5 - Mercantile Law Green Notes 2018 PDF

DE LA SALLE UNIVERSITY COLLEGE OF LAW
Lasallian Commission on Bar Operations 2018
MERCANTILE LAW
Green Notes
Chel Sy Tet Valeza Thad Taliño
LCBO Chairperson Academic Affairs Mercantile Law Chairperson
Chairperson
Nico Garcia Renzo Santos
LCBO Vice Chair for Janine Tutanes Mercantile Law Deputy
Internals Rod Zantua Chairperson
Academic Affairs Deputy
Steph Griar Chairpersons Tetel Guillermo
LCBO Vice Chair for Negotiable Instruments Law
Externals Subject Head
Pat Costales Louise Dadivas

LCBO Executive Secretary Corporation Law Subject
Head
Ces Naga
LCBO Executive Treasurer Vin Delgado
Intellectual Property Law
Subject Head
Chesca Cabral
Transportation Law Subject
Head
Keren Del Rosario

Insurance Subject Head
Jiro Dela Rosa

Banking Subject Head
Isa Hernandez
Special Commercial Laws
Subject Head
Mercantile Law Table of Contents
TABLE OF CONTENTS
LETTERS OF CREDIT.............................1 NEGOTIABLE INSTRUMENTS
Definition and Nature .............................. 1 LAW............................................................8
Definition ........................................................ 1 Forms and Interpretation .......................... 8
Essential Conditions ...................................... 1 Definition ........................................................8
Duration .......................................................... 1 Features ...........................................................8
Parties and Contracts Involved ............... 2 Requisites of Negotiability ...........................8
Contracts Involved…. ................................... 2 Kinds of Negotiable Instruments...............11
Parties in a Letter of Credit .......................... 2 Completion and Delivery ....................... 12
Rights and Obligations of Parties ................ 2 Insertion of Date ...........................................12
Basic Principles .......................................... 2 Completion of Blanks ..................................12
Doctrine of Independence ............................ 2 Incomplete and Undelivered Instruments
Fraud Exception Principle ............................ 3 ........................................................................13
Doctrine of Strict Compliance ...................... 3 Complete but Undelivered Instruments...14
Signature.................................................... 15
TRUST RECEIPTS LAW.........................4 Signing in Trade Name ...............................15
Definition and Concept............................ 4 Signature of Agent .......................................15
Definition ........................................................ 4 Indorsement by Minor or Corporation .....16
Loan/Security Feature .................................. 4 Forgery...........................................................16
Ownership of the Goods, Documents, and Summary of Rights and Liabilities in
Instruments under a Trust Receipt ............. 5 relation to Forgery .......................................19
Rights of the Entruster.............................. 5 Consideration ........................................... 21
Rights of the Entruster .................................. 5 Accommodation Party ............................. 21
Obligations of the Entruster ......................... 5 Negotiation ................................................ 22
Validity of the Security Interest of the Kinds of Transfer..........................................22
Entruster as against the Creditors of the Distinguished from Assignment................22
Entrustee or Innocent Purchaser for Value 5 Modes of Negotiation ..................................22
Obligations and Rights of the Entrustee Kinds of Indorsements ................................23
....................................................................... 5 Rights of a Holder .................................... 27
Obligations of the Entrustee......................... 5 Holder ............................................................27
Penal Sanction ................................................ 6 Rights of a Holder ........................................27
Rights of the Entrustee .................................. 6 Holder in Due Course .................................27
Remedies Available .................................. 6 Holder in Holder in Due Course ...............27
(Shelter Rule)......................................................................27
Cancel the Trust and Take Possession of
Kinds of Defenses ...............................................................29
GDI................................................................... 6 Liabilities of Parties................................. 29
Demand Payment for Deficiency ................ 6
Primary Liability ..........................................30
Charge for Estafa ........................................... 6
Secondary Liability ......................................30
Other Remedies .............................................. 6
Maker .............................................................30
Warehouseman’s Lien .............................. 6 Drawer ...........................................................30
Concept ........................................................... 6 Acceptor…. ...................................................30
Claims Included ............................................. 7 Indorser…. ....................................................31
Goods Subject to Lien.................................... 7 Warranties .....................................................32
Loss and Waiver of Lien ............................... 7 Summary of Warranties, Undertakings,
Enforcement of Warehouseman's Defenses Barred and Beneficiaries ............34
Lien...................................................................7 Presentment for Payment ....................... 36
Necessity of Presentment for Payment .....36

Parties to whom Presentment for Payment Hazard ...........................................................53

Should be Made ........................................... 37 Physical Hazards ..........................................53
Dispensation with Presentment for Moral Hazards ..............................................53
Payment ........................................................ 37 Kinds of Insurable Risks .............................54
Dishonor by Non-Payment ........................ 38 Requirements to be Insurable.....................54
Notice of Dishonor .................................. 39 What Constitutes Doing an Insurance
Definition ...................................................... 39 Business .........................................................54
Parties to be Notified................................... 39 Elements of Insurance Contract ............ 54
Parties who may give Notice and Dishonor Distinguishing Elements .............................54
........................................................................ 40 Form ...............................................................55
Effect of Notice ............................................. 40 Characteristics/Nature of Insurance
Form of Notice ............................................. 40 Contracts .................................................... 55
Waiver ........................................................... 42 Characteristics ..............................................55
Dispensation with Notice ........................... 42 Cardinal Principles in Insurance ...............55
Effect of Failure to Give Notice.................. 42 Purposes of Insurance Contracts ...............56
Discharge of Negotiable Instruments . 43 Rules...............................................................56
Discharge ...................................................... 43 Construction of the Insurance Contract....56
Discharge of Parties Secondarily Liable ... 44 Classes ........................................................ 56
Right of the Party who Discharged Marine Insurance .........................................56
Instrument .................................................... 44 Fire Insurance…. ..........................................57
Renunciation by Holder.............................. 44 Casualty Insurance ......................................57
Material Alteration .................................. 45 Suretyship .....................................................57
Concept ......................................................... 45 Life Insurance…. ..........................................57
Effect of Material Alteration....................... 45 Compulsory Motor Vehicle Liability
Acceptance ................................................ 46 Insurance .......................................................57
Definition ...................................................... 46 Insurable Interest ..................................... 58
Manner .......................................................... 46 Definition ......................................................58
Time for Acceptance .................................... 47 In Life/Health ..............................................58
Rules Governing Acceptance ..................... 47 In Property ....................................................58
Presentment for Acceptance .................. 48 Double Insurance and Over Insurance .....59
Definition ...................................................... 48 Multiple or Several Interests on the Same
Time/Place/Manner of Presentment ....... 48 Property .........................................................60
Effect of Failure to Make Presentment ..... 48 Perfection of Contract of Insurance...... 61
Dishonor by Non-Acceptance .................... 49 Perfection.......................................................61
Promissory Notes ..................................... 49 Offer ...............................................................61
Definition ...................................................... 49 Acceptance ....................................................62
Checks........................................................ 49 Premium Payment…. ..................................62
Definition ...................................................... 49 Non-Default Options in Life Insurance ....63
Kinds.............................................................. 50 Reinstatement of a Lapsed Policy ..............63
Presentment for Payment ........................... 50 Refund of Premiums....................................63
Recission of Insurance Contracts .......... 64
INSURANCE LAW................................52 Four Primary Concerns of the Parties .......64
Concept of Insurance .............................. 52 Grounds for Recission .................................64
Concealment .................................................64
Contract of Insurance .................................. 52
Misrepresentations/Omissions .................65
Requisites ...................................................... 52
Parties to Contract of Insurance ................ 52 Breach of Warranties ...................................65
Breach of Condition Subsequent ...............66
Summary of Rules Regarding Beneficiaries
Waiver of the Right to Rescind ..................66
........................................................................ 53
Limitations on the Right of the Insurer to
What may be Insured Against…. .............. 53
Rescind ..........................................................66
Risk ................................................................ 53
Peril ................................................................ 53

Cancellation of Non-Life Insurance Policy Carriage of Goods by Sea Act (COGSA –

........................................................................ 66 Public Act No. 521) ......................................91
Claims Settlement and Subrogation .... 66 Warsaw Convention ................................ 92
Proximate Cause .......................................... 67 Definition ......................................................92
Requisites for Recovery Upon Insurance . 67 Applicability.................................................92
Notice and Proof of Loss ............................ 67 Liability of Carrier .......................................92
Guidelines on Claims Settlement .............. 67 Limitation of Liability..................................93
Transfer of Policy ......................................... 68 Willful Misconduct…. .................................93
Change of Interest in the Thing ................. 68 When Complaint Must be Made ...............93
Particular Kinds of Insurance Contracts Prescriptive Period.......................................93
..................................................................... 69 Jurisdiction ....................................................94
Particular Kinds ........................................... 69
Insurance Commission ........................... 80 THE CORPORATION CODE.............95
Insurance Commission ............................... 80 Corporation ............................................... 95
Nature of Powers of the Insurance Definition ......................................................95
Commission .................................................. 80 Attributes of a Corporation ........................95
Duties and Functions of the Insurance Differentiated from other types of Business
Commission .................................................. 80 Organizations ...............................................95
Functions of the Insurance Commission .. 81 Advantages of a Corporate Authority ......97
Disadvantages of a Corporate Authority .97
TRANSPORTATION LAWS.…..........82 Theories in the Formation of Corporations
Common Carriers .................................... 82 ........................................................................98
Definition ...................................................... 83 Regulation of Corporations ........................98
Securities and Exchange Commission (SEC).......................98
Diligence Required of Common Carriers. 83
Obligations of Carriers ........................ 83 Classes of Corporation ............................ 99
In relation to the State .................................99
Liabilities of Common Carriers .......... 83
As to the Place of incorporation...............100
Vigilance Over Goods ............................ 83
As to Legal Status.......................................100
Exempting Causes ....................................... 83
As to Shares of Stock .................................101
Contributory Negligence ............................ 84
As to Management and Control ..............101
Duration of Liability.................................... 85
Nationality of Corporations ................. 101
Stipulations Limiting Liability ................... 85
Place of Incorporation Test .......................101
Liability for Baggage of Passengers .......... 86
Control Test.................................................102
Safety of Passengers ................................ 86 Grandfather Rule .......................................102
Void Stipulations ......................................... 86
Corporate Judicial Personality ............ 102
Duration of Liability.................................... 86
Doctrine of Separate Juridical Personality
Liability for Acts of Others ......................... 86
......................................................................102
Extent of Liability ........................................ 87
Liability for Torts and Crimes ..................102
Bill of Lading............................................ 87
Recovery of Moral Damages ....................103
Definition ...................................................... 87
Doctrine of Piercing the Corporate Veil .103
Three-Fold Character .................................. 88
Grounds for Application of the Doctrine
Delivery of Goods ........................................ 88
......................................................................103
Period of Filing Notice of Claims by Shipper
Classifications of Piercing the Corporate
........................................................................ 88
Veil ...............................................................104
Period of Filing Actions .............................. 89
Test in Determining Applicability ...........104
Maritime Commerce ............................... 89 Probative Factors........................................104
Maritime Law ............................................... 89 Circumstances to Justify the Application of
Charter Parties.............................................. 89 the Doctrine.................................................104
Liability of Ship Owners and Shipping Due Process is Essential ............................105
Agents............................................................ 89
Incorporation and Organization ......... 105
Accidents and Damages in Maritime
Commerce ..................................................... 90

Number and Qualifications of Remedial Rights .........................................132

Incorporators .............................................. 105 Obligations of a Stockholder ....................133
Corporate Name – Limitations on the Use of Meetings ......................................................134
Corporate Name ........................................ 105 Capital Structure .................................... 135
Corporate Terms ........................................ 106 Subscription Agreements ..........................135
Minimum Capital Stock and Subscription Consideration for Stocks ...........................135
Requirements ............................................. 106 Shares of Stock ............................................136
Articles of Incorporation........................... 107 Nature ..........................................................136
Registration and Issuance of Certificate of Payment of Subscription Balance ............138
Incorporation .............................................. 108 Effect of failure to pay ...............................139
Adoption of By-Laws ................................ 109 Call by Board of Directors ........................139
Amendment or Revision........................... 110 Notice Requirement ...................................139
Corporate Powers .................................. 110 Sale of Delinquent Shares .........................139
Express and Implied Powers ................... 110 Call by Resolution of the Board of Directors
Doctrine of Necessary Implication .......... 110 ......................................................................139
Theory of General Capacity ..................... 110 Notice of Sale ..............................................139
Theory of Limited Capacity ..................... 111 Auction Sale to the Highest Bidder .........139
General Powers .......................................... 110 Questioning the Delinquency Sale ..........140
Specific Powers .......................................... 111 Certificate of Stock .....................................140
Ultra Vires Acts .......................................... 115 Stock and Transfer Book....................142
How Exercised ........................................... 116 Disposition and Encumbrance of Shares 142
Theory of Estoppel and Ratification ....... 117 Dissolution and Liquidation ............... 143
Doctrine of Laches ..................................... 117 Modes of Dissolution.................................143
Doctrine of Apparent Authority .............. 117 Methods of Liquidation ............................145
Trust Fund Doctrine .................................. 118 Other Corporations ................................ 145
Board of Directors and Trustees ......... 117 Non-Stock Corporations ...........................145
Doctrine of Centralized Management .... 118 Foreign Corporations ................................146
Business Judgment Rule ........................... 118 Close Corporations ....................................149
Term of Directors and Trustees ............... 119 Corporation Sole ........................................151
Corporate Officers ..................................... 119 Mergers and Cosolidation .................... 151
Qualifications of Directors and Trustees 120 Merger .........................................................151
Disqualifications ........................................ 120 Consolidation .............................................151
Holdover ..................................................... 120 Plan of Merger or Consolidation .............152
Elections ...................................................... 120 Articles of Merger or Consolidation .......152
Voting in Non-Stock Corporations ......... 120 Procedure ....................................................152
Quorum ....................................................... 121 Effectivity ....................................................152
Removal ...................................................... 121 Limitations ..................................................153
Filling of Vacancies.................................... 121 Effects ...........................................................153
Resignation ................................................. 121
Compensation ............................................ 121
SECURITIES REGULATION CODE
Fiduciaries Duties and Liability Rules.... 122
When Personal Liability Attaches ........... 122 ..................................................................154
Responsibility for Crimes ......................... 123 State Policy and Purpose ...................... 154
Inside Information ..................................... 123 Declared State Policy .................................154
Contracts ..................................................... 123 Purpose ........................................................154
Executive Committee ................................ 124 Securities and Exchange Commission
Meetings ...................................................... 124 ................................................................... 154
Stockholders and Members ................. 125 SEC as a Collegial Body ............................154
Rights of a Stockholder and Member ..... 125 Powers and Functions ...............................154
Participation in the Management ............ 125 Definition of Securities ........................ 155
Proprietary Rights ..................................... 130 Definition ....................................................155
Howey Test .................................................155

Parties/Entities Involved ......................... 156 Responsibility and Primary Objective of the

Kinds of Securities ................................ 156 BSP ...............................................................166
Exempt Securities ...................................... 156 Monetary Board – Powers and Functions
Exempt Transactions ................................. 156 ......................................................................166
Formal Application for Exemption ......... 156 Legal Tender Power ...................................167
Non-Exempt ............................................... 156 Foreign Exchange Operations ..................167
Procedure for Registration of Securities Banks in Distress (R.A. No. 10846) ..... 168
................................................................... 157 Definition of Terms Under R.A. No. 3591, as
Mandatory Registration ............................ 157 amended ......................................................168
Procedure .................................................... 157 Conservatorship .........................................168
Registration Statement .............................. 158 Closure.........................................................169
Grounds for Rejection and Revocation of Receivership................................................169
Registration of Securities .......................... 158 Liquidation..................................................171
Withdrawal ................................................. 158 Law on Secrecy of Bank Deposits (R.A.
Prohibitions on Fraud, Manipulation No. 1405, as amended) ........................... 175
and Insider Trading .............................. 158 Purpose ........................................................175
Manipulation of Security Prices .............. 158 Prohibited Acts ...........................................175
Fraudulent Transaction............................. 159 Deposits Covered .......................................176
Insider Trading .......................................... 159 Exceptions ...................................................176
Protection of Investors .......................... 160 Garnishment of Deposits, Including
Tender Offer Rule ...................................... 160 Foreign Deposits ........................................176
Rule on Proxy Solicitation ........................ 162 General Banking Law of 2000 (R.A. No.
Full Disclosure Rule .................................. 162 8791 ........................................................... 176
Margin Trading ...................................... 162 Definition and Classification of Banks ....176
Definition .................................................... 162 Distinction of Banks from Quasi-Banks and
Limitation.................................................... 162 Trust Entities...............................................177
Exemption ................................................... 163 Bank Powers and Liabilities .....................177
Independent Director ........................... 163 Diligence Required of Banks ....................179
Civil Liability ......................................... 163 Nature of Bank Funds and Bank Deposits
Civil Liabilities on Account of False ......................................................................179
Registration Statement .............................. 163 Stipulation of Interests ..............................179
Civil Liabilities Arising in Connection with Grant of Loans and Securities Requirements
Prospectus, Communications, and Reports a Single Borrower’s Limits ........................179
...................................................................... 164
Civil Liability of Fraud in Connection With INTELLECTUAL PROPERTY CODE
Securities Transaction ............................... 164 ..................................................................182
Civil Liability for Manipulation of Security General ..................................................... 182
Prices............................................................ 164 State Policies ...............................................182
Civil Liability with Respect to Commodity Reciprocity Rule .........................................182
Futures Contracts and Pre-Needed Coverage of Intellectual Property Rights
Plans…......................................................... 164 ......................................................................183
Civil Liability on Account of Insider Differences between Copyrights,
Trading ........................................................ 164 Trademarks, and Patents ..........................183
Limitation of Actions ................................ 164 Intellectual Property Office ................. 183
Amount of Damages to be Awarded ...... 165 Powers of the IPO ......................................183
Cease and Desist Order ............................ 165 Disqualification of Officers and Employees
......................................................................183
BANKING LAWS ................................166 Patents ...................................................... 183
The New Central Bank Act (R.A. No. Notable Concepts .......................................183
7653) .......................................................... 166 Patentable Inventions ................................184
State Policies ............................................... 166 Non-Patentable Inventions .......................184

Novelty and Non-Prejudicial Disclosure Limitations of Copyright ..........................196

...................................................................... 184 Registration and Deposit with National
Ownership of Patent ................................. 184 Library and the Supreme Court ...............197
Grounds for Cancellation of Patents ....... 185 Moral Rights ...............................................197
Remedies ..................................................... 185 Terms of Protection....................................197
Rights Conferred by a Patent ................... 185 Copyright Infringement ............................197
Assignment of Patents .............................. 186
Limitation of Patent Owner’s Rights ...... 186 SPECIAL COMMERCIAL LAWS .....198
Patent Infringement................................... 186 Anti-Money Laundering Act (R.A. No.
Licensing ..................................................... 187 9160, as amended by R.A. No. 9194) ... 198
Utility Models ........................................ 188 Policy of the Law ........................................198
Definition…. ............................................... 188 Covered Institutions ..................................198
Applicability of Patent Provisions .......... 188 Obligations of Covered Institutions ........199
Patent Application Conversion to Utility Covered Transactions ................................199
Model Registration .................................... 188 Suspicious Transaction..............................199
Prohibition on Parallel Applications....... 189 Money Laundering ....................................200
Industrial Design ................................... 189 Unlawful Activities or Predicate Crimes 200
Definition .................................................... 189 Anti-Money Laundering Council (AMLC)
Integrated Circuit....................................... 189 ......................................................................200
Layout Design/Topography .................... 189 Functions of the AMLC .............................201
Trademarks ............................................. 189 Freezing of Monetary Instrument or
Definition .................................................... 189 Property .......................................................201
Purpose........................................................ 189 Civil Forfeiture ...........................................202
Acquisition of Ownership of Mark or Authority to Inquire Into Bank Deposits 202
Tradename .................................................. 189 Foreign Investments Act (R.A. No. 7042,
Non-Registrable Marks ............................. 190 as amended by R.A. No. 8179) ............. 202
Doctrine of Secondary Meaning .............. 191 Policy........................................................... 202
Trademark Dilution................................... 191 Definition of Terms ....................................203
Filing Date of Trademarks ........................ 191 Negative List ...............................................204
Priority Right of Foreign Applicant ........ 191 Registration .................................................205
Certificate of Registration ......................... 191 Electronic Commerce Act (R.A. No. 8792)
Rights Conferred from Certificate of
................................................................... 205
Registration................................................. 192
In General ....................................................205
License Contracts ....................................... 192
Legal Recognition ......................................205
Use of Indications by Third Parties for
Communication ..........................................207
Other Purposes........................................... 192
E-Commerce in Specific
Cancellation ................................................ 192
Areas............................................................209
Infringement ............................................... 192
Penalized Offenses .....................................209
Test to Determine Confusing Similarity
Other Provisions.........................................210
Between Marks ........................................... 193
Rules on Electronic Evidence (A.M. No. 01-
Colorable Imitation.................................... 193
7-01-SC)........................................................211
Unfair Competition ................................... 193
Financial Rehabilitation and Insolvency
Trade Secrets .............................................. 194
Act (R.A. No. 10142) ............................... 213
Copyrights............................................... 194
Concept ........................................................213
Basic Principles .......................................... 194
Types of Rehabilitation Proceedings .......213
Copyrightable Works ................................ 194
Commencement Order ..............................216
Non-Copyrightable Works ....................... 195
Rehabilitation Receiver .............................217
Right of Copyright Owner ....................... 195
Management Committee ..........................219
Rules on Copyright Ownership ............... 195
Rehabilitation Plan.....................................219
Presumption of Authorship ..................... 195
Cram Down Effect .....................................219
Transfer of Assignment ............................ 195
Stay or Suspension Order .........................220

Liquidation ................................................. 220

Governance ................................................. 224
Termination of Rehabilitation Proceedings
...................................................................... 224

Mercantile Law Letters of Credit
DEFINITION AND NATURE
DEFINITION
A letter of credit is an instrument issued by a bank that

guarantees its client’s ability to pay for imported goods or
services, authorizing an individual or a firm to draw drafts on
the bank or on its correspondents for bank’s account under
conditions specified in the credit. Its purpose is to insure a
seller payment of a definite amount upon presentation of
documents. [Prudential Bank v. IAC, G.R. No. 74886, December
8, 1992]
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.
To break the impasse, the buyer may be required to contract

with a bank to issue a letter of credit in favor of the seller so
that, by virtue thereof, the issuing bank authorizes the seller
LETTERS
to draw a draft and engage to pay them upon their
presentment simultaneously with the tender of documents
required by the letter of credit, which basically are the
OF
shipping documents of the goods purchased. [Bank of America
v. Court of Appeals, G.R. No. 105395, December 10, 1993]
CREDIT
Letter of Credit Guaranty
Bank undertakes a primary Accessory obligation -
obligation - Issuing bank Guarantor undertakes a
engages to pay seller once collateral obligation which
the draft and other arises only upon debtor’s
required shipping default.
documents are presented to
it.
[Metropolitan Waterworks v. Daway, G.R. No. 160732, June 21,
2004]
ESSENTIAL CONDITIONS
1. Issued in favor of a determined person and not to order;
2. Amount must be:
a. Fixed and specified; or
b. Indeterminate but within a maximum sum, the

limit of which already stated.
Non-compliance with the essential conditions renders the

instrument only as a letter of recommendation. [Art. 568, Code
of Commerce]
DURATION
1. Period fixed by parties;
2. If none:
a. 6 months from its date if used in the Philippines;
Lasallian Commission on Bar Operations 2018 1

b. 12 months from its date if used abroad. [Art. 572,

Code of Commerce] 1. Buyer –
PARTIES AND CONTRACTS INVOLVED a. Reimburse issuing bank;
CONTRACTS INVOLVED b. Obtain shipping documents to claim the goods

upon reimbursement; [The Hongkong & Shanghai
In a letter of credit, there are 3 distinct and independent Banking Corporation v. National Steel Corporation,
contracts: G.R. No. 183486, February 24, 2016]
a. Contract of sale between the buyer and the seller; c. Contingent liability until reimbursement by
issuing bank to negotiating bank, if any; [Bank of
b. Contract of the buyer with the issuing bank; and America v. Court of Appeals, G.R. No. 105395,
December 10, 1993]
c. Letter of credit proper in which the bank promises
to pay the seller pursuant to the terms and 2. Issuing Bank -
conditions stated therein.
a. Solidary, direct, primary, absolute and definite
The three contracts which make up the letter of credit undertaking to pay the beneficiary only upon
arrangement are to be maintained in a state of perpetual presentation of the required documents.
separation. A transaction involving the purchase of goods [Metropolitan Waterworks v. Daway, G.R. No.
may also require, apart from a letter of credit, a contract of 160732, June 21, 2004]
transportation specially when the seller and the buyer are not
in the same locale or country, and the goods purchased have b. Holds unto the shipping documents until
to be transported to the latter. [Keng Hua Paper Products v. reimbursement. [The Hongkong & Shanghai Banking
Court of Appeals, G.R. No. 116863, February 12, 1998] Corporation v. National Steel Corporation, G.R. No.
183486, February 24, 2016]
PARTIES IN A LETTER OF CREDIT
3. Seller – Draw drafts and recover from the bank the
Primary parties: value of his shipment if made within the terms of the
instrument and documents are complete;
a. Buyer/Applicant – purchases goods, procures the
letter of credit and obliges himself to reimburse the 4. Confirming Bank – Direct and primary obligation to the
issuing bank upon receipts of the documents of seller or beneficiary as if credit were issued by the
title; opening and confirming banks jointly. [Bank of America
v. Court of Appeals, G.R. No. 105395, December 10, 1993]
b. Opening/Issuing Bank (of the Letter of Credit) -
undertakes to pay the seller upon receipt of the 5. Advising/Notifying Bank - No liability except to notify
draft and proper document of titles and to and/or transmit to the beneficiary the existence of the
surrender the documents to the buyer upon letter of credit.
reimbursement; and
6. Negotiating Bank –
c. Seller/Beneficiary - ships the goods to the buyer
and delivers the documents of title and draft to the a. Before negotiation – no liability with respect to the
issuing bank to recover payment. seller.
Other parties: b. After negotiation – Contractual relationship with

seller. [Feati Bank v. Court of Appeals, G.R. No.
a. Advising/Notifying Bank – conveys to the seller 94209, April 30, 1991]
the existence of the credit;
c. Present the instrument to the issuing bank for
b. Confirming bank – lends credence to the letter of payment.
credit issued by a lesser known issuing bank;
7. Paying Bank – pay the seller/beneficiary and seeks
c. Paying Bank – the opening bank or another bank on reimbursement from the issuing bank:
which drafts are drawn and undertakes to encash
the drafts drawn by the seller; a. Debit the account which the opening bank has
with it; or
d. Negotiation Bank – buys or discounts the draft
where buyer opted to approach the negotiating b. Draw a bill of exchange on the opening bank. [Bank
bank instead of claiming payment from the issuing of America v. Court of Appeals, G.R. No. 105395,
bank. [Bank of America v. Court of Appeals, G.R. No. December 10, 1993]
105395, December 10, 1993]
BASIC PRINCIPLES
RIGHTS AND OBLIGATIONS OF PARTIES

DOCTRINE OF INDEPENDENCE Seller must demonstrate by Beneficiary must certify

documents that he has that obligor has not
A letter of credit is an entirely distinct and separate agreement performed the contract (of performed the contract;
which should not be affected by the main contract. Banks sale);
assume no liability or responsibility for the form, sufficiency, Documents show Documents show applicant
accuracy, genuineness, falsification or legal effect of any affirmative steps to comply has not performed;
documents, or for the general and/or particular conditions with contract;
stipulated in the documents or superimposed thereon, nor do
they assume any liability or responsibility for the description, FRAUD EXCEPTION PRINCIPLE
quantity, weight, quality, condition, packing, delivery, value
or existence of the goods represented by any documents, or Fraud and forgery is an exception to the independence
for the good faith or acts and/or omissions, solvency, principle. The “fraud exception” exists when the beneficiary,
performance or standing of the consignor, the carriers, or the for the purpose of drawing on the credit, fraudulently
insurers of the goods, or any other person whomsoever. presents to the conforming bank, documents that contain,
expressly or by implication, material representations of fact
The letter of credit is an entity unto itself, thus: that to his knowledge be untrue.
1. The relationship between the beneficiary and the issuer The remedy for fraudulent abuse is an injunction. However,
of a letter of credit is not strictly contractual, because injunction should not be granted unless:
both privity and a meeting of the minds are lacking, yet
strict compliance with its terms is an enforceable right; a. There is clear proof of fraud;
2. The letter of credit is not a third-party beneficiary b. Fraud constitutes fraudulent abuse of the
contract (pour atrui), because the issuer must honor independent purpose of the letter of credit and not
drafts drawn against a letter regardless of problems only fraud under the main agreement; and
subsequently arising in the underlying contract;
c. Irreparable injury might follow if injunction is not
3. Since the bank's customer (Buyer-Applicant) cannot granted or the recovery of damages would be
draw on the letter, it does not function as an assignment seriously damaged. [Transfield Philippines, Inc. v.
by the customer to the beneficiary; Luzon Hydro Corp., G.R. No. 146717, November 22,
2004]
4. If properly used, the letter of credit is not a contract of
suretyship or guarantee, because it entails a primary Prescriptive period: 10 years as the cause of action arises from
liability following a default; and a contract. [National Commercial Bank of Saudi Arabia v. Court of
Appeals, G.R. no. 124267, January 31, 2003]
5. Finally, the letter of credit is not in itself a negotiable
instrument, because it is not payable to order or bearer DOCTRINE OF STRICT COMPLIANCE
and is generally conditional, yet the draft presented
under it is often negotiable. Commercial involving letters of credit that the documents
tendered must strictly conform to the terms of the letter of
The doctrine works to the benefit of both the issuing bank and credit. The tender of documents by the beneficiary (seller)
the beneficiary. Its purpose is to assure the seller of prompt must include all documents required by the letter. A
payment independent of any breach of the main contract and correspondent bank which departs from what has been
to preclude the issuing bank from determining whether the stipulated under the letter of credit, as when it accepts a faulty
main contract is actually accomplished or not. 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
The independent nature may be: be, the money thus paid to the beneficiary. [Feati Bank v. Court
of Appeals, G.R. No. 94209, April 30, 1991]
1. Independent in toto where credit is independent from
the justification aspect and is a separate obligation from
the underlying agreement like a typical standby (letter of
credit); or
2. Independence only as to the justification aspect like in a

commercial letter of credit or repayment standby, which is
identical with the same obligations with the underlying
agreement. [Transfield Philippines, Inc. v. Luzon Hydro
Corp., G.R. No. 146717, November 22, 2004]
Commercial L/C Standby L/C

Credits become payable Credits become payable
upon presentation by the upon certification of a
seller of documents; party’s non-performance;

Mercantile Law Trust Receipts Law
DEFINITION AND CONCEPT
DEFINITION
A trust receipt is a commercial document whereby the bank

releases the goods in the possession of the entrustee but
retains ownership thereof, while the entrustee shall sell the
goods and apply the proceeds for the full payment of his
liability with the bank. It is a security arrangement to which a
bank acquires ownership of the imported personal property.
[Garcia v. Court of Appeals, G.R. No. 119845, July 5, 1996]
A trust receipt transaction is any transaction between an

entruster and entrustee whereby:
a. The entruster, who holds absolute title or security

interest over certain specified goods, documents or
instruments (GDI), releases the same to the
possession of the entrustee;
b. The entrustee executes and delivers to the entruster

a document called a trust receipt, binding himself to
hold the merchandise in trust with respect to two
TRUST obligations:
(1) Deliver to the entruster the price of the sale
RECEIPTS (2)
(entregarla); and
Return the GDI if unsold (devolvera) [Sec. 4,
LAW P.D. No. 115]
When both parties enter into an agreement knowing that the

return of the goods subject of the trust receipt is not possible
even without any fault on the part of the entrustee, the
transaction is a mere loan where the borrower is obligated to
return the amount spent for the purchase of the goods
through the proceeds of the sale. [Land Bank of the Philippines
v. Perez, G.R. No. 166884, June 13, 2012]
No violation of the right against imprisonment for non-payment of

a debt - The law does not singularly seek to enforce payment
of the loan. It punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice
of another, regardless of whether the latter is the owner or
not.[People v. Nitafan, G.R. Nos. 81559-60, April 6, 1992]
LOAN/SECURITY FEATURE
A trust receipt is considered as a security transaction intended

to aid in financing importers and retail dealers who do not
have sufficient funds or resources to finance the importation
or purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral of the
merchandise imported or purchased. [Samo v. People, G.R. No.
L-17603-04, May 31, 1962]
There are two features in the transaction:
a. Loan – Bank (entruster) extends a loan, represented

by a letter of credit, for the importation of goods
subject of the trust receipt;

b. Security – A trust receipt is a security agreement 2. Give notice of intention to sell in a private or public sale,
pursuant to which a bank acquires a security interest on or after default, to the entrustee if entruster is
in the goods. It secures an indebtedness and there already in possession of the GDI;
can be no such thing as security interest that secures
no obligation. [Vintola v. Insular Bank of Asia and Application of proceeds of any sale:
America, G.R. No. 73271, May 29, 1987]
a. Expenses of sale;
Note: Security interest refers to a property interest in GDI to
secure performance of some obligation of the entrustee or of b. Expenses of re-taking, keeping, and storing GDI;
some third persons to the entruster and includes title, whether and
or not expressed to be absolute, whenever such title is in
substance taken or retained for security only. c. Entrustee’s indebtedness to entruster.
OWNERSHIP OF THE GOODS, DOCUMENTS, AND Notice must be:

INSTRUMENTS UNDER A TRUST RECEIPT
a. In writing;
The importer (entruster) becomes absolute owner of the
imported merchandise as soon as he has paid its price. The b. Personal service or sent by ordinary mail to
ownership of the merchandise continues to be vested in the entrustee’s last known business address.
owner thereof or in the person who has advanced payment
(entrustee), until he has been paid in full, or if the VALIDITY OF THE SECURITY INTEREST OF THE
merchandise has already been sold, the proceeds of the sale ENTRUSTER AS AGAINST THE CREDITORS OF THE
should be turned over to him by the importer or by his ENTRUSTEE OR INNOCENT PURCHASER FOR VALUE
representative or successor in interest. [Prudential Bank v.
NLRC, G.R. No. 112592, December 19, 1995] GENERAL RULE: The entruster's security interest in goods,
documents, or instruments pursuant to the written terms of a
The bank does not become the real owner of the goods. It is trust receipt shall be valid as against all creditors of the
merely the holder of a security title for the advances it had entrustee for the duration of the trust receipt agreement. [Sec.
made to the importer. The goods the importer had purchased 12, P.D. No. 115]
through the bank financing, remain the importer's property
and he holds it at his own risk. The trust receipt arrangement EXCEPTION: When the goods are in the hands of an innocent
does not convert the bank into an investor; it remains a lender purchaser for value and in good faith. [Prudential Bank v.
and creditor. This is so because the bank had previously NLRC, G.R. No. 112592, December 19, 1995]
extended a loan which the letter of credit represents to the
importer, and by that loan, the importer should be the real Any purchaser who buys the GDI for value and in good faith
owner of the goods. [Abad v. Court of Appeals, G.R. No. L-42735, from the entrustee, acquires said goods, documents or
January 22, 1990] instruments free from the entruster's security interest. [Sec. 11,
P.D. No. 115]
RIGHTS OF THE ENTRUSTER
This is an exception to Nemo Dat Quod Non Habet where the
RIGHTS OF ENTRUSTER buyer is to acquire only whatever title the seller had at the
time the sale was perfected and the object is delivered.
1. Proceeds from the sale of GDI to the extent of the [Villanueva, 559]
amount owing to the entruster or as appears in the trust
receipt; OBLIGATIONS AND RIGHTS OF THE
ENTRUSTEE
2. Return of GDI in case of non-sale;
OBLIGATIONS OF ENTRUSTEE
3. Cancel the trust and take possession of GDI or the
proceeds thereof at any time upon default or failure of 1. Payment/delivery of proceeds of sale or disposition of
the entrustee to comply with any of the terms and goods, documents, or instruments;
conditions of the trust receipt or any other agreement
between the entruster and the entrustee; Entregarla - A trust receipt transaction imposes upon the
entrustee the obligation to deliver to the entruster the
4. Become the purchaser as a public sale held not less than price of the sale. [Gonzales v. HSBC, G.R. No. 164904,
5 days after service of notice; October 19, 2007]
5. Enforcement of all other rights conferred on him in the 2. Return of goods, documents, or instruments in case of
trust receipt provided such are not contrary to law. [Sec. non-sale;
7, P.D. No. 115]
Devolvera – In case of non-sale, the entrustee must
OBLIGATIONS OF ENTRUSTER return the merchandise to the entruster. [Gonzales v.
HSBC, G.R. No. 164904, October 19, 2007]
1. Give possession of goods to the entrustee;
3. Liability for loss of goods, documents, or instruments;

documents or instruments, and the satisfaction of the

The risk of loss is borne by the entrustee. Loss of GDI entrustee’s indebtedness to the entruster. [Sec. 7, P.D. No. 115]
subject of a trust receipt, pending their disposition,
irrespective of whether or not it was due to the fault or CHARGE FOR ESTAFA
negligence of the entrustee, shall not extinguish his
obligation to the entruster for the value thereof. [Sec. 10, The failure to turn over the goods or the proceeds realized
P.D. No. 115] from the sale thereof is a criminal offense punishable under
Article 315 (1) (b) of the Revised Penal Code. Elements:
This is an exception to Res Perit Domino where it is the
owner who must bear the risk of loss. The entrustee will a. Receipt of subject goods in trust or under the
bear the less should the goods be lost while in his obligation to sell the same and to remit the proceeds
possession although he is not the owner thereof. to the entruster, or to return the goods if not sold;
[Villanueva, 559]
b. Misappropriation or conversion of goods and/or
4. Insure goods for their total value against loss from fire, proceeds of sale;
theft, pilferage or other casualties;
c. Performance of such acts with abuse of confidence
5. Keep goods or proceeds thereof separate and capable of to the damage and prejudice of the entruster; and
identification as entruster’s property;
d. Demand was made by the entruster for the
6. Observe all other terms and conditions of the trust remittance of the proceeds of return of the unsold
receipt not contrary to law; [Sec. 9, P.D. No. 115] goods.
PENAL SANCTION Intent to defraud is presumed when:
Failure of entrustee to turn over the proceeds of the sale of the a. Entrustee fails to turn over the proceeds of the sale;
goods, covered by trust receipt to entruster or to return said
goods if they were not disposed of in accordance with the b. Entrustee fails to return the goods if they are not
terms of the trust receipt, shall be punishable as estafa under disposed of in accordance with the trust receipts.
Article 315 paragraph 1(b) of the Revised Penal Code. [Sec. 13, [Land Bank of the Philippines v. Perez, G.R. No. 166884,
P.D. No. 115] June 13, 2012]
If the entrustee is a corporation, the law makes the officers or Acquittal does not extinguish underlying loan - The acquittal of
employees suffer imprisonment. However, the person the entrustee in the criminal charge of estafa does not
signing the trust receipt for the corporation is not solidarily extinguish the civil liability arising from the trust receipt
liable with the corporation for the civil liability arising from arrangement. [Vintola v. Insular Bank, G.R. No. 73271, May 29,
the criminal offense. [Ong v. Court of Appeals, G.R. No. 119858, 1987]
April 29, 2003]
Damage to the entruster need not be proven – The offense is
RIGHTS OF ENTRUSTEE punished as malum prohibitum. A mere failure to deliver the
proceeds or return the goods constitutes a criminal offense
1. Possess the goods pursuant to the trust receipt that cause prejudice to another and to public interest.
agreement; and [Metropolitan Bank v. Tonda, G.R. No. 134436, August 16, 2000]
2. Receive surplus but not liable for any deficiency from OTHER REMEDIES
the sale. [Sec. 7, P.D. No. 115]
The law uses the word "may" in granting to the entruster the
REMEDIES AVAILABLE right to cancel the trust and take possession of the goods.
Consequently, the entrustor has the discretion to avail of such
CANCEL THE TRUST AND TAKE POSSESSION OF GDI right or seek any alternative action, such as a third party claim
or a separate civil action (collection) which it deems best to
In the event of default or failure of the entrustee to comply protect its right, at any time upon default or failure of the
with the trust receipt, the entruster may cancel the trust and entrustee to comply with any of the terms and conditions of
take possession of the GDI or of the proceeds realized the trust agreement. [South City Homes, Inc. v. BA Finance
therefrom at any time as a statutory remedy. The entruster Corp., G.R. No. 135462, December 7, 2001]
may give notice of the intention to sell on or after default and
may also become a purchaser. [Sec. 7, P.D. No. 115] Under Article 33 of the Civil Code, a civil action for damages,
entirely separate and distinct from the criminal action, may be
DEMAND PAYMENT FOR DEFIENCY brought by the injured party in cases of defamation, fraud and
physical injuries. Estafa falls under fraud. [Prudential Bank v.
The entrustee is be liable to the entruster for any deficiency IAC, G.R. No. 74886, December 8, 1992]
after the proceeds of the sale have been applied to the
payment of the expenses of the sale, the payment of the WAREHOUSEMAN’S LIEN
expenses of re-taking, keeping and storing the goods,
CONCEPT

