and Narra are not Filipino
since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such conclusion is derived from grandfathering
petitioners’ corporate owners, namely: MMI, SMMI and PLMDC.

Discussion:

The owner of 60% of McArthur was MMC = 5,997 shares; paid up P 825, 000
The owner of 40% of McArthur was MBMI = 3,998 shares; paid up P1,878,000
The owner of 40% of MMC was MBMI = 3,331 shares ; paid up P2,803,000
The owner of 60% of MMC was Olympic =6,663 shares; zero paid up
Mc Arthur, the holder of MPSA which under the law needs to be a Philippine national or 60% of the capital stock must belong to
Philippine nationals also. So owner of 40% of McArthur (MBMI) has a greater paid-up of P1,878,000 compared to the 60% (MMC) with
paid up paid up of P825, 000.
In turn, MMC (Filipino) was owned by 60% Olympic Mines- another Filipino corporation with zero paid-up and 40% MBMI with paid up
of P2,803,000. So basically, the paid up of MMC came also from MBMI since Olympic did not contribute anything. And this is the
structure of McArthur which basically has the same structure as Narra & Tesoro.
Redmont want to nullify because the 3 corporations were disqualified and since it (Redmont) wants to get the MPSAs for itself.
The defense of Narra, Tesoro and McArthur was based on the Control Test which only looks at the shareholding – if their
shareholding is owned by 60% Philippine national. So the shareholding of Olympic mines is 60%, thus should consider MMC as 100%
Philippine national. Since MMC is a Philippine national, and it has 60% of McArthur then McArthur as well is a Philippine national. So
take a look at our shareholdings- all 60%, the corporate layering is 60% and that is allowed by FIA. Further, they said that with FIA
advocating the Control test, the grandfather rule is no longer applicable.
The rulings previous to this –there was no SC ruling on what test to use. It was only SEC and DOJ opinion which mostly states that
use the control test unless there is ‘doubt’ in the equity ownership of Filipinos in which case use the grandfather rule. Now, when can
there be “doubt”? The 3 corporations allege that the ‘doubt’ happens when the Filipino shareholding is less than 60% so in this case,
and according to the 3 corporations (Narra, Tesoro and McArthur), there is no doubt.
But the Supreme Court said that the interpretation given by the 3 is absurd. Because, the moment the Filipino’s shareholding goes
below 60% , automatically you are NOT allowed to engage in a nationalized activity. There is NO doubt at all in that situation because
you are disallowed. It’s black and white. So there can only be ‘doubt’ if you have 60% but there are facts and circumstances which
tend to show that even if Filipinos own 60%, it is still the foreigners controlling the legal and the beneficial ownership of the
Philippine corporation.
There’s a doubt when there is an intention to circumvent the 60-40 ownership.
In this case, one of the circumstances is that their common investor, the 100% Canadian corporation- MBMI funded them. The
Filipinos have no financial contribution. So this situation puts the 60-40 ownership in ‘doubt’.
According to the SC, the foreigners owned more than 60% -specifically 64% because we grandfathered. 40% DIRECT Foreign
ownership and 24% INDIRECT Foreign ownership.
There is also an old DOJ case (because as mentioned there is just this SEC & DOJ ruling), wherein the shares were divided to high par
and low par. Same rights, it is only that the foreigners have high par shares because they really have the financial resources to put up
a corporation. But the DOJ said that you violated the Anti-Dummy law since the greater financing from the foreigner shows that
there is doubt in the 60% shareholding of the Filipinos. So you see, even to the extent of using high par and low par. But again, this is
just a DOJ ruling. While the present case is more concrete- there’s total funding by the foreigners.

Now, we have been talking about capital. Capital owned by 60% Filipino citizens. But then what is the meaning of capital? This is then the
subject in the case of Gamboa vs Teves.

CASE: GAMBOA vs TEVES


Facts:

Facts according to Gamboa

The Philippine Legislature granted PLDT the franchise and right to engage in telecommunications business. The American company,
General Telephone Electronics Corporation (GTE) which is a major stockholder of PLDT, sold 26% of its common shares to Philippine
Telecommunications Investment Corporation (PTIC). Prime Holdings, Inc. (PHI) became the owner of 111,415 shares of stock of PTIC. In turn,
such 111,415 shares of PTIC held by PHI were sequestered by the PCGG which represent 46.125% of the outstanding capital stock of PTIC that
were later declared to be owned by the Republic of the Philippines. First Pacific which is a Bermuda-registered & HK-based firm acquired the
remaining 54% of PTIC. Subsequently, Interagency Privatization Council announced selling the 111,415 shares or 46.125% of PTIC through a public
bidding. Parallax won the bid. Thereafter, First Pacific as PTIC stockholder announced to match the bid of Parallax to buy the 111,415 shares.
However, it failed to do so. Through its subsidiary MPAH, First Pacific entered into a Conditional Sale & Purchase Agreement with the
government. With the completed sale, First Pacific common shareholdings in PLDT increased to 37%, thereby increasing the shares of
foreigners to about 81.47% and thus violating the constitutional limitation of foreign ownership of the capital of a public utility.

Facts according to Teves

PTIC held 13.847% of PLDT’s outstanding common shares. PHI on the other hand, became the owner of 111,415 or 46.125% of the
outstanding capital stock of PTIC. PTIC shares held by PHI were sequestered by the PCGG. The government decided to sell the 111,415 PTIC
shares and Parallax emerged as the highest bidder. First Pacific announced its intention to match the bid. The HR Committee on Good
Government conducted a public hearing of the impending sale and concluded that First Pacific’s intended acquisition of the government’s
111,415 PTIC shares resulting in First Pacific’s 100% ownership of PTIC will not violate the constitutional limit since PTIC holds only 13.847% of the
total outstanding common shares of PLDT.

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Petitioner filed the instant petition for prohibition, injunction, declaratory relief, and declaration of nullity of sale of 111,415 shares and
averred that the sale would result in an increase in First Pacific’s common shareholdings in PLDT and this, combined with Japanese NTT
DoCoMo’s common shareholdings in PLDT would result to 51.56% foreign shareholdings which is over the 40% constitutional limit.

Ruling:

We PARTLY GRANT the petition and rule that the term “capital” in Section 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the present case ONLY to common shares, and NOT to the total
outstanding capital stock (common and non-voting preferred shares). Respondent Chairperson of the SEC is directed to apply this definition
of the term “capital” in determining the extent of allowable foreign ownership in respondent PLDT Company, and if there is a violation of
Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law.

Discussion:

So PTIC shares which were sequestered by the Philippine Government (46% of its shares) and PTIC owned 26% of PLDT.PTIC was
already owned up to 54% by First Pacific. So when Parallax won, there was a swiss challenge- the right to match by First Pacific. So
with the right to match, they were able to buy the 46%. Now, PTIC became 100% foreign owned which means that the 26%
shareholdings of PTIC in PLDT is now considered as 100% foreign owned. This 26% will now go to the foreign side.
When we say capital, we are talking about total outstanding capital stocks without regard to the kind of stock.
Take note in this case that the SC did not really rule on the validity of the sale, it did not even rule on whether the structure or the
stockholding of PLDT was in violation of the law. It just made a discussion on what capital is and remanded the case back to the SEC.
The contention of the Government side- the PLDT side is that we take a look at only the TOTAL outstanding to determine capital
because of you take a look at it- preferred is 77.85% Filipino. So definitely more than 60% of the total outstanding is Filipino. And less
than 40% of the total is considered as foreign. By taking a look at TOTAL Outstanding, we have a compliance with the Philippine
National requirement.
On the other hand, the contention of Gamboa and the other petitioners is that capital should be based NOT on the TOTAL
outstanding but look at the shares entitled to vote. And the SC interpreted that as the shares entitled to vote in the election of
directors. In the PLDT case, the preferred shares were non-voting shares so they could not vote in the election of directors.
So basically, the SC said that to be considered as Philippine national, Filipinos must control 60% - not just legal ownership but
beneficial ownership. And such beneficial ownership includes the capacity or power to control the operations of the corporation
which you can only do when you are allowed to vote in the election of directors.
So for purposes of determining compliance with capital requirement under the constitution, the 60% of the shares entitled to vote
in the election of the directors must be held by Filipino citizens.
The dispositive portion, under the wherefore (see ruling above), do you agree with this ruling? (Nathan: NO. Because the law does
not distinguish. So technically speaking, there’s no violation)
Take note class that in the FIA, it says ‘total outstanding capital stock entitled to vote’. That was the interpretation of Congress of the
capital requirement under the constitution. So basically, the ruling in this case is in line with FIA.
However, as stated by Mr Garcia, not everyone agreed. PLDT, the Government officials, the Secretary, the President of the PSE
including their lawyers, ACCRA (lawyers for PLDT) defended that it should be based on the total outstanding capital because, as Mr
Garcia said, the constitution only said outstanding capital without distinction. So they filed a motion for reconsideration.
A year later, the decision came out. So now, in the motion for reconsideration, not only did the SC say “No, you’re wrong. It’s still
NOT total outstanding capital stock, It IS BASED ON CAPITAL OUTSTANDING AND ENTITLED TO VOTE BUT THIS TIME, THEY TOOK
OUT THE TERM ‘IN THE ELECTION OF DIRECTORS’.”
NOW, the SC said that “Oh, we realized that preferred stocks can never be completely not entitled to vote because under the
corporation code, there are instances where even non-voting shares are required to vote- amendment of articles, sale of all or
substantially all the assets of the corporation, dissolution, increase or decrease of authorized capital stock, merger or consolidation,
investment in other activities.”
The more substantial changes in the corporation, even the nonvoting shares are required to vote.
So under Philippine law, no share of stock is COMPLETELY a nonvoting stock. You cannot deprive any stock completely with the right
to vote. You can only deprive a stock of its right to vote in the election of directors. But in other matters, even non-voting stocks are
required to vote.
So this time, the SC said it has to be 60-40 NOT on TOTAL Outstanding but based on EACH class of shares- voting or non-voting.
If the corporation has a common stock of Class A, Class B, and Class C, it has to be 60-40 in EACH CLASS. In other words, Class A must
be 60-40, Class B must be 60-40, Class C must be 60-40, etc. Because TOTAL Outsanding can be easily manipulated. So this is a
stricter requirement.
Do you know how PLDT got so much preferred stock? Because under the Marcos rule, there was a time that PLDT was in trouble so
they needed foreign investments but they realized that they cannot have the foreign investments because it is a public utility and so
Marcos devised a way so that Filipino ownership was increased and the way was everytime you subscribe to a PLDT line, you got 1
share of preferred stock. Also, PLDT was one of those listed in the New York Stock Exchange.
As I mentioned, this case law (Gamboa) came out in the 2012 & 2013 Bar but did not came out last 2014.
But this is not settled yet, SEC came out with its own rules on how to determine Philippine nationality, the SEC share was an ACCRA
partner, so ACCRA was lawyering for PLDT so it issued a memorandum circular which states that to be considered a Philippine
national, 60 of the voting and the total outstanding shares must be owned by Filipino citizens and now, the ACCRA partner is being
sued since the heirs of Gamboa contended that this does not follow the 2 nd Gamboa ruling so there’s this pending case right now. So
everything is held in abeyance. Next year, maybe you will have a new case. PLDT tried to maneuver it to the SEC but still failed

If you ever remember any SCL case, please REMEMBER these 2 cases because these are the landmark cases and such landmark cases
normally come out in the bar
By the way, you learned in you Corporation code that if a foreign corporation will do business in the Philippines it needs to be licensed.
But the corporation code does not define what ‘doing business’ is. The definition of doing business is in the FIA
Section 3. Definitions. - As used in this Act:
d) The phase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or
branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a
period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any

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domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings
or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided,
however, That the phrase "doing business: shall not be deemed to include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account;
How do you license a foreign corporation that wants to do business in the Philippines? What license?
A foreign corporation has 3 modes of doing business in the Philippines
1. You can incorporate a Subsidiary
So you do a domestic corporation. You register your own corporation here. If your activity is NOT in the FINL, you can
be 100% foreign-owned subject to the requirement that there must be at least 5 natural persons who will act as your
incorporators and directors. But they don’t need to own 60% of your total shares, they only need to own 1 share each
(because that’s how other people would interpret wrongly that the 5 would divide the 60% but in truth, they only need 1
each).
2. You can do a Branch office
If you want to earn income and you want to get license to do business here, and you don’t want to put up another
corporation, put up a branch office. So get a license to do business in the Philippines by applying a license to put up a
branch office so this office is a foreign corporation doing business in the Philippines since the branch is considered part of
the principal which is foreign.
3. Representative office
The problem with this is you are NOT allowed to earn income in the Philippines. So if your activity does NOT involve
earning income in the Philippines, merely logistics or you’re doing studies for your for principal, you can do a representative
office. You will be considered doing business in the Philippines

LETTERS OF CREDIT

March 12, 2015

Purpose of a Letter of Credit

Imagine a situation where you have buyer and a seller who are in the same place, there is no problem there. The buyer will only be
required to pay upon the delivery of the goods and the seller is also only required to deliver upon the payment of the goods. And since
they are in the same place, they can do that simultaneously.
If the buyer and the seller are not within the same country. The buyer is in Cebu and the seller is in China. What if the goods are not the
kind that was agreed by the parties or the buyer refuses to pay? Will they have recourse against each other? It would be difficult because
they are not under the same jurisdiction. So there will be an issue on enforcing the agreement. Ordinarily, it is recognized that the interest
of the buyer and the seller are so conflicting, such that in an ordinary situation, the seller does not want to deliver the goods unless he
gets the money at the same time the buyer does not want to pay until he actually sees the goods or the goods are there. How is this
situation addressed? That is why we have here a LETTER OF CREDIT.
In a Letter of Credit (LC), what we have here is that the buyer will go to a bank, ask the bank to issue a letter of credit in favor of a seller to
the effect that if the seller can present the documents agreed upon in the LC, the bank will honor the draft drawn by the seller. In effect,
the bank will pay the draft.
So, the seller ships the goods upon knowing that there is a LC in his favor. It will collect the documents agreed upon the LC, present
those documents to the issuing bank and also present the draft.
So upon doing that, the issuing bank will now pay the seller. Then, the issuing bank turns around, tells the buyer, “Hey, buyer! I have
your shipping documents, warehouse documents, bill of lading in other words the documents of title, with me. (I think this pertains to
documents of title ->) Allow me whoever is holding that document, the right to possess or to own the goods covered by those
documents of title.”
Now, the issuing bank will present the documents of title to the buyer and upon seeing that the documents are in order, the buyer
will now reimburse the issuing bank. The buyer will receive the goods because the bank will now release the documents of title to
the buyer and so the buyer can now collect the goods from the shipper.
Upon payment by the buyer with the issuing bank, that terminates the LC transaction.
There is no direct payment by the buyer to the seller. Everything is done through an issuing bank. So the bank is the intermediary, the
bridge between the conflicting interests of the seller and the buyer.
Ordinarily also, the buyer has no money to buy the goods. What will happen is that, the issuing bank will just require the buyer to sign a
trust receipt, basically saying that the bank as the trustor is releasing the goods to the buyer as the entrustee in trust for the bank. In
order to the following things:
Normally, to sell the goods and upon sale, to remit to the bank the proceeds covered by the trust receipts.
Letters of Credit and Trust Receipts Transactions are inter-connected.

3 CONTRACTS IN AN LC TRANSACTION

1. Contract of Sale between the buyer and the seller.


2. Contract between the issuing bank and the buyer
It is an undertaking by the buyer to reimburse the issuing bank for the amount paid by it to the seller.

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3. Letter of Credit Proper
It is the contract between the seller and the issuing bank. It is an undertaking by the issuing bank to pay the seller upon
presentation of all the required documents and presentation of the draft.

3RD CONTRACT Seller 1ST CONTRACT

Documents agreed
Draft
Bank

2ND CONTRACT Buyer (Receives the goods)

The most fundamental principle in a LC transaction is that each of these contracts is independent of each other; such that a defect in one
contract will not affect the others. A defect in one contract cannot be raised as a ground not to comply with the other terms or other contracts
in a LC transaction.

PRUDENTIAL BANK vs IAC:

Facts:

This involves a contract of sale between a domestic corporation, Phil. Rayon Mills (buyer) and foreign corp based in Japan, Nissho
Co. (seller). Rayon Mills purchased textile machineries and executed a LC through Prudential Bank and the latter paid Nissho because
the machines arrived.
The buyer refused to pay the bank according to Rayon Mills the drafts should have been presented for payment but the bank did not
present it for payment.
Issue No. 1: Whether or not acceptance is necessary or indispensable to make the buyer liable to pay the bank.

A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor
drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the
bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the
bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon.
Atty’s discussion: The issuing bank substitutes its own promise to pay with the promise to pay of the seller. The issuing bank
undertakes the obligation of the buyer to the seller.
Not necessary. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable
Instruments Law (NIL).
SECTION 143.When presentment for acceptance must be made. — Presentment for acceptance must be made:
(a)Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the
maturity of the instrument; or
(b)Where the bill expressly stipulates that it shall be presented for acceptance; or
(c)Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the bill liable."
The issuing bank is considered to be the drawee because it is the one who undertook to pay. Because a LC is an undertaking by the
issuing bank to pay on behalf of the buyer. It substitutes its promise to pay with the promise to pay of the buyer, so now the issuing
bank actually becomes a drawee of the draft.
A draft is a bill of exchange. In a bill of exchange, the drawer would be the seller; it drew on the issuing bank because it is the issuing
bank that has the obligation to pay and under the NIL, SC said that you will only present the draft or bill of exchange to the drawee.
In this case, the drawee is the bank. The buyer is not a party to the instrument because the indorsement was made by the bank to
the seller. That’s why presentment was not necessary.
Atty’s discussion: The buyer is not a party to the draft because the draft was issued through to a LC and in a LC it is the contract
between the issuing bank and the seller. So the draft is the undertaking by the issuing bank to pay the seller such that it stops with
the issuing bank as the drawee and now the obligation of the buyer to pay the issuing bank is a primary obligation which is separate
from the transaction between the issuing bank and the seller. There is no more need to present. The buyer whether or not
presentment was made is required to reimburse the issuing bank for whatever that is has paid to the seller.
Atty’s discussion: The important thing in this case is that the issuing bank in a LC would substitute its promise to pay such that when
the seller issues a bill of exchange or a draft, it is the issuing bank that is the drawee in a bill of exchange.
Provisions on LC are found in Code of Commerce which has no substance, because of this, the SC has recognized that the LC transactions are
also governed by Uniform Custom and Practice (UCP).

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PARTIES TO AN LC TRANSACTION

BANK OF AMERICA vs. CA, Inter-Resin Industrial Corp

Facts:

Bank of America received an irrevocable letter of credit allegedly issued by Bank of Ayudhya for the account of General Chemicals of
Thailand for the purchase of plastic ropes and agricultural files with the petitioner as advising bank and Inter-Resin as the beneficiary.
Buyer – Gen Chem; Seller – Inter Resin; Issuing Bank – Bank of Ayudhya;
After being informed of the LC, Inter Resin sent Atty. Tanay to the Bank of America for confirmation of the LC but the person in
charge of the LC of Bank of America said that there was no need for confirmation because the LC would not have been transmitted if
it were not genuine. After that, Inter Resin delivered the goods to Gen Chem and then presented the proof of deliveries, bill of lading
to the Bank of America for partial payment because of partial compliance.
For the first partial compliance, the Bank of America being satisfied with the documents presented by Inter Resin, paid Inter Resin.
Bank of America paid the first draft to Inter Resin.
After receiving the payment, Bank of America asked for reimbursement from Bank of Ayudhya. In the meantime, Inter Resin wanted
to fulfill or to complete the delivery of the goods, however Bank of America received information that Bank of Ayudhya the LCs are
fraudulent. Because actually, Bank of Ayudhya did not send a mail about the LC to Bank of America. The LC was a forgery.
Bank of America then issued a stop payment order to the second draft filed by Inter Resin and sued Inter Resin for the
reimbursement of the amount paid on the first draft.
Sensing that there was a fraud, Bank of America sought help from NBA and with the Help of Ph Embassy at Bangkok, and then
discovered that the vans exported by Inter Resin did not contain the goods agreed to be delivered by the Inter Resin but instead it
contained waste materials. Bank of America wanted reimbursement for payments it made to Inter Resin.
On the second draft, there is a claim that Bank of America should pay because they were made to know that Bank of America
confirmed the LC, meaning Bank of America is a confirming bank therefore making the Bank liable also to the second draft.
Gen Chem
(Buyer)

Correspondent Bank: Issuing Bank: Inter Resin (Seller)


Bank of America Bank Ayudyha

Bank of America

Same Jurisdiction with Inter Resin

Ruling:

There would at least be three (3) INDESPENSABLE parties:


(a) The buyer, 12 who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents
of title;
(b) The bank issuing the letter of credit, 13 which undertakes to pay the seller upon receipt of the draft and proper documents of
titles and to surrender the documents to the buyer upon reimbursement; and,
(c) The seller, 14 who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and
draft to the issuing bank to recover payment.
Atty’s Discussion: Ordinarily in a LC, there are three indispensable parties. (abovementioned) But there are situations as in this case,
where the issuing bank will be in the same jurisdiction as the buyer. So, how can it honor the draft presented by the seller? What
normally happens there is that the bank, will take the services of correspondent banks. You have the issuing bank and then issuing
bank will have a correspondent bank. Such as the Bank of America, it is a bank which is located in the same jurisdiction as the seller.
The obligations of a corresponding bank will depend on the role that it undertakes to play in the transaction.
The number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus, the services
of an advising (notifying) bank may be utilized to convey to the seller the existence of the credit; or, of a confirming bank which will
lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying bank which undertakes to encash the

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drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach
another bank, termed the negotiating bank, to have the draft discounted.
Types of correspondent banks or Four Roles of Correspondent Banks (They are not indispensable parties to the LC transaction
however their obligations depend on the role that it undertakes to play.):
1. Confirming Bank – to confirm the LC; incurs a liability because it confirms a LC; it basically undertakes to pay on the LC in place
of the issuing bank. Confirming bank is normally required when the issuing bank is a lesser known bank. When the seller does
not trust the issuing bank so much, it will normally require a confirming bank that will undertake the obligation of the issuing
bank.
2. Advising Bank – relay the information that there is a LC opened by an issuing bank. The obligation is just to inform so there is no
liability. It just notifies the seller as to the availability of the LC.
3. Negotiating Bank – is an independent bank, from the LC. The negotiating bank comes into play when the seller will negotiate
the bill of exchange or the draft; will have the draft discounted and the negotiating bank accepts it. This bank is a bank to which
the draft has been negotiated to. Prior to the discounting, there is no relationship between the negotiating bank and the seller.
Meaning you cannot compel the bank to become a negotiating bank. But the bank that it consents to accept your draft then it
becomes a negotiating bank.
4. Paying Bank – It has the obligation from the issuing bank to make payments to the seller.
Difference between the Confirming Bank and the Paying Bank:

The paying bank is the bank that has been requested by the issuing bank to make the payment to the seller. The confirming bank will
acknowledge the liability of its own volition. The liability of confirming bank is voluntary on its part while the paying bank is required
by the issuing bank to make the payment.
Procedure of a LC Transaction (Atty, “Read these two paragraphs from the Bank of America case.” Here in an enumerated form):

1. A letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods
to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before paying.
2. To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue
of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of credit.
3. The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the buyer.
4. Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or
documents of title.
5. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank.
6. The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with
what the letter of credit requires.
7. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses
the issuing bank and acquires the documents entitling him to the goods.
8. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the
said documents and control over the goods only after reimbursing the bank.
Back to Bank of America Case discussed by Atty:

The SC said that the role of Bank of America is a negotiating bank. As a negotiating bank, their relationships are governed by the
Negotiable Instruments Law. The drawer is the Inter Resin. The drawee bank is the issuing bank. The Bank of America is the endorser
or the holder of that negotiable instrument. The right of the holder is the right to paid from the drawee. The Bank of America’s right
to get the payment from the drawee from issuing bank, Bank of Ayudhya but the latter did not pay because the LC was a forgery.
The drawee refused payment. As an ordinary endorsee or a holder of a negotiable instrument, your recourse if the drawee refuses to
pay is to go back to the person who negotiated the draft to you and in this case, the one who negotiated the draft is the drawer,
Inter Resin.
For the draft that was accepted and paid by the Bank of America, the Bank can still get reimbursement from Inter Resin because the
role of Bank of America in this case is merely a negotiating bank. It purchased the draft. As the purchaser of the draft, if the drawee
refuses to pay, it has a right of recourse against the person who sold the draft to it. In which case, the person who sold the draft was
the drawer, Inter Resin. Inter Resin can be made to reimburse Bank of America for the first draft.
For the second draft, Inter Resin is claiming, “Hey you, Bank of America pay me now because I presented all the correct documents!”
Bank of America is not liable to the second draft because the Bank of America is considered as an advising bank. In fact when Inter
Resin expressly asked the bank to confirm, it refused; it sent a letter refusing to confirm the LC. The SC said clearly, it did not want to
act as a confirming bank. Rather, it is only a notifying or advising bank. A notifying or advising bank does not an obligation to the
seller. Inter Resin cannot proceed against Bank of America in relation to the second draft.