the depositor of all charges which the depositor has

GENERAL RULE: A warehouseman, by issuing the receipt, is bound himself to pay; [Sec. 32, Act No. 2137]
estopped from setting up any title or right to possession of the
goods. d. Undertaking other remedies allowed by law for the
enforcement of lien against personal property. [Sec.
EXCEPTION: Except when it pertains to his lien. [Villanueva, 35, Act No. 2137]
581]
A warehouseman’s lien is a lien over the goods deposited

with him as his security for the payment of lawful charges,
advances and other expenses in relation to such goods. [Sec.
27, Act No. 2137]
CLAIMS INCLUDED
a. Lawful charges for storage and preservation of the

goods;
b. Lawful claims for money advanced, interest, insurance,

transportation, labor, weighing, coopering and other
charges and expenses in relation to such goods;
c. Reasonable charges and expenses for notice, and

advertisements of sale; and
d. Sale of the goods where default had been made in

satisfying the warehouseman's lien. [Sec. 27, Act No.
2137]
GOODS SUBJECT TO LIEN
The warehouseman may enforce his lien against the

following:
a. Goods of the depositor who is liable as debtor

whenever such goods are deposited; and
b. Goods of other persons stored by the depositor who

is liable as debtor with authority to make a valid
pledge. [Sec. 28, Act No. 2137]
LOSS AND WAIVER OF LIEN
A warehouseman loses his lien upon goods by:
a. Surrendering possession thereof; or
b. Refusing to deliver the goods when a demand is

made with which he is bound to comply. [Sec. 29,
Act No. 2137]
ENFORCEMENT OF WAREHOUSEMAN’S LIEN
The remedies available to a warehouseman for enforcing his

lien against the person demanding the goods are as follows:
a. Refusing to deliver the goods until the lien is

satisfied; [Sec. 31, Act No. 2137]
b. Causing the extrajudicial sale of the property and

applying the proceeds to the value of the lien; [Secs.
33-34, Act No. 2137]
c. Undertaking other means allowed by law to a

creditor against his debtor for the collection from

Mercantile Law Negotiable Instruments Law
FORMS AND INTERPRETATION
DEFINITION
A Negotiable Instrument is a written contract for the payment

of money which is intended as a substitute for money and
passes from one person to another as money, in such a
manner as to give a holder in due course the right to hold the
instrument free from defenses available to prior parties.
[Salvador Austria & Timoteo Aquino, Fundamentals of Negotiable
Instruments Law (2009]
FEATURES
1. Negotiability – NI can be transferred from one person to

another.
2. Accumulation of Secondary Contracts – Indorsers

become secondarily liable to the immediate transferees
and to any holder.
Note:
▪ The negotiability of an instrument is determined
NEGOTIABLE from the writing, that is, from the face of the
instrument itself. [Caltex v. Court of Appeals, G.R. No.
97753, August 10, 1992]
INSTRUMENTS ▪ The fact that an instrument does not meet the

foregoing requisites will not affect its validity,
LAW however it will be governed by the Civil Code,

instead of NIL. [Ang Tiong v. Ting, G.R. No. L-26767,
February 22, 1968]
REQUISITES OF NEGOTIABILITY
1. Written and signed by the maker/drawer;
2. Contain an unconditional promise or order to pay a sum

certain in money;
3. Payable on demand, or at a fixed or determinable future

time;
4. Payable to order or bearer;
5. Where the instrument is addressed to a drawee, he must

be named or otherwise indicated therein with reasonable
certainty.
1. Written & Signed by the Maker/Drawer
▪ The writings may be made in any manner.
▪ The signature is binding whether it is in one’s

handwriting, or printed, engraved, lithographed or
photographed, so long as it is intended or adopted
as the signature of the signer or made with his
authority.
2. Unconditional Promise or Order to Pay a Sum Certain

in Money

Promise to Pay Order to Pay ▪ A note or bill, if it is to be negotiable, must be

A promise to pay is a written An order to pay instructs payable in money, not in other forms.
commitment of the maker to another person to make the
pay a sum of money to the payment. ▪ An instrument which contains an order or promise
payee or payee’s order. to do an act in addition to the payment of money is
An order to pay may be not negotiable.
A promise to pay must be on expressed or implied through
the instrument itself, although words equivalent to an order or ▪ But if the order or promise gives the holder the
it is not necessary to use the which show the drawer’s will option to require something to be done in lieu of
word “promise.” It is enough that the money should be paid. money, the instrument is negotiable.
that the meaning of promise is
expressed or implied in the A mere authorization to pay or Sec. 2. What constitutes certainty as to sum.
instrument itself. request to pay is not negotiable The sum payable is a sum certain within the meaning of
because it leaves the payee with this Act, although it is to be paid:
In addition to the discretion. (a) with interest; or
acknowledgement of (b) by stated installments; or
indebtedness, there must be (c) by stated installments, with a provision that, upon
other words expressing or default in payment of any installment or of interest,
implying the intention to pay. the whole shall become due; or
(d) with exchange, whether at a fixed rate or at the
Sec. 3. When promise is unconditional. current rate; or
An unqualified order or promise to pay is unconditional (e) with costs of collection or an attorney's fee, in case
within the meaning of this Act though coupled with: payment shall not be made at maturity.
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular 3. Payable on Demand, or at a Fixed or Determinable
account to be debited with the amount; or Future Time
(b) A statement of the transaction which gives rise
to the instrument. ▪ The requirement as to certainty of time of payment
But an order or promise to pay out of a particular fund is is for the purpose of informing the holder of the
not unconditional. instrument of the date when he may enforce the
payment thereof.
Notes on Sec. 3
Sec. 4. Determinable future time; what constitutes.
▪ The unconditionality of an order or promise means An instrument is payable at a determinable future time,
that such must not be subject to a condition. within the meaning of this Act, which is expressed to be
payable:
Condition (a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time
▪ Future and contingent event, or a past event specified therein; or
unknown to the parties, the happening or non- (c) On or at a fixed period after the occurrence of a
happening of which will either give rise to an specified event, which is certain to happen,
obligation or extinguish existing obligations. [Art. though the time of happening be uncertain.
1181, New Civil Code] An instrument payable upon a contingency is not
negotiable, and the happening of the event does not cure
▪ The mere fact that the underlying transaction stated the defect.
in the instrument will not make the promise or
order conditional. But where the promise or order 3.1. Payable at a fixed period after date or sight
is made subject to the terms and conditions of the
transaction stated, then, the instrument is rendered ▪ “Fixed period after date” – Pertains to a period of
non-negotiable. time (i.e. 30 days, 2 months) after a specified date
(i.e. June 20, 2016) within which payment must be
▪ An order or promise to pay out of a particular fund made.
is not unconditional [Sec. 4, NIL] because the
possibility of payment is contingent on the ▪ “After sight” – Pertains to the time after the drawee
availability of funds in the particular fund has seen the instrument upon presentation for
specified. acceptance
2.1. Sum Certain in Money 3.2. On or before a fixed or determinable future time
▪ The amount of money to be paid must be ▪ The phrase “on or before” gives the person liable
determinable by inspection and must be stated the option to pay on any other day before the due
specifically and definitely on the face of the date, which is either fixed or determinable.
instrument.

3.3. On or at a fixed period after the occurrence of a NIL, a check payable to a specified payee may
specified event, certain to happen nevertheless be considered as a bearer instrument
if it is payable to the order of a fictitious or non-
▪ The event described herein is that which will existing person, and such fact is known to the
certainly happen, but cannot be specifically person making it so payable.
determined in advance (i.e. death).
▪ A check made expressly payable to a non-fictitious
▪ A determinable future time can mean nothing else and existing person is not necessarily an order
than a time that can be certainly determined after instrument. If the payee is not the intended
the execution of the note. recipient of the proceeds of the check, the payee is
considered a "fictitious" payee and the check is a
▪ A contingency is, in law, an uncertain future event, bearer instrument. [PNB v. Rodriguez]
and, as a contingency may never happen, an
instrument payable only upon the happening Sec. 8. When payable to order.
thereof may never come due, and is therefore not The instrument is payable to order where it is drawn
negotiable. [State Bank of Halstad v. Bilstad] payable to the order of a specified person or to him or his
order. It may be drawn payable to the order of:
Sec. 7. When payable on demand. (a) A payee who is not maker, drawer, or drawee;
An instrument is payable on demand: or
(a) When it is so expressed to be payable on (b) The drawer or maker; or
demand, or at sight, or on presentation; or (c) The drawee; or
(b) In which no time for payment is expressed. (d) Two or more payees jointly; or
(e) One or some of several payees; or
Where an instrument is issued, accepted, or indorsed (f) The holder of an office for the time being.
when overdue, it is, as regards the person so issuing,
accepting, or indorsing it, payable on demand. Where the instrument is payable to order, the payee must
be named or otherwise indicated therein with reasonable
Notes on Sec. 7 certainty.
▪ Where a blank for time for payment is unfilled, the Notes on Sec. 8
instrument has been held to be payable on demand.
▪ Without the words “or order” or “to the order of”,
▪ After the date of maturity, the instrument can no the instrument is payable only to the person
longer be negotiated as to make the parties who designated therein and is therefore non-negotiable.
acquire the instrument after the date of maturity
holders in due course because they become holders ▪ Under the last paragraph of this section, the law
thereof with notice that it is already overdue, as this requires that the payee must be named or otherwise
can be determined from the face of the instrument indicated with reasonable certainty. If there is no
itself. The last paragraph of Section 7 means that the payee, where the instrument is payable to order, no
instrument is payable on demand only as between one could indorse the instrument.
the immediate parties – the indorser and the payee.
Sec. 9. When payable to bearer.
4. Payable to order or to bearer The instrument is payable to bearer:
(a) When it is expressed to be so payable; or
▪ An instrument is not negotiable unless made (b) When it is payable to a person named therein or
payable to a person or his “order” (ex. “Mr. X or his bearer; or
order”; “Order of Mr. X”) or to “bearer” (ex. “Mr. X (c) When it is payable to the order of a fictitious or
or bearer”; “Bearer”). Where the instrument is non-existing person, and such fact was known
payable only to a specified person (ex. “Pay to Mr. to the person making it so payable; or
X”), it is not payable to order. (d) When the name of the payee does not purport to
be the name of any person; or
▪ “Order” or “bearer” are critical words that define (e) When the only or last indorsement is an
negotiability. These words connote that the indorsement in blank.
instrument is transferrable from one person to
another. ▪ When an instrument is payable to bearer, it is payable to
whoever has physical possession. The bearer can
▪ Order means the instrument is payable to payee or indorse, present for payment, and collect the proceeds of
whom payee identifies. Bearer means the the instrument.
instrument payable to whoever has possession of
the instrument. ▪ Bearer instruments need not to be indorsed because it is
negotiated by mere delivery.
Fictitious Payee Rule
▪ When the last indorsement is an indorsement in blank,
▪ A check that is payable to a specified payee is an the instrument becomes bearer instrument.
order instrument. However, under Sec. 9(c) of the

make it negotiable. If it is not dated, and the date is

Additional provisions not affecting negotiability (Sec. 5.) necessary to fix the maturity of the instrument, the
NIL allows any holder to insert the true date of
issue. [Sec. 13, NIL]
An instrument which contains an order or promise to do
any act in addition to the payment of money is not
Effect of Omission of Value
negotiable. But the negotiable character of an instrument
otherwise negotiable is not affected by a provision which:
▪ It is not necessary to state that value has been
(a) authorizes the sale of collateral securities in case
received because consideration is presumed. [Sec.
the instrument be not paid at maturity; or
24, NIL]
(b) authorizes a confession of judgment if the
instrument be not paid at maturity; or Effect of Omission of Place
(c) waives the benefit of any law intended for the
advantage or protection of the obligor; or ▪ If no place is mentioned, the law fills in the gap by
(d) gives the holder an election to require providing that presentment should be made at the
something to be done in lieu of payment of address of the person who is to pay, if such address
money. is stated; if not, at the place of business or residence
of the person to make payment.
But nothing in this section shall validate any provision or
stipulation otherwise illegal. Sec. 11. Date, presumption as to.
Where the instrument or an acceptance or any
a. Authorizes the sale of collateral securities in case the indorsement thereon is dated, such date is deemed prima
instrument be not paid at maturity – A promise of the facie to be the true date of the making, drawing,
maker to furnish additional collateral will render the acceptance, or indorsement, as the case may be.
note non-negotiable, as that would be an additional act
to the promise to pay money. This legal provision applies to three cases:
b. Authorizes a confession of judgment if the instrument 1. The instrument contains the date of issue – the date
be not paid at maturity – Confession of judgments are placed is deemed prima facie the true date of the
void under Philippine Law. making or drawing of the instrument;
c. Waives the benefit of any law intended for the 2. In an accepted bill of exchange and the acceptance is
advantage or protection of the obligor – Benefits dated – the date placed is deemed prima facie the true
intended for the advantage or protection of the obligor date of acceptance;
are the rights to (1) presentment for payment, (2) notice
of dishonor, and (3) protest. All of these may be waived. 3. In an indorsed instrument and the indorsement is
dated – the date placed is deemed prima facie the true
d. Gives the holder an election to require something to be date of indorsement.
done in lieu of payment of money – Even if there is an
additional act given as an option, the instrument still Note: The date on the instrument is presumed to be the true
remains to be negotiable provided that the right to and correct date, unless proven otherwise by another
choose between payment of money or the performance interested person. However, as to a holder in due course, this
of the additional act is in the hands of the holder. presumption is conclusive.
Sec. 6. Omissions; seal; particular money. Sec. 12. Ante-dated and post-dated.
The validity and negotiable character of an instrument are The instrument is not invalid for the reason only that it is
not affected by the fact that: ante-dated or post-dated, provided this is not done for an
(a) it is not dated; or illegal or fraudulent purpose. The person to whom an
(b) does not specify the value given, or that any instrument so dated is delivered acquires the title thereto
value had been given therefor; or as of the date of delivery.
(c) does not specify the place where it is drawn or
the place where it is payable; or ▪ It may be negotiated before or after the date given as
(d) bears a seal; or
long as it is not negotiated after its maturity.
(e) designates a particular kind of current money in
which payment is to be made. ▪ The person to whom the instrument is delivered
acquires title or ownership over it, not as of the date
But nothing in this section shall alter or repeal any statute written on the instrument, but as to the date of actual
requiring in certain cases the nature of the consideration to delivery.
be stated in the instrument.
Effect of Omission of Date
▪ The validity and negotiable character of an

instrument are not affected by the fact that it is not
dated. A date in a bill or note is not essential to

KINDS OF NEGOTIABLE INSTRUMENTS Bill of Exchange Checks

May be payable on demand
Always payable on
1. Promissory Note - A promissory note is an or at a fixed or determinable
demand
unconditional promise in writing made by one person to future time
another, signed by the maker, engaging to pay on Must be presented for Need not be presented for
demand or at a fixed or determinable future time, a sum acceptance acceptance
certain in money to order or to bearer. [Sec. 184, NIL] Need not be drawn on a
Drawn on a deposit
deposit
Parties: Death of a drawer of an Death of a drawer of a
ordinary bill of exchange check, with knowledge of
a. Maker (“M”) – Promises to pay. does not revoke the the bank, revokes the
authority of the banker to authority of the banker to
b. Payee (“P”) – The one promised to be paid. pay pay
May be presented for Must be presented for
payment within a payment within a
2. Bill of Exchange – A bill of exchange is an unconditional reasonable time after its last reasonable time after its
order in writing addressed by one person to another negotiation issue
signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to COMPLETION AND DELIVERY
order or to bearer. [Sec. 126, NIL]
There are two steps in the execution of a negotiable
Parties: instrument, namely:
a. Drawer (“DR”) – Gives the order to pay. 1. Completion – The act of writing the instrument
completely and in accordance with Sec. 1; and
b. Drawee (“DW”) – The one ordered to pay.
2. Delivery – transfer of possession, actual or
c. Acceptor – The DW becomes acceptor once he constructive, of the NI with the intention of giving
accepts the order of DR to pay. effect to it
d. Payee (“P”) – The one to whom payment is ordered Issuance - The first delivery of the instrument complete in
to be made. form, to a person who takes it as a holder.
Check (Kind of BoE) Note: Once the instrument is no longer in the possession of
BoE payable on demand, with bank as drawee. the person who has signed it, a valid delivery by him is
presumed, until the contrary is proved, and as to the holder
Non-Negotiable Negotiable Instrument in due course, the presumption is conclusive, provided the
Instrument instrument is complete.
Does not contain all All requisites of Sec. 1 are
requisites under Sec. 1 present INSERTION OF DATE
NIL not applicable NIL is the governing law
To specified person To order or bearer Sec. 13. When date may be inserted.
Transfer by negotiation or Where an instrument expressed to be payable at a fixed
Transfer by assignment period after date is issued undated, or where the
assignment
Transferee is assignee, Transferee is holder. A holder acceptance of an instrument payable at a fixed period after
who merely acquires the in due course could have sight is undated, any holder may insert therein the true
totality of the rights of the rights superior to that to his date of issue or acceptance, and the instrument shall be
transferor. immediate transferor. payable accordingly. The insertion of a wrong date does
not void the instrument in the hands of a subsequent
Bill of Exchange Promissory Note holder in due course; but as to him, the date so inserted is
An unconditional order or An unconditional to be regarded as the true date.
command to pay promise to pay
The Drawer signs it; he is ▪ The date is critical is when the instrument is payable
secondarily liable. The Maker signs it; he is after a fixed date or payable after sight, as the date is
The Acceptor (Drawee who primarily liable. needed to determine the time payment is due.
accepts) is primarily liable.
▪ Filling in the missing element of date is delegated to the
Two presentments: (a) for
One presentment: for holder.
acceptance, and (b) for
payment
payment
▪ As to a holder in due course, the date appearing on the
instrument is conclusively the date of issuance.
Bill of Exchange Checks
Bank is not necessarily the
Bank is always the drawee ▪ Without the initial delivery of the instrument from the
drawee
drawer to the payee, there can be no liability on the

instrument. Moreover, such delivery must be intended the instrument to A. A negotiated to B, who is not a holder in
to give effect to the instrument. [Development Bank of due course.
Rizal v. Sima Wei, G.R. No. 85419, March 9, 1993]
• B cannot collect from DR, because DR can prove
COMPLETION OF BLANKS that P exceeded the authority given to him to fill up
the instrument.
Sec. 14. Blanks; when may be filled. • B can collect from P, for breach of warranty under
Where the instrument is wanting in any material Sec. 66.
particular, the person in possession thereof has a prima • B can collect from A, for breach of warranty under
facie authority to complete it by filling up the blanks Sec. 66.
therein. • If B were a holder in due course, he can collect
P20,000 from DR, as DR cannot raise any personal
And a signature on a blank paper delivered by the person defense against a holder in due course.
making the signature in order that the paper may be
converted into a negotiable instrument operates as a prima b. Blank Paper with Signature
facie authority to fill it up as such for any amount.
▪ Two conditions must be present before the
In order, however, that any such instrument when presumption of authority to complete may arise:
completed may be enforced against any person who
became a party thereto prior to its completion, it must be a. Delivery of a blank paper containing the
filled up strictly in accordance with the authority given signature of the person who will deliver;
and within a reasonable time.
b. Delivery must have been for the purpose of
But if any such instrument, after completion, is negotiated converting it into a negotiable instrument.
to a holder in due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as if it had Note: Thus, if the paper or writing is delivered without such
been filled up strictly in accordance with the authority intention, its subsequent conversion into a negotiable
given and within a reasonable time. instrument will not render the person signing liable to
anybody, not even a holder in due course. Fraud in factum is
▪ This provision merely raises a personal defense. It covers a real defense.
two kinds of writings:
Rights of a Holder in Due Course
a. Incomplete instruments, and
a. Free from any defect of title of prior parties;
b. A blank paper or a paper so far incomplete that it
does not constitute an instrument within the b. Free from defenses available to prior parties
meaning of the definition of this term, but signed. among themselves;
Material Particular c. May enforce payment of the instrument for the full
amount thereof against all parties liable thereon.
▪ This includes any important detail, including matters [Sec. 57, NIL]
under Sec. 1, that affects the tenor of the instrument or
the rights of the parties. d. Right to sue on the instrument in his own name.
Prima Facie Authority e. Right to receive payment [Sec. 51, NIL]
a. Incomplete Instruments (Protection Against Personal Defenses)
▪ The Payee is deemed to have prima facie authority ▪ Under this section, the defense of parties prior to
to fill up missing material particulars. completion is that it is not filled up within a
reasonable time. However, such personal defense is
▪ Upon completion, there is a presumption that the available only against holders who are not holders
person who completed the instrument did not in due course.
exceed his authority.
▪ A holder in due course can enforce the instrument
▪ Personal Defense: if the Maker or Drawer proves against parties prior to completion regardless if it
otherwise was filled up beyond the authority given by the
maker or drawer.
▪ Personal defenses cannot be raised against a holder
in due course. INCOMPLETE AND UNDELIVERED INSTRUMENTS
Example: P is authorized by DR to fill up the instrument with ▪ Incomplete: There are blanks in the instrument.
the amount of P10,000. P fills it up with P20,000. P negotiated
▪ Undelivered: Instrument was not transferred to another
by the drawer or maker

▪ An incomplete instrument is not valid against the party Undelivered: Instrument was not transferred to another by
before its delivery. The non-delivery of an incomplete the drawer or maker.
instrument is a real defense, not only between the
original parties but also against a holder in due course. Delivery: Transfer of possession of the NU by one person to
another with the intention to transfer.
▪ As to parties whose signatures appear on the instrument
after delivery, the instrument may be valid. a. Issue: First delivery of the instrument from the
maker or drawer to the payee.
▪ The delivery of a promissory note by the maker is
necessary to a valid inception of the contract. The b. Negotiation: Transfer from one person to another
possession of such a note by the payee or indorsee is that constitutes the transferee the holder of the NI.
prima facie evidence of delivery, but if it appears that the [Austria]
note has never been actually delivered, and that without
any confidence, or negligence, or fault of the maker, but Delivery of an instrument is a prerequisite for liability.
by force of fraud, it was put in circulation, there can be Delivery must be made by the drawer, maker, acceptor or
no recovery upon it, even when in the hands of an endorser, or by an agent under their authority.
innocent holder. [Linick v. AJ Nutting & Co.]
If the instrument is complete in all its particulars, but is not
▪ In order the one who is not a holder in due course can delivered, there is no contract.
enforce the instrument against a party prior to the Before delivery, the maker or drawer can revoke, cancel or
instrument’s completion, two requisites must exist: tear up the instrument. The payee named in the instrument
acquires no right until the instrument is delivered to him.
a. That the blank must be filled strictly in accordance
with the authority given; and As a general rule, when the instrument is no longer in the
possession of the party who signed, there is a prima facie
b. It must be filled up within a reasonable time. presumption that the party who signed it intentionally
delivered it, unless the contrary is proven. In respect to a
▪ If it was proven that the instrument had not been filled holder in due course, there is already a conclusive
up strictly in accordance with the authority given and presumption of delivery.
within a reasonable time, the maker can set this up as a
personal defense and avoid liability. In other words, the presumption is rebuttable as against an
immediate party or a remote party who is not a holder in due
▪ However, if the holder is a holder in due course, there is course and, as against him, it may prove that:
a conclusive presumption that authority to fill it up had
been given and that the same was not in excess of a. No delivery was made;
authority. [Patrimonio v. Gutierrez, G.R. No, 187769, June
4, 2014] b. If the delivery was made, it was not authorized;
COMPLETE BUT UNDELIVERED INSTRUMENTS c. If the delivery was made or authorized, the
delivery was conditional or for a special purpose
Sec. 16. Delivery; when effectual; when presumed. and not for the purpose of transferring the property
Every contract on a negotiable instrument is incomplete in the instrument.
and revocable until delivery of the instrument for the
purpose of giving effect thereto. Note: Non-delivery of a complete instrument is only a
personal defense that cannot be raised against a holder in due
As between immediate parties and as regards a remote course.
party other than a holder in due course, the delivery, in
order to be effectual, must be made either by or under the Delivery Subject to Conditions
authority of the party making, drawing, accepting, or
indorsing, as the case may be; and, in such case, the The following is an example of a conditional delivery:
delivery may be shown to have been conditional, or for a “A makes a complete note in favor of B, with the
special purpose only, and not for the purpose of understanding that it is not to become binding on A until it is
transferring the property in the instrument. also signed by C. If B files an action on the note without any
additional proof, the presumption is that it was delivered
But where the instrument is in the hands of a holder in due validly and intentionally. But as B knows of the condition
course, a valid delivery thereof by all parties prior to him placed upon the delivery, he is an immediate party.
so as to make them liable to him is conclusively presumed. Consequently, the presumption is rebuttable, and A can show
And where the instrument is no longer in the possession that the delivery was conditional and if the condition is not
of a party whose signature appears thereon, a valid and fulfilled, he cannot be held liable by B.”
intentional delivery by him is presumed until the contrary
is proved. It is to be noted that what is conditional here is the delivery,
not the promise or order to pay. Otherwise, the instrument is
Complete: There are no missing materials particular. rendered non-negotiable.

Delivery for Special Purposes 3. Incapacitated persons, signing through guardians.
The following is an example of delivery for a special purpose: 4. Forgers of signatures. [Sec. 23, NIL]
“A delivers a complete note payable to bearer signed by him
to B for (1) safekeeping or (2) for collection only. B cannot 5. Persons whose signatures were forged, but are
enforce the note against A, as A can prove that the note was precluded from setting up the defense of forgery.
delivered only for a special purpose. [Sec. 23, NIL]
Delivery of a negotiable instrument is necessary. Between 6. In case of constructive acceptance. [Sec. 137, NIL]
immediate parties, delivery must be made with intention to
pass title. 7. Indorsers who sign on a separate piece of paper
known as allonge.
HIDC NOT HIDC
Completion of Blanks (Sec. 14) 8. Persons who negotiate by mere delivery are liable
Holder can enforce the Holder can enforce for breach of warranty. [Sec. 65, NIL]
instrument as completed instrument as completed
against parties prior or only against parties SIGNING IN TRADE NAME
subsequent to completion. subsequent to the
completion but not against Sec. 18. Liability of person signing in trade or assumed
those prior thereto. name.
(Personal Defense) No person is liable on the instrument whose signature
Incomplete and Undelivered (Sec. 15) does not appear thereon, except as herein otherwise
Holder can enforce instrument as contemplated only expressly provided. But one who signs in a trade or
against parties subsequent to the delivery but not against assumed name will be liable to the same extent as if he had
those prior thereto. (Real Defense) signed in his own name.
Possession gives rise to a Possession does not give
prima facie presumption of rise to any presumption of Trademark: defined as including "any word, name, symbol,
delivery which the maker delivery. emblem, sign or device or any combination thereof adopted
or drawer may rebut by and used by a manufacturer or merchant to identify his goods
proof of non-delivery. and distinguish them from those manufactured, sold or dealt
Complete but Undelivered (Sec. 16) in by others. [R.A. 166 or the Trademark Law]
Possession gives rise to a Possession gives rise to a
conclusive presumption of prima facie presumption of Trademark is "any visible sign capable of distinguishing
delivery. delivery which the maker goods." [R.A. No. 8293, the Intellectual Property Code]
or drawer may rebut by
proof of non-delivery. Trademarks perform three distinct functions:
(Personal Defense)
a. They indicate origin or ownership of the articles to
which they are attached;
SIGNATURE
b. They guarantee that those articles come up to a
GENERAL RULE: A person sign the NI for him to be liable.
certain standard of quality;
Hence, a person whose signature does not appear on the
instrument is not liable.
c. They advertise the articles they symbolize.
EXCEPTIONS: [Austria]
SIGNATURE OF AGENT
1. One who signs in a trade or assumed name, is liable
A duly authorized agent may make the signature of any
as if he signed in his real name. [Sec. 18, NIL]
party.
2. One who signs through an agent or authorized
Liability of Agent
representative, provided:
▪ The liability an agent depends on the following
(i) agent must indicate his capacity as one, and circumstances:
(ii) agent must indicate the name of the principal a. IF the instruments contain words indicating
[Sec. 19, NIL]
that he signs for or on behalf of a principal,
and he is duly authorized, he shall not be
Sec. 21. Signature by procuration; effect of. liable on the instrument.
A signature by "procuration" operates as notice that the
agent has but a limited authority to sign, and the principal b. IF the principal is not disclosed, the mere
is bound only in case the agent in so signing acted within addition of words describing him as an agent
the actual limits of his authority. does not exempt him from personal liability
[Sec. 20, NIL]

Cases covered by Sec. 23:

▪ Where the agent signs his name but nowhere in the
instrument has he disclosed the fact that he is acting a. Where the signature on the instrument is forged;
in a representative capacity or the name of third
party for whom he might have acted as agent, the b. Where the signature is made without the authority
agent is personally liable to take holder of the of the person whose signature it purports it to be –
instrument and cannot be permitted to prove that Mr. F signed the NI for and in behalf of drawer DR,
he was merely acting as agent of another. [Republic without the knowledge and consent of DR
Planters Bank v. Court of Appeals, G.R. No. 93073,
December 21, 1992] GENERAL RULE: The forged signature is wholly inoperative
but the instrument itself is operative [Austria]. Forgery is a
▪ When that appears in the PN and the borrowers did real defense, since the person who signature was forged never
not inform the bank when they applied for and consented to the NI.
secured the loan, and that they were acting as
agents for and in behalf of the principal, the liability Fraud in Factum - Fraud in factum amounts to forgery and is
is personal. [Granada v. PNB, G.R. No. L-20745, a real defense.
September 2, 1966]
EXCEPTION: Negligence on the part of the person who
Procuration signed.
▪ The act of appointing someone as an agent or Example: B obtains the signature of A by telling A that it is
attorney in fact. The authority is vested in a person only for autograph instrument. The fraud here amounts to
so appointed; the function of an attorney. forgery, and may be raised as a real defense.
▪ An agent per procuration must be expressly

authorized to make, draw, accept or indorse the Fraud in Inducement – Fraud in inducement does not
instrument for his principal. Without express amount to forgery and is only a personal defense.
authority, an agent per procuration cannot
presume to act for and in behalf of the principal. Example: A sells to B what he represents to be as a diamond
ring, which in fact is only glass. B issues a check to A. The
INDORSEMENT BY MINOR OR CORPORATION check is not a forgery. The fraud here is in inducing B to issue
the check. Here, there is an intention of B to issue an
▪ The indorsement or assignment of the instrument by a instrument.
corporation or by an infant passes the property therein,
notwithstanding that from want of capacity, the Note: The general rule is to the effect that a forged signature
corporation or infant may incur no liability thereon. [Sec. is "wholly inoperative," and payment made "through or under
22, NIL] such signature" is ineffectual or does not discharge the
instrument. [Samsung Construction Co. Philippines Inc. v.
▪ As to indorsement/assignment by an infant, the transfer FEBTC, G.R. No. 129015, August 13, 2004]
of title is effective, however, the minor can still refuse to
pay on the ground of minority (Real Defense). Art. 1338, Civil Code
There is fraud when, through insidious words or
▪ As to indorsement/assignment by a corporation, the machinations of one of the contracting parties, the other is
transfer of title is effective, however, the corporation can induced to enter into a contract which, without them, he
still refuse to pay if such act was ultra vires (Real would not have agreed to.
Defense).
Duress Amounting to Forgery
FORGERY
▪ Ordinarily, duress is merely a personal defense.
Sec. 23. Forged signature; effect of. However, where it amounts to forgery, such as where B’s
When a signature is forged or made without the authority signature is taken through violence or intimidation, it is
of the person whose signature it purports to be, it is wholly a real defense due to the want of intention to execute an
inoperative, and no right to retain the instrument, or to NI.
give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or Effects of Forgery
under such signature, unless the party against whom it is
sought to enforce such right is precluded from setting up a. The signature forged or made without authority is
the forgery or want of authority. wholly inoperative; and
▪ Sec. 23 applies only to forged signatures or signatures b. Under such signature forged or made without
made without the authority of the person whose authority, the following rights cannot be acquired:
signature purports to be. Consequently, if the forgery
consists of alteration in the amount, Sec. 23 does not 1. to retain the instrument;
apply. Such alterations are covered by Sec. 124.
2. to give discharge therefor; or

3. to enforce payment thereof against any party ▪ DR is not liable, as his forged signature is
thereto. inoperative.
Note: ▪ DR cannot recover from the Collecting Bank,

as there is no privity of contract between them.
▪ When the signature is wholly inoperative, anybody
whose signature appears prior to the forgery ▪ DR can recover from DW, if it should accept
cannot be held liable by the last person who holds the NI, as DW becomes liable as an acceptor.
the instrument. DW’s recourse is not against the DR, but
against the forger. DW is only authorized to
▪ A holder in due course can then enforce payment pay or honor checks duly signed by the DR,
under breach of warranties under Section 66 hence, DR cannot be made to pay the value of
against the indorsers after the forgery. the amount wrongfully released by DW.
EXCEPTION: The above effects do not apply if the party ▪ DW Bank cannot recover from the Collecting
against whom the NI is sought to be enforced, is precluded Bank, as it is the DW Bank who warrants the
from setting up the forgery or want of authority. genuineness of the DR’s signature. DW Bank
is responsible for knowing the signature of its
Parties Barred from Setting Up the Defense of Forgery client, the DR.
Persons who are precluded from setting up the defense of ▪ A bank is bound to know the signature of its
forgery are: customers. If the bank pays a forged check, it
must be considered as making the payment
a. Those who warrant or admit the instrument’s out of its own funds, and cannot ordinarily
genuineness (i.e. general indorsers, persons charge the amount so paid to the account of
negotiating by mere delivery, acceptor); the depositor whose name was forged. [San
Carlos Milling v. BPI, G.R. No. L-37467,
b. Those who are barred on account of silence, acts or December 11, 1933]
negligence;
c. Forgery of Indorser’s Signature
c. Those who are in unreasonable delay in disclosing
the forgery upon discovery. ▪ The parties prior to the forgery of an
indorsement are not liable to any holder, even
Note: It is the duty of a depositor to carefully examine the one in due course.
bank’s statement and other pertinent records within a
reasonable time, and to report any errors without ▪ DR may recover from DW the amount debited
unreasonable delay. If his negligence should cause the bank from his account.
to honor a forged check or prevent it from recovering the
amount it may have already paid on such check, he cannot ▪ DW may recover from the collecting bank,
later complain should the bank refuse to re-credit his account which undertook the warranties of an
with the amount of such check. [MWSS v. Court of Appeals, indorser.
G.R. No, L-62943, July 14, 1986]
▪ Where a check has several indorsements on it,
Cut-Off Rule it was held that it is only the negotiation based
on the forged or unauthorized signature
▪ Parties prior to the forgery are cut-off from the which is inoperative.
parties after the forgery, such that the parties after
the forgery cannot hold parties prior to the forgery ▪ The Drawee of a check can recover from the
liable. Parties after the forgery (i.e. subsequent holder the money paid to him on a forged
indorsers) are liable to subsequent parties instrument. It is not the Drawee’s duty to
including the holder as if there is no forgery. ascertain whether the signatures of the payee
[Austria] or indorsers are genuine or not. [Republic Bank
v. Ebrada, G.R. No. L-40796, July 31, 1975]
Specific Cases of Forgery
Recovery from Recipient of Payment
a. Forgery of Maker’s Signature
▪ According to the general rule, a bank or other
▪ Where the maker’s signature is forged, he corporation or an individual, who has obtained
cannot be held liable by any holder, whether possession of a check, upon an unauthorized or
the holder is in due course or not. forged indorsement of the payee’s signature and
who collects the amount of the check from the
b. Forgery of Drawer’s Signature drawee, is liable for the proceeds thereof to the
payee or other owner, notwithstanding that they
▪ (Drawer = “DR”; Drawee = “DW”)

have been paid to the person whom the check was substantially contributed to the making of the
obtained. forged signature, the drawer is precluded from
asserting the forgery. [Associated Bank v. Court of
Liability of Party Negotiating After Forgery Appeals, G.R. No. 107382/G.R. No. 107612, January 31,
1996]
▪ Parties negotiating by indorsement and delivery, or
by mere delivery subsequent to the forgery, are Commercial Bad Faith Rule
precluded from setting up the defense of forgery
and may be held liable under their warranties or ▪ If at the same time the drawee bank was also
liabilities stated in Sections 65 or 66. negligent to the point of substantially contributing
to the loss, then such loss from the forgery can be
▪ A forged indorsement prevents any subsequent apportioned between the negligent drawer and the
party from acquiring any right as against any party negligent bank. [Associated Bank v. Court of Appeals,
whose name appears prior to the forgery. Although G.R. No. 107382/G.R. No. 107612, January 31, 1996]
rights may exist between and among parties
subsequent to the forged instrument, not one of
them can acquire rights against parties prior to the
forgery. [Gempesaw v. Court of Appeals, G.R. No.
92244, February 9, 1993]
Negligence of Drawer in Forgery of Indorsement Other than

a Check
▪ The negligence of drawers in making possible

forged indorsements by their swindling clerks, and
not discovering or reporting them promptly, barred
recovery from the drawee bank by the drawers, as
where there is negligence in delivery. Likewise,
unreasonable delay in giving notice will bar
recovery by the drawer from the drawee bank.
▪ Forgery "cannot be presumed." It must be

established by clear, positive and convincing
evidence. Under the best evidence rule as applied
to documentary evidence like the checks in
question, no secondary or substitutionary evidence
may inceptively be introduced, as the original
writing itself must be produced in court. But when,
without bad faith on the part of the offeror, the
original checks have already been destroyed or
cannot be produced in court, secondary evidence
may be produced. [BPI v. Casa Montessory
Internationale, G.R. No. 149454, May 28, 2004]
▪ The drawee bank is under strict liability to pay the

check to the order of the payee. The drawer's
instructions are reflected on the face and by the
terms of the check. Payment under a forged
indorsement is not to the drawer's order.
▪ When the drawee bank pays a person other than the

payee, it does not comply with the terms of the
check and violates its duty to charge its customer's
(the drawer) account only for properly payable
items. Since the drawee bank did not pay a holder
or other person entitled to receive payment, it has
no right to reimbursement from the drawer.
▪ The general rule then is that the drawee bank may

not debit the drawer's account and is not entitled to
indemnification from the drawer. The risk of loss
must perforce fall on the drawee bank.
▪ If the drawee bank can prove a failure by the

customer/drawer to exercise ordinary care that

Summary of Rights and Liabilities in Relation to Forgery
FORGERY OF PROMISSORY NOTES FORGERY OF BILLS OF EXCHANGE
Forgery of Maker’s Signature Forgery of Payee’s Signature Forgery of Drawer’s Signature

Rule The maker is not liable to any holder.
Reason The maker, whose signature is forged, is Drawer vs. Drawee Bill Accepted
not a party to the transaction. Rule Drawee Bank suffers the loss and must reimburse Rule Reason
Exception He may be made liable if the doctrine of the account of Drawer. Drawee/Acceptor By accepting the check, an
estoppel finds application. Reason Drawer instructed Drawee Bank to pay Payee must pay the check. acceptor undertakes to pay
Caveat If the note is negotiated nevertheless by and no one else. If Payee is not paid, Drawee Bank the instrument in accordance
subsequent endorsement and delivery, the did not obey the instruction. with the tenor of his
endorsers may be held liable on their acceptance.
statutory warranties. Drawee vs. Collecting Bank Drawer is not liable for A forged signature is totally
Rule Drawee Bank may recover from Collecting Bank the value of the check. inoperative.
Forgery of Indorser’s Signature because Collecting Bank had no authority to pay
Note Payable to Order the proceeds of the check to Forger. Bill Not Accepted
Rule Endorser whose signature is forged and all Reason Collecting Bank has the legal duty to ascertain Rule Reason
prior parties, including the maker are not that the payee’s endorsement is genuine. Drawee Bank cannot recover the Drawee Bank
liable to any holder. proceeds of the check from should have
Reason The signature of the endorser and the Drawer vs. Collecting Bank Holder if he is a holder in due detected the forgery
delivery of the note are necessary to Rule Drawer has no cause of action against Collecting course. of Drawer’s
transfer title to the note. Since an endorser’s Bank. signature because
signature is forged, the transfer of title to a Reasons There is no privity of contract between drawer Drawer is its client.
subsequent endorsee is inoperative. and collecting bank. The duly to observe due Endorser is liable to Holder, if An endorser is
care is owed by the collecting bank to the payee. Drawee Bank dishonored the liable under his
Note Payable to Bearer check warranties in
Rule Endorser whose endorsement is forged Payee vs. Drawer Section 66.
and all prior parties including the maker Rule Payee may recover from Drawer. Drawer generally enjoys A forged signature
ARE LIABLE TO A HOLDER IN DUE Reason The claim of Payee against Drawer remains protection against forgery. is wholly
COURSE, provided the note is unpaid. However, he must not be guilty inoperative.
mechanically complete before the forgery. of negligence; i.e., the forgery
Reason The endorsement is not necessary to Payee vs. Recipient of Payment must not have been caused by
transfer title. The only defense available to Rule Payee may recover from Forger. his own negligence. Also, he
resist the claim is want of delivery of a Reason Forger is not entitled to the proceeds of the check. must discover the forgery within
mechanically complete instrument under At best, Forger holds the proceeds of the check in a reasonable period of time.
Section 16. trust for Payee.
Exception Section 16 is a defense available only
against a holder who is not a holder in due Payee vs. Collecting Bank
course, because a valid and intentional Rule Payee may recover from the Collecting Bank.
delivery of the note is presumed by law as Reason Collecting Bank’s collection of the proceeds of the
regards a holder in due course. check is unlawful, and Collecting Bank therefore
Qualification If the note is incomplete, Section 14 would holds the funds in trust for the payee. A forged
apply, in which case the possessor of the endorsement is totally inoperative. Collecting
note must complete the instrument strictly Bank’s collection of the proceeds of the check
in accordance with the authority given amounts to a conversion – i.e., the unauthorized

FORGERY OF PROMISSORY NOTES FORGERY OF BILLS OF EXCHANGE
and within a reasonable time. But if upon assumption and exercise of rights of ownership
completion the note is negotiated to a over goods and chattels belonging to another.
holder in due course, the note is valid and
effectual for all purposes in his hands and Payee vs. Drawee
he may enforce the note as if it was strictly Rule Payee has no cause of action against Drawee
filled up in accordance with the authority Bank unless the check has been certified or
given, and within a reasonable period of accepted by the latter.
time. Reason There is no privity of contract between the
payee and the drawee.
If the note is incomplete and undelivered,
then Section 15 will apply and it will not Collecting Bank vs. Forger
be valid in the hands of any holder unless Rule C (Collecting Bank) has a cause of action against
completed and negotiated with authority. Y (forger) for the recovery of the proceeds of the
check.
Reason C was prejudiced by the withdrawal of funds by
Y, which amount must be reimbursed by C to
either the Payee or the Drawee.