SUMMARY:
In the first draft, Bank of America paid. It did not know yet of the fraudulent transaction. When it went back to Bank of Ayudhya for
payment, the latter refused to pay because the LC was a forged. After that, when Inter Resin presented the second draft, Bank of
America refused to pay because of the knowledge of the forge LCs. So there are two drafts in question in this case. The first draft,
Bank of America wanted reimbursement. Inter Resin that it is not liable because it presented the correct documents. Second draft,
Inter Resin wanted to be paid but Inter Resin refused claiming that it is not liable.
To determine whether the parties had obligations or rights with each other on the said drafts, you have to know the role of Bank of
America in each of these drafts.
For the first draft which is paid, the SC said, the draft was only negotiated to the Bank of America, it only acted as a

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negotiating bank. Therefore it had a right as an endorsee of a negotiable instrument which it went to the drawee which did
not honor the LC then it had to go back to the person who sold the draft, in which in this case, is the Inter Resin. It had a
right of recourse. Inter Resin here can be made to reimburse.
On the second draft, the contention is that the Bank of America already confirmed the LC because its officers confirmed
Inter Resin that those LCs were genuine. The SC chose to believe contention of the Bank of America where it expressly said
that it will not confirm and as result, the Bank of America cannot be a confirming bank. It is only an advising or notifying
bank and the role of an advising bank is merely to let the seller know that there is this LC. It does not mean that the
advising bank undertakes to pay the LC. Its obligation is just to inform. The Bank of America cannot be held liable on the
second draft because when it informed Inter Resin about the existence of the draft, there was no corresponding
undertaking on its part to pay the LC.

BPI vs DE RENY FABRIC INDUSTRIES

Facts:

The issuing bank is BPI and the seller, JB Distributing Company and the buyer is the De Reny Fabric. On four (4) different occasions in 1961,
the De Reny Fabric Industries, Inc., a Philippine corporation through its co-defendants-appellants, Aurora Carcereny, alias Aurora C.
Gonzales, and Aurora T. Tuyo, president and secretary, respectively of the corporation, applied to the Bank for four (4) irrevocable
commercial letters of credit to cover the purchase by the corporation of goods described in the covering L/C applications as "dyestuffs of
various colors" from its American supplier, the J.B. Distributing Company.
The Bank issued irrevocable commercial letters of credit addressed to its correspondent banks in the United States, with uniform
instructions for them to notify the beneficiary thereof, the J.B. Distributing Company, that they have been authorized to negotiate the
latter's sight drafts up to the amounts mentioned therein, respectively, if accompanied, upon presentation, by a full set of negotiable
clean "on board" ocean bills of lading, covering the merchandise appearing in the L/Cs, that is, dyestuffs of various colors. Consequently,
the J.B. Distributing Company drew upon, presented to and negotiated with these banks, its sight drafts covering the amounts of the
merchandise ostensibly being exported by it, together with clean bills of lading, and collected the full value of the drafts up to the
amounts appearing in the L/Cs as above indicated. These correspondent banks then debited the account of the Bank of the Philippine
Islands with them up to the full value of the drafts presented by the J.B. Distributing Company, plus commission thereon, and, thereafter,
endorsed and forwarded all documents to the Bank of the Philippine Islands.
De Reny Fabric Industries, Inc. made partial payments to the Bank amounting, in the aggregate, to P90, 000. Further payments were,
however, subsequently discontinued by the corporation when it became established, as a result of a chemical test conducted by the
National Science Development Board, that the goods that arrived in Manila were colored chalks instead of dyestuffs.
It is the submission of De Reny Fabric that it was the duty of the foreign correspondent banks of the Bank of the Philippine Islands to take
the necessary precaution to insure that the goods shipped under the covering L/Cs conformed with the item appearing therein, and,
that the foregoing banks having failed to perform this duty, no claim for recoupment against them, arising from the losses incurred for
the non-delivery or defective delivery of the articles ordered, could accrue. (The goods sent must be in accordance with the agreed goods
to be delivered in the contract of sale and the items listed in the shipping documents.)
Ruling:

Banks, in providing financing in international business transactions such as those entered into by the appellants, do not deal with the
property to be exported or shipped to the importer, but deal only with documents. The Bank introduced in evidence a provision
contained in the "Uniform Customs and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of International
Chamber of Commerce," to which the Philippines is a signatory nation. Article 10 thereof provides: "In documentary credit operations, all
parties concerned deal in documents and not in goods.—Payment, negotiation or acceptance against documents in accordance with the
terms and conditions of a credit by a Bank authorized to do so binds the party giving the authorization to take up the documents and
reimburse the Bank making the payment, negotiation or acceptance."
The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify whether what
has been described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship, having been
positively proven as a fact, the appellants are bound by this established usage. They were, after all, the ones who tapped the facilities
afforded by the Bank in order to engage in international business.
Atty’s discussion: This rule, “dealing with documents only” is what we call STRICT COMPLIANCE RULE. If a LC will list down the documents
required in order for the seller get paid. The issuing bank will have to strictly comply with all of those documents required because the
issuing bank and the seller deal only with documents. They will not concern themselves with the goods. This rule is an off shoot of the
INDEPENDENCE PRINCIPLE. Under the independence principle, the issuing bank is actually not concerned with the contract of sale
between the buyer and the seller. It is independent of contract of sale between the buyer and the seller. So that if there is any breach in
that contract of sale, the obligation of the bank is not affected as long as the seller can present can present the correct documents, the
issuing bank will have to pay. And if the issuing bank paid in accordance with the instructions of the buyer, then the buyer will have to
reimburse the issuing bank regardless of any defect or violation or breach committed in the actual contract sale between the buyer and
the seller.
The SC said that the bank has no obligation to inspect the goods because the banks only deal with documents. As long as the
documents are in order, the bank has to pay.
As for the allegation of the buyer that there was a breach, it does not matter because under the independence principle, the bank is not
affected by the breach. The buyer has to reimburse the bank for the payments it made to the seller.

FEATI BANK vs. CA

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Facts:

Villaluz agreed to sell to Christiansen lauan logs. Security Pacific National Bank of Los Angeles issued irrevocable letter of credit in
favor of Villaluz for the lauan logs. The LC was mailed to Feati Bank with the instruction that it “forward the enclosed letter of credit to the
beneficiary”. The logs were then shipped for Christiansento Korea however, the latter refused to issue the certification as required by the LC.
Because of the absence of the certification, Feati Bank refused to advance the payment. While the case was pending, Christiansen left the
Philippines without informing the Court. Thus, VIllaluz filed an amended complaint to make Feati Bank solidarily liable with Christiansen.

Issue 1: Was it justified in refusing the payment?

The bank was justified in not paying Villaluz. The bank may only negotiate, accept or pay, if the documents tendered to it are on their
face in accordance with the terms and conditions of the documentary credit. And since a correspondent bank, like the petitioner, principally
deals only with documents, the absence of any document required in the documentary credit justifies the refusal by the correspondent bank
to negotiate, accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness
of the documents tendered by the beneficiary.

Discussion:

Under the rule of STRICT COMPLIANCE, Feati Bank has to strictly comply with the documents required under the LC. In fact, the essence
of an LC is the seller gets paid upon presentation of documents stated in the LC together with presentation of the draft
In this case, the buyer refused to issue the certification that he approved the goods. Because of this missing certification, the bank
refused to pay. SC said it was justified because we follow the rule of strict compliance. It has to make sure it strictly conforms with the
terms of the LC in respect to the documents to be presented.
Issue 2: Tender of documents, what did the SC say about the documents to be presented?

Ruling:

It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the
terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A
correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its
own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the
beneficiary. Thus the rule of strict compliance.

Since a bank deals only with documents, it is not in a position to determine whether or not the documents required by the letter of
credit are material or superfluous. The mere fact that the document was specified therein readily means that the document is of vital
importance to the buyer.