CONSIDERATION Ex. Gift – not a Ex. Consideration is the delivery of

consideration merchandise, however, delivery
▪ The person claiming that a payee or an indorsee did not failed to materialize
give valuable consideration for an instrument must
prove that there really was no valuable consideration
given because every negotiable instrument is prima facie Partial failure of consideration means simply that part of the
presumed to have been issued for a valuable consideration did not materialize. Partial failure of
consideration. [Sec. 24, NIL] consideration is a defense pro tanto, available only in
proportion to the consideration that was performed.
▪ Value is any consideration sufficient to support a simple
contract. An antecedent or pre-existing debt constitutes ACCOMMODATION PARTY
value; and is deemed such whether the instrument is
payable on demand or at a future time. [Sec. 25, NIL] ▪ An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
▪ The consideration for a NI must be onerous. without receiving value therefor, and for the purpose of
lending his name to some other person.
▪ In onerous contracts the cause is understood to be, for
each contracting party, the prestation or promise of a ▪ Such a person is liable on the instrument to a holder for
thing or service by the other. [Art. 1350, New Civil Code] value, notwithstanding such holder, at the time of taking
the instrument, knew him to be only an accommodation
Sec. 26. What constitutes holder for value. party. [Sec. 29, NIL]
Where value has at any time been given for the instrument,
the holder is deemed a holder for value in respect to all ▪ Requisites:
parties who become such prior to that time.
a. He must be a party to the instrument;
Illustration: NI was negotiated to A by P (Payee). NI
negotiated to B then to C then to D. D obtained NI from C by Note: Signed the instrument as MAID - Maker, Acceptor,
way of gift. C obtained NI from B in payment of a car. In this Indorser, or Drawer
case, D is a holder for value as to B because value has been
given by C and B became a party to the instrument prior to b. He must not receive value therefor; and
such time the value was given by C. [Austria]
c. He must sign for the purpose of lending his name
Sec. 27. When lien on instrument constitutes holder for or credit to some other person.
value.
Where the holder has a lien on the instrument arising d. It should be noted that the phrase ‘without value
either from contract or by implication of law, he is deemed thereof’ means without receiving value by virtue of the
a holder for value to the extent of his lien. instrument and not without receiving payment for
lending his name. The accommodation party receives no
Lien: A charge against or interest in property to secure part of the consideration for the instrument, but assumes
payment of a debt or performance of an obligation. liability to the other parties thereto.
Sec. 28. Effect of want of consideration. e. In case an accommodating party cannot recover
Absence or failure of consideration is a matter of defense reimbursement from his co-accommodating parties, he
as against any person not a holder in due course; and can still recover from the accommodated party because
partial failure of consideration is a defense pro tanto, he is the principal debtor.
whether the failure is an ascertained and liquidated
amount or otherwise. f. An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, indorser,
▪ Whether total or partial, lack or failure of consideration without receiving value therefor and for the purpose of
is only a personal defense. lending his name to some other person. Such person is
liable on the instrument to a holder for value,
▪ In the hands of a holder in due course therefore, the notwithstanding such holder, at the time of the taking of
presumption of consideration is conclusive. the instrument knew him to be only an accommodation
party. [PBC v. Aruego, G.R. Nos. L-25836-37, January 31,
Lack of 1981]
Failure of Consideration
Consideration
Total lack of any There was an intended g. An accommodation party is one who has signed the
valid consideration consideration, but parties failed to instrument as maker, drawer, indorser, without
perform the consideration agreed receiving value therefor and for the purpose of lending
upon his name to some other person.
Remedy is to annul Remedies are (1) rescission of the
the instrument instrument as to value that was not h. Such person is liable on the instrument to a holder for
received or (2) specific performance value, notwithstanding such holder, at the time of the
taking of the instrument knew him to be only an
accommodation party.

by the indorsement of the holder and completed by

i. In lending his name to the accommodated party, the delivery.
accommodation party is in effect a surety for the latter.
DISTINGUISHED FROM ASSIGNMENT
j. Unlike in a contract of suretyship, the liability of the
accommodation party remains not only primary but also ▪ Negotiation is the transfer of the NI from one person to
unconditional to a holder for value, such that even if the another so as to constitute the transferee the holder
accommodated party receives an extension of the period thereof. The holder is not subject to real defenses, and
for payment without the consent of the accommodation should he be a holder in due course, he will also not be
party, the latter is still liable for the whole obligation and subject to personal defenses.
such extension does not release him because as far as a
holder for value is concerned, he is a solidary co-debtor. ▪ Only an instrument qualifying as a negotiable
[Aglibot v. Santia, G.R. No. 185945, December 5, 2012] instrument under the NIL may be negotiated either by
indorsement coupled with delivery or delivery alone.
k. An accommodation party lends his name to enable the
accommodated party to obtain credit or to raise money; ▪ Assignment constitutes the transferee as a mere
he receives no part of the consideration for the assignee, placed in the position of the assignor; he is not
instrument but assumes liability to the other parties a holder, hence he is subject to all personal defenses.
thereto.
▪ Assignment of Credit: agreement by virtue of which the
l. The accommodation party is liable on the instrument to owner of a credit, assignor, by a legal cause transfers his
a holder for value even though the holder, at the time of credit or accessory rights to another, assignee, who
taking the instrument, knew him or her to be merely an acquires the power to enforce it, the credit, to the same
accommodation party, as if the contract was not for extent as the assignor could enforce it to the debtor.
accommodation.
▪ A non-negotiable instrument may not be negotiated but
m. Since the liability of an accommodation party remains only assigned or transferred, absent an express
not only primary but also unconditional to a holder for prohibition against assignment or transfer written in the
value, even if the accommodated party receives an face of the instrument. [Sesbreño v. Court of Appeals, G.R.
extension of the period for payment without the consent No. 89252, May 24, 1993]
of the accommodation party, the latter is still liable for
the whole obligation and such extension does not release Negotiation Assignment
him because as far as a holder for value is concerned, he NIL governs NCC governs
is a solidary co-debtor. [Ang v. Associated Bank, G.R. No. Applies only to NI Applies to all contracts in
146511, September 5, 2007] general
Transferee becomes a Transferee is a mere
n. The accommodation party can claim no benefit as such, holder assignee
but he is liable according to the face of his undertaking, Transferee may be free Transferee is always
the same as if he were himself financially interested in from personal defenses, if subject to personal
the transaction. To fasten liability upon him, it is not he is a holder in due course defenses
necessary that any consideration should move to him.
MODES OF NEGOTIATION
o. After making payment to the holder, the
accommodation party may sue the accommodated party 1. By Delivery - Bearer instruments are negotiated by mere
for reimbursement, since the relation between them is in delivery.
effect that of principal and surety, the accommodation
party being the surety. [PNB v. Maza and Macenas, G.R. 2. By Indorsement Coupled With Delivery - Order
No. L-24224, November 3, 1925] instruments are negotiated by indorsement coupled
with delivery
NEGOTIATION
Meaning of Delivery
KINDS OF TRANSFER
▪ Delivery is the transfer of possession, actual or
1. Negotiation; constructive, from one person to another. [Sec. 191,
NIL]
2. Assignment;
▪ Delivery means the transfer of possession of the
3. Operation of Law (i.e. succession). instrument by the maker or drawer with the intent
to transfer title to the payee and recognize him as
Sec. 30. What constitutes negotiation. holder thereof.
An instrument is negotiated when it is transferred from
one person to another in such manner as to constitute the Delivery When Effectual, When Presumed
transferee the holder thereof. If payable to bearer, it is
negotiated by delivery; if payable to order, it is negotiated a. As to a holder in due course
▪ A valid delivery is presumed done by all

parties prior to him so as to make them of the indorser usually on the back of the instrument. An
liable. indorsement has double significance:
▪ When the instrument is no longer in the a. It constitutes a transfer or sale of the instrument to
possession of the party whose signature the indorsee or transferee;
appears thereon, the presumption is that
there is a valid and intentional delivery. b. It signifies the agreement of the indorser to answer
for the amount represented by the instrument in
b. As to holder not in due course case of default of the maker or the party primarily
liable.
▪ In order to have a valid delivery, must be
made either by or under the authority of One who negotiates by mere delivery, although he assumes
the party making, accepting, indorsing, o the liabilities of a seller or transferor of the note or bill, does
drawing, (MAID) as the case may be. not warrant that he will pay in case the primary party fails to
pay.
▪ Delivery must be shown to have been
conditional, or for a special purpose Sec. 31. Indorsement; how made.
only, and not for the purpose of The indorsement must be written on the instrument itself
transferring the instrument. or upon a paper attached thereto. The signature of the
indorser, without additional words, is a sufficient
KINDS OF INDORSEMENTS indorsement.
1. Special indorsement [Sec. 34, NIL]; Where the indorsement is written on a paper attached to the
instrument, such paper is called an “allonge.”
2. Blank indorsement [Sec. 34 – 35, NIL];
Sec. 32. Indorsement must be of entire instrument.
3. Restrictive indorsement [Sec. 36, NIL]; The indorsement must be an indorsement of the entire
instrument. An indorsement which purports to transfer to
4. Qualified indorsement [Sec. 38, NIL]; the indorsee a part only of the amount payable, or which
purports to transfer the instrument to two or more
5. Conditional indorsement [Sec. 39, NIL]; indorsees severally, does not operate as a negotiation of
the instrument. But where the instrument has been paid in
6. Joint indorsement [Sec. 41, NIL]; part, it may be indorsed as to the residue.
7. Successive indorsement [Sec. 50, NIL]; and Indorsement of a Part of the Amount Payable
8. Irregular indorsement. [Sec. 64, NIL] ▪ An indorsement of a part of the amount payable is
not negotiation, but mere assignment.
Indorsement
▪ There can still be indorsement if the part not
▪ When the payee of an instrument transfers it to indorsed was already paid.
another by signing at the back thereof he is said to
have negotiated or indorsed the same and thereby Indorsement to Two or More Indorsees
becomes an indorser. The person to whom he
negotiates it is the indorsee, who, by such ▪ Indorsement to two or more indorsees severally is
negotiation becomes the holder of the instrument. not negotiation, but mere assignment.
An indorser by indorsing the bill or note impliedly enters into ▪ Indorsement to two or more indorsees can still be
2 contracts: negotiation, so long as it is not made “severally”.
a. He is selling or transferring the instrument to his Basis of Classification of Indorsements

indorsee, thus assuming liabilities similar to that of
a seller or transferor of personal property; and ▪ Indorsements containing such additional words are
classified into special, restrictive, qualified, and
b. He warrants that he will pay the instrument when conditional. Where only the signature of the
the two conditions for his liability mentioned above indorser appears, it is called a blank indorsement.
have been fulfilled. The holder can therefore hold
any indorser liable should the maker or acceptor a. Special and blank – Future method of
fail to pay, provided these two conditions are negotiation, whether by indorsement and
complied. delivery or by delivery alone.
An instrument payable to order requires for its negotiation, b. Restrictive and non-restrictive – Kind of title
first, an indorsement by the payee or present holder, and transferred.
second, its delivery to the transferee or indorsee, who now
becomes the holder. An indorsement consists of the signature c. Qualified and unqualified – Scope of the
liability assumed by the indorser.
indorsement, the last indorsement always

d. Conditional and unconditional – Presence or controlling the means of further negotiation. On the
absence of express limitations put by the other hand, an instrument payable to bearer on its
indorser upon the primary obligor’s face always remains a bearer instrument. An
privileges of paying the holder. indorsement of a bearer instrument does not
convert it to an instrument payable to order.
Special Indorsement Therefore, a bearer instrument can always be
negotiated by mere delivery.
▪ Specifies the person to whom, or to whose order,
the instrument is to be payable, and the Restrictive Indorsement
indorsement of such indorsee is necessary to the
further negotiation of the instrument. An ▪ An indorsement is restrictive which either:
indorsement of a specified person is not similar
with an instrument payable to a specified person. a. Prohibits the further negotiation of the
An indorsement need not to comply with the instrument; or
requirements under Sec. 1 of NIL. [Sec. 34, NIL]
b. Constitutes the indorsee the agent of the
▪ Example: “Pay to A, Signed P” indorser; or
Blank Indorsement c. Vests the title in the indorsee in trust for or to

the use of some other persons.
▪ an indorsement that specifies no indorsee, and an
instrument so indorsed is payable to bearer, and ▪ But the mere absence of words implying power to
may be negotiated by delivery. [Sec. 3, NIL] negotiate does not make an indorsement restrictive.
[Sec. 36, NIL]
▪ Example: “Signed P”
▪ While the omission of words of negotiability in the
▪ To convert a blank indorsement into a special indorsement does not affect the negotiability of the
indorsement, the holder may write over the instrument, such omission in the body will render
signature of the indorser in blank any contract the instrument non-negotiable.
consistent with the character of the indorsement.
[Sec. 35, NIL] ▪ A restrictive indorsement either restricts the right of
the indorsee to further negotiate the instrument [Sec.
▪ Where the instrument is originally payable to order 36a, NIL] or reserves beneficial interest therein in the
and it is negotiated by the special indorsement, it indorser or in a third person [Sec. 36 (b-c), NIL]. In
can be further negotiated by the indorsee by the latter case, although the instrument may be
indorsement completed by delivery. further negotiated, all subsequent indorsees take
subject to the rights of the restrictive indorser or the
▪ Where the instrument is originally payable to order third person (i.e. the subsequent indorsee will also
and it is negotiated by the payee by blank be an agent or trustee), as the case may be.
indorsement, it can be further negotiated by the
holder by mere delivery. The reason is that the ▪ The notation “for deposit” is a restrictive
effect of a blank indorsement is to make the indrosement and indicates that the indorsee bank is
instrument payable to bearer. an agent for collection and not the payee.
Indorsement for a check by the payee “for deposit”
▪ Where the instrument is originally payable to does not thereby render it negotiable but prohibits
bearer it can be further negotiated by mere further negotiation for any purpose except for
delivery, even if the original bearer negotiated it by collection for deposit in the payee’s account in the
special indorsement. bank selected by the payee. By adding the notation,
title to the check remained in the name of the firm.
▪ A person who negotiates by mere delivery is liable [Granado v. Riverdale]
only to his immediate transferee. A special indorser
however is liable to subsequent holders, unless the ▪ An indorsement to A for the benefit of B was held
instrument is an originally bearer instrument, in restrictive making the indorsee or his successors
which case he is liable only to those who take title subject to good defenses against the restrictive
through his indorsement. indorser. [Sulbrason-Dickenson Co. v. Hopkins]
▪ The holder may convert a blank indorsement into a Effect of Restrictive Indorsement; Right of Indorsee
special indorsement by writing over the signature
of the indorser in blank any contract consistent a. To receive payment of the instrument;
with the character of the indorsement. [Sec. 35, NIL]
b. To bring any action thereon that the indorser could
▪ An instrument payable to order on its face may be bring;
converted into a bearer instrument by means of a
blank indorsement, and may later be reconverted c. To transfer his rights as such indorsee, where the
into an order instrument by a subsequent special form of the indorsement authorizes him to do so.
Conditional Indorsement
Note: But all subsequent indorsees acquire only the title of the
first indorsee under the restrictive indorsement. ▪ A conditional indorsement is an indorsement
subject to the happening of a contingent event, that
Qualified Indorsement is, an event that may or may not happen, or a past
event unknown to the parties.
▪ A qualified indorsement constitutes the indorser as
a mere assignor of the title to the instrument. ▪ A conditional indorsement imposes to the indorsee
‘Without recourse’ means without resort to a or transferee a contract and that the person who
person who is secondarily liable after the default of makes the condition is bound by it upon its
the person who is primarily liable. fulfillment. As such, non-fulfillment of the
condition carries with it a caveat to the indorsee or
▪ The indorser transfers his title over the instrument transferee that the indorser does not intend to be
but he is not secondarily liable for payment, since bound on the instrument.
he does not warrant the solvency of the
maker/drawer. However, he is still liable as an ▪ NIL allows payment by the maker/drawer even
indorser under Sec. 65. before the happening of the event that serves as a
suspensive condition. If the condition is not
Recourse fulfilled, the holder is obligated to return the
▪ Means resort to a person who is secondarily liable amount received.
after the default of the person who is primarily
liable. Sec. 40. Indorsement of instrument payable to bearer.
Where an instrument, payable to bearer, is indorsed
a. By indorsing the note “with recourse” does specially, it may nevertheless be further negotiated by
not make itself a qualified indorser but a delivery; but the person indorsing specially is liable as
general indorser who is secondarily liable. indorser to only such holders as make title through his
indorsement.
b. By such indorsement, it agreed that if the
party primarily liable fails to pay the note, the ▪ Section 40 applies only to instruments which are
indorsee can go after the indorser. originally payable to bearer. It does not apply to
instruments originally payable to order, even when they
c. The effect of such indorsement is that the note become payable to bearer.
was indorsed without qualification.
▪ An instrument, which is originally payable to bearer is
d. A person who indorses without qualification always payable to bearer. Hence, even when specially
engages that on due presentment, the note indorsed, it can be negotiated by mere delivery.
shall be accepted or paid, or both as the case
may be, and that if it be dishonored, he will ▪ A special indorser of an originally payable to bearer
pay the amount thereof to the holder. instrument is not liable to a holder who became a holder
through delivery because delivery was sufficient to
e. An intention of indorsing the note without transfer title. However, a special indorser is liable to
qualification does not limit liability but special indorsee/s because they acquire their title over
confirms his obligation as a general indorser. the instrument through the special indorsement as they
can trace their title through a series of unbroken
f. Indorser without qualification is not only indorsements.
secondarily liable but also becomes the
principal debtor. His liability becomes the Sec. 41. Indorsement where payable to two or more
same as that of the original obligor. persons.
Where an instrument is payable to the order of two or
g. To qualify the indorser’s liability, it should more payees or indorsees who are not partners, all must
have indorsed them “without recorse,” or in indorse unless the one indorsing has authority to indorse
such a manner as to disclaim any personal for the others.
liability.
Section 41 applies only to instruments payable to two or more
Words or Phrases for Qualified Indorsement payees jointly.
a. Without recourse; GENERAL RULE: All payees or indorsees must indorse.
b. Sans recourse; EXCEPTIONS:
c. Indorsee’s own risk; a. Where the payee or indorsee indorsing has

authority to indorse for the others; and
d. No recourse;
b. Where the payees or indorsees are partners.
e. With no recourse.

Sec. 42. Effect of instrument drawn or indorsed to a Two Ways a Negotiable Instrument Can Be Rendered Non-
person as cashier. Negotiable
Where an instrument is drawn or indorsed to a person as
"cashier" or other fiscal officer of a bank or corporation, it a. Restrictive indorsement under Sec. 36(a); or
is deemed prima facie to be payable to the bank or
corporation of which he is such officer, and may be b. NI is discharged by payment or otherwise.
negotiated by either the indorsement of the bank or
corporation or the indorsement of the officer. Note: After maturity, an instrument originally negotiable
continues to be negotiable in the sense that the contracts of the
Sec. 43. Indorsement where name is misspelled, and so parties to it continue and are governed by the NIL. However,
forth. the transferee after maturity is not a holder in due course, and,
Where the name of a payee or indorsee is wrongly therefore, is not free from defenses obtaining between prior
designated or misspelled, he may indorse the instrument parties.
as therein described adding, if he thinks fit, his proper
signature. Striking out Indorsement
The mistake in the spelling or designation of the indorsee or ▪ The holder may at any time strike out any
payee does not affect the negotiability of the instrument or the indorsement, which is not necessary to his title. The
validity or effectivity of the indorsement. [Austria] indorser whose indorsement is struck out, and all
indorsers subsequent to him, are thereby relieved
Sec. 44. Indorsement in representative capacity. from liability on the instrument. [Sec. 48, NIL]
Where any person is under obligation to indorse in a
Effects of Striking Out
representative capacity, he may indorse in such terms as
to negative personal liability.
a. Indorser whose indorsement is struck out is
relieved from liability on the instrument; and
A representative must indorse in the same manner as an agent
of the maker, drawer or acceptor should in order to escape
b. All subsequent indorsers are also relieved from
personal liability under Section 20.
their liability on the instrument.
a. He must add words describing himself as an agent;
Where the holder of an instrument payable to his order
transfers it for value without indorsing it, the transfer vests in
b. He must disclose his principal; and
the transferee such title as the transferor had therein, and the
transferee acquires in addition, the right to have the
c. He must be duly authorized.
indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due course,
Time of Indorsement
the negotiation takes effect as of the time when the
indorsement is actually made. [Sec. 49, NIL]
▪ Except where an indorsement bears date after the
maturity of the instrument, every negotiation is
Note: This applies only to instruments payable to order.
deemed prima facie to have been effected before
the instrument was overdue.
Rights of the Transferee for Value When No Indorsement was Made:
▪ This provision becomes important in connection
a. The transferee acquires only the rights of the
with Section 52(b). In order that one may be a
transferor. This means that if a defense is available
holder in due course, the instrument must be
against the transferor, that defense is also available
negotiated to him before it becomes overdue or
against the transferee.
before maturity date.
b. The transferee has also the right to require the
▪ The indorsement without date establishes a prima
transferor to indorse the instrument.
facie presumption that the instrument was
negotiated before maturity, and one who denies
Note: The transferee of an unindorsed instrument may
that the holder of such instrument is a holder in due
become a holder by obtaining the indorsement of his
course has the burden of proof.
transferor. It is only at this time that the instrument can be
considered as having been negotiated.
Place of Indorsement
Sec. 50. When prior party may negotiate instrument.
▪ Except where the contrary appears, every
Where an instrument is negotiated back to a prior party,
indorsement is presumed prima facie to have been
such party may, subject to the provisions of this Act,
made at the place where the instrument is dated
reissue and further negotiable the same. But he is not
entitled to enforce payment thereof against any
▪ An instrument negotiable in its origin continues to
intervening party to whom he was personally liable.
be negotiable until it has been restrictively indorsed
or discharged by payment or otherwise.
Successive Indorsement

▪ If a prior party acquires the NI again through a. That it is Complete and regular upon its face;
negotiation, he is remitted to his former rights as a b. That he became the holder of it before it was
prior party. He cannot therefore enforce payment Overdue, and without notice that it has been
against an intervening party. His liability to previously dishonored, if such was the fact;
subsequent indorsers megatives the liability of the c. That he took it in Good faith and for value;
same indorsers to him as holder. [Austria] d. That at the time it was negotiated to him, he had
No notice of any infirmity in the instrument or
Illustration: Payee negotiated NI to A by indorsement defect in the title of the person negotiating it.
and delivety, then A to B in the same manner, B to C, C
to D, and D too A. A is remitted to his former rights as Requisites of a Holder in Holder in Due Course (SHELTER
the indorsee of the payee. A cannot seek payment RULE)
against intervening parties B, C, D. [Austria]
a. He derived his title from a holder in due course;
Fictitious-Payee Rule and
Effect: b. He was not himself a party a party to any fraud or

illegality affecting the instrument.
a. The drawee bank is absolved from liability and the
drawer bears the loss. HOLDER IN HOLDER IN DUE COURSE
b. The check is treated as a bearer instrument that can A person who derives his title through a holder in due course
be negotiated by delivery. and who is not himself a party to any fraud or illegality
affecting the instrument
c. The underlying theory is that one cannot expect a
fictitious payee to negotiate the check by placing his GENERAL RULE: Prima facie presumption it that every
indorsement thereon. holder is a HIDC.
d. Since the maker knew this limitation, he must have EXCEPTIONS: Unless proven otherwise; or negotiation for
intended for the instrument to be negotiated by an unreasonable length of time.
mere delivery.
Note: As a general rule, every holder is presumed prima facie
e. In case of controversy, the drawer of the check will to be a holder in due course and he who claims otherwise has
bear the loss. [PNB v. Rodriguez, G.R. No. 170325, the onus probandi to prove that one or more of the conditions
September 26, 2008] required to constitute a holder in due course are lacking. In
this case, BPI contends that the element of “value” is not
Commercial Bad Faith present, therefore, Roxas could not be a holder in due course.
[BPI v. Gregorio Roxas, G.R. No. 157833, October 15, 2007]
▪ A showing of commercial bad faith on the part of
the drawee bank, or any transferee of the check for Shelter Rule
that matter, will work to strip it of this defense. The
exception will cause it to bear the loss. Commercial ▪ Shelter sets in when the holder though a holder not
bad faith is present if the transferee of the check acts in due course derives his title from a holder in due
dishonestly, and is a party to the fraudulent course, and the holder in due course is not a party
scheme. [PNB v. Rodriguez, G.R. No. 170325, to any fraud or illegality affecting the instrument,
September 26, 2008] the holder not in due course has all the rights of a
holder in due course enforceable against all parties
RIGHTS OF THE HOLDER prior to the said holder in due course.
HOLDER ▪ If a person not a holder in due course reacquires

from a holder in due course, the instrument
The payee or indorsee of a bill or note who is in possession of becomes subject to the same defenses to which it
it or the bearer thereof. [Sec. 191, NIL] would have been subject as if the paper had never
passed through the hands of a holder in due course.
RIGHTS OF A HOLDER The same is true where the instrument is
retransferred to the agent of a person not a holder
1. To sue in his own name; in due course. [Fossum v. Hermanos, G.R. No. L-
19461, March 28, 1923]
2. To receive payment; and
Complete and Regular Upon its Face
3. To transfer his right through negotiation or assignment
▪ An instrument is complete when the instrument
HOLDER IN DUE COURSE contains all requisites of negotiability under Sec. 1.
Sec. 52. What constitutes a holder in due course. (COGN) ▪ A NI is not regular on its face if it contains a
A holder in due course is a holder who has taken the material alteration.
instrument under the following conditions:
▪ If the alteration is not apparent on its face, the NI is them, taking the instrument may amount to bad
considered regular. faith.
Receipt Before Negotiable Instrument is Overdue ▪ It is sufficient that the buyer of a note had notice or
knowledge that the note was in some way tainted
▪ An instrument is overdue after the date of maturity. with fraud. It is not necessary that he should know
the particulars or even the nature of the fraud, since
▪ The fact that the instrument is overdue is a strong all that is required is knowledge of such facts that
indication that it was dishonored and the law puts his action in taking the note amounted bad faith.
the potential holder on inquiry as to whether it was [Ozark Motor Co. v. Horton]
dishonored and the reason therefor.
Effects of Crossing a Check
▪ Montinola cannot be considered a holder in due
course because Section 52 defines a holder in due a. The check may not be encashed, but only deposited
course as a holder who has taken the instrument in the bank;
under certain conditions, one of which is that he
became a holder before it was overdue. When he b. The check may be negotiated only once to one who
received the check, it was long overdue. [Montinola has an account with a bank;
v. PNB, G.R. No. L-2861, February 26, 1951]
c. The act of crossing the check serves as a warning to
Without Notice of Infirmity and Defect the holder that the check has been issued for a
definite purpose so that he must inquire if he has
▪ Knowledge of the principal or his agent of any received the check pursuant to that purpose,
infirmity in the instrument or defect in the title of a otherwise he is not a holder in due course.
prior party will destroy due course holding
Note: For failure to inquire from the holder as to the purpose
▪ Infirmity - Any irregularity in the instrument (i.e. of the check, plaintiff is not a HIDC, and is thus subject to
alteration, wrong date). personal defenses. [State Investment House v. IAC, G.R. No.
72764, July 13, 1989]
▪ Defect - Title of prior party is obtained through
fraud, duress, or force and fear, or other unlawful Good Faith
means, or for an illegal consideration, or when he
negotiated it in breach of faith, or other such ▪ A holder is in good faith if he has no knowledge of
circumstances as amount to fraud. [Sec. 57, NIL] any infirmity in the instrument or defect in his title
or the title of prior parties. [Austria]
Circumstances Which Make Title Defective
▪ Good faith on the part of the holder is presumed.
An instrument is defective when he obtained the instrument,
or any signature thereto, by: (FADOBIC) ▪ Presumption of good faith is destroyed if the NI is
a crossed check.
a. Fraud;
▪ All these suspicious circumstances should have put
b. Force And fear; the plaintiff to inquiry as to the why and wherefore
of the possession of the check by Manuel Gonzales,
c. Duress; and why he used it to pay Matilde's account. It was
payee's duty to ascertain from the holder Manuel
d. Other unlawful means; Gonzales what the nature of the latter's title to the
check was or the nature of his possession. Having
e. When he negotiates it in Breach of faith; failed in this respect, we must declare that plaintiff
was guilty of gross neglect in not finding out the
f. For an Illegal consideration; and nature of the title and possession of Manuel
Gonzales, amounting to legal absence of good faith,
g. Under such Circumstances as amount to a fraud. and it may not be considered as a holder of the
check in good faith.
To constitute notice of defect or infirmity, the transferee
must have actual knowledge, either - ▪ The rule that a possessor of the instrument is prima
facie a holder in due course does not apply because
a. of the defect or infirmity; or there was a defect in the title of Manuel Gonzales
and the instrument is not payable to him or to
b. of such facts that his action in taking the bearer.
instruments amounts to bad faith.
▪ Under the circumstances of this case, instead of the
Note: presumption that the payee was a holder in good
faith, he acquired possession of the instrument
▪ Where there is knowledge of suspicious under circumstances that should have put it to
circumstances, coupled with means of verifying inquiry as to the title of the holder who negotiated
the check to it. The burden was, therefore, placed b. He may enforce payment against all prior parties.
upon it to show that notwithstanding the
suspicious circumstances, it acquired the check in Sec. 58. When subject to original defense.
actual good faith. [De Ocampo v. Gatchalian, G.R. No. In the hands of any holder other than a holder in due
L-15126, November 30, 1961] course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable. But a holder who
For Value derives his title through a holder in due course, and who
is not himself a party to any fraud or illegality affecting the
▪ Where the holder gave no valuable consideration instrument, has all the rights of such former holder in
for the transfer of the instrument to him, he cannot respect of all parties prior to the latter.
be a holder in due course.
Defenses against the holder
▪ Whether or not the words “for value received”
appear in an instrument is immaterial. In their Sec. 54. Notice before full amount is paid.
absence, the presumption fills in the gap. On the Where the transferee receives notice of any infirmity in the
other hand, their presence will not preclude instrument or defect in the title of the person negotiating
evidence to show lack of consideration. The the same before he has paid the full amount agreed to be
presumption of consideration paid is prima facie paid therefor, he will be deemed a holder in due course
and may be rebutted by proof to the contrary. only to the extent of the amount therefore paid by him.
When Person Not Deemed Holder In Due Course Sec. 55. When title defective.
The title of a person who negotiates an instrument is
▪ Where an instrument payable on demand is defective within the meaning of this Act when he obtained
negotiated on an unreasonable length of time after the instrument, or any signature thereto, by fraud, duress,
its issue, the holder is not deemed a holder in due
or force and fear, or other unlawful means, or for an illegal
course. [Sec. 53, NIL] consideration, or when he negotiates it in breach of faith,
or under such circumstances as amount to a fraud.
▪ In determining the reasonability of time, regard is
to be had in the nature of the instrument, the usage
Kinds of Defenses
of the trade or business with respect to such
instruments, and the facts of the particular case. a. Personal Defense; and
[Austria]
b. Real Defense.
HIDC NOT HIDC
All Sec. 52 requisites are Not all Sec. 52 requisites Note: The defenses referred to in Section 57, from which the
present are present holder in due course is free, are equitable (personal) defenses
His rights can be defeated His rights can be defeated only, not legal (real) defenses, which latter class of defenses
only by real defenses, and by both real defenses and can be set up against all holders.
not personal defenses personal defenses
He has the right to enforce payment, sue in his own name, Personal
and negotiate the instrument
Sec. 57. Rights of holder in due course. ▪ Available only against a particular person or a
A holder in due course holds the instrument free from any subsequent holder who stands in privity with him.
defect of title of prior parties, and free from defenses
available to prior parties among themselves, and may ▪ GENERAL RULE: Personal defenses can be
enforce payment of the instrument for the full amount interposed against a person not a holder in due
thereof against all parties liable thereon. course.
▪ A holder in due course can acquire a better title than his ▪ EXCEPTION: A Holder in Holder in Due Course
predecessors because he takes the instrument free from has all the rights of a such former holder (in due
any defect of title of prior parties. He is furthermore free course) in respect to all parties prior to the latter. In
from defenses available to prior parties among other words, though he is not himself a holder in
themselves. due course, equitable defenses cannot be
interposed against him by parties prior to the
▪ The fact that a holder is not in due course will in no way holder in due course from whom he derived his
affect the negotiability of the instrument. It only affects title.
such holder’s rights, and does not necessarily prevent
subsequent holders from acquiring the status of due Real
course holders.
▪ Available against any holder, since the right sought
Additional Rights of a Holder in Due Course to be enforced has never existed or has ceased to
exist.
a. He holds the instrument free from defects and
defenses; Personal Defenses Real Defenses

Available against ordinary Available against all

holders. holders, including b. Maker admits the capacity of the payee to endorse.
HIDC.
Not available against:
(1) HIDC; and The maker consequently is precluded from setting up the
(2) Holders in HIDC in Sec. 58 following defenses:
c. Absence or failure of [F2EU-ADM2-WIWI]
consideration [Sec. 28] • Forgery [Sec. 23] a. That the payee is a fictitious person because, by
d. Absence of delivery of • Fraud in factum making the note, he admits that the payee exists;
complete instrument [Sec. 16] • Execution between and
e. Insertion of wrong date when public enemies
date is necessary • Ultra vires acts of a b. That the payee was insane, a minor, or a
f. Filling up blanks in excess of corporation corporation acting ultra vires because, by making
authority [Sec. 14] • Absence of delivery the note, he admits the then capacity of the payee
g. Fraud in inducement of incomplete to indorse.
h. Acquisition of instrument by instrument [Sec. 15]
ordinary duress, force, or fear • Duress amounting DRAWER
i. Negotiation in breach of faith to forgery
or under circumstances • Minority (available Sec. 61. Liability of drawer.
amounting to fraud [Sec. 55] only to the minor) The drawer by drawing the instrument admits the
j. Conditional delivery or • Material alteration existence of the payee and his then capacity to indorse; and
delivery for a special purpose (Secs. 124, 125) engages that, on due presentment, the instrument will be
of a complete instrument [Sec. accepted or paid, or both, according to its tenor, and that
• Want ot authority of
16] if it be dishonored and the necessary proceedings on
agent
k. Acquisition through dishonor be duly taken, he will pay the amount thereof to
• Illegality of contract
unlawful means [Sec. 55] the holder or to any subsequent indorser who may be
• Want of marital
l. Illegality of consideration compelled to pay it. But the drawer may insert in the
consent
m. Ante-dating or post-dating a instrument an express stipulation negativing or limiting
• Insanity
check for illegal or fraudulent his own liability to the holder.
purpose [Sec. 12]
Secondary Liability of the Drawer
LIABILITIES OF PARTIES
▪ Assures that the drawee will pay and if the drawee
will not pay, the drawer promises to pay the holder.
PRIMARY LIABILITY
Conditions for Payment by Drawer
There is primary liability if the party is the person who has an
absolute obligation to pay the NI. The party’s liability arises
a. BoE is dishonored; and
the moment he becomes a party to the NI. [Austria]
b. Necessary proceedings of dishonor are duly taken
Parties:
Negativing Liability
a. Maker (PN); and
▪ The Drawer may negative his liability by inserting
b. Acceptor (BoE)
a provision, “sans recourse against the drawer”.
When such provision is inserted, the drawer is no
SECONDARY LIABILITY
longer secondarily liable. [Austria]
There is secondary liability if the party is not subject to
Warranties of the Drawer
immediate recourse. The party’s liability arises only if the
person primarily liable fails or refuses to pay. [Austria]
a. Drawer admits the existence of the payee.
Parties:
b. Drawer admits the capacity of the payee to endorse.
a. Indorsers (PN, BoE); and
ACCEPTOR
b. Drawer (BoE)
Sec. 62. Liability of acceptor.
MAKER The acceptor, by accepting the instrument, engages that he
will pay it according to the tenor of his acceptance and
Primary Liability of the Maker admits:
(a) The existence of the drawer, the genuineness of his
▪ To pay absolutely the note according to its tenor signature, and his capacity and authority to draw
the instrument; and
Warranties of the Maker (b) The existence of the payee and his then capacity to
indorse.
a. Maker admits the existence of the payee.
Status of Drawee Prior to Acceptance

▪ An acceptor will pay the instrument according to
▪ The drawee is the person on whom a bill of the tenor of his acceptance, not according to the
exchange or check is drawn and who is ordered to tenor of the instrument. Acceptor may choose to
pay it. He is not liable on the instrument until he accept the instrument on terms that are different
accepts it, and even a holder in due course cannot from what was written on the instrument. When
sue him on the instrument before his acceptance. you agree to pay, you are bound to the instrument.
The mere issuance of the bill does not make the
drawee liable thereon because it does not operate ▪ The drawee, by accepting unconditionally the bill,
as an assignment of the funds of the drawee. Once becomes liable to the holder, and cannot allege
the bill is accepted, the acceptor becomes primarily want of consideration between him and the drawer.
liable on the instrument under Sec. 62. The holder is a stranger as regards the transaction
between the drawer and the drawee, and if he has
▪ A bill of exchange presupposes a debtor-creditor given value to the drawer and has no knowledge of
relationship between the drawer and the drawee. any equity between the drawer and drawee, he is
Thus, although a drawee is not liable to the holder in the same situation as an indorsee in good faith.
until and unless he accepts, the drawee who refuses
to accept may, under some circumstances, be made ▪ An acceptor, upon acceptance, detaches himself
liable to the drawer for breach of contract or for from the underlying transaction. He assumes
damages based on tort. If the drawee, for a certain liability under the instrument and independent
consideration, had previously promised the drawer from the underlying trasaction of the instrument.
that he would honor the latter’s bill, unjustified Thus, defects in the underlying transaction do not
refusal to accept will be a breach of the promise. affect the acceptor. [PNB v. Picornell, G.R. Nos. L-
18751 & L-18915, September 26, 1922]
Primary Liability of the Acceptor
▪ The drawee bank’s duty is to verify the
▪ By the drawee’s acceptance of the BoE, he becomes genuineness of the drawer’s signature, and not that
primarily liable to pay the holder. of the indorsement because the drawer is its client.
[Associated Bank v. Court of Appeals, G.R. No.
Warranties of the Acceptor 107382/G.R. No. 107612, January 31, 1996]
a. Acceptor admits the existence of the drawer INDORSER

(“DR”).
Sec. 63. When a person deemed indorser.
b. Acceptor admits the genuineness of the signature A person placing his signature upon an instrument
of the DR. otherwise than as maker, drawer, or acceptor, is deemed
to be indorser unless he clearly indicates by appropriate
c. Acceptor admits the capacity of the DR to draw the words his intention to be bound in some other capacity.
instrument.
▪ In the absence of any indication in what capacity a
d. Acceptor admits the existence of the payee. person whose signature is written on the instrument
intends to be bound, he shall be deemed an indorser.
e. Acceptor admits the capacity of the payee to
indorse. ▪ And one who signs otherwise than as maker, drawer, or
acceptor, will not be deemed an indorser if he indicates
Note: But he does not admit the genuineness of the by appropriate words his intention to be bound in some
indorser’s signature. other capacity.
Effect of Acceptor’s Admissions ▪ An indorser upon a promissory note or bill of exchange

who indorses for the purpose of indentifying the person
▪ The acceptor is consequently precluded from only and not for the purpose of incurring any liability as
setting up the defense that the drawer is non- to the payment of such promissory note or bill of
existent or fictitious because of his admission of the exchange incurs no liability. This indorsement or
drawer’s existence; guaranty, however, must clearly indicate that it is for the
purpose of identification only. [American Bank v.
▪ Neither can he claim that the drawer’s signature is Macondray & Co., G.R. No. 1808, August 23, 1905]
a forgery because he admits the genuineness of the
drawer’s signature. Liability of General Indorser
▪ Neither can the drawee escape liability by alleging Every indorser who indorses without qualification, warrants
want of consideration between him and the drawer to all subsequent holders in due course:
as, by accepting the bill, he admits the capacity and
authority of the drawer to draw the bill. For the a. The matters and things mentioned in subdivisions
same reason, the better rule seems to be that the (a), (b), and (c) of the next preceding section; and
acceptor is liable on the bill even if the drawer has
overdrawn his account. b. That the instrument is, at the time of his
indorsement, valid and subsisting; accommodation party. Thus, subsequent parties may look to
the accommodation party for payment.
And, in addition, he engages that, on due presentment, it shall
be accepted or paid, or both, as the case may be, according to WARRANTIES
its tenor, and that if it be dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the Sec. 65. Warranty where negotiation by delivery and so
amount thereof to the holder, or to any subsequent indorser forth.
who may be compelled to pay it. [Sec. 66, NIL] Every person negotiating an instrument by delivery or by
a qualified indorsement warrants:
Secondary Liability of the General Indorser
(a) That the instrument is genuine and in all respects
▪ Liable if for any reason, the NI is dishonored (i.e. what it purports to be;
the maker or acceptor cannot pay). (b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
Warranties of the General Indorser (d) That he has no knowledge of any fact which would
impair the validity of the instrument or render it
a. That the instrument is genuine and in all respects valueless.
what it purports to be;
But when the negotiation is by delivery only, the warranty
b. That he has a good title to it; extends in favor of no holder other than the immediate
transferee.
c. That all prior parties had capacity to contract; and
The provisions of subdivision (c) of this section do not
d. That the instrument is, at the time of his apply to a person negotiating public or corporation
indorsement, valid and subsisting. securities other than bills and notes.
Section 65 (d) Section 66 (b) Parties Contemplated Under Sec. 65

There is no mention of the validity There is a
of the instrument but only a categorical a. A person negotiating by mere delivery;
warranty that he has no knowledge statement that the
of any fact that would impair the instrument is valid b. A person negotiating by qualified indorsement.
instrument’s validity or render it and subsisting.
valueless. No Liability
Sec. 64. Liability of irregular indorser. ▪ Negotiation through qualified indorsement or by

Where a person, not otherwise a party to an instrument, mere delivery of a bearer instrument transfers title
places thereon his signature in blank before delivery, he is without rendering the indorser or transferor
liable as indorser, in accordance with the following rules: secondarily liable.
(a) If the instrument is payable to the order of a third
person, he is liable to the payee and to all Warranties
subsequent parties.
(b) If the instrument is payable to the order of the a. That the instrument is genuine and in all respects
maker or drawer, or is payable to bearer, he is what it purports to be;
liable to all parties subsequent to the maker or
drawer. b. That he has a good title to it;
(c) If he signs for the accommodation of the payee, he
is liable to all parties subsequent to the payee. c. That all prior parties had capacity to contract;
Requisites of an Irregular Indorser d. That he has no knowledge of any fact, which would
impair the validity of the instrument or render it
a. He must not otherwise be a party to the instrument, valueless.
that is, he must not be a maker, drawer, acceptor or
regular indorsee thereon; Note:
b. He must sign the instrument in blank; and ▪ The qualified indorser has the same warranties as
those of a person negotiating by mere delivery. The
c. He must sign before delivery. only difference is that, while the person negotiating
by mere delivery is liable only to his immediate
Note: An irregular indorser signs the instrument even before transferee, the person negotiating by qualified
issuance. Like a deemed indorser, an irregular indorser is also indorsement is liable to all parties who derive their
an accommodation indorser. He accommodates the title though his indorsement.
maker/drawer. An accommodation party can never claim
lack of consideration. Since an accommodation party does ▪ A qualified indorser and a person negotiating by
not have any liability to the payee or the subsequent parties, mere delivery are only liable for breach of
Section 64 makes the accommodation party liable because warranties, and not for dishonor when the maker
subsequent parties relied in good faith on the signature of the or acceptor fails to pay.
Beneficiaries of the Warranties
▪ The law extends the warranties only to subsequent

holders in due course. But a person negotiating by
delivery is liable only to his immediate transferee,
while a qualified indorser is liable to all parties who
can trace their title to his indorsement, whether
such parties are holders in due course or not.
▪ As to the matter of forgery in indorsements, the

collecting bank or last indorser generally suffers the
loss because it has the duty to ascertain the
genuineness of all prior indorsements considering
that the act of presenting the check for payment to
the drawee is an assertion that the party making the
presentment has done its duty to ascertain the
genuineness of the indorsements. [BDO v. Equitable
Bank, G.R. No, 74917, January 20, 1988]
Where Paper is Negotiable by Delivery
▪ Where a person places his indorsement on an

instrument negotiable by delivery, he incurs all the
liability of an indorser.
▪ Signing a bearer instrument makes the indorser

liable under Section 66.
Order in Which Indorsers are Liable
▪ As respect one another, indorsers are liable prima

facie in the order in which they indorse; but
evidence is admissible to show that, as between or
among themselves, they have agreed
otherwise. Joint payees or joint indorsees who
indorse are deemed to indorse jointly and
severally. [Sec. 68, NIL]
▪ Every indorser is liable to all indorsers subsequent

to him but not those prior to him, whom he in turn
makes liable. This section contemplates successive
negotiations of the instrument and successive
indorsements. It does not determine the order of
liability of joint indorsers among themselves.
▪ Among themselves, indorsers are liable prima facie

in the order they indorse. As to the holder, they are
liable in any order.
Sec. 69. Liability of an agent or broker.

Where a broker or other agent negotiates an instrument
without indorsement, he incurs all the liabilities
prescribed by Section Sixty-five of this Act, unless he
discloses the name of his principal and the fact that he is
acting only as agent.
Requisites of Agent’s Non-Liability
a. He must identify himself as an agent; and
b. He must identify his principal.

Summary of Warranties, Undertakings, Defenses Barred and Beneficiaries
Maker Drawer Acceptor Qualified Indorser General (Irregular) Indorser

Section 60 61 62 65 66 (64)
drawer is a instrument instrument
payee is a drawer’s fictitious or is genuine is genuine
fictitious existence non-existent and in all forgery and and in all forgery and
payee's payee is a fictitious person or non- payee's
person or person respects material respects material
existence existent person existence
non-existent drawer’s forgery of what it alteration what it alteration
person genuine drawer’s purports purports to
signature signature to be be
drawer is a
minor or an
he has no title he has no title
insane
to the to the
person or
he has instrument instrument
otherwise he has good
drawer’s good title because he because he
incapacitated title to the
capacity to the stole it or he stole it or he
in the case of instrument
instrument procured it procured it
a corporate
through through
payee is a payee, the
fraud fraud
minor or an transaction is
payee is a minor or an insane person or insane ultra vires
otherwise incapacitated person or drawer lacks
Warranties otherwise of authority
- Defenses incapacitated to draw
a prior party a prior party
Barred drawer’s instrument
is a minor or is a minor or
payee's authority (e.g. want of
payee's an insane an insane
capacity to draw consideration
capacity to person or person or
to the or amount all prior
indorse otherwise all prior otherwise
indorse instrument drawn is in parties
incapacitated parties have incapacitated
excess of have
capacity to
drawer’s capacity to
contract
funds) contract
in the case of in the case of
payee is a
a corporate a corporate
fictitious
payee’s prior party, prior party,
person or
existence the the
in the case of non-existent
transaction is transaction is
a corporate person
in case of a corporate payee, the ultra vires ultra vires
payee, the
transaction is ultra vires payee is a no if the
transaction is the illegality of
minor or an knowledge insolvency of
ultra vires payee’s instrument the note
insane of fact that the maker at
capacity to is, at the time because of
person or would the time of
endorse of his illegal
otherwise impair the negotiation is
endorsement consideration
incapacitated validity of known to the

Maker Drawer Acceptor Qualified Indorser General (Irregular) Indorser

in the case of the endorser, he is valid and
a corporate instrument would be subsisting
payee, the or would liable for a
transaction is render it breach of this
ultra vires valueless warranty
by qualified
delivery indorsement
Warranties
extend to all
subsequent
parties
deriving title
through the
qualified
Warranties extend to all
endorsement,
holders in due course as well
whether or
as to the transferee of a holder
Warranties not such
Beneficiaries in due course. The secondary
extend to subsequent
of Warranties obligation to pay is not
immediate party is a
limited to a dishonor
transferee holder in due
resulting from a breach of the
only. course. No
warranties.
undertaking
to pay the
instrument
except if
dishonor
results in a
breach of any
of the 4
warranties.
If bill is dishonored and
proceedings for dishonor
taken, he will pay the bill
Pay the bill according to the If instrument is dishonored, and proceedings for dishonor are
Unconditional and principal obligation to pay to holder or endorser
Undertakings tenor of his acceptance; taken, he will pay holder or any endorser who pays it;
according to tenor of instrument. who may be compelled to
obligation is principal. obligation is secondary.
pay it; obligation to pay is
secondary and
conditional.

PRESENTMENT FOR PAYMENT

▪ Where an instrument payable on demand is
▪ A promissory note is presented once while, as a rule, a negotiated an unreasonable length of time after its
bill of exchange is presented twice. A BoE that stipulates issue, the holder is not a holder in due course. Thus,
that presentment is waived may be presented once. the holder who takes the instrument after the lapse
of a reasonable time from its issue, will be subject
▪ The equivalent of presentment in Civil Law is demand. to personal defenses.
The rule is no presentment, no payment, unless waived
or excused. ▪ If an instrument has a fixed date of maturity,
presentment must be made on the day the
NECESSITY OF PRESENTMENT FOR PAYMENT instrument falls due. If made before maturity, it is
not effective. Thus, a notice to the makers before
Presentment maturity, reminding them of the date when the
note would fall due, is not a proper presentment. If
▪ Presentation of the instrument to the person made after maturity, it is too late and unless delay
primarily liable for the purpose of demanding and is excused by law, the secondary parties will be
obtaining payment thereof discharged.
Effect on Primary Liability ▪ A stale check is one, which has not been presented
for payment within a reasonable time after its issue.
▪ Presentment for payment need not be made to It is valueless and, therefore, should not be paid.
charge the primary party. The maker and acceptor Under the NIL, an instrument not payable on
are obliged to pay the instrument upon making or demand must be presented for payment on the day
upon acceptance, although no demand has been it falls due. When the instrument is payable on
made on them on its due date and they remain demand, presentment must be made within a
liable even when it is already overdue. reasonable time after its issue.
▪ It is not the presentment that creates the liability for ▪ A check must be presented for payment within a
persons primarily liable because the liability is reasonable time after its issue. Failure to present for
already there but the presentment/demand will payment within a reasonable time will result to the
make it due and payable (demandable). discharge of the drawer to the extent of the loss
caused by the delay. [International Corporate Bank v.
▪ Before he accepts, the drawee is a stranger to the bill Sps. Gueco, G.R. No. 141968, February 12, 2001]
but from the moment he accepts, he becomes bound
as a party primarily liable on the instrument. He is Sufficient Presentment
bound according to the tenor of his acceptance and
he cannot show, as against the payee, that the ▪ Presentment for payment, to be sufficient, must be
drawer modifying the terms of the acceptance. made:
Effect on Secondary Liability a. By the holder, or by some person authorized

to receive payment on his behalf;
▪ Presentment for payment to the person primarily
liable is necessary to charge persons secondarily b. At a reasonable hour on a business day;
liable. Otherwise, they are discharged except as
otherwise provided for. c. At a proper place as herein defined;
Rules on Presentment d. To the person primarily liable on the

instrument, or if he is absent or inaccessible, to
▪ When not payable on demand: presentment must any person found at the place where the
be made on the day it falls due. presentment is made. [Sec. 72, NIL]
▪ When payable on demand: presentment must be ▪ If the presentment does not comply with any of
made within a reasonable time after its issue, except these requisites, it is not sufficient. The effect is the
that in the case of a bill of exchange, presentment same as if no presentment is made, namely, the
for payment will be sufficient if made within a persons secondarily liable are discharged.
reasonable time after the last negotiation thereof.
▪ Presentment for payment is to be made to the
Reasonable Time maker (PN), or to the acceptor (BoE), and not to the
persons secondarily liable.
▪ So much time as is necessary under the
circumstances for a reasonable prudent and Place of Presentment
diligent man to do, conveniently, what the contract
or duty requires should be done, having a regard Presentment for payment is made at the proper place:
for the rights and possibility of loss, if any, to the
other party. a. Where a place of payment is specified in the

instrument and it is there presented; primarily liable, there must be no place of payment specified
in the NI.
b. Where no place of payment is specified but the
address of the person to make payment is given in Sec. 78. Presentment to joint debtors.
the instrument and it is there presented; Where there are several persons, not partners, primarily
liable on the instrument and no place of payment is
c. Where no place of payment is specified and no specified, presentment must be made to them all.
address is given and the instrument is presented at
the usual place of business or residence of the DISPENSATION WITH PRESENTMENT FOR PAYMENT
person to make payment;
Sec. 79. When presentment not required to charge the
d. In any other case if presented to the person to make drawer.
payment wherever he can be found, or if presented Presentment for payment is not required in order to charge
at his last known place of business or residence. the drawer where he has no right to expect or require that
the drawee or acceptor will pay the instrument.
PARTIES TO WHOM PRESENTMENT FOR PAYMENT
SHOULD BE MADE ▪ This section gives an instance where the drawer will not
be discharged in spite of lack of presentment to the
Sec. 74. Instrument must be exhibited drawee.
The instrument must be exhibited to the person from
whom payment is demanded, and when it is paid, must be ▪ Presentment to the drawee is useless if the drawee is sure
delivered up to the party paying it. to dishonor the instrument.
Purpose of Presentment ▪ A right to require payment means that there is a pre-

existing contract between the drawer and drawee, which
a. To determine the genuineness of the instrument makes it a duty on the part of the drawee or acceptor to
and the right of the holder to receive payment; and pay.
b. To enable him to reclaim possession upon payment. ▪ Where the drawer has no funds with the drawee, or
where his bank balance is less than the amount of his
Exception to Rule Requiring Exhibition of Instrument check, or if he stopped payment thereof, the drawer
would have no right to require or expect payment and
a. When the debtor does not demand to see the presentment is therefore not necessary to charge him.
instrument but refuses payment on some other
grounds; and ▪ Where the drawee is insolvent at the time a check is
issued, and the drawer knows of it, presentment and
b. When the instrument is lost or destroyed. notice are not required to charge him because he would
not have the right to expect payment.
Sec. 75. Presentment where instrument payable at bank.
Where the instrument is payable at a bank, presentment To excuse presentment, two conditions must concur:
for payment must be made during banking hours, unless
the person to make payment has no funds there to meet it a. The instrument was made or accepted for the
at any time during the day, in which case presentment at indorser’s accommodation; and
any hour before the bank is closed on that day is sufficient.
b. He has no reason to expect its payment.
Sec. 76. Presentment where principal debtor is dead.
Where the person primarily liable on the instrument is Note: Thus, where the instrument was not made or accepted
dead and no place of payment is specified, presentment for for his accommodation, knowledge on the part of an indorser
payment must be made to his personal representative, if that the primary party is insolvent at the date of maturity does
such there be, and if, with the exercise of reasonable not free the holder from his duty to present, though he would
diligence, he can be found. have no reason to expect its payment.
Presentment for payment may be made to the executor or Summary of Rules: When Presentment is Excused
administrator if there be one, or to the heirs. The holder must
use diligence to find the personal representative, if there be Presentment is excused to charge the drawer (“DR”) in the
one. following cases:
Sec. 77. Presentment to persons liable as partners. a. Where the DR has no right to expect or require that
Where the persons primarily liable on the instrument are the drawee (“DW”) will pay the NI;
liable as partners and no place of payment is specified,
presentment for payment may be made to any one of them, b. Where the holder exercised reasonable diligence to
even though there has been a dissolution of the firm. present the NI but it cannot be made;
Each partner is, under the law, an agent of the other partners. c. When the DW is a fictitious person;
Before presentment can be made to either of the partners

d. When there is waiver of presentment; and DISHONOR BY NON-PAYMENT
e. When there is waiver of protest, when protest is Sec. 83. When instrument dishonored by non-payment.
necessary. [Austria] The instrument is dishonored by non-payment when:
(a) It is duly presented for payment and payment is
Presentment is not necessary in order to charge an indorser in refused or cannot be obtained; or
the following cases: (b) Presentment is excused and the instrument is
overdue and unpaid.
a. Where the NI was made or accepted for the
indorser’s accommodation and he has no reason to Requisites of Dishonor under Sec. 83(a):
expect that it will be honored;
a. There was due presentment for payment; and
b. Where the holder exercised reasonable diligence to
present the NI but it cannot be made; b. Payment is refused or cannot be obtained.
c. When the DW is a fictitious person; Requisites of Dishonor under Sec. 83(b):
d. When there is waiver of presentment; and a. Presentment for payment is excused;
e. When there is waiver of protest, when protest is b. NI is already overdue; and

necessary. [Austria]
c. NI is still unpaid.
When Delay in Making Presentment is Excused
Note:
▪ Delay in making presentment for payment is
excused when the delay is caused by circumstances ▪ When the instrument is dishonored by non-
beyond the control of the holder and not imputable payment, an immediate right of recourse to all
to his default, misconduct, or negligence. When the parties secondarily liable thereon accrues to the
cause of delay ceases to operate, presentment must holder.
be made with reasonable diligence.
▪ As to the holder, after an instrument is dishonored
▪ What is excused here is not the making of by non-payment, the persons secondarily liable
presentment but only the delay in making thereon cease to be secondarily liable. They become
presentment. After the cause of delay ceases, principal debtors and their liability becomes the
presentment must be made within reasonable time. same as that of the original debtor, provided that
Excusable circumstances are those events which notice of dishonor is given to them. If no notice of
could not be foreseen, or which though foreseen, dishonor is given to them, they are discharged.
are inevitable.
Time of Maturity
▪ Presentment for payment is excused:
GENERAL RULE: payable at the time fixed, without grace
a. Where, after the exercise of reasonable period
diligence, presentment, as required by this
Act, cannot be made; QUALIFICATIONS:
b. Where the drawee is a fictitious person; and a. When date of maturity falls on a Sunday or holiday,
the instruments falling due or becoming payable on
c. By waiver of presentment, express or implied. Saturday are to be presented for payment on the
next succeeding business day.
▪ Reasonable diligence implies active search. In other
words, the holder must take all steps likely to b. When payable on demand, at the option of the
discover the whereabouts of the party to whom holder, be presented for payment before twelve
presentment is to be made. o'clock noon on Saturday when that entire day is
not a holiday.
▪ Presentment is not required where the drawee is a
fictitious person because there is no one to whom Reckoning point of the time: determined by excluding the
presentment is to be made. day from which the time is to begin to run, and by including
the date of payment.
▪ Implied waiver of presentment may be manifested
by any language or conduct or agreement between Note:
the parties reasonably calculated to lead the holder
to believe that presentment is waived or to mislead ▪ Where the instrument is made payable at a bank, it
to prevent him from treating the bill as he otherwise is equivalent to an order to the bank to pay the same
would. for the account of the principal debtor thereon.

▪ The bank may charge the amount of the note from Contents of the Notice of Dishonor
the account of the maker without further authority
from the latter. a. It must contain sufficient description of the NI;
Payment in Due Course b. A statement that the NI has been dishonored upon
presentment for acceptance or for payment;
▪ When payment is made at or after the maturity of
the payment to the holder thereof in good faith and c. A statement that the NI has been protested, if
without notice that his title is defective protest is required;
▪ Requisites: d. An announcement of the intention to look to the

party addressed for payment.
a. Payment must be made by the person
primarily liable (i.e. maker or acceptor); Note:
b. Payment must be made on maturity date; ▪ Persons primarily liable need not be given notice of
dishonor in order to charge them because they are
c. Payment must be made to the holder or any the very ones who dishonor the instrument. Thus,
authorized representative; and a joint maker and an accommodation maker are not
entitled to notice.
d. Payment must be made in good faith and
without notice that the title of the holder is ▪ Notice of dishonor is notice given to persons
defective. secondarily liable, bringing to their attention the
fact that the instrument was presented to person
▪ Payment in order to discharge the instrument must primarily liable, and that person declined to make
be in due course. payment. Without this notice, the party is
discharged from its secondary liability, except in
▪ Payment by the indorser without presentment for the cases where the law provides otherwise.
payment to the maker is not payment in due course
because the indorser is not a person primarily ▪ If, after a negotiable instrument is dishonored for
liable. non-acceptance or non-payment, the indorser is not
notified of the fact in the time and manner
Summary of Rules on Presentment for Payment prescribed by law, said indorser is released from all
liability upon the document.
▪ Presentment for payment is not necessary to charge
persons primarily liable. But it is necessary to ▪ To charge the indorser, the complaint must allege
charge persons secondarily liable, except: and prove presentment to the maker and notice of
dishonor, or that the same are dispensed with
a. As to the drawer, under Section 79; under Sections 82 and 109, respectively, or is not
required under Section 118. And the burden of
b. As to the indorser, under Section 80; proving due notice or that notice was waived or
excused is on the holder. The indorser’s knowledge
c. When dispensed with under Section 82; and that the maker was in default on a note does not
dispense with notice of dishonor, and failure to
d. When the instrument has been dishonored by notify the indorser discharges his obligation. [Asia
non-acceptance. Banking Corporation v. Javier, G.R. No. L-19051, April
4, 1923]
▪ Presentment for payment is necessary so that
persons secondarily liable can be made liable. It is Exceptions to Notice Requirement
made by (1) exhibiting instrument and (2)
demanding payment. If paid, NI must be a. When notice is waived [Sec. 109, NIL];
surrendered to person liable to enable person to
check genuineness and to retrieve upon payment. b. When dispensed with under Sec. 112;
NOTICE OF DISHONOR c. As to drawer, under Sec. 114;
DEFINITION d. As to indorser, under Sec. 115;
Bringing, either verbally or in writing, to the knowledge of the e. Where due notice of dishonor by non-acceptance
drawer or the indorser of a NI, the fact that a specified NI, has been given [Sec. 116, NIL]; and
upon proper proceedings taken, has not been accepted [Sec.
149, NIL], or has not been paid [Sec. 83, NIL], and that the f. As to a holder in due course without notice. [Sec.
party notified is expected to pay it. 117, NIL]

PARTIES TO BE NOTIFIED party to whom this benefit inures can charge the party
receiving the notice of dishonor, even if he himself did not
1. The drawer; and give the notice.
2. Each indorser Parties who will benefit from a notice already given:
Note: a. All subsequent holders;
▪ Any drawer or indorser to whom such notice is not b. All prior parties who have a right of recourse
given [Sec 89, NIL] against the party to whom notice is given.
▪ The notice may be given by or on behalf of the Sec. 93. Effect where notice is given by party entitled
holder, or by or on behalf of any party to the thereto.
instrument who might be compelled to pay it to the Where notice is given by or on behalf of a party entitled to
holder, and who, upon taking it up, would have a give notice, it inures to the benefit of the holder and all
right to reimbursement from the party to whom the parties subsequent to the party to whom notice is given.
notice is given. [Sec. 90, NIL]
The principle involved here is the same as under Section 92.
PARTIES WHO MAY GIVE NOTICE AND DISHONOR The notice, however, is given, not by the holder but by a party
entitled to give notice under Section 90, namely, by a party to
Notice of dishonor may be given by: the instrument who might be compelled to pay it to the
holder, and who, upon taking it up, would have a right of
a. The holder; reimbursement from the party to whom notice is given.
b. Another person on behalf of the holder; a. The holder; and
c. Any party to the instrument who may be compelled b. Parties subsequent to the party to whom notice is
to pay the holder; given
d. Another person on behalf of the party to the Sec. 95. When notice sufficient.
instrument who may be compelled to pay the A written notice need not be signed and an insufficient
holder. written notice may be supplemented and validated by
verbal communication. A misdescription of the instrument
Note: Notice of dishonor may be given by an agent. It is not does not vitiate the notice unless the party to whom the
necessary that the agent be authorized by the principal. notice is given is in fact misled thereby.
The agent may give notice in the following instances: FORM OF NOTICE
a. Where the instrument has been dishonored in the Sec. 96. Form of notice.
hands of an agent, he may either himself give notice The notice may be in writing or merely oral and may be
to the parties liable thereon, or he may give notice given in any terms which sufficiently identify the
to his principal. instrument, and indicate that it has been dishonored by
non-acceptance or non-payment. It may in all cases be
b. If he gives notice to his principal, he must do so given by delivering it personally or through the mails.
within the same time as if he were the holder, and
the principal, upon the receipt of such notice, has Contents of Notice
himself the same time for giving notice as if the
agent had been an independent holder. a. Sufficient description of the instrument to identify
it;
Note: If the agent chooses to give notice to his principal, he
must give notice within the time allowed by law [Secs. 102- b. A statement that it has been presented for payment
104, NIL] as if he were a holder. The principal has also the or acceptance, and that it has been dishonored; and
same time [Secs. 102-104, NIL] to give notice to the parties
secondarily liable. c. A statement that the party giving notice intends to
look for the party addressed for payment.
EFFECT OF NOTICE
Note: Notice may be given orally or in writing. Notice may
Sec. 92. Effect of notice on behalf of holder. thus be given by telephone. What is necessary is to give
Where notice is given by or on behalf of the holder, it details of the dishonored instrument, describe in a manner
inures to the benefit of all subsequent holders and all prior sufficient to inform persons secondarily liable which
parties who have a right of recourse against the party to instrument was in fact dishonored. The notice must state that
whom it is given. it was presented for payment and the fact that payment was
refused. It must contain that you are holding the person
The benefit referred to here is the right to charge the person secondarily liable for the value of the instrument.
secondarily liable who received the notice. In other words, the

Sec. 97. To whom notice may be given. creditors, notice may be given either to the party himself
Notice of dishonor may be given either to the party himself or to his trustee or assignee.
or to his agent in that behalf.
Sec. 102. Time within which notice must be given.
▪ Notice of dishonor is given to parties secondarily liable Notice may be given as soon as the instrument is
in order to enforce their liability. dishonored and, unless delay is excused as hereinafter
provided, must be given within the time fixed by this Act.
▪ Not every agent of the party sought to be charged would
be a proper agent within this section, because it is clear But where the notice is actually received by the party
therefrom that an agent to be competent to receive notice within the time specified in this Act, it will be sufficient,
of dishonor must be authorized “in that behalf” though not sent in accordance with the requirement of this
section.
▪ If the agent is not authorized to receive notice of
dishonor, then service to him is fatally defective, and ▪ Notice given before the maturity date is premature and
secondarily liable parties are discharged insufficient, and cannot affect the liability of secondary
parties.
Sec. 98. Notice where party is dead.
When any party is dead and his death is known to the ▪ At any rate, if a notice is not given within the time fixed
party giving notice, the notice must be given to a personal by Sections 103 and 104, the notice is inoperative and the
representative, if there be one, and if with reasonable secondary party not notified is discharged.
diligence, he can be found. If there be no personal
representative, notice may be sent to the last residence or Sec. 103. Where parties reside in same place.
last place of business of the deceased. Where the person giving and the person to receive notice
reside in the same place, notice must be given within the
Requisites of Notice to Personal Representatives of following times:
Deceased (a) If given at the place of business of the person to
receive notice, it must be given before the close of
a. The person who should give notice knows that the business hours on the day following.
person to receive notice is dead; (b) If given at his residence, it must be given before the
usual hours of rest on the day following.
b. The person who is supposed to receive notice has a (c) If sent by mail, it must be deposited in the post office
personal representative; and in time to reach him in usual course on the day
following.
c. The personal representative could be found after
the exercise of reasonable diligence Sec. 104. Where parties reside in different places.
Where the person giving and the person to receive notice
Cases When Notice to Personal Representative is Not reside in different places, the notice must be given within
Necessary the following times:
(a) If sent by mail, it must be deposited in the post office
a. If there was, in fact, no personal representative; in time to go by mail the day following the day of
dishonor, or if there be no mail at a convenient hour
b. If the person to give notice is not aware of the death on last day, by the next mail thereafter.
of the person who is supposed to receive notice; or (b) If given otherwise than through the post office, then
within the time that notice would have been received
c. If the personal representative cannot be found in due course of mail, if it had been deposited in the
despite the exercise of reasonable diligence post office within the time specified in the last
subdivision.
Sec. 99. Notice to partners.
Where the parties to be notified are partners, notice to any ▪ The same place refers to the corporate limits of a town or
one partner is notice to the firm, even though there has city where the presentment is made or where the holder
been a dissolution. resides.
Each partner is an agent of the partnership of which he is a ▪ Unless excused, notice given out of time would be
member. Accordingly, notice to one is notice to the others. considered not to have been given. Hence, the party to
receive notice would be discharged.
Sec. 100. Notice to persons jointly liable.
Notice to joint persons who are not partners must be given Sec. 108. Where notice must be sent.
to each of them unless one of them has authority to receive Where a party has added an address to his signature,
such notice for the others. notice of dishonor must be sent to that address; but if he
has not given such address, then the notice must be sent as
Sec. 101. Notice to bankrupt. follows:
Where a party has been adjudged a bankrupt or an (a) Either to the post-office nearest to his place of
insolvent, or has made an assignment for the benefit of residence or to the post-office where he is accustomed
to receive his letters; or

(b) If he lives in one place and has his place of business a waiver not only of a formal protest but also of
in another, notice may be sent to either place; or presentment and notice of dishonor.
(c) If he is sojourning in another place, notice may be
sent to the place where he is so sojourning. Protest
▪ The sending of a notice to an address designated by the ▪ Formal statement in writing made by a notary
indorser will be sufficient even though the address is an public at the instance of the holder declaring that
incorrect one. the instrument has been presented for payment or
acceptance but the same was dishonored. [Austria]
▪ Strict compliance is not necessary. It is sufficient that
notice is actually received on time. ▪ Protest is only indispensable in a foreign BoE.
Sec. 105. When sender deemed to have given due notice. ▪ Where protest is waived, presentment and notice of
Where notice of dishonor is duly addressed and deposited dishonor are deemed waived also. But where notice
in the post office, the sender is deemed to have given due of dishonor is waived, presentment is not waived.
notice, notwithstanding any miscarriage in the mails.
▪ Specific Cases When Protest is Required:
Sec. 106. Deposit in post office; what constitutes.
Notice is deemed to have been deposited in the post-office a. If a foreign bill has been dishonored by non-
when deposited in any branch post office or in any letter acceptance;
box under the control of the post-office department.
b. If a foreign bill which was not previously
The notice must be properly addressed, stamped and mailed. presented for acceptance has been dishonored
Otherwise, the notice, even though mailed, is not proper. by non-payment;
Sec. 107. Notice to subsequent party; time of. c. A bill that is supposed to be accepted for
Where a party receives notice of dishonor, he has, after the honor;
receipt of such notice, the same time for giving notice to
antecedent parties that the holder has after the dishonor. d. A bill that is to be presented to the acceptor for
honor or referee in case of need;
He is given the same time period under Secs. 103-104.
e. When the bill is dishonored by acceptor for
Sec. 109. Waiver of notice. honor [Austria]
Notice of dishonor may be waived either before the time
of giving notice has arrived or after the omission to give DISPENSATION WITH NOTICE
due notice, and the waiver may be expressed or implied.
Sec. 112. Where notice is dispensed with.
WAIVER Notice of dishonor is dispensed with when, after the
exercise of reasonable diligence, it cannot be given to or
Intentional renouncement of the benefit of the act or matter in does not reach the parties sought to be charged.
his favor.
The person giving notice must do what a reasonable man
Types of Waiver would have done under the same circumstances.
a. Express, or implied; Sec. 113. Delay in giving notice; how excused.

Delay in giving notice of dishonor is excused when the
b. Written in the instrument itself, or written above delay is caused by circumstances beyond the control of the
the signature of the indorser; holder and not imputable to his default, misconduct, or
negligence. When the cause of delay ceases to operate,
c. Waiver done before the time of giving of notice, or notice must be given with reasonable diligence.
waiver done after the failure to give notice.
Exercise of reasonable diligence excuses the delay in the
To Whom Binding giving of notice, provided there is no default, misconduct, or
negligence on his part.
a. If the waiver is written on the instrument itself –
binding on all parties. EFFECT OF FAILURE TO GIVE NOTICE
b. If the waiver is written above the signature of the Sec. 114. When notice need not be given to drawer.
indorser – binding only on the indorser and he is Notice of dishonor is not required to be given to the
the only one deemed to have made the waiver. drawer in either of the following cases:
(a) Where the drawer and drawee are the same
Sec. 111. Waiver of protest. person;
A waiver of protest, whether in the case of a foreign bill of (b) When the drawee is fictitious person or a person
exchange or other negotiable instrument, is deemed to be not having capacity to contract;

(c) When the drawer is the person to whom the not necessary unless in the meantime the instrument has
instrument is presented for payment; been accepted.
(d) Where the drawer has no right to expect or require
that the drawee or acceptor will honor the Sec. 117. Effect of omission to give notice of non-
instrument; acceptance.
(e) Where the drawer has countermanded payment. An omission to give notice of dishonor by non-acceptance
does not prejudice the rights of a holder in due course
▪ The reason for not requiring notice under paragraphs (a) subsequent to the omission.
and (b) is that in each of these cases, the holder is given
the option under Sec. 130 of treating the instrument as a Failure of a prior holder does not prejudice a holder in due
promissory note, thus considering the drawer a “maker” course. A HIDC may still give notice, so as not to discharge
and a primary party. those secondarily liable.
▪ The reason for non-requirement of notice under Sec. 118. When protest need not be made; when must be
paragraph (c) is because such demand for payment, of made.
itself, constitutes notice of dishonor of the bill. Where any negotiable instrument has been dishonored, it
may be protested for non-acceptance or non-payment, as
▪ Under paragraph (d), where there is no antecedent the case may be; but protest is not required except in the
contractual relation between the drawer and drawee case of foreign bills of exchange.
under which the drawee is bound to accept or pay, notice
of dishonor is not required because the drawee has no Protest is necessary for foreign bills of exchange, while protest
right to require that the drawee accept or pay. Thus, for other negotiable instruments is optional.
where the drawer of a check has no account or no
sufficient funds with the drawee bank, he is not entitled DISCHARGE OF NEGOTIABLE
to notice of dishonor.
INSTRUMENTS
▪ Under paragraph (e), notice of dishonor is not required
where the drawer has countermanded payment because DISCHARGE
it is his own act which causes the dishonor of the
▪ Release of all parties, primarily or secondarily liable,
instrument.
from further liability, obligation, or from the binding
effect of the NI. [Austria]
Sec. 115. When notice need not be given to indorser.
Notice of dishonor is not required to be given to an
▪ In a negotiable instrument, the only obligation meant to
indorser in either of the following cases:
be discharged is that for payment for a sum of money.
(a) When the drawee is a fictitious person or person
not having capacity to contract, and the indorser
Sec. 119. Instrument; how discharged.
was aware of that fact at the time he indorsed the
A negotiable instrument is discharged:
instrument;
(a) By payment in due course by or on behalf of the
(b) Where the indorser is the person to whom the
principal debtor;
instrument is presented for payment;
(b) By payment in due course by the party
(c) Where the instrument was made or accepted for
accommodated, where the instrument is made or
his accommodation.
accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
▪ As to a particular person secondarily liable on an
(d) By any other act which will discharge a simple
instrument, such as the drawer or an indorser, notice of
contract for the payment of money;
dishonor to him is not necessary:
(e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.
a. Where he has knowledge of the dishonor by means
other than through a formal notice, as when he is
Payment in Due Course –
both the drawee and drawer or when presentment
is made him; and Requisites for Discharge through Payment in Due Course
b. Where the drawee is fictitious or without capacity a. Payment must be made in due course;
to contract.
b. Payment must be made by the principal debtor (i.e.
▪ These sections apply only to the drawer or indorser maker or acceptor) or his agent or by an
concerned. Failure to give due notice to the other parties accommodated party; and
secondarily liable will discharge them.
c. Payment should be made to the holder.
Sec. 116. Notice of non-payment where acceptance
refused. Note: When the instrument is paid by a third party, not a
Where due notice of dishonor by non-acceptance has been party to the instrument or a virtual stranger, the instrument
given, notice of a subsequent dishonor by non-payment is cannot be presumed to have been paid. When a person makes
a payment and he is not the party obligated to pay, there is a

presumption that the instrument was negotiated to him. This holder's right to enforce the instrument unless
presumption can be overturned when it is expressed that the made with the assent of the party secondarily
payment is to discharge the instrument. liable or unless the right of recourse against such
party is expressly reserved.
Cancellation by Holder
a. By Discharge of Instrument – Any of the acts that will
▪ The cancellation must be intentional and made by discharge an instrument under Section 119 will
the holder. Cancellation may be done by tearing the discharge the parties secondarily liable thereon.
instrument, burning it or writing across it the word
“cancelled.” b. By Intentional Cancellation – No consideration is
necessary to support a discharge by intentional
Acts that Discharge a Simple Contract cancellation of an indorser’s signature by the holder.
Art. 1231. Obligations are extinguished: (PLRMCN-ARFP) c. By the Discharge of Prior Party – The intentional
cancellation of a prior party also discharges the
a. By Payment or performance; subsequent parties thereto because if the latter were not
discharged, and he is made to pay the holder, he would
b. By the Loss of the thing due; not be able to enforce his right of recourse against the
prior party who has been discharged by the holder.
c. By the condonation or Remission of the debt;
d. By Valid Tender of Payment – When a party
d. By the confusion or Merger of the rights of creditor secondarily liable offers to pay the holder and the latter
and debtor; declines payment, that party as well as all subsequent
parties are considered discharged because it is not fair
e. By Compensation; that if the holder fails to collect from the person he
wanted, the holder goes back to the persons secondarily
f. By Novation. liable who already offered to pay the instrument.
Note: Other causes of extinguishment of obligations, such as e. By Release of Principal Debtor – If the holder releases
Annulment, Rescission, Fulfillment of a Resolutory the principal debtor, the persons secondarily liable are
Condition, and Prescription, are governed elsewhere in this also discharged as (1) this discharges the instrument and
Code. (2) deprives them of their right of recourse against the
principal debtor. But if on releasing the principal debtor,
Principal Debtor Acquires Instrument – the holder reserves his right of recourse against the
parties secondarily liable, they are not discharged.
Reacquisition by principal debtor discharges instrument,
when it is done: f. By Extension of Time – If the holder agrees to extend the
time of payment, the indorsers are discharged. The
a. By the principal debtor; following, however, are exceptions:
b. In his own right; and 1. Where the extension of time is consented to by the
party secondarily liable, he is not discharged; and
c. At or after the date of maturity.
2. Where the holder reserves his right of recourse
Note: “In his own right” implies that an agent cannot against the party secondarily liable, he is not
reacquire the NI on behalf of the principal debtor, so as to discharged.
effect the discharge of NI
RIGHT OF PARTY WHO DISCHARGED INSTRUMENT
DISCHARGE OF PARTIES SECONDARILY LIABLE
Sec. 121. Right of party who discharges instrument.
Sec. 120. When persons secondarily liable on the Where the instrument is paid by a party secondarily liable
instrument are discharged. thereon, it is not discharged; but the party so paying it is
A person secondarily liable on the instrument is remitted to his former rights as regard all prior parties, and
discharged: he may strike out his own and all subsequent
(a) By any act which discharges the instrument; indorsements and against negotiate the instrument,
(b) By the intentional cancellation of his signature by except:
the holder; (a) Where it is payable to the order of a third person
(c) By the discharge of a prior party; and has been paid by the drawer; and
(d) By a valid tender of payment made by a prior (b) Where it was made or accepted for
party; accommodation and has been paid by the party
(e) By a release of the principal debtor unless the accommodated.
holder's right of recourse against the party
secondarily liable is expressly reserved; Payment by a party secondarily liable does not discharge
(f) By any agreement binding upon the holder to the NI, but has the following effects:
extend the time of payment or to postpone the

a. The person secondarily liable is remitted to his

former rights, and can thus enforce such rights MATERIAL ALTERATION
against prior parties and/or re-negotiate the
instrument; and
b. The same person may strike out the indorsements Sec. 124. Alteration of instrument; effect of.
subsequent to his original position. Where a negotiable instrument is materially altered
without the assent of all parties liable thereon, it is
EXCEPTIONS: avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent
a. Accommodated Party – Payment by the indorsers.
accommodated party will discharge the NI because
But when an instrument has been materially altered and is
Sec. 123. Cancellation; unintentional; burden of proof. in the hands of a holder in due course not a party to the
A cancellation made unintentionally or under a mistake or alteration, he may enforce payment thereof according to
without the authority of the holder, is inoperative but its original tenor.
where an instrument or any signature thereon appears to
have been cancelled, the burden of proof lies on the party CONCEPT
who alleges that the cancellation was made
unintentionally or under a mistake or without authority. ▪ A material alteration changes the contract of the parties.
the accommodated party is the principal.
▪ Material alteration is any change in the details of the
b. Drawer – Payment by the drawer will discharge the instrument that results in a change in the effect of such
NI, since the DR is the person who is ultimately instrument.
liable on the NI even if the acceptor will pay the
payee. ▪ An alteration is said to be material if it alters the effect of
the instrument. It means an unauthorized change in an
RENUNCIATION BY HOLDER instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of
Renunciation words or numbers or other change to an incomplete
instrument relating to the obligation of a party.
▪ The holder expressly waives his right to recover
against any party. ▪ In other words, a material alteration is one which
changes the items which are required to be stated under
Requisites of Renunciation: Sec. 1. [PNB v. CA]
a. The renunciation must be expressly provided for in ▪ Section 125 specifies and defines what constitutes a
writing or in the alternative delivered to the person material alteration. Any other alteration not mentioned
primarily liable; and under Sec. 125 would be non-material and would not
affect the liability of any prior party on the instrument.
b. The renunciation must be absolute and
unconditional. ▪ Examples of Material Alterations:
a. Substituting the words “or bearer” for “order”;