Discussion:

It’s a rule of strict compliance that the tender of documents by the seller/beneficiary must include all the documents required in the LC. if
the correspondent bank deviates from these documents, he bears the risk of not getting paid by the buyer or by the issuing bank.
There was no certification issued, the buyer was missing in action. He left the country so the seller was holding the bill with no one to pay.
He went after the bank but the bank said I’m not liable. SC said it is indeed not liable under the doctrine of strict compliance, otherwise it
bears the risk since banks only deal with documents
Also, it’s not up to the bank to determine whether or not this document is needed or not. As long as it is in the list, it is required
Reconcile this with BPI vs De Reny. In that case, all the documents were there but the goods were not correct. Was the bank justified in
paying the seller? YES because all the correct documents were there. In this case, the bank refused to pay the seller. All the goods were
correct, but the bank refused to pay. Was it justified? YES because the documents were incomplete. This is the application of strict
compliance
Issue 3: Lower courts ruled, and also according to the seller, the fact that the LC is an irrevocable LC means that the correspondent bank is
already liable

Ruling:

The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. An irrevocable credit is not
synonymous with a confirmed credit. These types of letters have different meanings and the legal relations arising from there varies. A credit
may be an irrevocable credit and at the same time a confirmed credit or vice-versa.

An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not without the
consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the
right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent
bank. In this case, the correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as
its own according to the terms and conditions of the credit. Hence, the mere fact that a letter of credit is irrevocable does not necessarily
imply that the correspondent bank in accepting the instructions of the issuing bank has also confirmed the letter of credit.

Discussion:

An Irrevocable letter of credit is not based on a fixed period. It is based on the consent of the beneficiary. You call it irrevocable because
the bank cannot revoke it unilaterally. As long as the beneficiary does not consent to the revocation of the credit, the LC will stand. What
will terminate it is not the passage of a fixed period of time, but the consent of the beneficiary. The duration only means that as long as
beneficiary has not consented, it is not terminated

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A confirmed letter of credit is one wherein the confirming bank has acknowledged the obligation and undertook to pay the obligation in
lieu of the issuing bank. There is another bank which is willing to pay the obligation under the LC. So you can have an irrevocable LC which
is confirmed; you can also have an irrevocable LC and unconfirmed.
In this case, it was an irrevocable LC. The issue was whether or not by the fact that it was irrevocable it was also confirmed. IT IS NOT.
Confirming is another act from the irrevocability of the LC
The role of Feati bank was only a notifying bank, not a confirming bank. Similar to the Bank of America case, a notifying bank has no
obligation at all even if the LC is irrevocable. It only means it cannot be revoked; it doesn’t mean the correspondent bank is liable
Distinguished from a revolving letter of credit: It is open, then you pay it so it closes, then it opens again without you having to open
another LC. It’s like a revolving door. When you open the revolving LC, the bank will use that to pay your seller. Then it goes to the buyer,
hey pay me the money. The moment you pay it, it is open again. So you can use it for another supplier. Normally, LC is opened for 1
transaction only.
Atty: Do you understand? Or you don’t care? You look like you don’t care (HEHE). When you’re already lawyers, I hope you won’t forget these
differences.

TRANSFIELD PHILIPPINES INC. vs. LUZON HYDRO CORP.

Facts:

Transfield and Luzon Hydro Corporation (LHC) entered into a Turnkey contract whereby Transfield as turnkey contractor undertook
to construct hydro-electric power station (the project). To secure the performance of Transfield’s obligation, Transfield opened 2 standby
letters of credit with ANZ Bank and SBC. Transfield sought various extensions, which gave rise to a series of legal actions. The issue under
arbitration was whether or not Transfield was in breach of its contract by delay. Transfield, while arbitration was pending, contacted its banks
and warned them against paying LHC.

LHC asserted that Transfield was in default and demanded payment of liquidated damages for the delay from the securities put up by
Transfield. It contended that the securities are independent of the main contract between them as shown by the face of the 2 LC which both
provide that the banks have no responsibility to investigate the authenticity or accuracy of the declarant’s capacity.

Issue 1: Whether or not LHC can claim under the independence principle

Ruling:

As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a
definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the conditions of
the credit are complied with. Precisely, the independence principle liberates the issuing bank from the duty of ascertaining compliance by the
parties in the main contract. As the principle's nomenclature clearly suggests, the obligation under the letter of credit is independent of the
related and originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction.

Given the nature of letters of credit, petitioner's argument — that it is only the issuing bank that may invoke the independence
principle on letters of credit — does not impress this Court. To say that the independence principle may only be invoked by the issuing banks
would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine
works to the benefit of both the issuing bank and the beneficiary.

Discussion:

Involved here was a TURNKEY CONTRACT which referred to a readily operating power plant so that the principal will just have to “turn
the key” and it will go. It’s a contract where one is asked to construct something that can be readily operated so that all the principal has
to do is to turn the key and everything goes
In the other cases, everyone who claimed the independence principle were only the banks. In this case, it was the beneficiary saying that
he has the right to claim under the LC regardless of what happens in the contract because my claim under the LC is independent of what
happens to our arbitration, WON Transfield was really in delay
SC said it is not only the issuing bank that can recover under the independence principle. The beneficiary is only entitled
Issue 2: Whether the fraudulent exception rule is applicable

Ruling:

In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the Securities which
would justify the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to call on the Securities was contractually
rooted and subject to the express stipulations in the Turnkey Contract. 55 Indeed, the Turnkey Contract is plain and unequivocal in that it
conferred upon LHC the right to draw upon the Securities in case of default.

The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities wrongful or fraudulent for there
was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through
arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the
Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default.

Discussion:

So far, we’ve been discussing commercial letter of credit. Differentiate this with standby letter of credit.
COMMERCIAL LETTER OF CREDIT - used for sales or transactions such as importation and exportation. To prove you are entitled to
payment, you prove compliance or present documents required

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STANDBY LETTER OF CREDIT – serves as a guarantee; prove non-compliance with the contract so you can claim under the standby
letter of credit
Here, what was issued was a standby LC. The proof shown by LHC that there was a violation was that they presented a certificate of non-
compliance by Transfield. They stated that Transfield was already in delay because it failed to complete the project on time. Transfield
said that the certificate was fraudulent because it said we are not yet sure if there is really a delay because we are still undergoing
arbitration. So you, LHC, you lied! You misstated the information in the certificate. So that is a fraudulent certification
Under the FRAUD EXCEPTION RULE, if your basis, or the document that you issue to claim under the standby LC is fraudulent, that is an
exception to the independence principle. The courts can enjoin the payment by the issuing banks because the proof is fraudulent.
The fraud exception principle is an exception to the independence principle but it is only for the courts to enjoin the banks from paying. It
is not up to the bank to determine the authenticity of the proof given. It is merely a ground to seek an injunction against the payment
under the LC
SC said that technically, the certificate issued by LHC was not misstated because under the Turnkey contract, you did not define delay to
be after the final determination from arbitration. You just stated a particular date. This is not fraudulent.

MWSS vs. DAWAY

Facts:

MWSS granted Maynilad under a concession agreement a 20-year period to manage and refurbish the existing MWSS water delivery
and sewerage services, for which Maynilad undertook to pay the corresponding concession fees. To secure the concessionaire’s performance
of its obligations, Maynilad was required to put up securities. It was issued an irrevocable standby letter of credit in favor or MWSS. Maynilad
served upon MWSS a notice of event of termination claiming that MWSS failed to comply with its obligations.

Prior to the instant case, Maynilad had filed a petition for rehabilitation which resulted in the issuance of a stay order.

Issue:

Did the rehabilitation court act in excess of its authority/jurisdiction when it enjoined MWSS from seeking payment of the concession
fees from the banks that issued the irrevocable standby LC

Ruling:

The prohibition under Sec. 6(b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is on the
enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The participating
banks' obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not
conditioned on the prior exhaustion of the debtor's assets. These are the same characteristics of a surety or solidary obligor. Being solidary,
the claims against them can be pursued separately from and independently of the rehabilitation case.