Effect of Renunciation on HIDC
b. Writing “protest waived” above blank
▪ If a renouncing holder will later negotiate the NI to indorsements;
a HIDC, the HIDC can still recover from the
indorsers who were released if he was not aware of c. A change in the date from which interest is to run;
such fact.
d. A change in the sum payable;
Cancellation
e. Adding the words “with interest”;
▪ Destroying the instrument either by tearing it up,
burning it, or writing the word “cancelled”. f. An alteration in the maturity of a note;
When Cancellation is Inoperative
a. When made unintentionally;
b. When made under a mistake; or
c. When made without authority of the holder.
Note: Unintentional cancellation does not discharge the NI.

later than 4:00 pm the next business day after the

g. A change in or addition to the name of the payee; questioned check was presented for clearance.
h. Inserting the name of a different payee. [PNB v. ▪ As to altered/forged checks, the drawee bank can still
Court of Appeals, G.R. No. 107508, April 25, 1996] return them even after 4:00 pm of the next day provided
it does so within 24 hours from its discovery of the
▪ Any material alteration in the terms of the NI by holder alteration or forged indorsement, but in no case may
of the same, without the consent of the obligor, will return be made beyond the usual prescriptive period
relieve such obligor from all liability thereon. [American under law, which would be 10. Thus, if the drawer
Bank v. Macondray, G.R. No. 1808, August 23, 1905] discovers the alteration or forged indorsement say, one
year after the check’s clearing, he should notify and
EFFECT OF MATERIAL ALTERATION return the defective check to the collecting bank not later
than 4pm of the next business day after it receives notice
▪ Where a negotiable instrument is materially altered, it is of the defect. Otherwise, the collecting bank will not be
avoided in the hands of one who is not a holder in due liable to return the amount to the drawee bank.
course as against any prior party who has not assented
to the alteration. However, the law makes certain ▪ Regardless of forgery/alteration or lack thereof, under
exceptions. The instrument is not avoided as against: banking laws, when a check is deposited and the drawee
bank does not act within 24 hours, the drawee bank is
a. A party who has made the alteration; considered to have conclusively honored the check. This
is irreversible.
b. A party who authorizes or assented to the
alteration; and ▪ In this case, the check was not returned to the collecting
bank in accordance with the 24-hour clearing house
c. Subsequent indorsers. period, but was cleared by the drawee bank. Failure of
the drawee bank, therefore, to call the attention of the
▪ A holder in due course can enforce the instrument collecting bank to the alteration of the check in question
according to its original tenor regardless of whether the until after the lapse of nine days, negates whatever right
alteration was innocent or fraudulent because the law it might have against the collecting bank. Its remedy is
does not make any distinction. not against the collecting bank, but against the party
responsible for the alteration.
▪ A material alteration avoids the instrument and
discharges all parties, unless they authorized or ▪ As to the liability of the collecting bank on its clearing
consented to the alteration. house endorsement, such an indorsement must be read
together with the 24-hour regulations on clearing House
▪ A subsequent indorser is excepted from this rule because Operations of the Central Bank. Once that 24-hour
by the indorsement he warrants, among other things, period is over, the liability on such an indorsement has
that the instrument is in all what it purports to be and ceased.
that it was valid and subsisting at the time of his
indorsement. ▪ Banks are bound by 24-hour clearing house rule, and
must notify collecting banks within 24 hours of
▪ When you change the contractual relationship of the alteration of checks.
parties, the instrument is avoided as to parties prior to
the alteration and thereby released from liability. But as ▪ The 24-hour clearing house rule is a valid rule applicable
to commercial banks. When an indorsement is forged,
Sec. 125. What constitutes a material alteration.
the collecting bank or last indorser, as a general rule,
Any alteration which changes:
bears the loss. But the unqualified indorsement of the
(a) The date;
collecting bank on the check should be read together
(b) The sum payable, either for principal or interest;
with the 24-hour regulation on clearing house operation.
(c) The time or place of payment:
Thus, when the drawee bank fails to return a forged or
(d) The number or the relations of the parties;
altered check to the collecting bank within 24-hour
(e) The medium or currency in which payment is to be
clearing period, the collecting bank is absolved from
made;
liability.
(f) Or which adds a place of payment where no place
of payment is specified, or any other change or
▪ When drawee bank fails to return a forged or altered
addition which alters the effect of the instrument
check to the collecting bank within the 24-hour clearing
in any respect, is a material alteration.
period, collecting bank is absolved for liability.
to parties subsequent, they already saw the alteration
and thus it cannot be avoided as to them.
▪ It is true that when an indorsement is forged, the
collecting bank or last indorser, as a general rule, bears
24-Hour Clearing Rule
the loss. But the unqualified indorsement of the
collecting bank on the check should be read together
▪ Under Section 1 of the BSP Circular, the clearing is
with the 24-hour regulation on clearing house operation.
conducted at 4:00 pm every business day. Therefore,
Thus, when the drawee bank fails to return a forged or
defective items must be returned by the drawee bank not
altered check to the collecting bank within the 24-hour

clearing period, the collecting bank is absolved from c. There is a promise to accept the bill;
liability. [Republic Bank v. Court of Appeals, G.R. No. 42725,
April 22, 1991] d. The bill is executed within a reasonable period of
time because advance acceptance is worthless
ACCEPTANCE without the bill being made; and
DEFINITION e. The holder takes the bill on the faith of the forward
acceptance.
The signification of the drawee of his assent to the order of the
drawer to pay. TIME FOR ACCEPTANCE
Requisites: Sec. 136. Time allowed drawee to accept.

The drawee is allowed twenty-four hours after
a. The acceptance must be in writing; presentment in which to decide whether or not he will
accept the bill; the acceptance, if given, dates as of the day
b. The written acceptance must be signed by the of presentation.
drawee; and
RULES GOVERNING ACCEPTANCE
c. The drawee must assent to the promise to pay a
sum certain in money and not by any other means Sec. 137. Liability of drawee returning or destroying bill.
Where a drawee to whom a bill is delivered for acceptance
Acceptance Payment destroys the same, or refuses within twenty-four hours
Undertaking to perform an Actual performance of an after such delivery or within such other period as the
act act holder may allow, to return the bill accepted or non-
accepted to the holder, he will be deemed to have accepted
Acceptance only applies to bills of exchange and its object is the same.
to bind the drawee and make him an actual party to the
instrument. Constructive Acceptance
MANNER a. Where the drawee to whom the bill is delivered for

acceptance destroys it; or
Sec. 133. Holder entitled to acceptance on face of bill.
The holder of a bill presenting the same for acceptance b. Where the drawee refuses, within 24 hours after
may require that the acceptance be written on the bill, and, such delivery, or within such time as is given him,
if such request is refused, may treat the bill as dishonored. to return the bill accepted or not accepted.
Sec. 134. Acceptance by separate instrument. Note:

Where an acceptance is written on a paper other than the
bill itself, it does not bind the acceptor except in favor of a ▪ In any of these cases, the drawee will be deemed to
person to whom it is shown and who, on the faith thereof, have accepted the bill even if there is no actual
receives the bill for value. written acceptance by him.
▪ The drawee is not entitled to keep the bill while he

Where Acceptance Should be Written:
makes up his mind. The bill is at all times the
a. On the bill itself; or property of the holder and he is entitled to have it
when he wants it. If the holder should demand its
return before twenty-four hours, the drawee would
b. On a separate paper (i.e. allonge)
be required to comply on pain of being held as an
Sec. 135. Promise to accept; when equivalent to acceptor; but return within twenty-four hours
acceptance. unaccepted would not be a dishonor. The drawee
An unconditional promise in writing to accept a bill before could still accept by notification within twenty-four
it is drawn is deemed an actual acceptance in favor of hours. If the drawee, after returning the bill, still
every person who, upon the faith thereof, receives the bill refused to act after the expiration of the time
for value. allowed, the holder then would be required to treat
the bill as dishonored or lose his right against prior
parties.
The acceptance here is binding on all persons who relied on
the acceptance even if they have not seen the instrument. For
▪ Should the drawee return the bill unaccepted
there to be an acceptance, the following must concur:
within 24 hours, the bill is not necessarily
dishonored because he can still accept it until the
a. The acceptance must refer to a bill yet to be drawn;
expiration of the 24th hour. Should he return it
b. The acceptance is in writing and describes the bill before the 24-hour period, and fails to accept within
such period or within such other period as the
to be accepted;
holder may allow, the holder must treat the bill as
dishonored or else he will lose his right against

prior parties. If the drawee returns it with a

statement of refusal to accept, then even if the 24- c. Local – Acceptance to pay only at a particular place.
hour period has not lapsed, the bill should then be
considered dishonored. (ex. “Accepted, but payable at X bank only”)
Sec. 138. Acceptance of incomplete bill. d. Qualified as to time

A bill may be accepted before it has been signed by the
drawer, or while otherwise incomplete, or when it is (ex. “Accepted, but to be paid only 10 days after
overdue, or after it has been dishonored by a previous maturity date”)
refusal to accept, or by non-payment. But when a bill
payable after sight is dishonored by non-acceptance and e. Acceptance of some, one or more of the drawees
the drawee subsequently accepts it, the holder, in the but not all.
absence of any different agreement, is entitled to have the
bill accepted as of the date of the first presentment. (ex. BoE addressed to A and B as drawees, but upon
presentment, only A accepted) (Austria)
Acceptance Under Sec. 138
Sec. 142. Rights of parties as to qualified acceptance.
a. Acceptance before the bill is signed by the drawer; The holder may refuse to take a qualified acceptance and
if he does not obtain an unqualified acceptance, he may
b. Acceptance while the bill is still incomplete; treat the bill as dishonored by non-acceptance. Where a
qualified acceptance is taken, the drawer and indorsers are
c. Acceptance of an overdue instrument; discharged from liability on the bill unless they have
expressly or impliedly authorized the holder to take a
d. Acceptance of an instrument which was previously qualified acceptance, or subsequently assent thereto.
dishonored by non-acceptance; and When the drawer or an indorser receives notice of a
qualified acceptance, he must, within a reasonable time,
e. Acceptance of an instrument which was previously express his dissent to the holder or he will be deemed to
dishonored by non-payment. have assented thereto.
Kinds of acceptance ▪ A holder need not take a qualified acceptance but

instead may insist on a general or unqualified
▪ An acceptance is either general or qualified. A acceptance, and upon his failure to obtain the latter, may
general acceptance assents without qualification to treat the bill as dishonored. However, if he agrees to a
the order of the drawer. A qualified acceptance in qualified acceptance, he should give notice thereof to the
express terms varies the effect of the bill as drawn. drawer and indorsers, otherwise the latter will be
discharged from liability. If notified and they do not
Sec. 140. What constitutes a general acceptance. express their dissent within a reasonable time, they
An acceptance to pay at a particular place is a general remain liable on the instrument.
acceptance unless it expressly states that the bill is to be
paid there only and not elsewhere. ▪ Acceptance is presumed to be unqualified or absolute. If
the drawee intends to qualify his acceptance, he must do
Sec. 141. Qualified acceptance. so distinctly and unmistakably or else the acceptance
An acceptance is qualified which is: will be taken as absolute.
(a) Conditional; that is to say, which makes payment
by the acceptor dependent on the fulfillment of a PRESENTMENT FOR ACCEPTANCE
condition therein stated;
(b) Partial; that is to say, an acceptance to pay part DEFINITION
only of the amount for which the bill is drawn;
(c) Local; that is to say, an acceptance to pay only at a Physical production of a bill of exchange to the drawee for his
particular place; acceptance.
(d) Qualified as to time;
(e) The acceptance of some, one or more of the TIME/PLACE/MANNER OF PRESENTMENT
drawees but not of all.
Sec. 143. When presentment for acceptance must be
Kinds of Qualified Acceptance made.
Presentment for acceptance must be made:
a. Conditional – Makes payment by the acceptor (a) Where the bill is payable after sight, or in any other
dependent on the fulfillment of a condition . case, where presentment for acceptance is
necessary in order to fix the maturity of the
(ex. “Accepted if P will graduate from college”) instrument; or
(b) Where the bill expressly stipulates that it shall be
b. Partial – Acceptance to pay only part of the amount presented for acceptance; or
for which the bill is drawn. (c) Where the bill is drawn payable elsewhere than at
the residence or place of business of the drawee.
(ex. “Accepted up to P200 only”)

present the bill for acceptance before presenting it for

In no other case is presentment for acceptance necessary in payment on the day that it falls due, the delay caused by
order to render any party to the bill liable. presenting the bill for acceptance before presenting it for
payment is excused and does not discharge the drawers
▪ Presentment for acceptance is not necessary to render and indorsers.
any party liable except in the three cases enumerated in
Sec. 143. Sec. 145. Presentment; how made.
Presentment for acceptance must be made by or on behalf
▪ Checks are not meant to be presented for acceptance or of the holder at a reasonable hour, on a business day and
certification and if so presented and certification refused, before the bill is overdue, to the drawee or some person
they will not be deemed dishonored. authorized to accept or refuse acceptance on his behalf;
and
▪ A Cashier’s Check is deemed as cash. Moreover, since (a) Where a bill is addressed to two or more drawees
the said check has been certified by the drawee bank, by who are not partners, presentment must be made to
the certification, the funds represented by the check are them all unless one has authority to accept or refuse
transferred from the credit of the maker to that of the acceptance for all, in which case presentment may be
payee or holder, and for all intents and purposes, the made to him only;
latter becomes the depositor of the drawee bank, with (b) Where the drawee is dead, presentment may be made
rights and duties of one in such situation. to his personal representative;
(c) Where the drawee has been adjudged a bankrupt or
▪ Where a check is certified by the bank on which it is an insolvent or has made an assignment for the
drawn, the certification is equivalent to acceptance. [New benefit of creditors, presentment may be made to him
Pacific Timber Co. v. Seneris, G.R No. L-41764, December 19, or to his trustee or assignee.
1980]
Requisites:
EFFECT OF FAILURE TO MAKE PRESENTMENT
a. Presentment must be made by or on behalf of the
Sec. 144. When failure to present releases drawer and holder;
indorser.
Except as herein otherwise provided, the holder of a bill b. Presentment must be made at a reasonable hour on
which is required by the next preceding section to be a business day;
presented for acceptance must either present it for
acceptance or negotiate it within a reasonable time. If he c. Presentment must be made before the bill is
fails to do so, the drawer and all indorsers are discharged. overdue;
▪ When presentment for acceptance is necessary, the d. Presentment must be to the drawee or some person
holder must either present it for acceptance or negotiate authorized to accept or refuse acceptance on his
it within a reasonable time, or else the drawer and all behalf.
indorsers are discharged.
Sec. 146. On what days presentment may be made.
▪ In this case, the instrument was presented for acceptance A bill may be presented for acceptance on any day on
more than a month. It was held that there was which negotiable instruments may be presented for
unreasonable delay, which discharges parties payment under the provisions of Sections seventy-two and
secondarily liable. [N.O. Behn Meyer & Co. v. HSBC] eighty-five of this Act. When Saturday is not otherwise a
holiday, presentment for acceptance may be made before
Sec. 148. Where presentment is excused. twelve o'clock noon on that day.
Presentment for acceptance is excused and a bill may be
treated as dishonored by non-acceptance in either of the DISHONOR BY NON-ACCEPTANCE
following cases:
(a) Where the drawee is dead, or has absconded, or is a Sec. 149. When dishonored by non-acceptance.
fictitious person or a person not having capacity to A bill is dishonored by non-acceptance:
contract by bill. (a) When it is duly presented for acceptance and such an
(b) Where, after the exercise of reasonable diligence, acceptance as is prescribed by this Act is refused or
presentment cannot be made. can not be obtained; or
(c) Where, although presentment has been irregular, (b) When presentment for acceptance is excused and the
acceptance has been refused on some other ground. bill is not accepted.
Where presentment cannot be made notwithstanding the Sec. 150. Duty of holder where bill not accepted.
exercise of reasonable diligence, presentment is excused. Where a bill is duly presented for acceptance and is not
accepted within the prescribed time, the person presenting
Sec. 147. Presentment where time is insufficient. it must treat the bill as dishonored by nonacceptance or he
Where the holder of a bill drawn payable elsewhere than loses the right of recourse against the drawer and
at the place of business or the residence of the drawee has indorsers.
no time, with the exercise of reasonable diligence, to

Sec. 151. Rights of holder where bill not accepted. ▪ If it is not drawn on a bank or is not payable on demand,
When a bill is dishonored by nonacceptance, an immediate it is not a check.
right of recourse against the drawer and indorsers accrues
to the holder and no presentment for payment is ▪ A depositor places money in his bank under an
necessary. agreement that it may be withdrawn anytime by his
order. The order is evidenced by the check which he
▪ When a bill is dishonored by non-acceptance there is no draws and by which he expresses his desire to
need to present the instrument again for payment, and appropriate as much of his money in the bank to the
the holder acquires an “immediate right of recourse payee named therein.
against the persons secondarily liable,” provided he
gives them the notice of dishonor as prescribed by Sec. ▪ Checks are not presented for acceptance, as it is always
89. payable on demand and drawn on a bank. However,
checks must be presented for payment.
▪ Where the bill is dishonored by non-acceptance, the
holder must, within 24 hours, give notice of dishonor ▪ The relationship between the bank and depositor is that
and protest, when required. Otherwise, the drawer and of a debtor and creditor. By virtue of the contract of
the indorsers will be discharged. deposit between the banker and its depositor, the banker
agrees to pay checks drawn by the depositor provided
PROMISSORY NOTES that said depositor has money in the hands of the bank.
DEFINITION ▪ Hence, where the bank possesses funds of a depositor, it

is bound to honor his checks to the extent of the amount
A negotiable promissory note within the meaning of this Act of his deposits. The failure of a bank to pay the check of
is an unconditional promise in writing made by one person to a merchant or a trader, when the deposit is sufficient,
another, signed by the maker, engaging to pay on demand, or entitles the drawer to substantial damages without any
at a fixed or determinable future time, a sum certain in money proof of actual damages. [Sps. Moran v. Court of Appeals,
G.R. No. 105836, March 7, 1994]
to order or to bearer. Where a note is drawn to the maker's
own order, it is not complete until indorsed by him. [Sec. 184,
KINDS
NIL]
1. Cashier’s Check and Manager’s Check
Note:
▪ Bill drawn by a bank upon itself, and is accepted by
▪ Bonds are evidences of indebtedness of the issuer and
its issuance.
are usually sold to raise capital. They are really elaborate
promissory notes.
▪ A manager’s check is one drawn by a bank’s
manager upon the bank itself. It stands on the same
▪ Bank notes are the promissory notes of the issuing bank
footing as a certified check, which is deemed to
payable to bearer on demand and intended to circulate
have been accepted by the bank that certified it. As
as money.
the bank’s own check, a manager’s check becomes
the primary obligation of the bank and is accepted
CHECKS in advance by the act of its issuance. [Security Bank
v. RCBC, G.R. No. 170984, January 30, 2009]
DEFINITION
2. Memorandum Check
A check is a bill of exchange drawn on a bank payable on
demand. [Sec. 185, NIL] ▪ Ordinary check, with the word “memorandum” or
“memo” written across its face, signifying the
▪ Applicable Rules – maker or drawer engages to pay the bona fide
holder absolutely, without any condition
GENERAL RULE: The provisions of the NIL applicable concerning the presentment.
to a bill of exchange payable on demand shall also apply
to a check. 3. Certified Check
EXCEPTION: Except as otherwise provided. [Sec. 185, ▪ Bill drawn by a depositor upon funds to his credit
NIL] in a bank which a proper officer of the bank certifies
will be paid when duly presented for payment.
▪ There is therefore an element of certainty or assurance
that the instrument will be paid upon presentation. 4. Crossed Check
▪ A check is an instrument which is in the form and nature ▪ Check with two parallel lines written diagonally on
of a bill of exchange, but unlike an ordinary bill it is the left top portion of the check, to put the holder
always payable on demand and always drawn on a on notice that the check has been issued for a
bank. particular purpose. [Austria]

▪ Effects of Crossing a Check: ▪ Before acceptance or certification, the bank is not liable
and the holder has no right to sue the drawee bank on
a. The check may not be encashed but only the check. Without acceptance or certification, as
deposited in the bank; provided by the statute, there is no privity of contract
between the drawee bank and the payee, or holder of the
b. The check may be negotiated only once – to check.
one who has an account with the bank; and
c. The act of crossing serves as a warning to the

holder that the check has been issued for a
definite purpose so that he must inquire if he
has received the check pursuant to that
purpose.
PRESENTMENT FOR PAYMENT
Time
▪ A check must be presented within a reasonable

time after its issue.
Effect of Delay
▪ A stale check is not presented for payment within

a reasonable time after its issue.
▪ Under the law, when a check is not presented for

payment within a reasonable time after its issue, the
drawer is discharged but only to the extent of the
loss caused by the delay.
▪ Delay in the presentment of a check for payment

will discharge the indorsers thereon, whether or
not he is injured by the delay as the law presume
that he is prejudiced.
Sec. 187. Certification of check; effect of.

Where a check is certified by the bank on which it is drawn,
the certification is equivalent to an acceptance.
A certification is an agreement whereby the bank against

whom a check is drawn, undertakes to pay it at any future
time when presented for payment. Certification is thus
equivalent to acceptance, and dispenses the need for
presentment for acceptance.
Sec. 188. Effect where the holder of check procures it to

be certified.
Where the holder of a check procures it to be accepted or
certified, the drawer and all indorsers are discharged from
liability thereon.
Sec. 189. When check operates as an assignment.

A check of itself does not operate as an assignment of any
part of the funds to the credit of the drawer with the bank,
and the bank is not liable to the holder unless and until it
accepts or certifies the check.
▪ A check of itself is not an assignment of the funds of the

drawer in the bank. A check drawn upon the bank in the
usual form, not accepted or certified by its cashier to be
good, does not constitute a transfer of any money to the
credit of the holder.

Mercantile Law Insurance Law
CONCEPT OF INSURANCE
▪ Agreement by which one party (insurer) for a

consideration (premium) paid by the other party
(insured), promises to pay money or its equivalent, or to
do some act valuable to the latter, upon the happening
of a loss, damage, liability, or disability arising from an
unknown or contingent event.
▪ The term assurance is also used, although seldom

employed. But modern writers use assurance to describe
the life insurance business. Thus, assurance is used to
refer to an event like death, which must happen; while
insurance, to a contingent event, which may or may not
happen.
▪ The definition of law is subject to criticism for it does not

include life insurance (contract upon a condition rather
than to indemnify, since a loss of life is beyond pecuniary
estimation.
CONTRACT OF INSURANCE
▪ An agreement whereby one undertakes for a
INSURANCE
consideration to indemnify another against loss, damage
or liability arising from an unknown or contingent event
[Sec. 2(1), Insurance Code]
LAW ▪ A contract of insurance involves public interest. Thus,

the business is regulated by the State through the
requirement of license or certificate of authority. [White
Gold Marine Services v. Pioneer Insurance, G.R. No. 154514,
July 28, 2005]
REQUISITES
1. Subject matter which the insured has an insurable interest;
2. Consideration known as premium;
3. Event or peril insured against which may be any future

contingent or unknown event, past or future and a
duration for the risk thereof;
4. Promise to pay or indemnify in a fixed or ascertainable

amount; and
5. Meeting of the minds of the parties
PARTIES TO CONTRACT OF INSURANCE
1. Insurer
▪ Person who undertakes to indemnify another.
▪ The business of insurance may be carried on by

individuals just as much as by corporations and
associations.
▪ For a person to be called an insurance agent, it is

necessary that he should perform the function for
compensation. [Aisporna v. Court of Appeals, G.R. No.
L-39419, April 12, 1982]

▪ The interest of a beneficiary in a life insurance

2. Insured policy shall be forfeited when the beneficiary is the
principal accomplice or accessory in willfully
▪ The person whose loss is the occasion for the bringing about the death of the insured in which
payment of the insurance proceeds by the insurer. event, the nearest relative of the insured shall
receive the proceeds of said insurance if not
▪ Requisites: otherwise disqualified.
a. Capacity to contract; Property Insurance
b. Possess an insurable interest in the subject of ▪ Unlike in life insurance, the beneficiary of property
the insurance; insurance must have an insurable interest in such
property, which must exist not only at the time the
c. Must not be a public enemy: policy takes effect but also when the loss occurs.
Note: Public Enemy nation with which the Effects of Irrevocable Designation of Beneficiary
Philippines are at war (includes every citizen
or subject of such nation). Insured cannot:
▪ The terms insured and assured are generally used a. Assign the policy;
interchangeably; but technically, insured refers to
the owner or property insured or the person whose b. Take the cash surrender value of the policy;
life is the subject of the contract of insurance; while
assured refers to the person for whose benefit the c. Allow his creditors to attach or execute on the
insurance is granted. policy;
3. Beneficiary d. Add new beneficiary; or
▪ A person designated to receive proceeds of policy e. Change the irrevocable designation to revocable,
when risk attaches. even though the change is just and reasonable.
SUMMARY OF RULES REGARDING BENEFICARIES Note: The insured does not even retain the power to destroy
the contract by refusing to pay the premiums for the
Life Insurance beneficiary can protect his interest by paying such premiums
for he has an interest in the fulfillment of the obligation.
▪ GENERAL RULE: A person who insures his own life
can designate any person as his beneficiary, WHAT MAY BE INSURED AGAINST
whether or not the beneficiary has an insurable
interest in the life of the insured subject to the 1. Future contingent event resulting in loss or damage (e.g.,
limitations under the NCC provisions on void possible destruction of cargo);
donations.
2. Past unknown event resulting in loss or damage (e.g.,
▪ EXCEPTION: Any person who is forbidden from fact of past sinking of a vessel unknown to the parties);
receiving any donation under Article 739, Civil
Code cannot be named beneficiary of a life 3. Contingent liability (e.g., reinsurance).
insurance policy by the person who cannot make
any donation to him. RISK
▪ Reason: A life insurance policy is no different form The chance of loss. If loss is certain to happen No risk is
a civil donation insofar as the beneficiary is involved.
concerned. Both are founded on the same
consideration of liberality. [Insular Life v. Ebrado, PERIL
G.R. No. L-44059, October 28, 1977]
A contingent or unknown event which may cause a loss. Its
Note: existence creates the risk. It can be covered or excluded by a
policy. Ex. fires, floods, accident, etc.
▪ A person who insures the life of another person and
name himself as the beneficiary must have an HAZARD
insurable interest in such life.
The condition or factor, tangible or intangible, which may
▪ The insured shall have the right to change the create or increase the chance of loss from a given peril.
beneficiary he designated in the policy (unless he
has expressly waived this right in the policy). PHYSICAL HAZARDS

Everything relating to location, structure, occupancy, 4. No Catastrophic Loss

exposure, etc. (e.g., pile of papers, stored gasoline in the
premises, unsafe brakes in the car). ▪ When a large number of people are subject to the
same kind of losses, it is an obvious deviation of the
MORAL HAZARDS principle that losses of a few are borne by the
contributions of many. Thus, war and political risks
▪ Factors that involve mental attitudes in which appraisal are often excluded. They may sometimes be
of this hazard requires the study of the character of the shouldered by the State.
person under consideration in the light of his reputation
(e.g., hazards created by dishonesty, insanity, 5. Accidental Nature
carelessness)
▪ Insurance is intended to cover fortuitous events.
▪ In practice, the terms are used interchangeably or may Intentional losses are uninsurable because they are
be given more than one meaning. against public policy. Other losses are commonly
expected: wear and tear
KINDS OF INSURABLE RISKS
▪ The above requirements are not absolute.
1. Personal Risks Insurability is relative. What is insurable varies
among insurers and may change over time.
▪ Involves a person, it is often divided into life and
health risks and mainly concerned with the time of WHAT CONSTITUTES DOING AN INSURANCE
death or disability. BUSINESS?
2. Property Risks 1. Making or proposing to make, as insurer, any insurance

contract;
▪ Involves loss or damage to property.
2. Making or proposing to make, as surety, any contract of
3. Direct Losses suretyship as a vocation, not as a mere incident to any
other legitimate business of a surety;
▪ By fire, lightning, etc. offer a constant threat of loss
on the property itself. 3. Doing any insurance business, including a reinsurance
business;
4. Indirect Losses
4. Doing or proposing to do any business in substance
▪ Involves loss of profits, rents, or favorable leases. equivalent to any of the foregoing.
5. Liability Risks Note: The fact that no profits is derived from the making of
insurance contracts, agreements or transactions or that no
▪ Involves liability for the injury to the person or separate or direct consideration is received thereof, shall not
property of others occasioned by the law on be deemed conclusive to show that the making thereof does
liability (torts). not constitute the doing or transacting of an insurance
business. [Sec.2(b), Insurance Code]
▪ Also called third party risks because insurance is
used to pay a “third party”, as agreed by the insurer ELEMENTS OF INSURANCE CONTRACT
and the insured.
DISTINGUISHING ELEMENTS
▪ Includes bodily injury and property damage risks
*Remember Atty. Ceniza’s Mnemonic Device: PARIS
REQUIREMENTS TO BE INSURABLE
1. The insured makes a ratable contribution (premium) to a
1. Importance
general insurance fund;
▪ The loss should be important enough. An attempt
2. The insurer assumes that risk of loss;
to cover every small loss would increase the cost of
protection.
3. The insured is subject to a risk of loss through the
destruction or impairment of that interest by the
2. Calculability
happening of designated perils;
▪ Risk must be calculable, if not, it is impossible to
4. The insured possesses an insurable interest susceptible of
determine the premiums.
pecuniary estimation; and
3. Definiteness of Loss
5. Such assumption is part of a general scheme to distribute
actual losses among a large group or substantial number
▪ As to cause, time, place, amount.
of persons bearing somewhat similar risks.

4. Unilateral
Note:
▪ Imposes legal duties only on the insurer who
▪ A contract possessing only the first 3 elements promises to indemnify in case of loss.
above is a risk-shifting device. If all the elements, it
is a risk-distributing device. ▪ Executed as to insured after payment of premium.
▪ All the elements must be present; otherwise, it is ▪ Executory as to insurer, not executed until payment
not an insurance contract. Further, even if all the for a loss.
elements are present, it is not an insurance contract
if the same is entered into for the purpose of 5. Conditional
rendering service and not indemnification for a
loss. ▪ It is subject to conditions the principal one of which
is the happening of the event insured against.
▪ Insurance serves to distribute the risk of economic
loss among as many as possible of those who are 6. Contract of Indemnity
subject to the same kind of risk (each member
contributes). ▪ Whereby the insurer promises to make good only
the loss of the insured (except life and accident
▪ A member does not need to bear all the loss by insurance).
himself.
7. Personal
FORM
▪ Each party having in view the character, credit and
▪ An Insurance Policy is different from the contract of conduct of the other.
insurance.
8. Risk Distribution Device
▪ Unless otherwise stipulated, the policy is not essential to
the existence of the contract. ▪ Insurer’s assumption is a part of a general scheme
to distribute the loss among a large numebr of
▪ The policy is merely the formal written instrument persons exposed to similar risks.
evidencing the contract of insurance entered into
between the insured and the insurer. 9. Contract of Adhesion
▪ There. is no particular form required for a contract of ▪ One party only adheres to the printed form the
insurance. other party presents.
Note: Characteristics according to Atty. Ceniza [CAPUI]:

CHARACTERISTICS/ NATURE OF
a. Conditional;
INSURANCE CONTRACTS b. Aleatory;
c. Personal;
CHARACTERISTICS d. Uberrimae Fidei (Good Faith); and
e. Indemnity (Up to the Extent of the Damage).
1. Consensual
CARDINAL PRINCIPLES IN INSURANCE
▪ It is perfected by the meeting of the minds of the
parties. There must be a concurrence of offer and
1. Insurable Interest
acceptance.
▪ The insured must have an insurable interest in the
2. Voluntary
subject matter of the insurance contract or else, it
shall be void.
▪ The parties may incorporate such terms and
conditions as they may deem convenient, provided
2. Principle of Utmost Good Faith
they are not contrary to law, morals, good customs,
public order, or public policy.
▪ Uberrimae fidei - An insurance contract requires
utmost good faith between the parties. The
▪ Exception: Insurance contracts are required by law
applicant is enjoined to disclose any material fact,
for motor vehicles [Compulsory Motor Vehicle
which he knows or ought to know.
Liability Insurance, Secs. 386-402, Insurance Code]
▪ Reason: An insurance contract is an aleatory
3. Aleatory
contract. The insurer relies on the representation of
the applicant, who is in the best position to know
▪ Depends upon some contingent event.
the state of his health.

3. Contract of Indemnity a. Where the insured by his own act releases the
wrongdoer or third party liable for the loss or
▪ It is the basis of all property insurance. The insured damage;
who has insurable interest over a property is only
entitled to recover the amount of actual loss b. Where the insurer pays the insured the value of the
sustained and the burden is upon him to establish loss without notifying the carrier who has in good
the amount of such loss. [Sundiang and Aquino, faith settled the insured’s claim for loss;
Reviewer on Commercial Law]
c. Where the insurer pays the insured for a loss or risk
▪ Rules: not covered by the policy. [Pan Malayan Insurance
Corp. v. Court of Appeals, G.R. No. 81026, April 3,
a. Applies only to property insurance except 1990]
when the creditor insures the life of his debtor;
d. Life insurance.
b. Life insurance is not a contract of indemnity;
e. Recovery of loss in excess of insurance coverage.
c. Insurance contracts are not wagering
contracts. [Sec. 4, Insurance Code] CONSTRUCTION OF THE INSURANCE CONTRACT
4. Contract of Adhesion The ambiguous terms are to be construed strictly against the
insurer, and liberally in favor of the insured. However, if the
▪ Most of the terms of the contract do not result from terms are clear, there is no room for interpretation. [Calanoc v.
mutual negotiations between the parties as they are Court of Appeals, G.R. No. L-8151, December 16, 1955]
prescribed by the insurer in final printed form to
which the insured may “adhere” if he chooses but Note:
which he cannot change. [Rizal Surety and Insurance
Co. v. Court of Appeals, G.R. No. 112360, July 18, 2000] ▪ Where there is ambiguity or doubt, strictly against
▪ the insurer and liberally in favor of the
insured/beneficiary. [Serrano v. Court of Appeals,
▪ A process of legal substitution where the insurer G.R. No. L-35529, July 16, 1984]
steps into the shoes of the insured and he avails of
the latter’s rights against the wrongdoer at the time ▪ Where terms are clear, although the contract may
of loss. be rather onerous, it cannot be enlarged or
diminished by judicial construction since courts
▪ The principle of subrogation is a normal incident of cannot make a new contract for the parties where
indemnity insurance as a legal effect of payment; it they themselves have employed express and
inures to the insurer without any formal unambiguous words.
assignment or any express stipulation to that effect
in the policy. Said right is not dependent upon nor CLASSES
does it grow out of any private contract. Payment
to the insured makes the insurer a subrogee in
equity. [Rizal Surety and Insurance Co. v. Court of MARINE INSURANCE
Appeals, G.R. No. 112360, July 18, 2000]
*(see Secs. 99–166, Insurance Code)
PURPOSES OF INSURANCE CONTRACTS
▪ Marine insurance is a type of transportation insurance
1. To make the person who caused the loss legally which is concerned with the perils of property in, or
responsible for it; incidental to, transit as opposed to property perils at a
generally fixed location.
2. To prevent the insured from receiving a double recovery
from the wrongdoer and the insurer; and ▪ Ocean marine insurance insures against risk connected
with navigation, to which a ship, cargo, freightage,
3. To prevent tortfeasors from being free from liabilities profits, or other insurable interest immovable property,
and is thus founded on considerations of public policy. may be exposed during a certain voyage or a fixed
period of time. It protects ships at sea and the cargo or
RULES freight on such ships from standard “perils of the sea”.
1. Applicable only to property insurance. ▪ In the absence of stipulation, the risks insured against are
only perils of the sea. However, in an all risk policy, all
2. The insurer can only recover from the third person what risks are covered unless expressly excepted. The burden
the insured could have recovered. rests on the insurer to prove that the loss is caused by a
risk that is excluded.
3. There can be no subrogation in cases:
Perils of the Sea –

GENERAL RULE: The term perils of the sea extend only to CASUALTY INSURANCE
losses caused by sea damage, or by the violence of the
elements, and does not embrace all losses happening at sea. *(see Sec. 174, Insurance Code)
They insure against losses from extraordinary occurrences
only which cannot be guarded against by the ordinary ▪ Insurance covering loss or liability arising from accident
exertion of human skill or prudence, as distinguished from or mishap, excluding fire or marine.
the ordinary wear and tear of the voyage and from injuries
suffered by the vessel in consequences of her not being ▪ It may be liability insurance or indemnity insurance.
unseaworthy. [Roque v. IAC, G.R. No. L-66935, November 11,
1985] ▪ A liability insurance is when the insurer assumes the
obligation to pay the third party in whose favour the
Note: It also includes barratry which refers to the willful and liability of the insured arises. The liability of the insurer
intentional act on the part of the master or the crew, in attaches as soon as the liability of the insured to the third
pursuance of some unlawful or fraudulent purpose, without party is established.
consent of the owner, and to the prejudice of his interest.
▪ An indemnity insurance is when no action will lie
EXCEPTION: An “all-risk policy”. [Malayan Insurance Corp. v. against the insurer unless brought by the insured for loss
CA, G.R. No. 119599 (1997)] actually sustained and paid by him. Liability of the
insurer attached only after the insured has paid his
Perils of the Ship – liability.
Those which cause a loss which in the ordinary course of SURETYSHIP

events, results:
*(see Secs. 175–178, Insurance Code)
a. From the ordinary, natural, and inevitable action of
the sea; ▪ An agreement whereby a surety, guarantees the
performance by the principal obligor of an obligation in
b. From ordinary wear and tear of the ship; and favor of the obligee.
c. From the negligent failure of the ship’s owner to ▪ It shall be deemed as insurance contract if the surety’s
provide the vessel with the proper equipment to main business is that of suretyship, and not where the
convey the cargo under the ordinary conditions. contract is merely incidental to any other legitimate
[De Leon (2014)] business or activity of the surety.
FIRE INSURANCE LIFE INSURANCE
*(see Secs. 167–173, Insurance Code) ▪ Life insurance is insurance on human lives and
insurance appertaining thereto or connected therewith.
▪ An insurance against loss of, or damage to, property by [Sec. 181, Insurance Code]
hostile fire.
▪ Every contract or pledge for the payment of
▪ It includes loss by fire, lightning, windstorm, tornado, or endowments or annuities shall be considered a life
earthquake and other allied risks when such risks are insurance contract for purposes of the Insurance Code.
covered by extension to fire insurance policies or under [Sec. 182, Insurance Code]
separate policies. These must be the proximate cause of
the damage or loss. Individual Life
*(see Secs. 179–183, 227, Insurance Code)
Hostile Fire
▪ An insurance upon life may be made payable on the
▪ One that escapes from the place where it was death of the person, or on his surviving a specified
intended to burn and ought to be, or one which period, or otherwise contingently on the
remains completely within its proper place but continuance or cessation of life
because of the unsuitable to light it, becomes
inherently dangerous and uncontrollable. Group Life
*(see Secs. 50, last par., 228, Insurance Code)
Friendly Fire
▪ It is a blanket policy covering a number of
▪ One that burns in a place where it is intended to individuals who are usually a cohesive group and
burn and ought to be like fire burning in a stove or subjected to a common risk.
a lamp.
Industrial Life
▪ The risk assumed by the insurer is the loss and *(see Secs. 229–231, Insurance Code)
damages caused by hostile fire and not friendly fire.
▪ It provides insurance coverage to industrial
workers or people who are unable to afford

insurance for bigger amounts. d. any person upon whose life any estate or interest
vested in him depends. [Sec. 10, Insurance Code]
COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE When it should exist
▪ Protection coverage that will answer for legal liability for ▪ When the insurance takes effect; not thereafter or
losses and damages for bodily injuries or property when the loss occurs.
damage that may be sustained by another arising from
the use and operation of motor vehicle by its owner. Amount
▪ Motor Vehicle Liability Insurance is a requisite for ▪ GENERAL RULE: There is no limit in the amount
registration or renewal of registration of a motor vehicle the insured can insure his life.
by every land transportation operator or owner.
▪ EXCEPTION: In a creditor-debtor relationship
▪ The insurer’s liability is direct and primary so the insurer where the creditor insures the life of his debtor, the
need not wait for the final judgment in the criminal case limit of insurable interest is equal to the amount of
to be liable. The purpose is to give immediate financial the debt.)
assistance to victims of motor vehicles accidents and/or
their dependents, especially if they are poor, regardless Note:
of the financial capability of motor vehicles owners or
operators responsible for the accident sustained. [Shafer ▪ If at the time of the death of the debtor the whole
v. Judge, RTC Olangapo, G.R. No. 78848, November 14, debt has already been paid, the creditor can no
1988] longer recover on the policy because the principle
of indemnity applies.
INSURABLE INTEREST
▪ Each person has unlimited interest in his own life,
whether the insurance is for the benefit of himself
DEFINITION
or another.
A person is deemed to have an insurable interest in the subject
▪ The beneficiary designated need not have any
matter where he has a relation or connection with or concern
interest in the life of the insured when person takes
in it that he will derive pecuniary or financial benefit or
out policy on his own life. But if a person obtains a
advantage from its preservation and will suffer pecuniary loss
policy on the life of another and names himself as
or damage from its destruction, termination, or injury by the
the beneficiary, he must have insurable interest
happening of the event insured against. [Lalican v. Insular Life,
therein.
G.R. No. 183526, August 25, 2009]
IN PROPERTY
Note:
▪ Every interest in property whether real or personal, or
▪ The existence of insurable interest gives the person any relation thereto, or liability in respect thereof, of
the legal right to insure the subject of the policy of such nature that the contemplated peril might directly
insurance. damnify the insured. [Sec. 13, Insurance Code]
▪ In its absence, the person insuring would in effect ▪ It consists of:

be merely gambling since it allows the insured to
have an interest in destruction of the subject matter
a. an existing interest;
rather than in its preservation.
b. any inchoate interest founded on an existing
▪ However, it is held not to apply to industrial life interest; or
insurance.
c. an expectancy coupled with an existing interest in
IN LIFE/HEALTH
that out of which the expectancy arises. [Sec. 14,
Insurance Code]
Every person has an insurable interest in the life and health
of:
When it should exist
a. himself, his spouse and his children; ▪ When the insurance takes effect and when the loss
occurs, but need not exist in the meantime. [Sec. 19,
b. any person on whom he depends wholly or in part Insurance Code]
for education or support;
Amount
c. any person under a legal obligation to him to pay
money or respecting property or services, of which ▪ The measure of insurable interest in property is the
death or illness might delay or prevent extent to which the insured might be damnified by
performance; and loss or injury thereof. [Sec. 17, Insurance Code]

mortgage debt is extinguished.

Interest in Life and Property, Distinguished
Note: The lessor cannot be validly a beneficiary of
Life Property a fire insurance policy taken by a lessee over his
Existence merchandise, and the provision in the lease
Only at the time the policy At the time the policy contract providing for such automatic assignment
takes effect and need not takes effect and when the is void for being contrary to law and public policy.
exist at the time of loss loss occurs [Sps. Cha v. Court of Appeals, G.R. No. 124520, August
Value 18, 1997]
Unlimited except in life Limited to actual value of
insurance effected by interest in property Insurance by Mortgagor of His Own Interest
creditor on life of debtor. insured.
a. Own benefit
Expectation of benefit derived
from the continued existence ▪ In case of loss, the insurance proceeds do not
Need not have any legal inure to the benefit of the mortgagee who has
basis whatever. A Must have a legal basis. no greater right than unsecured creditors
reasonable probability is
sufficient without more. b. Benefit of mortgagee
Interest of Beneficiary
Need not have an insurable ▪ Loss payable to mortgagee made through the
interest over the life of the following ways:
insured if the insured
Must have insurable
himself secured the policy. 1. Assignee of the policy (with insurer’s
interest over the thing
However, if the life insurance consent);
insured.
was obtained by the
beneficiary, the latter must 2. Mere pledge (without insurer’s consent);
have insurable interest over
the life of the insured. 3. Rider;
Other Cases 4. Standard mortgage clause;
a. Carrier or Depositary 5. Equitable lien- the policy procured by a

mortgagor under a contract duty to
▪ A carrier or depository of any kind has an insure for the mortgagee’s benefit.
insurable interest in a thing held by him as
such, to the extent of his liability but not to Effects of Loss Payable Clause
exceed the value thereof.
▪ The contract is deemed to be upon the interest of
b. Mortgaged Property the mortgagor; hence, he does not cease to be a
party to the contract.
▪ The mortgagor and mortgagee have each an
insurable interest in the property mortgaged ▪ Any act of the mortgagor prior to the loss, which
and this interest is separate and distinct from would otherwise avoid the insurance affects the
the other. mortgagee even if the property is in the hands of
the mortgagee.
▪ Thus, insurance taken by one in his own name ▪ Any act, which under the contract of insurance is to
only and in his favor alone, does not inure to be performed by the mortgagor, may be performed
the benefit of the other. by the mortgagee with the same effect.
▪ In case both of them take out separate ▪ In case of loss, the mortgagee is entitled to the
insurance policies on the same property, or proceeds to the extent of his credit.
one policy covering their respective interest,
the same is not open to the objection that there ▪ Upon recovery by the mortgagee to the extent of his
is double insurance. credit, the debt is extinguished.
▪ Mortgagor- Has an insurable interest therein

Standard Or Union Open Or Loss Payable
to the extent of its value, even if the mortgage
Mortgage Clause Mortgage Clause
debt equals such value since he is the owner.
Subsequent acts of the Acts of the mortgagor affect the
▪ Reason: Loss or destruction of the property mortgagor cannot affect mortgagee because the former
insured will not extinguish the mortgage debt. the rights of the does not cease to be a party to
assignee the contract.
▪ Mortgagee- Interest is only up to the extent of
the debt and the interest continues until the Note: In case a mortgagee insures his own interest and a loss

occurs, he is entitled to the proceeds of the insurance but he is

not allowed to retain his claim against the mortgagor as the Additional or “Other Insurance” Clause
claim is discharged but it passes by subrogation to the insurer
to the extent of the money paid by such insurer. ▪ Double insurance is not prohibited under the law,
unless the policy contained a stipulation to the
DOUBLE INSURANCE AND OVER INSURANCE contrary. Such clause is intended to prevent over
insurance and thus avert the perpetuation of fraud.
Double Insurance
▪ Usually, insurance policies contain “other
▪ Exists where same person is insured by several insurance clause” which is condition in the policy
insurers separately in respect to same subject and requiring the insured to inform the insurer of any
interest. [Sec. 95, Insurance Code] other insurance coverage of the property insured.
Requisites of Double Insurance a. It is lawful and specifically allowed under Sec.

75 which provides that “(a) policy may declare
a. Person insured is the same; that a violation of a specified provision thereof
shall avoid it, otherwise the breach of an
b. Two or more insurers insuring separately; immaterial provision does not avoid it.”
c. Subject matter is the same; b. To constitute a violation of the clause, there

should have been double insurance.
d. Interest insured is also the same;
Over Insurance
e. Risk or peril insured against is likewise the same.
▪ Results when the insured insures the same
Note: Requisites According to Atty. Ceniza [SIRS2] property for an amount greater than the value of
a. Several Insurers; the property with the same insurance company.
b. Interest;
c. Risk Effect in Case of Loss
d. Same Subject; and
e. Same Insured. a. The insurer is bound only to pay to the extent of the
real value of the property lost;
Effects of Double Insurance
b. The insured is entitled to recover the amount of
Where double insurance is allowed, but over insurance premium corresponding to the excess in value of
results: the property.
a. The insured, unless the policy otherwise provides, Note: Over-insurance is not per se void but recovery is
may claim payment from the insurers in such order allowed only to the extent of the loss or damage incurred by
as he may select, up to the amount for which the the insured.
insurers are severally liable under their respective
contracts; Double Insurance and Over Insurance, Distinguished
b. Where the policy under which the insured claims is

a valued policy, the insured must give credit as Over Insurance Double Insurance
against the valuation for any sum received by him
under any other policy without regard to the actual There may be no over-
value of the subject matter insured; Amount of the insurance is insurance when the sum
beyond the value of the total of the amounts of the
c. Where the policy under which the insured claims is insured’s insurable policies issued does NOT
an unvalued policy he must give credit, as against interest. exceed the insurable
the full insurable value, for any sum received by interest of the insured.
him under any policy; There may be only one ALWAYS several insurers.
insurer involved.
d. Where the insured receives any sum in excess of the
valuation in the case of valued policies, or of the MULTIPLE OR SEVERAL INTERESTS ON SAME
insurable value in the case of unvalued policies, he PROPERTY
must hold such sum in trust for the insurers,
according to their right of contribution among Concept of Reinsurance
themselves;
▪ Referred to as an “insurance of an insurance”.
e. Each insurer is bound, as between himself and the
other insurers, to contribute ratably to the loss in ▪ It is one by which an insurer procures a third
proportion to the amount for which he is liable person to insure him against loss or liability by
under his contract. reason of such original insurance. [Sec. 97, Insurance

Code] companies whereby one agrees to cede and the

other to accept reinsurance business pursuant to
▪ A reassurance is presumed to be a contract of provisions specified in the treaty.
indemnity against liability, and not merely against
damage. [Sec. 99, Insurance Code] Automatic Reinsurance
▪ The original insured has no interest in a contract of ▪ The reinsured is bound to cede and the reinsurer is
reinsurance. [Sec. 100, Insurance Code] obligated to accept a fixed share of the risk which
has to be reinsured under the contract.
▪ In every reinsurance, the original contract of
insurance and the contract of reinsurance are Facultative Reinsurance
covered by separate policies.
▪ There is no obligation to cede or accept
Nature of Contract of Reinsurance participation in the risk each party having a free
choice. But once the share is accepted, the
a. Contract of Indemnity against liability - reinsurer obligation is absolute and the liability thereunder
agrees to indemnify the insurer against liabilities can be discharged only by payment. [Equitable
incurred. Not a condition precedent that the insurer Insurance & Casualty Co. v. Rural Insurance & Surety
first paid a loss before demanding payment from Co., G.R. No. L-17436, January 31, 1962]
the reinsurer;
Retrocession
b. Contract separate from original insurance policy;
▪ A transaction whereby the reinsurer in turn, passes
c. Contract based on original policy - The reinsured to another insurer a portion of the risk reinsured. It
risk must be the same as that covered by the is really the reinsurance of reinsurance.
original insurance policy;
Rights of Original Insured in Contract of Reinsurance
d. Insurable interest requirement applicable- The
primary insurer is not entitled to contract for ▪ The insured has no concern with the contract of
reinsurance exceeding the limits of the policy ceded reinsurance, and the reinsurer is not liable to the
to the reinsurer. The reinsurer also cannot provide insured either as surety or otherwise. Unless the
coverage beyond the risks covered by the primary contract so provides.
insurer; and
▪ There is no privity of contract between the original
e. Rule on subrogation is applicable. reinsured and the reinsurer.
Original Insurance Contract And Reinsurance Contract Liability of Reinsurer to Reinsured

Distinguished
a. The reinsurer is entitled to avail itself of every
▪ The original insurance contract is separate and defense which the reinsured might urge in an
distinct from the insurance contract. action by the person originally insured; and
▪ An original insurance contract covers indemnity b. Reinsurer is not liable to the reinsured for a loss if
against damages, while reinsurance covers the latter is not liable to the original insured, or for
indemnity against liability. an amount more than the sum actually paid to the
insured.
Double Insurance and Reinsurance, Distinguished
Liability of Reinsurer to Original Insured
Double Insurance Reinsurance a. Contract of reinsurance solely between the insurer

Involves the same Involves different interest and the reinsurer- the original insured absolutely
interest has no interest in the contract. Thus, remedy of the
original insured is only against the insurer.
Insurer remains in such Insurer becomes the insured
capacity in relation to reinsurer
b. Contract of reinsurance with stipulation in favor of
Insured is the party in Original insured has no
original insured- the reinsurer may bind himself to
interest in the 2 contracts interest in the reinsurance
pay to the policy holder for any loss for which the
contract.
insurer may become liable. Thus, remedy of the
Subject of insurance is Subject of insurance is the
original insured is both against the reinsurer and
property original insurer’s risk
the insurer.
Insured has to give his Insured’s consent not
consent necessary
c. Contract of reinsurance amounting to novation of
original contract- circumstances attending the
Reinsurance Treaty making of the contract of reinsurance amount to a
novation of the original contract, thus discharging
▪ Merely an agreement between two insurance

the original insurer from all obligations thereunder. a. When all the conditions precedent stated in the
offer have been satisfied; and
Note: Technically not one of reinsurance since the reinsurer is
substituted for the original insurer. b. When delivered.
PERFECTION OF CONTRACT OF Requisites for a Valid Delivery

INSURANCE
a. Intention of the insurer to give legal effect as a
completed instrument;
PERFECTION
b. Word or act by insurer putting the instrument
When the consent is manifested by the meeting of the offer
beyond his legal, though not necessarily physical
and the acceptance upon the thing and the cause which are to
control; and
constitute the contract. Mere offer or proposal is not
contemplated. (De Lim v. Sun Life Assurance Co., G.R. No. L-
c. Insured must comply in this intention.
15774, November 29, 1920)
OFFER Note: Possession of the policy by the insured raises the

presumption of delivery, while the possession by the insurer
Party Making the Offer is prima facie evidence of no delivery.
▪ It is the insurer who makes an offer to the insurer, PREMIUM PAYMENT

who accepts the offer, rejects it, or makes a counter-
offer. Definition of Premium
How Offer is Made ▪ It is an agreed price for assuming and carrying the
risk – that is, the consideration paid an insurer for
It depends upon whether the insured pays the premium at the undertaking to indemnify the insured against a
time he applies for insurance. specific peril.
a. If he does not pay the premium, his application is Premium v. Assessment

considered an invitation to the insurer to make an
offer, which he must then accept before the contract PREMIUM ASSESSMENT
goes into effect. It is levied and paid to It is collected to meet
meet anticipated losses. actual losses.
b. If he pays the premium with his application, his It is not a debt. It is properly levied.
application will be considered an offer.
Non-Payment of Balance of Premiums
ACCEPTANCE
▪ Non-payment of balance of premiums does not
When is there an acceptance? cancel the policy. A contrary rule would place
exclusively in the hands of the insured the right to
▪ Where the application for insurance constitutes an decide whether the contract should stand or not.
offer by the insured, a policy is issued strictly in [Philippine Phoenix Surety & Insurance, Co., Inc., v.
accordance with the offer is an acceptance of the Woodworks, Inc., G.R. No. L-22684, August 31, 1967]
offer that perfects in the contract.
Effects of Non-Payment of Premiums
Issuance of Policy Without Acceptance
▪ Non-payment of the first premium unless waived,
▪ If the issued policy does not conform to the prevents the contract from becoming binding
insured’s application, it is an offer to the insured notwithstanding the acceptance of the application
which he may accept or reject. or the issuance of the policy.
Effect of Delay ▪ Non-payment of the subsequent premiums does

not affect the validity of the contracts unless, by
▪ Unreasonable delay in returning the premium express stipulation, it is provided that the policy
raises the presumption of acceptance of the shall in that event be suspended or shall be lapse.
insurance application. [Gloria v. Philippine American
Life Ins. Co., [CA} 73 O.G. [No.73] 8660] Non-Payment of Premiums Due to Fortuitous Event
Binding Effect of a Policy GENERAL RULE: Non-payment of premiums does not

merely suspend but put an end to an insurance contract since
Insurance Policy becomes binding under the following the time of the payment is peculiarly of the essence of the
circumstances: contract.
EXCEPTIONS:

a. The insurer has become insolvent and has f. When the public interest so requires, as determined
suspended business, or has refused without by the Insurance Commissioner.
justification a valid tender of premiums [Gonzales v.
Asia Life Ins. Co., G.R. No. L-5188, October 29, 1952]; Effect of Acknowledgment of Receipt of Premium in Policy
b. Failure to pay was due to the wrongful conduct of ▪ When the policy contains a written
the insurer; acknowledgement, it is presumed that the insurer
has waived the condition of prepayment. It hereby
c. The insurer has waived his right to demand creates a legal fiction of payment. The presumption
payment. is however, extended only to the question of the
binding effect of the policy.
Effect of Acceptance of Premium
▪ As far as the payment of the premium itself is
▪ Acceptance of premium within the stipulated concerned, the acknowledgement is only a prima
period for payment thereof, including the agreed facie evidence of the fact of such payment.
grace period, merely assures continued effectivity
of the insurance policy in accordance with its terms. BAR 2006
[Stoke v. Malayan Insurance Co., Inc., G.R. No. L- Q: Is the insurance company liable when a car, bought on
34768, February. 28, 1984] installment basis, met an accident but the car is not yet
fully paid?
What if there was no premium paid, may the insurer recover
the unpaid premium from the insured? A: Yes, when insured and insurer have agreed to the
payment of premium by installments and partial payment
▪ No. The continuance of the insurer’s obligation is has been made at the time of the loss, then the insurer
conditioned upon the payment of the premium, so becomes liable. (2006 Bar Question)
that no recovery can be had upon a lapsed policy,
the contractual relation between the parties having NON-DEFAULT OPTIONS IN LIFE INSURANCE
ceased. If the peril insured against had occurred,
the insurer would have had a valid defense against Devices used to prevent the forfeiture of a life insurance after
the recovery under the policy. the payment of the first premium:
“Cash and Carry” Rule a. Grace Period – after the payment of the first
premium, the insured is entitled to a grace period
BAR 2003 of 30 days within which to pay the succeeding
No policy or contract of insurance issued by an insurance premiums.
company is valid and binding unless and until the
premium thereof has been paid. Any agreement to the b. Cash Surrender Value – the amount the insurer
contrary is void. (2003 Bar Question) agrees to pay to the holder of the policy if he
surrenders it and releases his claim upon it.
EXCEPTION: A policy is valid and binding even when there c. Extended Insurance – it is where the insured is
is non-payment of premium: (LAICEP) given a right, upon default, after payment of at least
three full annual premiums to have the policy
a. In case of life or industrial life policy whenever the continued in force from the date of default.
grace period provision applies;
d. Paid Up Insurance – the insured is given a right,
b. When there is acknowledgment in a policy of a upon default, after the payment of a least three
receipt of premium even if there is stipulation annual premiums to have the policy continued in
therein that it shall not be binding until the force from the date of default.
premium is actually paid [Sec. 77, Insurance Code];
e. Automatic Loan Clause – a stipulation in the policy
c. When there is an agreement allowing the insured to providing that upon default in payment of
pay the premium in installments [Makati Tuscany premium, the same shall be paid from the loan
Condominium Corp. v. Court of Appeals, G.R. No. value of the policy until that value is consumed.
95546, November. 6, 1992];
f. Reinstatement – provision that the holder of the
d. When there is an agreement to grant the insured policy shall be entitled to reinstatement of the
credit extension for the payment of the premium contract at any time within 3 years from the date of
and the loss occurs before the expiration of the default in the payment of premium unless the cash
credit term; [UCPB General Insurance v. Masagana surrender value has been paid or the extension
Telemart, G.R. No. 137172, April 4, 2001]; period expired.
e. When estoppel bars the insurer to invoke non- REINSTATEMENT OF A LAPSED POLICY
recovery on the policy;

Purpose of Reinstatement Provision

1. Policy not made for a definite period of time;
▪ It is to clarify the requirements for restoring a policy
to premium-paying status after it has been 2. Short period rate is agreed upon;
permitted to lapse.
3. Life insurance policy.
Period for Reinstatement of the Contract
b. When there is over-insurance. The premiums to be
▪ The law requires that the policy owner be returned shall be proportioned to the amount by
permitted to reinstate the policy, subject to the which the aggregate sum insured in all the policies
violation specified, any time within 3 years from exceeds the insurable value of the thing at risk.
the date of default of premium payment. A longer
period, being more favorable to the insured, may be When Insured is not Liable to Return the Premiums Paid
used.
a. The risk has already attached and the risk is entire
Reinstatement of a Lapsed Policy is not an Absolute Right and indivisible;
▪ Reinstatement is not an absolute right of the b. In life policies;

insured, but discretionary on the part of the insurer,
which has the right to deny reinstatement if it were c. If contract is void ab initio because of fraud by the
no satisfied as to the insurability of the insured, and insured;
if the latter dis not pay all overdue premiums and
other indebtedness to the insurer. [McGuire v. d. If contract is illegal and the parties are in pari delicto.
Manufacturer’s Life Insurance Co., G.R. No. L-3581,
September 21, 1950] RESCISSION OF INSURANCE
CONTRACTS
Q: A life insurance policy lapsed. The insured applied for
reinstatement of the policy and paid only a part of the
FOUR PRIMARY CONCERNS OF THE PARTIES
overdue premiums. Subsequently, the insured died. Was the
insurer liable?
1. Correct estimation of the risk;
A: The insurer was not liable as the policy was not reinstated.
2. Precise delimitation of the risk;
The failure to pay the balance of the overdue premiums
prevented reinstatement and recovery of the face value of the
3. Control of the risk;
policy. [Andres v. Crown Life Ins., Co., 55 O.D. 3483]
4. Determining whether a loss occurred and if so, the
REFUND OF PREMIUMS
amount of such loss.
The insured is entitled to recover premiums already paid,
GROUNDS FOR RESCISSION
when:
1. Concealment;
Whole:
2. Misrepresentation;
a. No part of the thing insured has been exposed to
any of the perils insured against;
3. Breach of material warranty; and
b. The contract is voidable because of the fraud or
4. Breach of a condition subsequent.
misrepresentation of the insurer of his agent;
c. The insurance is voidable because of the existence CONCEALMENT

of the facts of which the insured was ignorant
without his fault; A neglect to communicate that which a party knows and
ought to communicate.
d. The insurer never incurred any liability under the
policy because of the default of the insured other Requisites:
than the actual fraud;
a. A party knows a fact which he neglects to
e. The rescission is granted due to insurer’s breach of communicate or disclose to the other;
contract.
b. Such party concealing is duty bound to disclose
Pro rata: such fact to the other;
a. The insurance is for a definite period and the c. Such party concealing makes no warranty as to the
insured surrenders his policy before the fact concealed;
termination thereof; except:

d. The other party has not the means of ascertaining a. The insured stated a fact which is untrue;
the fact concealed; and
b. Such fact was stated with knowledge that it is
e. Fact must be material untrue and with intent to deceive or which he states
positively as true without knowing it to be true and
Effects of Concealment which has a tendency to mislead; and
▪ Entitles insurer to rescind, even if the death or loss c. Such fact in either case is material to the risk.
is due to a cause not related to the concealed matter.
Characteristics:
▪ Good Faith is not a defense in concealment. Sec. 27
clearly provides that, “the concealment whether a. It is not a part of the contract but merely a collateral
intentional or unintentional entitles the injured inducement to it;
party to rescind the contract of insurance.”
b. It may be oral or written;
Test of Materiality
c. It is made at the same time of issuing the policy or
▪ GENERAL RULE: It is determined not by the event, before but not after;
but solely by the probable and reasonable influence
of the facts upon the party to whom the d. It may be altered or withdrawn before the
communication is due, in forming his estimate of insurance is effected but not afterwards;
the advantages of the proposed contract, or in
making his inquiries. e. It always refers to the date the contract goes into
effect.
▪ EXCEPTION:
Kinds:
a. Incontestability Clause; and
a. Affirmative – Affirmation of a fact when the
b. Matters under Sec.110 (marine insurance) contract begins.
Note: b. Promissory – Promise to be performed after policy

was issued.
▪ The waiver of medical examination in a non-
medical insurance contract renders even more Effect of Misrepresentation
material the information required of the applicant
concerning the previous conditions of health and ▪ The injured party is entitled to rescind from the
diseases suffered. [Sunlife v. Sps. Bacani, G.R. No. time when the representation becomes false.
105135, June 22, 1995]
Test of Materiality
▪ The right to information of material facts may be
waived, either by the terms of the insurance or by ▪ Same as that in concealment.
neglect to make inquiries as to such facts where
they are distinctly implied in other facts of which Note: Where the insured merely signed the application form
information is communicated. and made the agent of the insurer fill the same for him, it was
held that by doing so, the insured made the agent of the
▪ Where matters of opinion or judgment are called insurer his own agent and he was responsible for his acts for
for, answers made in good faith and without intent that purpose. [Insular Life v. Feliciano, G.R. No. L-47593,
to deceiver will not avoid the policy even though September 13, 1941]
they are untrue.
BREACH OF WARRANTIES
➢ Reason: The insurer cannot rely on those
statements. He must make further Statement or promise by the insured set forth in the policy or
inquiry. [Philamcare Health Systems v. by reference incorporated therein, the untruth or non-
Court of Appeals, G.R. No. 125678, March fulfillment of which in any respect, and without reference to
18, 2002] whether insurer was in fact prejudiced by such untruth or
non-fulfillment, renders the policy voidable by the insurer.
MISREPRESENTATIONS/OMISSIONS
Purpose
Factual statements made by the insured at the time of, or prior
to, the issuance of the policy to give information to the insurer ▪ To eliminate potentially increasing hazards which
and induce him to enter into the insurance contract. They are may either be due to the acts of the insured or to the
considered an active form of concealment. change to the condition of the property.
Requisites of Misrepresentation: Kinds of Breach of Warranty:

a. Express Breach – An agreement expressed in a ▪ GENERAL RULE: It prevents the accrual of

policy whereby the insured stipulates that certain cause of action.
facts relating to the risk are or shall be true, or
certain acts relating to the same subject have been Note: The insurer may also protect himself against
or shall be done. fraudulent claims of loss. He attempts to do this by
inserting in the policy various conditions. This
b. Implied Breach – It is deemed included in the takes the form of a condition precedent.
contract although not expressly mentioned.
Example: In marine insurance, seaworthiness of the For instance, there are conditions requiring
vessel. immediate notice of loss or injury and detailed
proofs of loss within a limited period.
Effects of Breach of Warranty:
▪ EXCEPTIONS: Provisions that may specify
a. Material – excepted perils. It makes more definite the
coverage indicated by the general description
▪ GENERAL RULE: The violation of material of the risk by excluding certain specified risk
warranty or of a material provision of a policy that otherwise would be included under the
will entitle the other party to rescind the general language describing the risks
contract. assumed
▪ EXCEPTIONS: b. Condition Subsequent – It avoids the policy or

entitles the insurer to rescind.
1. Loss occurs before the time of
performance of the warranty; WAIVER OF THE RIGHT TO RESCIND
2. The performance becomes unlawful at Acceptance of premium payments despite the knowledge of
the place of the contract; and the ground for rescission.
3. Performance becomes impossible. LIMITATIONS ON THE RIGHT OF THE INSURER TO

RESCIND
b. Immaterial –
1. Non-Life - The right must be exercised prior to the
▪ GENERAL RULE: It will not avoid the policy. commencement of an action on the contract;
▪ EXCEPTIONS: When the policy expressly 2. Life – The right must be availed of during the first two
provides or declares that a violation thereof years from the date of issue of policy or its last
will avoid it. reinstatement; prior to “incontestability.”
Warranty and Representation, Distinguished CANCELLATION OF NON-LIFE INSURANCE POLICY
Warranty Representation Right of the insurer to abandon the contract on the occurrence
of certain grounds after the effectivity date of a non-life
Part of the contract Mere collateral inducement
policy.
Written on the policy, May be written in the policy
actually or by reference or may be oral.
Grounds for Cancellation:
Presumed material Must be proved to be a. Non-payment of premium;

material
Must be strictly complied Requires only substantial b. Conviction of a crime out of acts increasing the
with truth and compliance hazard insured against;
BREACH OF CONDITION SUBSEQUENT c. Discovery of fraud or material misrepresentation;
Definition of Condition d. Discovery of willful or reckless acts of omissions

increasing the hazard insured against;
▪ Events signifying in its broadest sense either an
occurrence or a non-occurrence that alters the e. Physical changes in property making the property
previously existing legal relations of the parties to uninsurable; and
the contract. They may be conditions precedent or
conditions subsequent. f. Determination by the Insurance Commissioner that
the continuation of the policy would violate the
Effects of Breach of Condition: Insurance Code.
a. Condition Precedent – Requirements for Cancellation

a. Prior notice of cancellation to the insured;

REQUISITES FOR RECOVERY UPON INSURANCE
b. Notice must be in writing, mailed or delivered to
the named insured at the address shown in the 1. Insured must have insurable interest in the subject
policy; matter;
c. Notice must state which of the grounds set forth in 2. Interest is covered by the policy;
Sec. 64 is relied upon and upon request of the
insured, the insurer must furnish facts on which the 3. Loss;
cancellation is based;
4. Loss must be proximately caused by the peril insured
d. Grounds should have existed after the effectivity against.
date of the policy.
NOTICE AND PROOF OF LOSS
CLAIMS SETTLEMENT AND
More or less formal notice given to the insurer by the
SUBROGATION
insurer/claimant in the policy if the loss insured against
occurred.
Injury or damage sustained by the insured in consequence of
the happening of one or more of the accidents or misfortune
against which the insurer, in consideration of the premium, Fire insurance Other types of insurance
has undertaken to indemnify the insured. [Bonifacio Bros., Inc. Required Not required
v. Mora, G.R. No. L-20853, May 29, 1967] Failure to give notice will Failure to give notice will
defeat the right of the not exonerate the insurer,
insured to recover. unless there is a stipulation
Loss for which insurer Loss for which insurer is in the policy requiring the
is liable not liable insured to do so.
a. Loss the proximate a. Loss by insured’s
cause of which is willful act
the peril insured b. Loss due to connivance Purpose:
against of the insured
b. Loss the immediate c. Loss where the a. Apprise the insurer for it to gather information
cause of which is excepted peril is the while the evidence is still fresh.
the peril insured proximate cause.
against except b. Actual notice is sufficient. Formal notice is not
where proximate necessary in case there’s actual notice.
cause is an excepted
peril GUIDELINES ON CLAIMS SETTLEMENT
c. Loss through
negligence of The Indemnification of the Loss of the Insured
insured except
where there was
Life Non-life
gross negligence
a. Maturing upon the
amounting to
expiration of the term – The proceeds shall be paid
willful acts
The proceeds are within 30 days after the
d. Loss caused by
immediately payable receipt by the insurer of
efforts to rescue the
to the insured, unless proof of loss, and
thing from peril
they are made ascertainment of the loss or
insured agains
payable in damage by agreement of the
e. If during the course
installments or as parties or by arbitration but
of rescue, the thing
annuity, in which not later than 90 days from
is exposed to a peril
case, the installments such receipt of proof of loss
not insured against,
or annuities shall be whether or not
which permanently
paid as they become ascertainment is had or
deprives the
due. made.
insured of its
possession, in
b. Maturing at the death of
whole or in part
the insured, occurring
prior to the expiration of
the term stipulated –
PROXIMATE CAUSE
The proceeds are
payable to the
An event that sets all other events in motion without any
beneficiaries within
intervening or independent case, without which the injury or
60 days after
loss would not have occurred.
presentation and
filing of proof of
Lasallian Commission on Bar Operations 2018 death. 67
Time for Payment of Claims otherwise the claim is deemed waived. The suit for
damages either with the proper court or with the
In case of an unreasonable delay in the payment of the Insurance Commissioner should be filed within 1
insured’s claim by the insurer, the insured can recover: year from the date of the denial of the claim by the
insurer, otherwise claimant’s right of action shall
a. Attorney’s fees; prescribe.
b. Expenses incurred by reason of the unreasonable Subrogation

withholding;
▪ Subrogation is a process of legal substitution. The
c. Interest at double the legal interest rate fixed by the insurer, after paying the amount covered by the
Monetary Board; and insurance policy, steps in to the shoes of the insured
and avails himself of the latter’s rights that exist
d. The amount of the claim. [Zenith Insurance Corp. v. against the wrongdoer at the time of loss.
Court of Appeals, G.R. No. 85296, May 14, 1990]
▪ The insurer becomes entitled to recover from the
wrongdoer the amount of the loss it may have paid
Unfair Claims Settlement to the insured.
Any of the following acts by the insurance company, if ▪ The Right of Subrogation stems from Art. 2207 of
committed without just cause and performed with such the Civil Code.
frequency as to indicate a general business practice, shall
constitute unfair claim settlement practices: ▪ Subrogation applies only to property insurance and
non-life insurance.
a. Knowingly misrepresenting to claimants pertinent
facts or policy provisions relating to coverage at TRANSFER OF POLICY
issue;
1. Life Insurance
b. Failing to acknowledge with reasonable
promptness pertinent communications with ▪ Can be transferred even without the consent of the
respect to claims arising under its policies; insurer (except when there is a stipulation
requiring the consent of the insurer before
c. Failing to adopt and implement reasonable transfer).
standards for the prompt investigation of claims
arising under its policies; or ▪ Reason: The policy does not represent a personal
agreement between the insured and the insurer.
d. Compelling policy holders to institute suits to
recover amounts due under its policies by offering 2. Property Insurance
without justifiable reason substantially less than
the amounts ultimately recovered in suits brought ▪ It cannot be transferred without the consent of the
by them. insurer.
Prescription of Actions ▪ Reason: The insurer approved the policy based on

the personal qualification and the insurable interest
▪ In the absence of an express stipulation in the of the insured.
policy, it being based on a written contract, the
action prescribes in 10 years. 3. Casualty Insurance
▪ However the parties may validly agree on a shorter ▪ It cannot be transferred without the consent of the
period provided it is not less than one year from the insurer.
time the cause of action accrues.
▪ Reason: The moral hazards are as great as those of
▪ The cause of action accrues from the rejection of the property insurance.
claim of the insured and not from the time of loss.
4. Fire Insurance
▪ It shall commence from the denial of the claim, not
from the resolution of the motion for ▪ Not subject to assignment, being strictly a personal
reconsideration, otherwise it can be used by the contract.
insured as a scheme or device to waste time until
the evidence which may be used against him is ▪ Reason: Insurer is concerned with the moral
destroyed. [Sun Insurance Office, Ltd. v. Court of character of the insured.
Appeals, G.R. No. 89741, March 13, 1991]
5. Marine Insurance
▪ In CMVLI, the written notice of claim must be filed
within 6 months from the date of the accident ▪ Not assignable without the consent of the insurer.