Discussion:

Under the rehabilitation laws, if a company or corporation is put unde rehabilitation, the Court will also issue a stop payment order. The
corporation will stop paying any of its creditors. It cannot pay anyone.
The SC said the bank is required to pay under the LC because the obligation under the LC is different from the Maynilad’s obligation to
pay. The latter’s obligation is under the stop payment order but not the bank because the bank’s obligation is primary and solidary. So
you can claim under the standby LC even if the person who asked that the LC be issued is under rehabilitation
MWSS can claim under the LC but when the bank seeks reimbursement from Maynilad, it cannot be paid because Maynilad is under a stop
payment order
Most important here is that the nature of the obligation is primary and solidary

TRUST RECEIPTS

March 19, 2015

Whereas clause of PD 115

WHEREAS, the utilization of trust receipts, as a convenient business device to assist importers and merchants solve their financing
problems, had gained popular acceptance in international and domestic business practices, particularly in commercial banking
transactions;

Trust Receipt Transaction – Definition in Sec 4

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this Decree, is any transaction by
and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security interests 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" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to
sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof
to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves
if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other
purposes substantially equivalent to any of the following:

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1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the
purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the
entrustee has complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal with
them in a manner preliminary or necessary to their sale; or
2. In the case of instruments,
a) to sell or procure their sale or exchange; or
b) to deliver them to a principal; or
c) to effect the consummation of some transactions involving delivery to a depository or register; or
d) to effect their presentation, collection or renewal
The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at
the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the
same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust
receipt transaction and is outside the purview and coverage of this Decree.

A trust receipt (TR) transaction presupposes an existence of a letter of credit agreement or transaction. The said goods would be
entrustee, here the buyer, to be sold and the proceeds of the said goods will be given to the bank in payment of their obligation. With
the maturity of the trust agreement and there is no payment, then the goods will be returned to the bank and the bank will sell it to the
public through a public auction. If the proceeds of the public auction are insufficient to cover the amounts of the LC and TR or the
obligation of the entrustee, the bank can ask the entrustee to pay the remaining balance. If there are excess amounts from the proceeds
of the public auction, the entrustee is entitled to the excess.
There is no form required for a Trust Receipt contract.
In Prundential Bank case, it made a discussion on a TR transaction because after the goods were received by Prudential Bank, they were
turned over to Phil Rayon through a TR transaction. Phil Rayon executed a TR for the goods. In that case, you will see there a description
on how a TR transaction works vis-à-vis a LC (letter of credit) transaction. The LC is basically that can be done outside the jurisdiction of
the issuing bank and the buyer. Once the LC is fulfilled and the goods arrived, there is now the bank that turns around, tells the buyer,
“Hey, the goods are here. You pay me the amount that I paid to the seller.” If the buyer cannot pay yet, the bank will not hold on to the
goods. The bank will turn over the goods under a TR transaction.
An important aspect of which is that the bank will retain title or ownership over the goods. So that the buyer will only act as an
entrustee of the bank. Only for the specific purpose to sell. Generally, to sell the goods and turn over the proceeds of the sale
corresponding to the amount covered by the trust receipts.

OBLIGATIONS OF THE ENTRUSTEE

To deliver to the entruster the price of the sale


If the merchandise is not sold, to return the merchandise to the entruster.
More specific obligations from a case: The entrustee is obliged to:
(1) Hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms
and conditions of the trust receipt;
(2) Receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owed to the
entruster or as appears on the trust receipt;
(3) Insure the goods for their total value against loss from fire, theft, pilferage or other casualties;
(4) Keep said goods or the proceeds therefrom whether in money or whatever form, separate and capable of identification as property
of the entruster;
(5) Return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and
(6) Observe all other terms and conditions of the trust receipt not contrary to the provisions of the decree.

RIGHTS OF AN ENTRUSTER:

Sec. 7. Rights of the entruster. — The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments
released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to
the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the
trust receipt provided such are not contrary to the provisions of this Decree.

The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds
realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt
or any other agreement between the entruster and the entrustee, and the entruster in possession of the goods, documents or
instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or
sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become
a purchaser.

The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment
of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee’s
indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. Notice of sale
shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the
entrustee's last known business address.

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The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt
to the entrustee to the extent of the amount owed to the entruster or as appears in the trust receipt;
To the return of the goods, documents or instruments in case of non-sale; and
To the enforcement of all other rights conferred on him in the trust receipt, provided these are not contrary to the provisions of the
document.
In case of breach of a TR contract:

The entruster can demand for a return of the goods.


The entruster can also goods in a public or private sale and apply the proceeds to the amount covered by the TR.
If the proceeds are still insufficient, the entruster can still demand for the deficiency from the entrustee.
Proceeds of the Sale Application:

The proceeds of the sale will be applied in accordance with Section 7 of PD 115:
The proceeds of any such sale, whether public or private, shall be applied:
(a) to the payment of the expenses thereof;
(b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of
the entrustee’s indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any
deficiency.
If there is an excess from the sale, the entrustee shall be entitled to the surplus of the sale.
When can the entrustee be liable for Estafa?

There are only two instances where the entrustee can be held liable for estafa:
Failure to remit the proceeds of the sale by the entrustee, in case the goods are sold.
Failure to return the goods to the entruster covered by the TR in case that the goods remain unsold.
Estafa is not a remedy but a criminal penalty, in case of two specific violations of the entrustee.
For any other breach of the trust agreement, your recourse is not a case of estafa, rather to cancel the TR agreement as provided in
Section 7 of PD 115.
Under Section 13, there are only two instances for criminal liability of estafa:

Section 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall
constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or
offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall
be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense.

Outside of these two instances, there is no liability for estafa.


Purpose of the Trust Receipt Law:

To aid importers and merchants in purchasing goods, materials for the purpose of selling and manufacturing.
In other words, to aid importers and retailers in solving their financing problems in case of the procurement of their supplies and the
importation of the goods and supplies.

CASES DISCUSSED

NG VS PEOPLE OF THE PHILIPPINES

Facts:

Petitioner Anthony Ng, then engaged in the business of building and fabricating telecommunication towers under the trade name
"Capitol Blacksmith and Builders," applied for a credit line of PhP3,000,000 with Asiatrust Development Bank, Inc. (Asiatrust).
On May 30, 1997, Asiatrust approved petitioner's loan application. Petitioner was then required to sign several documents, among
which are the Credit Line Agreement, Application and Agreement for Irrevocable L/C, Trust Receipt Agreements, 4 and Promissory
Notes. Though the Promissory Notes matured on September 18, 1997, the two (2) aforementioned Trust Receipt Agreements did not
bear any maturity dates as they were left unfilled or in blank by Asiatrust.
As petitioner realized difficulty in collecting from his client Islacom, he failed to pay his loan to Asiatrust. Asiatrust then conducted a
surprise ocular inspection of petitioner's business through Villarva S. Linga, Asiatrust's representative appraiser. Linga thereafter
reported to Asiatrust that he found that approximately 97% of the subject goods of the Trust Receipts were "sold-out and that only
3% of the goods pertaining to PN No. 1963 remained."
Ng sourced his goods, locally. Ng is not an importer.
Ng purchased the goods for the fabrication and construction of cell towers.
Ng was sued for estafa:
Issue: Whether or not Ng is liable for Estafa.

Ruling:

The transaction between Ng and Asiatrust is not a TR transaction but one of simple loan. Transactions discussed in relation to Trust
Receipts mainly involved sales. Transactions covered by PD 115 are sales, manufacturing or processing for the purposes of sale,
loading, unloading, shipment or transshipment of goods.
PD 115 does not apply. It must be remembered that petitioner was transparent to Asiatrust from the very beginning that the subject
goods were not being held for sale but were to be used for the fabrication of steel communication towers in accordance with his

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contracts with Islacom, Smart, and Infocom. In these contracts, he was commissioned to build, out of the materials received, steel
communication towers, not to sell them.
To emphasize, the Trust Receipts Law was created to "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." Since Asiatrust knew that petitioner was neither an
importer nor retail dealer, it should have known that the said agreement could not possibly apply to petitioner.
Ng is not liable for estafa.
Goods Were Not Received in Trust. The first element of Estafa under Art. 315, par. 1 (b) of the RPC requires that the money, goods or
other personal property must be received by the offender in trust or on commission, or for administration, or under any other
obligation involving the duty to make delivery of, or to return it. But as we already discussed, the goods received by petitioner were
not held in trust. They were also not intended for sale and neither did petitioner have the duty to return them. They were only
intended for use in the fabrication of steel communication towers.
No misappropriation of goods or proceeds. Assuming arguendo that the provisions of PD 115 apply, petitioner is not liable for Estafa
because Sec. 13 of PD 115 provides that an entrustee is only liable for Estafa when he fails "to turn over the proceeds of the sale of
the goods . . . covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt . . . in
accordance with the terms of the trust receipt."
Petitioner was only obligated to turn over the proceeds as soon as he received payment. However, the evidence reveals that
petitioner experienced difficulties in collecting payments from his clients for the communication towers. Thus, absent proof that the
proceeds have been actually and fully received by petitioner, his obligation to turn over the same to Asiatrust never arose. What is
more, under the Trust Receipt Agreement itself, no date of maturity was stipulated.
Furthermore, Asiatrust was informed at the time of petitioner's application for the loan that the payment for the loan would be
derived from the collectibles of his clients. Petitioner informed Asiatrust that he was having extreme difficulties in collecting from
Islacom the full contracted price of the towers. Thus, the duty of petitioner to remit the proceeds of the goods has not yet arisen
since he has yet to receive proceeds of the goods. Again, petitioner could not be said to have misappropriated or converted the
proceeds of the transaction since he has not yet received the proceeds from his client, Islacom.
Discussion:

The SC in this case made a ruling whether or not PD 115 will apply to Ng’s transaction.
Trust Receipts Law (TRL) was created to aid in financing importers and retailers who do not have sufficient funds to finance the
importation or purchase or merchandise and who may not be able to acquire credit except through utilization, as collateral, of the
merchandise imported or purchased. Since Asiatrust knew that Ng was neither importer nor retailer dealer. It should have known that
the said agreement would not possibly be applied to petitioner.
PD 115 will not apply because Ng was neither an importer nor a dealer. The SC here made a delineation that if you’re not an importer or
retailer and you execute a TR agreement, in general, the provisions of the TRL will not apply.
The SC is limiting the application of the TRL to importers and retailers.
Ng is in the business of construction. The goods here are not held for sale but were used for construction business. No application of the
TRL.

METROPOLITAN BANK & TRUST COMPANY vs HON. SEC. GONZALES


Facts:
Respondents as duly authorized representatives of Visaland Inc. and in order to finance the operations of its sister company, Titan
Ikeda Construction & Devt Corp (TICDC), applied with petitioner MBTC 24 letters of credit with aggregate amount of P68, 749,487.96.
Respondents signed trust receipts simultaneously with the issuance of letters of credit in favour of petitioner, and have bound themselves to
sell good covered by such letters and to remit the proceeds to petitioner, if sold, or to return the goods, if not sold, on or before their agreed
maturity dates.
When the trust receipts matured, respondents failed to return goods to petitioner or return the value despite demand. Thus,
petitioner filed a criminal complaint for estafa. Private respondents denied having entered into trust receipt transactions and claimed that the
contract entered was a Contract of Loan secured by real estate mortgage. The Secretary of Justice, as well as the appellate court found no
probable cause and ruled that the transaction was a contract of loan.

Ruling:

The fact of existence or non-existence of a trust receipt transaction is evidentiary in nature, the veracity of which can best be passed
upon after trial on the merits, for it is virtually impossible to ascertain the real nature of the transaction involved based solely on the self-
serving allegations contained in the opposing parties’ pleadings. Trust receipt transactions are governed by the provisions of Presidential
Decree No. 115 and the following pieces of evidence adduced from the affidavits and documents submitted before the Prosecutor are
sufficient to establish the existence of probable cause, to wit: 1st, the trust receipts bearing the genuine signatures of private respondents; 2 nd,
the demand letter of petitioner addressed to respondents; and 3rd, the initial admission by private respondents of the receipt of the imported
goods from petitioner. Prescinding from the foregoing, we conclude that there is ample evidence on record to warrant a finding that there is a
probable cause. It is highly improbable to mistake trust receipt documents for a contract of loan when the heading thereon printed in bold and
legible letters read: “Trust Receipts”.

Discussion:

One of the contention was that this is not a trust receipt transaction because the goods were not held for sale but rather, they were only
allowed to be used by the sister company of Visaland. Visaland itself did not acquire the goods for sale.
If you remember the Ng vs Pp case- if the goods are not for sale, then it may not fall under a trust receipt transaction
So what’s the difference between the Ng vs Pp and this case? Why did SC apply PD 115 in this MBTC case?
Remember that under the Ng case, the SC said 2 transactions protected under PD 115 –(1) the importation &(2) the purchase of
merchandise by the retailer dealers.
Here, this was NOT a purchase of merchandise by a retailer dealer. Here, the goods are not for sale. But it was an IMPORTATION. And
here lies the difference between the 2cases.

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So the MBTC case falls within the purview of PD 115. Because again, there was an importation of goods.
It is NOT THE FACT of the goods not being held for sale NOR THE FACT that it will just be used in the construction business but rather, it
was also the FACT THAT Ng was NOT AN IMPORTER.
Here, Visaland may not be a retailer-dealer but IT IS AN IMPORTER that’s why SC applied PD 115

CASE: METROPOLITAN BANK & TRUST COMPANY vs JIMMY GO


Facts:

Metrobank executed a Credit Line Agreement in favour of its client, BGB Industrial Textile Mills, Inc. in the total amount of
P10,000,000.00. As security, private respondent Benjamin Go (now deceased) executed a Continuing Surety Agreement in favour of
Metrobank. Thereafter, respondent Jimmy Go applied for 11 commercial letters of credit to cover the shipments to which shipments were
delivered to and accepted by BGB. Consequently, 11 trust receipts were executed by Jimmy & Benjamin thru BGB, as entrustees in favour of
Metrobank entruster. BGB agreed by the terms to hold the goods in trust for Metrobank and, in case of sale of goods, to hand the proceeds to
the bank to be applied against the total obligation object of the trust receipts. On maturity date, they failed to satisfy obligation because the
goods remain unsold prompting Metrobank to file 3 complaints of sum of money and later instituted 11 criminal charges for violation of PD115.

Ruling:

In order that respondents Jimmy and Benjamin Go may be validly prosecuted for estafa under Art 315, par 1(b) of the RPC, in relation
to Sec 13 of the Trust Receipts Law, the following elements must be established: (a) they received the subject goods in trust or under the
obligation to sell the same and to remit the proceeds thereof to Metrobank, or to return the goods if not sold; (b) they misappropriated or
converted the goods and/or the proceeds of the sale; (c) they performed such acts with abuse of confidence to the damage and prejudice of
Metrobank; and (d) demand was made on them by Metrobank for the remittance of the proceeds or the return of the unsold goods.
Prosecution for estafa cannot prosper because the 2nd (misappropriation/conversion) and 4th (demand) elements of the offense are not
present.

The trust receipts subject of this case partake of the nature of contracts of adhesion. Being contracts of adhesion, are not per se
invalid and inefficacious. But should there be ambiguities therein, such ambiguities are to be strictly construed against Metrobank, the party
that prepared them

Discussion:

The acts that would make an entrustee liable for estafa under the Trust Receipts law are: 1. Failure to remit the proceeds of the goods – in
here, the SC clarified that if there is NO sale, then there is NO failure to remit
Second, failure to return the goods covered by the letters of credit – SC said there was no failure to return since they actually offered to
inventory and return it but Metrobank did not listen to their offer because Metrobank contended that all the goods were sold but infact,
the gods are just there in the warehouse and all intact.
So the SC quoted the prosecutors in saying that there was no violation of PD 115 since there are only 2 violations namely: (1) when the
goods are sold and you fail to remit the proceeds, and (2) failure to return the goods
What about the contention that a Trust receipt transaction or agreement is a contract of adhesion? Will that serve to invalidate an
agreement? NO.
There was a contention as to when should the Gos offer to return the goods. When does their obligation arise? Is it on the date of the
maturity of the agreement or is it upon demand by Metrobank? The SC pointed out that the Trust Receipt Agreement was vague as it
does not specify when.
SC said that this Trust Receipt Agreement is a contract of adhesion but it does NOT mean that the contract is void.
The effect of a contract of adhesion is that it will be strictly construed against the person who caused the ambiguity which in this case is
the one who prepared the contract- Metrobank.
So the most onerous provision against Metrobank was made as the interpretation. So it is NOT on the date of the maturity of the
agreement but rather, on the DATE OF DEMAND by the Metrobank for the Gos to return the goods.
But remember, Metrobank never demanded because it was always their position that the goods were sold. So even if at the point when
the ruling of the SC was made, the goods were not yet returned the court said that it does not matter because their obligation to return
did not arise because Metrobank did not make a demand.
For you to be held liable for estafa, you do not turn over the goods. Here, the Gos did not turn it over, they only offered. But the SC said it
does not matter because Metrobank never made a demand. No crime of estafa was committed

LANDL & CO. PHIL. INC. vs. MBTC

Facts:

LANDL is engaged in business of selling imported welding rods and alloys. It opened a commercial letter of credit with Metrobank.
To secure the indebtedness, Metrobank required the execution of a trust receipt on the condition that LANDL would hold the goods in trust
for Metrobank, with the right to sell the goods and the obligation to turn over the proceeds of the sale, if any. If the goods remained unsold,
corporation had to return them.