CHANGE OF INTEREST IN THE THING Insurance against loss or damage to:
▪ The mere transfer of the thing insured does not transfer a. Vessels, goods, freight, cargo, merchandise, profits,
the policy, but suspends it until the same person money, valuable papers, bottomry and
becomes the owner of both the policy and the thing respondentia, and interest in respect to all risks or
insured. perils of navigation;
▪ Reason: Insurance contract is personal. b. Persons or property in connection with marine

insurance;
▪ Purpose: To provide against changes which might give
a motive to destroy the property or might lessen the c. Precious stones, jewels, jewelry and precious
interest of the insured in protecting or guarding it. metals whether in the course of transportation or
otherwise; and
▪ Therefore, the purchaser of the insured policy should
obtain a transfer of the policy of insurance, if NOT then d. Bridges, tunnels, piers, docks and other aids to
nobody can recover on the insurance policy in case the navigation and transportation.
thing insured was purchased because the purchaser is
not a party to the policy and the seller had no more e. Cargo can be the subject of marine insurance, and
insurable interest. once it is entered into, the implied warranty of
seaworthiness immediately attaches to whoever is
▪ Here, the insurance policy is not rendered void, it is insuring the cargo, whether he be the shipowner or
merely SUSPENDED by a change of interest. not. [Roque v. IAC, G.R. No. L-66935, November 11,
1985]
▪ EXCEPTIONS:
Marine Protection and Indemnity Insurance
a. Life, health and accident insurance;
▪ Insurance against, or against legal liability of the
b. Change in interest in the thing insured after insured for loss, damage, or expense incident to
occurrence of an injury which results in a loss; ownership, operation, chartering, maintenance,
use, repair, or construction of any vessel, craft or
c. Change in interest in one or more of several distinct instrumentality in use of ocean or inland
things separately insured by one policy; waterways, including liability of the insured for
personal injury, illness or death or for loss of or
d. Change of interest, by will or succession, on the damage to the property of another person.
death of the insured;
Major Divisions of Marine Insurance
e. Transfer of interest by one of several partners, joint
owners, or owners in common, who are jointly a. Ocean Marine Insurance
insured, to others;
▪ Provides protection to property frequently exposed
f. When a policy is so framed that it will inure to the to loss while it is transportation form one location
benefit of whomsoever, during the continuance of to another.
the risk, may become the owner of the interest
insured; and Scope of Ocean Marine Insurance
g. When there is an express prohibition against a. Ships or hulls;

alienation in the policy, in case of alienation, the
contract of insurance is not merely suspended but b. Goods or cargoes;
avoided.
c. Earnings such as freight, passage money,
commissions, or profits;
PARTICULAR KINDS OF INSURANCE
CONTRACTS d. Liability incurred by the owner or any party
interested in or responsible for the insured property
PARTICULAR KINDS by reason of maritime perils.
A. Marine Insurance b. Inland Marine Insurance
Insurance against risks connected with navigation, to which a ▪ Covers primarily the land or over the land
ship, cargo, freightage, profits or other insurable interest in transportation perils of property shipped by
movable property, may be exposed during a certain voyage railroads, motor trucks, airplanes, and other means
or a fixed period of time. of transportation.
Coverage

Classes of Inland Marine Insurance customary rights and liabilities of

the ship-owner in relation to third
a. Property in Transit - Provides protection to persons who have dealt with him or
property frequently exposed to loss while it is with the vessel.
transportation form one location to another.
▪ “Under the charterer’s direction”-
b. Bailee Liability - Insurance for those who have master and crew then become
temporary custody of the goods. agents and servants or employees of
the charterer, and the charterer
c. Fixed Transportation Property - They are so through the agency of the master,
insured because they are held to be an essential part has possession and control of the
of the transportation system such as bridges, vessel during the charter period.
tunnels, and other instrumentalities of
transportation and communication. b. Contract of Affreightment
d. Floater - Provides insurance to follow the insured ▪ The owner of the vessel leases part
property wherever it may be located, subject or all of its space to haul goods for
always to the territorial limits of the contract. others. It is a contract of special
service to be rendered by the owner
Insurable Interest in Marine Insurance of the vessel who retains the
possession, command and
a. Parties in the Contract of Marine Insurance navigation of the ship, the character
or freighter merely having use of
1. Shipowner the space in the vessel in return for
the payment of the charter hire or
▪ Over the vessel to the extent of its value, freight.
except that if chartered, the insurance is only
up to the amount not recoverable from the ▪ Voyage Charter or Trip Charter – A
charterer. contract for the carriage of goods,
from one or more ports of loading to
▪ Shipowner has NO insurable interest in the one or more ports of unloading, on
excepted freightage IF he will be compensated one or on a series of voyages.
by charterer for the value of the vessel, in case
of loss. ▪ Time Charter – A contract for the
use of a vessel for a specified period
2. Cargo Owner or for the duration of one or more
specified voyages. What time
▪ Over the cargo and expected profits charterer acquires is the right to
utilize the carrying capacity and
3. Charterer facilities of the vessel and to
designate her destinations during
▪ Over the amount he is liable to the shipowner, the term of the charter. The
if the ship is lost or damaged during the
charterer is free from liability to
voyage
third persons in respect to the ship.
4. Charter Party
b. In Cases of Loans on Bottomry and Respondentia
▪ A contract by which an entire ship or some Loan on Bottomry
principal part thereof is lent by the owner to
another person for a specified time or use. ▪ One which is payable only if the vessel given as
security for the loan completes in safety the
▪ Types of Charter Party:
contemplated voyage.
a. Bare Boat or Demise Charter ▪ The same rule would apply to the hypothecation of
the cargo by respondentia.
▪ The ship-owner turns over full
possession and control of his vessel
Insurable Interest When Ship Hypothecated by
to the charterer, who then Bottomry
undertakes to provide a crew and
victuals and supplies and fuel for ▪ The insurable interest of the owner of the ship
her during the term of the charter. hypothecated by bottomry is only the excess of its
value over the amount secured by bottomry since a
▪ The charterer is treated as owner pro loan on bottomry partakes of the nature of an
hac vice of the vessel, the charterer insurance coverage to the extent of the loan
assuming in large measure the accommodation

a. National character of the insured;

▪ Owner/Debtor- difference between the value of
vessel or goods and the amount of loan. b. Liability of the thing insured to capture or
detention;
▪ Creditor/lender- amount of the loan
c. Liability to seizure from breach of foreign laws;
Special Marine Insurance Contracts and Clauses
d. Want of necessary documents; and
a. All Risks Policy
e. Use of false or simulated papers.
▪ GENERAL RULE: It is an insurance against all
causes of conceivable loss or damage Distinctions on Concealment in Marine Insurance and
Other Property Insurance
▪ EXCEPTIONS:
1. Otherwise excluded in the policy; Marine Insurance Other Property Insurance
The information of the belief The information or belief

2. Due to fraud or intentional misconduct
or expectation of 3rd persons of a 3rd party is not
on the part of the insured .
is material and must be material and need not be
communicated communicated unless it
▪ The insured has the initial burden of proving
proceeds form an agent of
that the cargo was in good condition when the
the insured whose duty it
policy attached and that the cargo was
is to give information
damaged when unloaded from the vessel;
The concealment of any fact Concealment of any
thereafter, the burden then shifts to the insurer
in relation to any of the material fact will vitiate
to show the exception to the coverage. [Filipino
matters stated in Sec. 110 the entire contract,
Merchants Insurance Co., v. Court of Appeals,
does not vitiate the entire whether or not the loss
G.R. No. 85141, November 28, 1989]
contract but merely results for the risk
exonerates the insurer from concealed.
b. Barratry Clause
a risk resulting from the fact
▪ It is a provision which states that there can be concealed
no recovery on the policy in case of any willful
misconduct on the part of the master or crew Representation
in pursuance of some unlawful or fraudulent
An intentionally false representation by a person insured by
purpose without consent of owners, and to the
prejudice of the owner’s interest. [Roque v. a contract of marine insurance in:
IAC, G.R. No. L-66935, November 11, 1985]
a. Any material respect;
c. Inchamaree Clause
b. In respect of any fact on which the character and
▪ The clause makes the insurer liable for loss or nature of the risk depends; and
damage to the hull or machinery arising from
the: c. The general rules on representation are applicable.
Effect of False Representation by the Insured

1. Negligence of the captain, engineers,
crew;
a. Intentional – avoids the policy.
2. Explosions, breakage of shafts;
b. Not intentional but the fact misrepresented is
material to the risk – the insurer may rescind the
3. Latent defect of machinery or hull.
contract from the time the representation becomes
false.
d. Sue and Labor Clause
Implied Warranties
▪ It is a clause which the insurer may become
a. Seaworthiness of the ship at the inception of the
liable to pay the insured, in addition to the loss
insurance;
actually suffered, such expenses as he may
have incurred in his efforts to protect the
b. Against improper deviation;
property against a peril for which the insurer
would have been liable.
c. Against illegal venture;
Matters Although Concealed, will not Vitiate the Contract
d. Warranty of neutrality: the ship will carry the
Except When They Caused the Loss
requisite documents of nationality or neutrality of

the ship or cargo where such nationality or pursuing the voyage or the commencement of
neutrality is expressly warranted. an entirely different voyage.
Presence of Insurable Interest ▪ Instances of Deviation:
▪ While the payment by the insurer for the insured value a. Departure of vessel from the course of
of the lost cargo operates as a waiver of the insurer’s the sailing fixed by mercantile usage.
right to enforce the term of the implied warranty against
the assured under the marine insurance policy, the same b. Departure of vessel from the most
cannot be validly interpreted as an automatic admission natural, direct and advantageous route if
of the vessel’s seaworthiness by the insurer as to not fixed by mercantile usage.
foreclose recourse against the common carrier for any
liability under the contractual obligation as such c. Unreasonable delay in pursuing voyage.
common carrier. [Delsan Transport Lines, Inc. v. Court of
Appeals, G.R. No. 127897, November 15, 2001] d. Commencement of an entirely different
voyage.
a. Seaworthiness
▪ Kinds of Deviation:
▪ A relative term depending upon the nature of
the ship, voyage, service and goods, denoting
a. Proper Deviation - In case of loss, the
in general a ship’s fitness to perform the
insurer is still liable:
service and to encounter the ordinary perils of
the voyage, contemplated by the parties to the
1. When caused by circumstances
policy.
outside the control of the ship
captain or ship owner;
▪ The warranty of seaworthiness is complied
with if the ship be seaworthy at the time of the
2. When necessary to comply with a
commencement of the risk. Prior or
warranty or to avoid a peril;
subsequent unseaworthiness is not a breach of
the warranty nor is it material that the vessel
3. When made in good faith to avoid
arrives in safety at the end of her voyage.
a peril;
4. When made in good faith to save

▪ EXCEPTIONS:
human life or to relieve another
vessel in distress.
a. In the case of a time policy, the ship must
be seaworthy at the commencement of
b. Improper Deviation – Every deviation
every voyage she may undertake.
not specified above. And in case of loss
or damage, the insurer is not liable.
b. In the case of cargo policy, each vessel
upon which the cargo is shipped or
Loss in Marine Insurance
transshipped, must be seaworthy at the
commencement of each particular
a. Total Loss -
voyage
1. Actual Total Loss
c. In the case of a voyage policy
contemplating a voyage in different
1. Total destruction;
stages, the ship must be seaworthy at the
commencement of each portion.
2. Irretrievable loss by sinking;
d. It becomes the obligation of a cargo
3. Damage rendering the thing valueless; or
owner to look for a reliable common
carrier, which keeps its vessels in
4. Total deprivation of owner of possession
seaworthy conditions. The shipper may
of thing insured. [Sec. 130, Insurance Code]
have no control over the vessel but he has
control in the choice of the common
2. Constructive Total Loss
carrier that will transport his goods.
[Roque v. IAC, G.R. No. L-66935, November
1. Actual loss of more than ¾ of the value of
11, 1985]
the object;
b. Improper Deviation
2. Damage reducing value by more than ¾
of the value of the vessel and of cargo;
▪ Deviation – Departure from the course of the
and
voyage insured, or an unreasonable delay in

3. Expense of transshipment exceed ¾ of property sacrificed for the general benefit,

value of cargo. [Sec. 131, in relation to Sec. subrogating him to his own right of contribution or
139, Insurance Code] demand contribution from the other interested
parties as soon as the vessel arrives at her
Note: In case of constructive total loss, insured may: destination.
a. Abandon goods or vessel to the insurer and ▪ EXCEPTIONS:

claim for whole insured value; or
a. After the separation of interests liable to
b. Without abandoning vessel, claim for partial contribution; and
actual loss.
b. When the insured has neglected or waived his
b. Partial Loss - That which is not total (not right to contribution.
specified above).
Free From Particular Average (FPA) Clause
Average
▪ A clause agreed upon in a policy of marine
▪ Any extraordinary or accidental expense insurance in which it is stated that the insurer shall
incurred during the voyage for the not be liable for a particular average, such insurer
preservation of the vessel, cargo, or both, and shall be free therefrom, but he shall continue to be
all damages to the vessel and cargo from the liable for his proportion of all general average
time it is loaded and the voyage commenced losses assessed upon the thing insured.
until it ends and the cargo unloaded.
Abandonment
General Average Particular Average
Has inured to the common Has not inured to the ▪ The act of the insured by which, after a constructive
benefit and profit of all common benefit and profit total loss, he declared the relinquishment to the
persons interested in the of all persons interested in insurer of his interest in the thing insured.
vessel and cargo the vessel and her cargo.
To be borne equally by all of To be borne alone by the Requisites for Valid Abandonment:
the interests concerned in owner of the cargo or the
the venture. vessel, as the case may be. a. Actual relinquishment by the person insured
Requisites for the right to of his interest in the thing insured;
claim contribution:
a. Common danger b. Constructive total loss;
to the vessel or
cargo;
b. Part of the vessel c. Abandonment be neither partial nor
or cargo was conditional;
sacrificed
deliberately; d. Must be made within a reasonable time after
c. Sacrifice must be receipt of reliable information of the loss;
for the common
safety or for the e. Factual;
benefit of all;
d. Sacrifice must be f. Give notice thereof to the insurer which may
made by the be done orally or in writing; and
master or upon
his authority; g. Notice of abandonment must be explicit and
e. It must be not be must specify the particular cause of the
caused by any abandonment.
fault of the party
asking the Effects of Valid Abandonment
contribution;
f. It must be a. Transfer of Interest – Equivalent to a transfer
successful, i.e. by the insured of his interest to the insurer
resulted in the with all the chances of recovery and
saving of the indemnity.
vessel or cargo;
and necessary. b. Transfer of Agency – Acts done in good faith
by those who were agents of the insured in
respect to the thing insured, subsequent to the
Rights of Insured in Case of General Average
loss, are at the risk of the insurer and for his
▪ The insured may either hold the insurer directly benefit.
liable for the whole of the insured value of the

If an insurer refuses to accept a valid a. Notice of loss – Must be immediately given, unless
abandonment, he is liable upon an actual total delay is waived expressly or impliedly by the
loss, deducting form the amount any proceeds insurer
of the thing insured which may have come to
the hands of the insured. b. Proof of loss – According to best evidence
obtainable. Delay may also be waived expressly or
Co-Insurance impliedly by the insurer
▪ A marine insurer is liable upon a partial loss, only Measure of Indemnity

for such proportion of the amount insured by him
as the loss bears to the value of the whole interest a. Open policy—Only the expense necessary to
of the insured in the property insured. replace the thing lost or injured in the condition it
was at the time of the injury.
▪ When the property is insured for less than its value,
the insured is considered a co-insurer of the b. Valued policy— The parties are bound by the
difference between the amount of insurance and valuation, in the absence of fraud or mistake.
the value of the property.
▪ It is very crucial to determine whether a
Requisites of Co-Insurance: marine vessel is covered by a marine
insurance or fire insurance. The determination
a. Loss is partial. is important for 2 reasons:
b. The amount of insurance is less than the value 1. Rules on constructive total loss and
of the property insured. abandonment and co-insurance apply
only to marine insurance.
Rules on Co-Insurance:
2. Rule on co-insurance applies to fire
a. Co-insurance applies only to marine insurance only if expressly agreed upon.
insurance.
Distinctions of Ocean Marine and Fire Policies
b. There cannot be co-insurance in life insurance.
1. When considered as OCEAN marine insurance –
c. Co-insurance applies in fire insurance when Policy on a vessel engaged in navigation, although
expressly provided for by the parties. it insures against fire risks only.
Co-Insurance and Reinsurance, Distinguished 2. When considered as FIRE insurance – When the
hazard is fire alone and the subject is an unfinished
Co-Insurance Reinsurance vessel, which is not afloat for voyage. - In the
A percentage in the value of Situation where the absence of express agreement that it shall be a
the insured property which the insurer procures a 3rd marine insurance policy.
insured himself assumes to act party called the
as insurer to the extent of the reinsurer to insure him 1. When the policy insured materials in a
deficiency in the insurance of against liability by shipyard for use in constructing vessel.
the insured property. In case of reason of an original
loss or damage, the insurer will insurance. Basically, 2. When it is a fire insurance policy, while a
be liable only for such reinsurance is an vessel is moored and in use as a hospital.
proportion of the loss or insurance against
damage as the amount of the liability which the Alteration as a Special Ground for Rescission by Insurer –
insurance bears to the original insurer may
designated percentage of the incur in favor of the Requisites of Alteration
full value of the property original insured.
insured. a. Use or condition of the thing is specifically limited
or stipulated in the policy;
B. Fire Insurance
b. Such use or condition as limited by the policy is
A contract by which the insurer for a consideration agrees to altered;
indemnify the insured against loss of, or damage to, property
by hostile fire (including allied lines- loss by lightning, c. Made without the consent of the insurer;
windstorm, tornado or earthquake and other allied risks,
when such risks are covered by extension to fire insurance d. Made by means within the control of the insured;
policies or under separate policies).
e. Increases the risk;
Prerequisites to Recovery:
f. Violation of a policy provision.

Fall-of-Building Clause The moment the insured becomes liable to third

persons, the insured acquires an interest in the
▪ A clause in a fire insurance policy that if the insurance contract which may be garnished like
building or any part thereof falls, except as a result any other credit. [Perla Compania de Seguros, Inc. v.
of fire, all insurance by the policy shall immediately Ramolete, G.R. No. L-60887, November 13, 1991]
cease.
▪ Aside from compulsory motor vehicle liability
Option to Rebuild Clause insurance, the Insurance Code contains no other
provisions applicable to casualty insurance.
▪ A clause giving the insurer the option to reinstate Therefore, such casualty insurance are governed by
or replace the property damaged or destroyed or the general provisions applicable to all types of
any part thereof, instead of paying the amount of insurance, and outside of such statutory provisions,
the loss or the damage. the rights and obligations of the parties must be
determined by their contract, taking into
a. The insurer, after electing to rebuild, cannot be consideration its purpose and always in accordance
compelled to perform this undertaking by with the general principles of insurance law.
specific performance because this is an
obligation to do, not to give. f. The insurer is not solidarily liable with the insured.
b. The remedy is Art. 1167. [NCC] The insurer’s liability is based on contract; that of
the insured is based on torts. Furthermore, the
Insured not a Co-Insurer in Fire Insurance: insurer’s liability is limited by the amount of the
insurance coverage. [Pan Malayan Insurance Corp. v.
▪ In a usual contract of fire insurance, the insurer is Court of Appeals, G.R. No. 81026, April 3, 1990]
required to give full indemnity for a partial loss up
to the amount written in the policy, even though Burglary, Robbery, and Theft Insurance
the property be very inadequately insured. (Unlike
in marine insurance where the insured becomes a ▪ In burglary, robbery and theft insurance, the
co-insurer as to the value of the thing not insure. opportunity to defraud the insurer – the moral
hazard – is so great that insurer have found it
C. Casualty or Accident Insurance necessary to fill up the policies with many
restrictions designed to reduce the hazard. Persons
Insurance covering loss or liability arising from accident or frequently excluded are those in the insured’s
mishap, excluding those falling under other types of service and employment.
insurance such as fire or marine.
▪ The purpose of the exception is to guard against
Classifications of Casualty or Accident Insurance: liability should theft be committed by one having
unrestricted access to the property. [Fortune
a. Accident or Health Insurance - Insurance Insurance v. Court of Appeals, G.R. No. 115278, May
against specified perils which may affect the 23, 1995]
person and/or property of the insured
(examples: personal accident, robbery/theft Right of a Third Party Injured to Sue the Insurer
insurance).
a. Indemnity against liability- A third party injured
b. Third Party Liability Insurance - Insurance can directly sue the insurer.
against specified perils which may give rise to
liability on the part of the insured for claims b. Indemnity for actual loss or reimbursement after
for injuries to or damage to property of others actual payment by the insured- A third party has
(examples: workmen’s compensation, motor no cause of action against the insurer. [Bonifacio
vehicle liability). Bros., Inc. v. Mora, G.R. No. L-20853, May 29, 1967]
Basis of Insurable Interest Intentional
▪ Insurable interest is based on the interest of the ▪ Implies the exercise of the reasoning faculties,
insured in the safety of persons, and their property, consciousness and volition. Where a provision of
who may maintain an action against him in case of the policy excludes intentional injury, it is the
their injury or destruction, respectively. intention of the person inflicting the injury that is
controlling. If the injuries suffered by the insured
Liability of Insurer clearly resulted from the intentional act of the third
person, the insurer is relieve from liability as
▪ In a third party liability (TPL) insurance contract, stipulated. [Biagatan v. The Insular Life Assurance Co.,
the insurer assumes the obligation by paying the Ltd., G.R. No. L-25579, March 29, 1972]
injured third party to whom the insured is liable.
Accidental
▪ Prior payment by the insured to the third person is
not necessary in order that the obligation may arise.

▪ That which happens by chance or fortuitously, ▪ A clause that allows the victim (injured person or
without intention or design, which is unexpected, heirs of the deceased) to an option to file a claim for
unusual and unforeseen. death or injury without the necessity of proving
fault or negligence of any kind.
No Action Clause
▪ Purpose: Guarantee compensation or indemnity to
▪ A requirement in a policy of liability insurance injured persons in motor vehicle accidents.
which provides that suit and final judgment be first
obtained against the insured; that only thereafter ▪ Essence: Provide victims of vehicular accidents or
can the person injured recover on the policy. their heirs immediate compensation although in
[Guingona v. Del Monte, G.R. No. L-22042, August 17, limited amount, pending final determination of
1967] who is responsible for the accident and liable for the
victims injuries or death.
D. Compulsory Motor Vehicle Liability Insurance
(CMVLI) Summary of CMVLI Rules:
Compulsory insurance that provides for protection coverage a. Total indemnity - maximum of P5,000.
that will answer for legal liability for losses and damages for
bodily injuries or property damage that may be sustained by b. Proofs of loss –
another arising from the use and operation of motor vehicle
by its owner. 1. Police report of accident;
Purpose 2. Death certificate and evidence sufficient to

establish proper payee;
▪ To give immediate financial assistance to victims of
motor vehicle accidents and/or their dependents, 3. Medical report and evidence of medical or
especially if they are poor regardless of the financial hospital disbursement.
capability of motor vehicle owners or operators
responsible for the accident sustained. [Shafer v. c. Claim may be made against one motor vehicle only.
Judge, G.R. No. 78848, November 14, 1988]
d. Proper insurer from which to claim –
▪ It is the only compulsory insurance coverage under
the Insurance Code. 1. Occupant: Insurer of the vehicle in which the
occupant is riding, mounting or dismounting
▪ It applies to all vehicles whether public and private from;
vehicles.
2. Other case: Insurer of the directly offending
Method of Coverage vehicle.
a. Insurance Policy; e. The claimant is not free to choose from which

insurer he will claim the “no fault indemnity” as the
b. Surety Bond; and law makes it mandatory that the claim shall lie
against the insurer of the vehicle in which the
c. Cash Deposit. occupant is riding, mounting or dismounting from.
That said vehicle might not be the one that caused
Claimants of CMVLI: the accident is of no moment since the law itself
provides that the party paying may recover against
a. Passenger – Any fare-paying person being the owner of the vehicle responsible for the
transported and conveyed in and by a motor accident.
vehicle for transportation of passengers for
compensation (including: persons expressly f. This no-fault claim does not apply to property
authorized by law or by the vehicle’s operator damage. If the total indemnity claim exceeds Php
or his agents to ride without fare). 5,000 and there is controversy in respect thereto, the
finding of fault may be availed of by the insurer
b. Third Party – Any person other than the only as to the excess. The first Php 5,000 shall be
passenger (excluding: member of the paid without regard to fault.
household or a member of the family within
the second degree of consanguinity or affinity, Special Clauses
of a motor vehicle owner or land
transportation operator, or his employee in a. Authorized Driver Clause
respect of death or bodily injury arising out of
and in the course of employment. ▪ A clause which aims to indemnify the insured
owner against loss or damage to the car but
No-Fault Clause limits the use of the insured vehicle to the
insured himself or any person who drives on

his order or with his permission. [Villacorta v.

Insurance Commissioner, G.R. No. L-54171, ▪ Performance Bond – Covering the faithful
October 28, 1980] performance of the contract
▪ The requirement that the person driving the ▪ Payment Bond – Covering the payment of
insured vehicle is permitted in accordance laborers and material men
with the licensing laws or other laws or
regulations to drive the motor vehicle b. Fidelity Bonds
(licensed driver) is applicable only if the
person driving is other than the insured. ▪ Surety pays an employer for loss growing out
of a dishonest act of his employee.
b. Theft Clause
▪ Industrial Bond – Required by private
▪ A clause which includes theft as among the employers to cover loss through dishonesty
risks insured against. of employees.
▪ Where the car is unlawfully and wrongfully ▪ Public Official Bond – Required of public
taken without the owner’s consent or officers for the faithful performance of their
knowledge, such taking constitutes theft, and duties and as a condition of entering upon
thus, it is the “theft clause” and not the the duties of their offices.
“authorized driver clause that should apply.
[Palermo v. Pyramids Insurance, G.R. No. L- c. Judicial Bonds
36480, May 31, 1988]
▪ Those which are required in connection with
c. Cooperation Clause judicial proceedings. The purpose of requiring
a litigant to furnish a judicial bond is to
▪ A clause which provides in essence that the indemnify the adverse party against damages
insured shall give all such information and resulting from the proceeding.
assistance as the insurer may require, usually
requiring attendance at trials or hearings. Suretyship and Property Insurance, Distinguished
E. Suretyship
Suretyship Property insurance
▪ An agreement whereby a surety guarantees the Accessory contract Principal contract
performance by the principal or obligor of an 3 parties: surety, obligor 2 parties: insurer and
obligation or undertaking in favor of an obligee. and oblige insured
Credit accommodation Contract of indemnity
▪ It is essentially a credit accommodation. However,
it is considered an insurance contract if it is Surety can recover from Insurer has no such right;
executed by the surety as a vocation, and not principal only right of subrogation
incidentally. Bond can be cancelled only May be cancelled
with consent of obligee, unilaterally either by
▪ Suretyship, especially in fidelity bonding, is thus Commissioner or court insured or insurer on
treated like non-life insurance in some respects. grounds provided by law
Requires acceptance of No need of acceptance by
Nature of Liability of Surety obligee to be valid any third party
Risk-shifting device; Risk-distributing device;
a. Solidary; premium paid being in the premium paid as a ratable
nature of a service fee contribution to a common
b. Limited to the amount of the bond; and fund
c. It is determined strictly by the terms of the contract Surety and Guaranty, Distinguished
of suretyship in relation to the principal contract
between the obligor and the obligee. Surety Guaranty
Assumes liability as a Liability of the guarantor
Types of Surety Bonds regular party to the depends upon an
undertaking independent agreement to
a. Contract Bonds pay if the primary debtor
fails to do so
▪ Bonds connected with construction and Primarily liable Secondarily liable
supply contracts. They are for the protection Not entitled to the benefit Has this right to have all the
of the owner against a possible default by the of exhaustion of the property of the debtor and
contractor to comply with his contract or his debtor’s assets legal remedies against the
possible failure to pay material men, laborers debtor first exhausted
and subcontractors.

before he can be compelled period, his beneficiaries benefits. If he outlives the

to pay the creditor period, no person benefits from the insurance.
Undertakes to pay if the Undertakes to pay if the
principal does not pay principal cannot pay f. Industrial Life – Life insurance entitling the
insured to pay premiums weekly, or where
F. Life Insurance premiums are payable monthly or oftener.
Insurance on human lives and insurance appertaining thereto g. Mortgage Redemption Insurance – A life
or connected therewith which includes every contract or insurance taken pursuant to a group mortgage
pledge for the payment of endowments or annuities. redemption scheme by the lender of money on the
life of a mortgagor who, to secure the loan,
Parties in a Life Insurance mortgages the house constructed from the use of
the proceeds of the loan, to the extent of the
a. Owner of the policy- one who has the power to mortgage indebtedness such that if the mortgagor
name or change the beneficiary, to assign the policy dies, the proceeds of his life insurance will be used
(under certain conditions) cash it in for its to pay for his indebtedness to the lender assured
surrender value, or use it as a collateral in obtaining and the deceased’s heirs will thereby be relieved
a loan, and the obligation to pay the premiums. from paying the unpaid balance of the loan. [Great
Pacific Life Assurance Corp. v. Court of Appeals, G.R.
b. Cestui que vie – person whose life is the subject of No. 113899, October 13, 1999]
the policy.
Liability of Insurer in Certain Causes of Death of Insured
c. Beneficiary – one to whom the proceeds are paid.
a. Suicide
1. Minor as beneficiary in a contract of life,
health or accident insurance – the judicial ▪ Insurer is liable in the following cases:
guardian, father, or mother may exercise, in
behalf of said minor, any right under the 1. If committed after two years from the date
policy, where the interest of the minor in the of the policy’s issue or its last
particular act involved does not exceed reinstatement;
twenty thousand pesos.
2. If committed in a state of insanity
2. Such right may include, but shall not be regardless of the date of the commission
limited to, obtaining a policy loan, unless suicide is an excepted peril.
surrendering the policy, receiving the
proceeds of the policy, and giving the minor's 3. If committed after a shorter period
consent to any transaction on the policy. provided in the policy.
3. No need for court appointment or filing of a ▪ Any stipulation extending the 2-year period is
bond. null and void.
Note: One person might occupy all 3 positions by naming his Note: Justice Vitug believes that death by suicide (if
estate as beneficiary. the insured is sane) or at the hands of the law
obviates against recovery as being more in
Kinds of Life Insurance consonance with public policy.
a. Ordinary Life, General Life or Old Line Policy – b. At the hands of the law (legal execution)
Insured pays a fixed premium every year until he
dies. Surrender value after 3 years. ▪ It is one of the risks assumed by the insurer
under a life insurance policy in the absence of
b. Group Life – Essentially a single insurance contract a valid policy exception.
that provides coverage for many individuals.
c. Killing by the beneficiary
c. Limited Payment Policy – insured pays premium
for a limited period. If he dies within the period, ▪ The interest of a beneficiary in a life insurance
his beneficiary is paid; if he outlives the period, he policy shall be forfeited when the beneficiary
does not get anything. is the principal accomplice or accessory in
willfully bringing about the death of the
d. Endowment Policy – Pays premium for specified insured, in which event, the nearest relative of
period. If he outlives the period, the face value of the insured shall receive the proceeds of said
the policy is paid to him; if not, his beneficiaries insurance if not otherwise disqualified.
receive the benefit.
▪ EXCEPTIONS:
e. Term Insurance – Insurer pays once only, and he is
insured for a specified period. If he dies within the 1. Accidental killing;

uncertainty being the time

2. Self-defense; when it will take place
The liability of the insurer to Liability is uncertain
3. Insanity of the beneficiary at the time he make payment is certain, the because the happening of
killed the insured; only uncertain element being the peril insured against is
when such payment must be uncertain
4. If the premiums paid came from conjugal made
funds, the proceeds are considered Although it may be May be cancelled by
conjugal. If the beneficiary is other than terminated by the insured, it either party. Usually for a
the insured’s estate, the source of cannot be cancelled by the term of 1 year
premiums would not be relevant [Del Val insurer. Usually a long term
v. Del Val, G.R. No. L-9374, February 16, contract
1915]; The loss to the beneficiary Such loss can generally be
caused by the death of the measured accurately
5. the measure of indemnity in life or health insured can seldom be
insurance policy is the sum fixed in the measured accurately in
policy except when a creditor insures the terms of cash value
life of his debtor. The beneficiary is under no The insured is required to
obligation to prove actual submit proof of his actual
Is the consent of the beneficiary necessary to the assignment financial loss as a result of pecuniary loss as a
of a life insurance policy? the death of the insured in condition precedent to
order to collect the insurance collecting the insurance
a. If the designation of the beneficiary is irrevocable
– the beneficiary’s consent is essential because of
Variable Contract
his vested right.
▪ Any policy or contract on either a group or
b. If the designation is revocable – the policy may be
individual basis issued by an insurance company
assigned without such consent because the
providing for benefits or other contractual
beneficiary only has a mere expectancy to the
payments or values thereunder to vary so as to
proceeds.
reflect investment results of any segregated
portfolio of investment.
Cash Surrender Value
Mandatory Provisions in Life Insurance Policies
▪ As applied to a life insurance policy, it is the
amount the insured in case of default, after the a. Grace Period
payment of at least 3 full annual premiums, is
entitled to receive if he surrenders the policy and ▪ The policyholder is entitled to a grace period
releases his claims upon it. of 30 days or 1 month within which the
payment of any premium after the first may be
Fire and Marine made, subject to the option to charge interest
Life Insurance
Insurance not in excess of 6%.
Contract of investment Contract of indemnity
Always a valued policy May be open or valued ▪ In case there is a claim during the grace period
May be transferred or Transferee or assignee before the overdue amount is paid, the
assigned to any person even must have an insurable amount of such premium with interest may
if he has no insurable interest interest in the thing be deducted from the proceeds. [Sec. 233,
insured Insurance Code]
Consent of the insurer is not Such consent is essential
required to the validity of the in the assignment b. Incontestability Clause
assignment
Insurable interest in the life Insurable interest in the ▪ Clause in life insurance policy that stipulates
or health of the person property insured must that the policy shall be incontestable after a
insured need not exist after exist not only when the stated period. [Sec. 233, Insurance Code]
the insurance takes effect or insurance takes effect but
when the loss occurs (must also when the loss occurs ▪ GENERAL RULE: The policy shall be
exist only when the incontestable after it shall have been in force
insurance takes effect, during the lifetime of the insured for a period
EXCEPT: if the insurance of 2 years from issuance as shown in the policy
was taken by the creditor on or date of approval of last reinstatement.
the life of the debtor)
Insurable interest need not Insurable interest must ▪ EXCEPTIONS:
have any legal basis have a legal basis
The contingency that is The contingency insured 1. Non-Payment of Premium; and
contemplated (death) is a may or may not occur
certain event, the only

2. Violation of the conditions of the policy g. Benefits Payable on Installments or Annuity

relating to military or naval service in
times of war. ▪ There must be a table showing the minimum
amounts of installments or annuity payments.
▪ Requisites of Incontestability Clause: [Villanueva, 319]
a. Life insurance policy; h. Right of Reinstatement
b. Payable on the death of the insured; and ▪ A provision that the policyholder shall be
entitled to have the policy reinstated at any
c. It has been in force during the lifetime of time within 3 years from the date of default of
the insured for a period of at least two premium payment unless the cash surrender
years from the date of its issue or of its value has been duly paid, or the extension
last reinstatement.: period has expired, upon production of
evidence of insurability satisfactory to the
▪ The period of 2 years may be shortened but it company and upon payment of all overdue
cannot be extended by stipulation. premiums and any indebtedness to the
company upon said policy, with interest rate
▪ Incontestability only deprives the insurer of not exceeding that which would have been
those defenses which arise in connection with applicable to said premiums and indebtedness
the formation and operation of the policy in the policy years prior to reinstatement. [Sec.
prior to loss. 233, Insurance Code]
c. Entirety of the Agreement Note: The following do not apply to Group Life or Industrial
Life Insurance. Section 234 of the Insurance Code provides for
▪ The policy shall constitute the entire contract the provisions needed to be stated for such kinds of life
between the parties. [Sec. 233, Insurance Code] insurance.
d. Age of the Insured INSURANCE COMMISSION

▪ A provision that if the age of the insured is
INSURANCE COMMISSION
considered in determining the premium and
the benefits accruing under the policy, and the Main agency charged with the enforcement of the Insurance
age of the insured has been misstated, the Code and other related. The agency is headed by the
amount payable under the policy shall be such
Insurance Commissioner.
as the premium would have purchased at the
correct age. [Sec. 233, Insurance Code]
NATURE OF POWERS OF THE INSURANCE
COMMISSION
e. Participating Policy
1. Regulatory or non-quasi judicial- generally provided in
▪ The policy must state that the insurer shall Sec. 414.
periodically ascertain and apportion any
divisible surplus accruing on the policy under a. The authority to issue, or refuse issuance of, a
the conditions stated therein. [Sec. 233, certificate of authority to a person or entity desiring
Insurance Code] to engage in insurance business in the Philippines;
f. Options Available in Case of Default in Premium b. To revoke or suspend such certificate of authority
Payment upon a finding of the existence of statutory grounds
for such revocation or suspension.
▪ A provision specifying the options to which
the policyholder is entitled to in the event of 2. Adjudicatory or quasi-judicial- generally described in
default in a premium payment after three (3) Sec. 416.
full annual premiums shall have been paid.
Such option shall consist of: DUTIES AND FUNCTIONS OF THE INSURANCE
COMMISSION
1. A cash surrender value;
1. To insure the solvency of insurance companies:
2. One or more paid-up benefits on a plan
or plans specified in the policy of such a. Issue certificates of authority;
value as may be purchased by the cash
surrender value. b. Suspend or revoke the certificates of authority;
3. Loan available against the cash surrender c. Require insurance companies to keep books,
value. [Villanueva, 319] records, accounts and vouchers;

d. Require the setting up of reserves; b. Concurrent original jurisdiction (with the RTC) –
Where the maximum amount involved in any
e. Require the filing of annual statements; single claim is P100,000 (Sec. 416), except in case of
maritime insurance which is within the exclusive
f. Require adequate rates; jurisdiction of the RTC. (BP 129; admiralty &
maritime jurisdiction) OR Where the amount
g. Pass upon and approve certain classes of exceeds P100,000, the RTC has jurisdiction.
investments;
c. The Insurance Commissioner has no jurisdiction to
h. Cause an examination, into the financial conditions decide the legality of a contract of agency entered
of insurance companies; into between an insurance company and its agent.
The same is not covered by the term “doing or
i. Act as depository of securities; transacting insurance business” under Sec 2, ICP,
neither is it covered by Sec. 416 of the same Code
j. See that no non-life insurance company shall retain which grants the Commissioner adjudicatory
any risk on any one subject of insurance in an powers. [Philippine American Life Insurance Co., v.
amount exceeding 20% of its net worth; Ansaldo, G.R. No. 76452, July 26, 1994]
k. Rehabilitate or liquidate insolvent insurance 2. Administrative/Regulatory

companies; and
a. Enforcement of insurance laws;
l. Maintain and administer the P10million Security
Fund as well as the Guaranty Fund. b. Issuance, suspension or revocation of certificate of
authority;
2. To assure fair trade practices of insurance companies
and their agents: c. Power to examine books and records, etc.;
a. Approve policy forms; d. Rule-making authority; and
b. Require that rates be equitable and reasonable; e. Punitive
c. Adjudicate claims and complaints where the

amount involved does not exceed P100,000 in any
single claim;
d. Prohibit unfair claims settlement practices; and
e. Accept legal processes for foreign insurance

companies without an agent.
3. To assure reasonable insurance service:
a. License agents, brokers, adjusters, resident agents,

non-life company underwriters, actuaries and
rating organizations.
4. To promote national interest:
a. Pass upon and approve investments of insurance

companies’ funds to insure that technical reserves
are invested locally;
b. Require insurance companies to increase their

retention of local risks and/or reinsure locally
before ceding to unauthorized foreign companies
whenever technically feasible.
FUNCTIONS OF INSURANCE COMMISSIONER
1. Adjudicatory/Quasi-Judicial
a. Exclusive original jurisdiction – Any dispute in the

enforcement of any policy issued pursuant to
Chapter VI (CMVLI).

Mercantile Law Transportation Law
COMMON CARRIERS
DEFINITION
Persons, corporations, firms or associations engaged in the

business of carrying or transporting passengers or goods or
both, by land, water, or air, for compensation, offering their
services to the public.
Characteristics:
a. No distinction between one whose principal

business is the transportation of persons/goods
and one who does such as an ancillary business
(sideline);
b. No distinction between regular or scheduled basis

and one offering such service on an occasional,
episodic or unscheduled business;
c. No distinction as to the means of transporting, as

long as it is by land, water or air;
d. No specification to use motor vehicles only. As
TRANSPORTATION
such, pipeline operators are CCs – not necessarily
motor vehicles;
LAW e. Still a CC even if he has no fixed and publicly know

route, maintains no terminals, and issues no tickets;
f. Still a CC even if services offered to a limited

clientele (between the general public and a narrow
segment of the general population); and
g. Still considered a CC even if he did not secure a

Certificate of Public Convenience.
Test to Determine if Common Carrier:
a. It must be engaged in the business of carrying

goods for others as a public employment and must
hold itself out as ready to engage in the
transportation of goods generally as a business and
not as a casual occupation;
b. It must undertake to carry goods of the kind to

which its business in confined;
c. It must undertake to carry by the method by which

his business is conducted and over its established
roads; and
d. The transportation must be for hire. [FPIC v. Court

of Appeals, G.R. No. 125948, December 29, 1998]
Distinction:
COMMON CARRIER PRIVATE CARRIER
Extraordinary diligence in Ordinary diligence in the

the vigilance over the goods carriage of goods will ▪ Passengers should be transported without
they carry suffice encountering any harm or loss.
No such presumption
In case of loss, destruction,
applies to private carriers, LIABILITIES OF COMMON CARRIERS
or deterioration of goods,
for whosoever alleges
they are presumed to have GENERAL RULE: Common Carriers are presumed
damage to or deterioration
been at fault or to have negligent the moment he fails to deliver the goods to its
n of the goods carried has
acted negligently; burden destination or the passenger did not reach the destination.
the onus of proving that the
of proving otherwise rests
cause was the negligence of
on them Defenses Against Liability:
the carrier
Cannot stipulate that it is
May validly enter into a. Total release from liability:
exempt from liability for the
such stipulation
negligence of its agents or
employees 1. Carrier exercised extraordinary diligence and
*Towage, Arrastre, and Stevedoring services are not Common so there is no causal connection between the
Carriers unless their nature expressly provides otherwise. damage and the carrier’s act or omission.
DILIGENCE REQUIRED OF COMMON CARRIERS b. Mitigating liability:
Extraordinary Diligence – rendition of service with the 1. Contributory Negligence;

greatest skill and utmost foresight but not an absolute insurer
of all risks of travel. A common carrier is obliged to transport 2. Avoidable Consequences Rule; and
its passengers to their destinations with the utmost diligence
of very cautious persons. 3. Valid stipulation reducing liability.
OBLIGATIONS OF THE CARRIERS VIGILANCE OVER GOODS

1. Duty to Accept Cargo or Passengers Without EXEMPTING CAUSES
Discrimination.
Presumption on Loss, Destruction, or Deterioration of
EXCEPTIONS (When can common carriers refuse Goods:
accepting):
GENERAL RULE: The common carrier is presumed to have
a. Cargoes consist of dangerous objects or substances; been at fault or to have acted negligently when the goods
transported are lost, destroyed or deteriorated.
b. Goods are unfit for transportation;
Note: The presumption of fault or negligence against the
c. Acceptance would result in overloading; carrier is only a disputable presumption. The law, in creating
such a presumption merely relieves the owner of the goods,
d. Contrabands or illegal goods; for the time being, from introducing evidence to fasten the
negligence on the former, because the presumption stands in
e. Goods injurious to health; the place of evidence.
f. Goods will be exposed to untoward danger; EXCEPTIONS: When the same is due to any of the following
causes only:
g. Goods will be exposed to disease;
1. Fortuitous Event (Flood, storm, earthquake,
h. Strike; and lightning or other natural disaster or calamity).
Provided, the following conditions are present:
i. Failure to tender goods on time.
a. Natural disaster was the proximate and only
2. Duty to Deliver Goods and Passengers. cause;  
▪ Time to deliver: period stipulated in contract or b. Carrier exercised diligence to prevent or

reasonable time if no contract. minimize loss before, during and after the
occurrence of the natural disaster; and
▪ Reasonable time: depends on circumstances and
nature of goods. c. The common carrier has not negligently
incurred delay in transporting the goods. [Art.
3. Duty to Exercise Extraordinary Diligence. 1740, New Civil Code]
▪ Goods should be delivered in the same condition Note:

that they were received.
▪ Mechanical defects are not fortuitous
events. [Sweet Lines, Inc. v. Court of