On the maturity date, LANDL defaulted in the payment of its obligation. The goods were sold at public auction, and the proceeds
were insufficient to completely satisfy the obligation. After LANDL failed to pay the balance, Metrobank instituted the instant case to collect
said deficiency.

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Ruling:

Respondent bank’s repossession of the properties and subsequent sale of the goods were completely in accordance with its
statutory and contractual rights upon default of petitioner corporation.

The second paragraph of Section 7 expressly provides that the entrustee shall be liable to the entruster for any deficiency after the
proceeds of the sale have been applied to the payment of the expenses of the sale, the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments, and the satisfaction of the entrustee’s indebtedness to the entruster.

In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely petitioner corporation’s indebtedness to the
respondent bank. Respondent bank was thus well within its rights to institute the instant case to collect the deficiency.

Discussion:

There are 2 instances under PD 115 where the entruster will take possession of the goods
1. If the goods are unsold, entrustee is liable to return the goods
2. Entruster may cancel the trust and take possession of the goods, sell them at a private or public auction. If there is deficiency,
entrustee is liable to pay the deficiency
In this case, the repossession was under the first instance. So the contention of the buyer was that it is only in the 2nd instance where the
provision on deficiency will apply. In the 1st instance, it does not apply because I’m just returning the goods, you are the owner, so I’m
clean, no need for me to pay. My obligation is extinguished. In the 2nd instance, I’m in default, so I will have to pay the deficiency. The
entrustee sought to differentiate the two instances. Entrustee argued that the availment of one remedy is distinct.
SC said the contention is incorrect. In the 1st instance, it does not mean you are just returning the goods to the owner because the
ownership of the entruster is just a legal fiction. It is just there because the entruster holds a security interst over the goods. Regardless
of the nature, this is really a security arrangement. The fiction is created to protect the entruster
Thus, you cannot use the legal fiction to say you will not pay because this is just a security arrangement. As a security arrangement, the
proceeds of the sale not sufficient, pay the deficiency
In the 2 instances (under sec 7), deficiency judgment can be availed of
SC cited another case in this case of LANDL, saying: “Contrary to the allegations of the VINTOLAS, IBAA did not become the real owner of
the goods. It was merely the holder of a security title for the advances it had made to the VINTOLAS. The goods the VINTOLAS had
purchased through IBAA financing remain their own property and they hold it at their own risk. The trust receipt arrangement did not
convert the IBAA into an investor; the latter remained a lender and creditor.”
So even if it owned the goods under the trust receipt, that is legal fiction than fact
When you return the goods, bank will sell it because of deficiency, you will still be liable because at the bottom of it, a trust
receipt is just a security agreement

DBP vs PRUDENTIAL BANK

Facts:

Litex opened an irrevocable commercial letter of credit with Prudential Bank in connection with its importation of spindles. These were
released to Litex under trust receipts. Litex installed and used the items in its textile mill in Rizal. DBP granted a foreign currency loan, and this
was secured by mortgages. Among the machineries mortgaged were the articles covered by the trust receipts.

DBP foreclosed the mortgages and acquired the properties. Prudential Bank wrote a letter asserting its claim. Without knowledge of
Prudential Bank, DBP sold the Litex textile Mill as well as the machineries to Lyon Textile Mills. Prudential Bank filed a complaint for sum of
money with damages against DBP.

Ruling:

Article 2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is essential that the pledgor or mortgagor
should be the absolute owner of the thing pledged or mortgaged and that he must have the free disposal of his property.

Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. Their inclusion in the mortgage
was void and had no legal effect. There being no valid mortgage, there could also be no valid foreclosure or valid auction sale. Thus, DBP could
not be considered either as a mortgagee or as a purchaser in good faith. DBP merely stepped into the shoes of Litex as trustee of the imported
articles with an obligation to pay their value or to return them on Prudential Bank's demand. By its failure to pay or return them despite
Prudential Bank's repeated demands and by selling them to Lyon without Prudential Bank's knowledge and conformity, DBP became a trustee
ex maleficio.

Discussion:

DBP contended that it was not a trust receipt transaction because the articles were not released to Litex to be sold. The imported articles
were released to Litex to be installed in the textile mill and to be used in its business. It follows that the transaction was not goverened by
the Trust Receipts Law.
SC said, so what if PD 115 does not apply? There is still a valid trust receipt contract. Even if PD 115 does not apply. It is still valid
because it not contrary to law, morals, public policy, good custom, public order. That contract said Prudential was the owner of the
goods, not Litex

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So when it comes to enforcement of criminal provisions under PD 115, the SC is very strict about it. There are only two instances, only if
you are an importer or retailer
In enforcing the civil aspect, it is more favorable to the entruster. So the thing here is that it may be you have a trust receipt transaction
that is a valid contract but not a trust receipt transaction under PD 115 that will render the entrustee liable for estafa. If it’s just a contract
between the parties, the liability is only civil in nature. To be held liable under PD 115, the trust receipt has to be one that complies with PD
115.
In this case, we are talking about the essence of a trust receipt agreement where entruster remains the owner, therefore you cannot sell
it to another person. SC did not say if PD 115 will apply, but they said the trust receipt agreement was valid. Under that, the owner was
Prudential; therefore you Litex, you had no right to mortgage it
What if I am the lawyer of DBP and I will argue that under Sec 11 of PD 115 ----
“Section 11. Rights of purchaser for value and in good faith. – Any purchaser of goods from an entrustee with right to sell, or of documents
or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith
from the entrustee, acquires said goods, documents or instruments free from the entruster’s security interest.
--- the buyer (DBP) has better rights than the entruster. Can DBP validly use Sec 11?
In order to avail of Sec 11, you have to be a purchaser in good faith. SC said in this case that DBP was not
More importantly, Sec 11 talks about an entrustee who is a retailer who takes the goods with an obligation to sell them. In this case,
Litex was not a retailer for selling the goods. It took the goods so it can use them on the factory. Sec 11 will not apply
Thus, Sec 11 only applies when the entrustee will sell the goods in the ordinary course of his business where he takes the goods in
such terms that he is supposed to sell the goods to 3rd parties
This is just a side discussion because it was not taken up in the case

ROSARIO TEXTILE MILLS CORP. vs. HOME BANKERS SAVINGS AND TRUST COMPANY

Facts:

The bank granted RTMC a credit line of 10M. RTMC availed of this by making numerous drawdowns, each being covered by a
separate promissory note and trust receipt. RTMC failed to pay its loans, thus the bank filed a complaint for sum of money.

Petitioners theorize that when petitioner RTMC imported the raw materials needed for its manufacture, using the credit line, it was
merely acting on behalf of the bank, the true owner of the goods by virtue of the trust receipts. Hence, under the doctrine of res perit domino,
the bank took the risk of the loss of said raw materials when RTMC’s premises was destroyed by a fire.

Ruling:

It is thus clear that the principal transaction between petitioner RTMC and the bank is a contract of loan. The Trust receipts were
mere securities. A trust receipt is a security arrangement which secures indebtedness. There can be no such thing as security interest that
secures no obligation. Thus, petitioners cannot be relieved of their obligation to pay their loan in favor of the bank.

Discussion:

This case is just a reiteration of the principle that a trust receipt transaction is just a security agreement. Even if the bank is made the
owner, in reality, it is really the buyer who is the beneficial owner. Thus, the buyer bears the risk of loss.
So even if the goods are lost, the buyer is still liable to pay the loan obligation
In essence, the ownership of the bank is a mere security interest. It is a legal fiction.

There is a new motion for reconsideration ruling of the Narra case; Jan. 28, 2015. It’s the same, no change. It’s just a better ruling, more
detailed. But it’s still the same rule: That the 1st test to apply is always the control test. It’s only when you pass the control test, and there
is still doubt of the control and beneficial ownership of Filipinos, you apply the grandfather rule. You don’t apply the grandfather rule
separate from the control test. If you pass the control test, then that’s okay. If you don’t pass it, don’t apply any test because it’s useless.

- END –
“And will you succeed? Yes! You will indeed! (98 and ¾ percent guaranteed).” – Dr. Seuss

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