Appeals, G.R. No. L-46340, April 29, 1983] carrier is not liable for the value of the undelivered
merchandise which was lost because of an event that is
▪ Fire will only be considered a fortuitous beyond his control. [De Guzman v. CA, G.R. No. L‐47822,
event if caused by natural disasters or December 22, 1988]
calamities. [Eastern Shipping Lines v. IAC,
G.R. No. L-69044, May 29, 1987] Requirement of Absence of Negligence –
Requisites:
2. Act of the public enemy in war, whether
international or civil, provided: a. The cause of the breach of obligation must be
independent of the will of the debtor;
a. Act was the proximate and only  cause;
b. The event must be unforeseen or unavoidable;
b. Carrier exercised diligence to  prevent or
minimize loss before, during and after the act; c. The event must be such as to render it impossible
and for the debtor to fulfil his obligation in a normal
manner; 
c. No delay. [Art. 1740, New Civil Code]
d. The debtor must be free from nay participation in
Note: Presupposes a state of war and refers to the or aggravation of the injury to the creditor.
government of a foreign nation at war with the
country to which the carrier belongs, though not Absence of Delay:
necessarily with that to which the owner of the
gods owes allegiance. ▪ The absence of delay is important in case of natural
disaster because if a common carrier incurs in delay
3. Act or omission of the shipper or owner of the in transporting the goods, such disaster shall not
goods, provided:   free such carriers from responsibility. [Art. 1740
New Civil Code]
a. If proximate and only cause‐ exempting;
Rules Regarding Time of Delivery of Goods:
b. If contributory negligence‐ mitigating.
a. If there is an agreement as to time of delivery –
delivery must be within the time stipulated in the
4. The character of the goods or defects in the packing
or in the containers. Provided, carrier exercised due contract or bill of lading
diligence to forestall or prevent loss. [Art 1742, New
b. If there is no agreement – delivery must be within
Civil Code]  
a reasonable time. [Saludo, Jr. v. CA, G.R. No. 95536,
March. 23, 1992]
Note: If the fact of improper packing is known to
the carrier or its servants, or apparent upon
Liability in Case of Delay in Delivery of Goods:
ordinary observation, but it accepts the goods
notwithstanding such condition, it is not relieved
▪ The carrier shall be liable for damages immediately
from responsibility for loss or injury resulting
and proximately resulting from such neglect of
therefrom. [Southern Lines Inc., v. CA, G.R. No. L‐
duty. [Saludo, Jr. v. CA, GR No. 95536, March 23,
16629, January. 31, 1962]
1992]
5. Order or act of competent authority. Provided, the
Civil Code Provisions Regarding Delay in the
authority is with power to issue order [Art. 1743,
Transportation of Goods:
New Civil Code]. If the officer acts without legal
process, the common carrier will be held liable a. Those who in the performance of their obligations
[Ganzon vs. CA, GR No. L‐48757, May 30, 1988]. are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof,
Note: The public officer should be acting within its
are liable for damages; [Art. 1170, New Civil Code]
powers and authority in issuing such.
b. If the common carrier negligently incurs in delay in
Note: In all cases other than those enumerated above, there is
transporting the goods, a natural disaster shall not
presumption of negligence even if there is an agreement
free such carrier from responsibility; [Art. 1740,
limiting the liability of the common carrier in the vigilance
New Civil Code]
over the goods
c. If the common carrier, without just cause, delays
Liability in Relation to Acts of Criminals or Strangers:
the transportation of the goods or changes the
stipulated or usual route, the contract limiting the
GENERAL RULE: A common carrier is liable even for acts of
common carrier’s liability cannot be availed of in
criminals or strangers.
case of the loss, destruction, or deterioration of the
goods; [Art. 1747, New Civil Code]
EXCEPTION: Where such thieves or robbers acted "with
grave or irresistible threat, violence or force." The common

d. An agreement limiting the common carrier’s

liability for delay on account of strikes or riots is ▪ EXCEPTION: Unless the shipper or owner has
valid. [Art. 1748, New Civil Code] made use of the right of stoppage in transitu.
CONTRIBUTORY NEGLIGENCE Note:
GENERAL RULE: If the shipper or owner merely contributed ▪ The Right of Stoppage In Transitu – It is the
to the loss, destruction or deterioration of the goods, the right exercised by the seller by stopping the
proximate cause thereof being the negligence of the common delivery of the goods to a certain buyer or
carrier, the latter shall be liable for damages, which however, consignee (because of insolvency) when such
shall be equitably reduced. [Art. 1741, New Civil Code] goods are already in transit.
EXCEPTION: In a collision case and allision cases, the parties ▪ Ordinary diligence is required in exercising
are liable for their own damages. the right of stoppage in transitu, because of the
following:
Note: Allision – The running of a ship upon another ship that
is stationary. a. It is holding the goods in the capacity of
an ordinary bailee or warehouseman and
Partial Relief from Liability: not as a carrier;  
a. The Shipper or Owner contributed negligence; b. There is a change of contract from a

contract of carriage to a contract of
b. Inherent defect or character of the goods or in the deposit.
packing or container.
STIPULATIONS LIMITING LIABILITY
▪ Carrier cannot be relieved from any liability
when it accepts the goods knowing of their GENERAL RULE: Stipulations limiting the liability of a
improper packing or the defect was apparent common carrier are not valid.
upon ordinary observation.
EXCEPTION: Unless
DURATION OF LIABILITY
a. in writing, signed by the shipper or owner;
1. Delivery of Goods to Common Carrier
b. supported by a valuable consideration other than
▪ From the time the goods are unconditionally placed the service rendered by the common carrier;
in the possession of, and received by the carrier for
transportation until the same are delivered actually c. Reasonable, just and not contrary to public policy.
or constructively by the carrier to the consignee or [Art. 1744, New Civil Code]
to the person who has the right to receive them.
1. Void Stipulations
2. Actual or Constructive Delivery
a. That the goods are transported at the risk of the
▪ Liability continues to be operative even during the owner or shipper;
time the goods are stored in a warehouse of the
carrier at the place of destination until the b. That carrier will not be liable for any loss,
consignee has been advised of the arrival of the destruction or deterioration of the goods;
goods and has had reasonable opportunity
thereafter to remove them or otherwise dispose of c. That the carrier need not observe any diligence in
them. the custody of the goods;
▪ Delivery of goods to the custom authorities is not d. That the carrier shall exercise a degree of diligence
delivery to the consignee. less than that of a good father of a family over the
movable transported;
▪ Constructive Delivery – delivery of a
representation of property (as a written instrument) e. That the carrier shall not be responsible for the acts
or means of possession (as a key) that is construed or omissions of his or its employees;
by a court as sufficient to show the transferor's
intent or to put the property under the transferee's f. That the carrier’s liability for acts committed by
control thieves or robbers who do not act with grave or
irresistible threat, violence or force is dispensed
3. Temporary Unloading or Storage with or diminished;
▪ GENERAL RULE: Liability remains in full force g. That the carrier is not responsible for the loss,
and effect even when they are temporarily destruction or deterioration of the goods on
unloaded or stored in transit. account of the defective condition of the car,

vehicle, ship or other equipment used in the

contract of carriage. c. The act of a thief or robber, who has entered the
carrier is not deemed force majeure, unless it is
h. Any similar stipulation that is unreasonable, done with the use of arms or through an irresistible
unjust, and contrary to public policy. [Art. 1745, force. [Art. 2001, New Civil Code]
New Civil Code]
d. The common carrier is not liable for compensation
2. Valid Stipulations if the loss is due to the acts of the shipper, his
family, or servants, or if the loss arises from the
a. Reduction of degree of diligence to ordinary character of the things brought into the carrier. [Art.
diligence, provided it be: 2002, New Civil Code]
1. In writing, signed by the shipper or owner; e. The common carrier cannot free himself from
responsibility by posting notices to the effect that
2. Supported by a valuable consideration other he is not liable for the articles brought by the
than the service rendered by the carriers; and passenger. Any stipulation between the common
carrier and the shipper whereby the responsibility
3. Reasonable, just and not contrary to public of the former as set forth in Articles 1998 to 2001 is
policy. [Art. 1744, New Civil Code] suppressed or diminished shall be void. [Art. 2003,
New Civil Code]
b. Limitation of Liability to Fixed Amount;
Distinction:
c. A contract fixing the sum to be recovered by the
owner or shipper for the loss, destruction or In Possession of In Possession
deterioration of the goods, if it is reasonable and Carrier (check-in) of Passengers
just under the circumstances and has been fairly Nature Mere goods Necessary
and freely agreed upon; [Art. 1750, New Civil Code] Deposit
Diligence Extraordinary Ordinary
d. Limitation of Liability in Absence of Declaration of required of a
Greater Value; common carrier
Applicable NCC 1733-1753 NCC 1998,
e. Stipulation limiting liability to the value of the Rules 2000-2003
goods appearing in the bill of lading, unless the
shipper or owner declares a greater value. [Art. SAFETY OF PASSENGERS
1749, New Civil Code]
VOID STIPULATIONS
f. Limitation of Liability for Delay;
▪ Dispensing with or lessening the extraordinary
g. An agreement limiting the common carrier’s responsibility of a common carrier for the safety of
liability for delay on account of strikes or riots. [Art. passengers imposed by law by stipulation, by posting of
1748, New Civil Code] notices, by statements on tickets or otherwise.
LIABILITY FOR BAGGAGE OF PASSENGERS ▪ Thus, the carrier and the passenger cannot enter into an
agreement which absolutely exempts the carrier from
Rules Regarding Checked-In Baggage of Passengers: liability from the passenger’s death or injuries and
lessening the required degree of diligence required by
▪ The provisions of Articles 1733 to 1753 of the Civil law.
Code shall apply.
▪ EXCEPTION: Gratuitous carriage where in the carrier
Rules Regarding Baggage in Possession of Passengers:
and passenger may stipulate limiting the common
carrier’s liability for negligence. However, they cannot
a. The common carrier shall be responsible for
stipulate to completely eliminate the liability of the
shipper’s baggage as depositaries, provided that
carrier.
notice was given to them, or to their employees, of
the effects brought by the guests and that, on the
Note: The reduction of fare does not justify any limitation of
part of the shipper, they take the precautions which
the common carrier’s liability.
said common carriers or their substitutes advised
relative to the care and vigilance of their effects.
DURATION OF LIABILITY
[Art. 1998, New Civil Code]
The duty of a common carrier to provide safety to its
b. The responsibility shall include the loss of, or injury
passengers so obligates it not only during the course of the
to the personal property of the shipper caused by trip, but for so long as the passengers are within its premises
the employees of the common carrier as well as and where they ought to be in pursuance to the contract of
strangers; but not that which may proceed from any
carriage.
force majeure. [Art. 2000, New Civil Code]

Waiting for Carrier or Boarding of Carrier common carrier will be mitigated. [Art. 1762,
New Civil Code]
▪ All persons who remain on the premises within a
reasonable time after leaving the conveyance are to 2. Liability for Acts of Employees
be deemed passengers, who are under common
carrier’s duty to protect. ▪ Common carriers are bound to carry its passengers
safely to their destination. Common carriers are
Arrival at Destination also liable for the actions or omission of its
employees that may result to the damage, injury, or
▪ The duty which the carrier of passengers owes to its death of the passenger.
patrons extends to persons boarding the cars as
well as to those alighting therefrom including a ▪ Exception is when the act or omission was done
reasonable time to see after his baggage and outside the line of duty of the employee or may fall
prepare for his departure. under caso fortuito (see De Gillaco, et. al. v. Manila
Railroad)
LIABILITY FOR ACTS OF OTHERS
▪ In quasi-delict cases, an employer is subsidiary
1. Employees liable with the employee. The employer is also
▪ Required Diligence: Extraordinary. directly liable for negligence in selecting and
supervising his employee.
▪ Nature of Liability: Tort or Quasi-Delict.
3. Liability from Carrier’s Defective Equipment and
▪ Requisite: Employee must be on duty at the time of Facilities
the injury so that the Common Carrier may be held
liable. ▪ Passengers are entitled to recover damages from
the carrier resulting from a defect in an appliance
▪ Defense: Diligence in the selection and supervision purchased from a manufacturer, when it appears
of employees. that the defect would have been discoverable by the
carrier if it had exercised the degree of care which
2. Other Passengers and Strangers under the circumstances was incumbent upon it.
▪ Required Diligence: Ordinary. 4. Liability as to Third Persons
▪ Nature of Liability: Limited by Article 1763. ▪ Quasi-delict. The common carrier is liable and may
maintain an action to recover damages against its
▪ *As to acts of strangers and other passengers, the employee. The law requires common carriers to
common carrier can still be held liable if its exercise extraordinary diligence in carrying and
employee could have prevented the injury (not transporting passengers. In requiring the highest
death) to the passenger through the exercise of the form of diligence, the law compels them to curb the
diligence of a good father of a family. [Art. 1763, recklessness of drivers. [Kapalaran Bus Line v.
New Civil Code] Coronado, G.R. No. 85331, August 25, 1989]
EXTENT OF LIABILITY ▪ Common carriers are also liable for any omission,
lapse or neglect that results to the damage,
1. Liability of the Common Carrier prejudice, injuries or even death caused to
members of its crew members or complement
▪ In a contract of carriage, it is presumed that the operating the carrier. [PAL v. Court of Appeals, G.R.
common carrier is at fault or was negligent when a No. L-46558, July 31, 1981]
passenger dies or is injured. This presumption may
only be overcome by evidence that the common 5. Liability of Common Carriers for Injuries Caused by
carrier exercised extraordinary diligence. [Baliwag Other Passengers
Transit v. Court of Appeals, G.R. No. 116110, May 15,
1996] ▪ Common carriers are liable for the injuries suffered
by its passengers due to the willful acts or
▪ Act or omission of passenger – Passengers are negligence of other passengers or of strangers, if the
required to exercise diligence of a good father of a common carrier’s employees, through the exercise
family to avoid injury to themselves. [Art. 1761, of the diligence of a good father of a family, could
New Civil Code] have prevented or stopped the act or omission.
[Manila Railroad Company v. Ballesteros et. al., G.R.
➢ If the passenger’s act or omission is the No. L-19161, April 29, 1966]
proximate cause of the injury or death, then
the common carrier is exempt from liability. If BILL OF LADING
the act or omission of the passenger is only
contributory, damages to be paid by the DEFINITION

▪ Written acknowledgment of receipt of goods and are to be shipped is already in the port where the
agreement to transport them to a specific place to a goods are held for shipment.
person named or to his order.
THREE-FOLD CHARACTER
▪ Not indispensable for the creation of a contract of
carriage [Compañia Maritima v. Insurance Company of 1. Receipt as to the quantity and description of the goods
North America, G.R. No. L-18965, October 30, 1964]; in the shipped;
absence of a Bill of Lading, disputes shall be determined
by the legal proofs presented by the parties in 2. Contract to transport and deliver the goods to the
accordance with the general provisions of the Code of consignee or other person therein designated, on the
Commerce in relation to commercial contracts. terms specified in such instrument; and
▪ In the absence of fraud, concealment, or improper 3. Document of title, which makes it a symbol of the goods.
conduct, it is presumed that the stipulations of the bill
are known to the shipper, and he is generally bound by DELIVERY OF GOODS
his acceptance whether he reads the bill or not. [Magellan
Manufacturing Marketing Corp. v. Court of Appeals, G.R. Period of Delivery –
No. 95529, August 22, 1991]
GENERAL RULE: Period to deliver is that which is stated in
Kinds: the contract of Bill of Lading.
a. On board - issued when the goods have been EXCEPTION: When no period is provided, delivery shall be
actually placed aboard the ship with very made:
reasonable expectation that the shipment is as good
as on its way. a. Within reasonable time, or
b. Received - one in which it is stated that the goods b. In the first shipment of the same goods or similar
have been received for shipment with or without goods which he may make the point of delivery.
specifying the vessel by which the goods are to be
shipped. Effects of Delay –
c. Negotiable - one in which it is stated that the goods a. Merely suspends and generally does not terminate
referred to therein will be delivered to the bearer or the contract of carriage;
to the order of any person named therein.
b. Carrier remains duty bound to exercise
d. Non-negotiable - One in which it is stated that the extraordinary diligence;
goods referred to therein will be delivered to a
specified person. c. Natural disaster shall not free the carrier from
responsibility [Art. 1740, New Civil Code];
e. Clean – One which does not indicate any defect in
the goods. d. If delay is without just cause, the contract limiting
the common carrier’s liability cannot be availed of
f. Foul – One which contains a notation thereon in case of loss or deterioration of the goods. [Art.
indicating that the goods covered by it are in bad 1747, New Civil Code]
condition.
Delivery Without Surrender of Bill of Lading –
g. Spent – One which covers goods that already have
been delivered by the carrier without a surrender of GENERAL RULE: Bill of Lading shall be returned to the
a signed copy of the bill. carrier upon delivery of the goods, and such obligations and
actions shall be considered cancelled [Art. 353, 2nd par., Code
h. Through – One issued by the carrier who is obliged of Commerce].
to use the facilities of other carriers as well as his
own facilities for the purpose of transporting the EXCEPTION: When the bill of lading cannot be returned
goods from the city of the seller to the city of the because it was lost or whatever reason – the carrier shall be
buyer, which bill of lading is honored by the second issued a receipt to that effect which shall produce same effect
and other interested carriers who do not issue their as if the bill of lading has been returned.
own bills.
Right of Consignee to Refuse the Delivery –
i. Custody – One wherein the goods are already
a. Partial non-delivery, where the goods are useless
received by the carrier but the vessel indicated
without the others [Art. 363, Code of Commerce];
therein has not yet arrived in the port.
j. Port – One which is issued by the carrier to whom b. Goods are rendered useless for sale or consumption
for the purposes for which they are properly
the goods have been delivered, and the vessel
destined [Art. 365, Code of Commerce];
indicated in the bill of lading by which the goods

▪ Contract whereby an entire ship, or some principal

c. In case of delay through the fault of the carrier [Art. part of the said ship, is let by the owner thereof to a
371, Code of Commerce]; merchant or other person for a specified time or use
for the conveyance of goods, in consideration of the
d. In case part of the goods is in good condition and payment of freight. [Caltex Phils., Inc. v. Sulpicio
separation is possible, the consignee may refuse to Lines, Inc., G.R. No. 131166, September 30, 1999]
receive only the damaged goods. [Art. 365, Code of
Commerce] Types
PERIOD OF FILING NOTICE OF CLAIMS BY SHIPPER a. Bareboat/Demise Charter - The charterer provides
crew, food and fuel. The charterer is liable as if he
▪ Patent Damage: notice must be filed immediately upon were the owner, except when the cause arises from
delivery of cargo to the consignee or place of destination. the unworthiness of the vessel. The shipowner leases
to the charterer the whole vessel, transferring to the
▪ Latent Damage: notice must be filed within 24 hours latter the entire command, possession and
from delivery of cargo to the consignee or place of consequent control over the vessel’s navigation,
destination. including the master and the crew, who thereby
become the charter’s servants. It transforms a
Note: common carrier into a private carrier.
▪ Shorter or modified period may be stipulated by ▪ The charterer becomes the owner of the vessel
parties. [PHILAMGEN v. Sweet Lines, Inc., G.R. No. pro hac vice, just for that one particular purpose
87434, August 5, 1992] only.
▪ Notice of claim is a condition precedent before ▪ Charterer assumes the customary rights and
filing of court action because the rule protects the liabilities of the shipowner to third persons and
carrier by affording it an opportunity to make an is held liable for the expense of the voyage and
investigation of a claim while the matter is still the wages of the seamen.
fresh and easily investigated so as to safeguard
itself from false and fraudulent claims. [UCPB b. Contract of Affreightment - A contract whereby the
General Ins. Co., Inc. v. Aboitiz Shipping, G.R. No. owner of the vessel leases part or all of its space to
168433, February 10, 2009] haul goods for others.
PERIOD OF FILING ACTIONS ▪ The shipowner retains the possession,

command and navigation of the ship, the
The general rules under the Civil Code on extinctive charterer merely having use of the space in the
prescription apply. Thus, action for damages must be filed in vessel in return for his payment of the charter
court: hired.
a. If a bill of lading was issued: within 10 years; and ▪ Kinds:
b. If a bill of lading was not issued: within 6 years. 1. Time Charter - vessel is chartered for a
fixed period of time or duration of voyage.
Note: Period based on New Civil Code because Code of The common carrier remained a common
Commerce is silent. carrier. [Planters Products, Inc. v. Court of
Appeals, G.R. No. 101503, September 15,
MARITIME COMMERCE 1993]
MARITIME LAW 2. Voyage/Trip Charter - the vessel is leased

for one or series of voyages usually for
It is the system of laws which particularly relates to the affairs purposes of transporting goods for
and business of the sea, to ships, their crews and navigation, charterer.
and to maritime conveyance of persons and property. [Notes
and Cases on the Law on Transportation and Public Utilities, LIABILITY OF SHIP OWNERS AND SHIPPING AGENTS
Aquino & Hernando, citing Francisco, p.254]
Liability for Acts of Captain
CHARTER PARTIES
The captain shall be liable to the agent, and the latter to third
Definition persons:
▪ Contract by virtue of which the owner or agent 1. For all the damages suffered by the vessel
binds himself to transport merchandise or persons and his cargo by reason of want of skill or
for a fixed price. negligence on his part;

2. For all the thefts committed by the crew,

reserving his right of action against the d. Expenses for repair on vessel completed before
guilty parties; loss;
3. For the losses, fines, and confiscations e. In case there is no total loss and the vessel is not
imposed on account of violation of the abandoned;
laws and regulations of customs, police,
health, and navigation; f. Collision between two negligent vessels.
4. For the losses and damages caused by ACCIDENTS AND DAMAGES IN MARITIME
mutinies on board the vessel, or by reason COMMERCE
of faults committed by the crew in the
service and defense of the same, if he does 1. Averages
not prove that he made full use of his
authority to prevent or avoid them; ▪ Extraordinary or accidental expense incurred
during the voyage in order to preserve the cargo,
5. For those arising by reason of an undue vessel, or both; and
use of powers and non-fulfillment of the
obligations which are his; ▪ All damages or deterioration suffered by the vessel
from departure to the port of destination and to the
6. For those arising by reason of his going cargo from the port of loading to the port of
out of his course or taking a course which consignment.
he should not have taken without
sufficient cause, in the opinion of the Classes:
officers of the vessel at a meeting with the
shippers or supercargoes who may be on Particular or Gross or General
board; Simple
Definition Damages or Damages or
7. For those arising by reason of his expenses caused expenses
voluntarily entering a port other than that to the vessel or deliberately
of his destination; cargo that did not caused in order to
inure to the save the vessel, its
8. For those arising by reason of non- common benefit, cargo or both from
observance of the provisions contained in and borne by real and known
the regulations on situation of lights. [Art. respective risk. (Art. 811)
618, Code of Commerce] owners. (Art. 809)
Requisites 1. common
Limited Liability Rule (Hypothecary Doctrine) danger;
2. deliberate
▪ The liability of shipowner and ship agent is limited sacrifice;
to the amount of interest in said vessel such that 3. success;
where vessel is entirely lost, the obligation is 4. proper
extinguished. formalities and
legal steps.
▪ The interest extends to: Liability The owner of the All the persons
goods which gave having an interest
a. Vessel itself; rise to the expense in the vessel and
or suffered the the cargo therein
b. Equipment; damage shall bear at the time of the
this average. occurrence of the
c. Freightage; and (Art. 810) average shall
contribute to
d. Insurance proceeds. satisfy this
average. (Art. 812)
Exceptions Limited Liability Rule  The insurers
(Art.859) and
a. Claims under Workmen’s Compensation [Abueg v. lenders on
San Diego, G.R. No. L-773, December 17, 1946]; bottomry and
respondentia shall
b. Injury or damage due to shipowner or to the likewise
concurring negligence of the shipowner and the contribute.
captain; (Art.732).
Interests Only one interest Several interests
c. The vessel is insured [Vasquez v. Court of Appeals, Involved involved involved
G.R. No. L-42926, September 13, 1985];

Kinds Art. 809 Art. 811 damages. [Art. 831, Code of Commerce]
2. Collisions e. Fortuitous event/force majeure
Collision vs Allision ▪ No liability. Each bears its own loss. [Art.

830, Code of Commerce]
▪ Collision – Impact of two vessels both of
which are moving. ▪ The doctrine of res ipsa loquitur applies in
case a moving vessel strikes a stationary
▪ Allision – Impact between a moving vessel object, such as a bridge post, dock, or
and a stationary one. navigational aid. [Far Eastern Shipping v.
Court of Appeals, G.R. No. 130068, October 1,
Zones in Collision 1998; Luzon Stevedoring v. Court of Appeals,
G.R. No. L-58897, December 3, 1987]
a. First Division – covers all the time up to the
moment when the risk of collision may be said ▪ Even if the cause of action against the
to have begun or becomes apparent; common carrier is based on quasi-delict, the
defense of due diligence in the selection and
b. Second Division - covers the time between the supervision of employees is unavailing in
moment when the risk of collision begins or case of a maritime tort resulting in collision.
becomes apparent and the moment when it It is not a civil tort governed by the Civil
becomes a practical certainty; Code but a maritime one governed by Arts.
826-839 of the Code of Commerce. [Manila
c. Third Division– covers the time between the Steamship v. Abdulhaman, G.R. No. L-9534,
moment of actual contact. [Aquino] September 29, 1956]
Note: If a vessel, having a right of way, suddenly changes ▪ Doctrine of Last Clear Chance and Rule on
its course during the third zone, in an effort to avoid an Contributory Negligence cannot be applied
imminent collision due to the fault of another vessel, such in collision cases because of Art.827 of the
act may be said to be done in extremis, and even if wrong, Code of Commerce. [Notes and Cases on the
the sailing vessel is not responsible for the result. (Id.) Law on Transportation and Public Utilities,
Aquino, T. & Hernando, R.P. 2004 ed.]
Cases Covered by Collision and Allision
3. Arrival under Stress
a. One vessel at fault
▪ The arrival of a vessel at the nearest and most
▪ Vessel at fault is liable for damage caused to convenient port instead of the port of destination, if
innocent vessel as well as damages suffered during the voyage the vessel cannot continue the trip
by the owners of cargo of both vessels. [Art. to the port of destination.
826, Code of Commerce]
4. Shipwreck
b. Both vessels at fault
▪ It is the loss of the vessel at sea as a consequence of
▪ Each vessel must bear its own loss, but the its grounding, or running against an object in sea or
shippers of both vessels may go against the on the coast. It occurs when the vessel sustains
shipowners who will be solidarily liable. injuries due to a marine peril rendering her
[Art. 827, Code of Commerce] incapable of navigation.
c. Vessel at fault not known ▪ If the wreck was due to malice, negligence or lack of
skill of the captain, the owner of the vessel may
▪ Each vessel must bear its own loss, but the demand indemnity from said captain. [Art. 841, Code
shippers of both vessels may go against the of Commerce]
shipowners who will be solidarily liable.
[Art. 828, Code of Commerce] ▪ The rules on collision or allision, as may be pertinent,
can equally apply to shipwrecks.
▪ Doctrine of Inscrutable Fault – In case of
collision where it cannot be determined CARRIAGE OF GOODS BY SEA ACT
which between the two vessels was at fault, (COGSA – PUBLIC ACT NO. 521)
both vessels bear their respective damage,
but both should be solidarily liable for 1. Application
damage to the cargo of both vessels.
a. International/overseas/foreign (from foreign port
d. Third vessel at fault to Philippine port);
▪ The third vessel will be liable for losses and b. Water/Maritime transportation; and

obligations [Ang v. American Steamship Agencies,

c. Carriage of goods. G.R. No. L-25047, March 18, 1967]
Rules on the application: ▪ The one-year prescriptive period is suspended by:
a. If the common carrier is coming to the Philippines: a. The express agreement of the parties
[Universal Shipping Lines, Inc. v. IAC, G.R. No.
1. First: Civil Code; 74125, July 31, 1990];
2. Second: COGSA (in foreign trade); b. The filing of an action in court until it is
dismissed. [F. H. Stevens & Co. v. Nordeutscher
3. Third: Code of Commerce; Lloyd, G.R. No. L-17730, September 29, 1962]
b. If the private carrier is coming to the Philippines: 4. Limitation of Liability
1. First: COGSA; ▪ $500 per package or customary freight unit unless

the nature and value of such good is declared by the
2. Second: Code of Commerce; shipper.
3. Third: Civil Code (excluding rules on common ▪ Bigger amount declared by shipper when such
carriers); amount is the real value of goods.
c. If the private or common carrier is from the WARSAW CONVENTION

Philippines to a foreign country, the law of the
foreign country applies [Art. 1753, Civil Code] DEFINITION
UNLESS the parties make COGSA applicable.
The Warsaw Convention is an international convention which
Note: Under Art. 1766, in all matters not regulated by the Civil regulates liability for air carriers that cross international
Code, the rights and obligations of common carriers shall be boundaries.
governed by the Code of Commerce and special laws. Thus,
although a special law, COGSA only applies when the Civil Differences between Warsaw Convention and Carriage of
Code has no provision dealing with the matter. [UP Reviewer] Goods by Sea Act:
2. Notice of Loss or Damage COGSA WARSAW

Applies to goods only Applies to goods and
▪ Notice of claim and the general nature of the loss or passengers
damage must be given in writing to the carrier or Applies to carriage of Applies to carriage by air
his agent at the port of discharge before or at the goods by sea or water
time of the removal of the goods [Section 3(6), Applies to domestic Applies to international
COGSA].
carriage (when the carriage only
destination is the
a. Patent Damage: shipper should file a claim with the
Philippines)
carrier immediately upon delivery
Domestic Law International Law
b. Latent Damage: shipper should file claim with the
Prescriptive period of 1 Prescriptive period of 2
carrier within three days from delivery
year to file suit years to file suit
Note: Filing of notice of claim is not a condition precedent.
APPLICABILITY
3. Period of Prescription
Warsaw Convention applies to:
▪ Action for loss or damage to the cargo should be
a. All international carriage of persons, baggage, or
brought within one year after:
cargo performed by aircraft for reward; and
a. Date of delivery of goods when there is
▪ International Carriage - any carriage in
delivery; or
which, according to the agreement between
the parties, the place of departure and the
b. Date when the goods should have been
place of destination, whether or not there be a
delivered when the goods were NOT
break in the carriage or a transhipment, are
delivered at all.
situated either within the territories of 2 High
Contracting Parties or within the territory of a
Note: The cases of misdelivery or conversion are
single High Contracting Party if there is an
not covered. Instead, what will apply are the rules
agreed stopping place within the territory of
under the Civil Code. Prescriptive period is 10
another State, even if that State is not a High
years for contracts or 4 years for tortious
Contracting Party.

b. that it was impossible for them to take

b. Gratuitous carriage by aircraft performed by an air such measures. [Art. 20, Warsaw
transport undertaking. Convention]
When Inapplicable: LIMITATION OF LIABILITY
a. When public policy is contradicted; and GENERAL RULE: Any provision tending to relieve the carrier
of liability or to fix a lower limit than that laid down in the
b. If requirements under convention has not been Warsaw Convention shall be null and void. [Art. 23 (1),
complied with. Warsaw Convention]
LIABILITY OF THE CARRIER Note: The nullity of any such provision does not involve the
nullity of the whole contract.
The carrier is liable for damage sustained:
EXCEPTION: The rule does not apply to provisions
a. In the event of the death or wounding of a governing loss or damage resulting from inherent defect,
passenger or any other bodily injury suffered by a quality or vice of the cargo carried. [Art. 23 (2), Warsaw
passenger if the accident took place: Convention]
1. On board the aircraft; or 1. Liability to Passengers
2. In the course of any of the operations of ▪ GENERAL RULE: The liability of the carrier for
embarking or disembarking. [Art. 17, Warsaw each passenger is limited to the sum of 250,000
Convention] francs (16, 600 Special Drawing Rights)
b. In the event of the destruction or loss of, or damage ▪ EXCEPTION: By special contract, the carrier and
to, any registered baggage or cargo, if the the passenger may agree to a higher limit of
occurrence took place: liability.
1. During the carriage by air [Art. 18, Warsaw 2. Liability for Checked Baggage
Convention];
▪ GENERAL RULE: In the carriage of registered
2. By reason of delay [Art. 19, Warsaw baggage, the liability of the carrier is limited to a
Convention] sum of 250 francs (17 Special Drawing Rights) per
kilogram.
Note: Carrier is not liable if he proves that the
destruction, loss of, or damage to, the cargo ▪ EXCEPTION: When the passenger or consigner has
resulted solely from one or more of the following: made, at the time when the package was handed
over to the carrier, a special declaration of interest
a. Inherent defect, quality or vice of that in delivery at destination and has paid a
cargo; supplementary sum. In that case the carrier will be
liable to pay a sum not exceeding the declared sum.
b. Defective packing of that cargo
performed by a person other than the ▪ EXCEPTION TO EXCEPTION: When he proves
carrier or his servants or agents; that the sum is greater than the passenger’s or
consignor’s actual interest in delivery at
c. An act of war or an armed conflict; destination.
d. An act of public authority carried out in 3. Liability for Handcarried Baggage

connection with the entry, exit or transit
of the cargo. [Art. 18 (3), Warsaw ▪ Absolute rule: As regards objects which the
Convention] passenger takes charge himself, the liability of the
carrier is limited to 5,000 francs (332 Special
c. Occasioned by delay in the transportation by air of Drawing Rights) per passenger.
passengers, baggage, or cargo. [Art. 19, Warsaw
Convention] WILLFUL MISCONDUCT
▪ The carrier shall not be liable if he proves: ▪ For willful misconduct to exist, there must be a showing
that the acts complained of were impelled by an
a. that he and his servants and agents have intention to violate the law, or were in persistent
taken all necessary measures to avoid the disregard of one’s rights. It must be evidenced by a
damage; or flagrantly or shamefully wrong or improper conduct.
[Luna v. Court of Appeals, G.R. Nos. 100374-75, November
27, 1992]

▪ A common carrier may not avail of the limitation of

liability in the following cases:
a. Willful misconduct;
b. Default amounting to wilful misconduct [Art. 25,

Warsaw Convention];
c. Accepting passengers without ticket [Art. 3 (2),

Warsaw Convention]; and
d. Accepting goods without airway bill or baggage

without baggage check.
WHEN COMPLAINT MUST BE MADE
1. In the case of damage: the person entitled to delivery

must complain to the carrier after the discovery of the
damage within:
a. Baggage: 7 days from the date of receipt;
b. Cargo: 14 days from the date of receipt.
2. In the case of delay: complaint must be made at the latest

within 21 days from the date on which the baggage or
cargo have been placed at his disposal. [Art. 26 (2),
Warsaw Convention]
GENERAL RULE: If there is failure to raise complaint within

the times stated, no action shall lie against the carrier.
EXCEPTION: In case of fraud.
PRESCRIPTIVE PERIOD
The right to damages shall be extinguished if action is not

brought within 2 years:
a. from date of arrival at the destination; or
b. from date on which the aircraft ought to have

arrived; or
c. from the date on which the carriage stopped. [Art.

29, Warsaw Convention]
JURISDICTION
An action for damages must be brought, at the option of the

plaintiff, in the territory of one of the High Contracting
Parties, either before the court where:
a. the carrier is ordinarily resident;
b. the carrier has his principal place of business;
c. the carrier has an establishment by which the

contract has been made; or
d. at the place of destination. [Art. 28, Warsaw

Convention]

Mercantile Law Corporation Law
CORPORATION
DEFINITION
A corporation is an artificial being created by operation of

law, having the right of succession and the powers, attributes,
and properties expressly authorized by law or incident to its
existence. [Sec. 2, Corporation Code]
ATTRIBUTES OF A CORPORATION
From the statutory definition of a corporation, the following

basic attributes are ascribed to the corporate entity:
a. Artificial Being – A corporation is an artificial

being created by operation of law, and upon
coming into existence, is invested by law with a
personality separate and distinct from those
persons comprising it as well as from any other
legal entity to which it may be related. [Corporation
THE
Code, Sec. 2]
b. Creature of Law – The juridical existence of a
CORPORATION
corporation is dependent on the consent or grant of
the State. From a strict legal point of view, and
under the theory of concession, a corporation
CODE
cannot come into being by mere consent of the
parties; there must be a law granting it, and once
granted, forms the primary franchise of the
corporation.
c. Right of Succession – A corporation has the

capacity for continuous existence despite the death
or replacement of its shareholders or members, for
it has a personality separate and distinct from those
who compose it.
d. Creature of Enumerated Powers, Attributes, and

Properties/Creature of Limited Powers – A
corporation has no power except those expressly
conferred on it by the Corporation Code and those
that are implied by or are incidental to its existence.
[Villanueva, 19-22]
DIFFERENTIATED FROM OTHER TYPES OF BUSINESS

ORGANIZATIONS
Sole Proprietorship - A business medium where the sole

proprietor exercises both the prerogatives of control and
management and the main beneficiary of the income and
fruits of operation that flow from “full ownership of the
business enterprise remains personally liable for all debts and
liabilities of the enterprise with all his assets and properties,
whether they be intended for business or those for personal
consumption or enjoyment. [Villanueva, 28]
Sole
Corporation
Proprietorship
As to the
attribute of
No separate Has separate juridical
having a
juridical entity entity
separate
personality

Unlimited Limited liability (by to demand for the corporate books

As to the
liability (by the the accounting or [Sec. 63 Corporation
degree of
owner/sole investors/shareholders distribution of Code].
liability
proprietor) or members) profits
As to who May be dissolved May only be
As to
exercises anytime by the dissolved with the
Sole dissolution
control of Board of Directors partners consent of the state
proprietor/owner
the
business
Does a Defective Attempt to Form a Corporation Result in
Partnerships a Partnership?
[Villanueva, 29-30]
A partnership relation between certain stockholders and
other stockholders, who were also directors, will not be
Partnerships Corporation implied in the absence of an agreement, so as to make the
By operation of law former liable to contribute for payment of debts illegally
By the agreement
As to the and there must be contracted by the latter. [Pioneer Insurance v. CA, G.R. No.
of at least 2
creation at least 5 84197, July 28, 1989]
persons
incorporators
Has separate Under the law on estoppel including that under Sec. 21, those
personality acting on behalf of an ostensible corporation and those
As to the Has separate
distinct from the benefited by it, knowing it to be without valid existence, are
attribute of juridical entity from
partners from the held liable as general partners. [Lim Tong Lim v. Philippine
having a the date of issuance
moment of Fishing Gear Industries Inc., G.R. No. 136448, November 3, 1999]
separate of the certificate of
execution of the
personality incorporation
contract of Business Trusts – As compared to a corporation, a business
partnership trust is created under the terms of a deed of trust which is
May exercise any May only exercise easier and less expensive to constitute for it is not bounded
power authorized powers expressly by any legal requirements like the former. It does not have a
As to its
by the partners; granted to it by law separate juridical personality, and is mainly governed by
powers
Provided, it is not or those implied contractual doctrines and the common law principles on
contrary to law from its existence trust. [Villanueva, 34]
Exists for any
As to term Exists only for 50
period of time Joint Ventures – Under Philippine Law, a joint venture is a
of years; extendible
stipulated by the form of partnership and is governed by the Law on
existence for another 50 years
partners Partnerships. Therefore, the same distinctions between
As to the Automatic Continues despite partnership and corporation would apply. [Aubach v. Sanitary
effect of dissolution when the death, Wares Mfg. Corp., G.R. No. 75875, December 15, 1989]
death, a partner dies, incapacity,
incapacity, withdraws, withdrawal or Cooperatives – A cooperative is an autonomous and duly
withdrawal becomes insolvency of a registered association of persons, with a common bond of
or incapacitated or stockholder or interest, who have voluntarily joined together to achieve their
insolvency insolvent member social, economic and cultural needs and aspirations by
Personal liability making equitable contributions to the capital required,
for debts not only patronizing their products and services and by accepting a
As to the Limited liability; fair share of the risks and benefits of the undertaking in
to what they have
degree of not liable beyond accordance with universally accepted cooperative principles.
invested but even
liability investment [Phil. Cooperative Code, Art. 3]
as to other
properties
A partner can Cooperative Corporation
bind the As to the
partnership by his attribute of
As to who Only the Board of Separate juridical Separate
sole act for every having a
can bind Directors or its entity juridical entity
partner is separate
the agents can bind the personality
generally an agent
business corporation As to the
of the partnership
degree of Limited liability Limited liability
[Art. 1803 (1)
liability
NCC]
Governed by
Buyer or Buyer or transferee Governed by the
As to the principles of
transferee does of shares assume As to what provisions of the
right of the democratic control
not assume the role of the governs the Corporation
buyer or where the members
transferor’s stockholder of said business Code, Securities
transferee in primary
position as shares when the enterprise Regulation
of business cooperatives have
partner but transfer has been Code, articles of
interest equal voting rights
merely has a right duly registered in

on a one-member- incorporation is personally liable for the financial obligations of the

one-vote principle and by-laws corporation to the extent of his unpaid subscription.” [Halley
[Art. 4 (2) Rep. Act v. Printwell, G.R. No. 157549, May 30, 2011]
No. 6938]
As to the
government 4. Free Transferability of Units of Investment
Cooperative Securities and
body which
Development Exchange
exercises In a corporate setting, as a general rule, the shares of stocks
Authority Commission
supervision can be transferred without the consent of the other
and control stockholders.
Stock
corporations – 5. Advantages of Unregistered Associations
Self-help; to help profit
As to the
improve the quality Non-Stock A corporation established in accordance with the Corporation
primary
of life of its corporations – Code enjoys perpetual succession under its corporate name
objective
members any and in an artificial form; has capacity to take and grant
eleemosynary property, and contract obligations; can sue and be sued in its
purpose corporate name as a juridical person; has the capacity to
[Villanueva, 35-36] receive and enjoy common grants of privileges and
immunities; and its stockholders or members have generally
ADVANTAGES OF CORPORATE ENTITY no personal liability beyond the value of their shares [SEC
Opinion, June 26, 1989].
1. Strong Juridical Personality
Note: These advantages are subject to the application of the
As distinguished from a partnership, it has a strong legal corporation by estoppel doctrine. [Villanueva, 22-25]
personality from the members composing it, unaffected by
the death, incapacity, withdrawal, or insolvency of any of its DISADVANTAGES OF A CORPORATE ENTITY
stockholders or members. In addition, a corporation’s
creation, management and dissolution are standardized as 1. Complicated and Costly Formation and Maintenance
they are governed by a general incorporation law, and
therefore, the commercial practice and jurisprudential law The corporation entails a relatively high cost of formation,
governing corporations tend to be more established and operation and maintenance. There is greater degree of
reliable when compared to other media of doing business. governmental control and supervision than in other forms of
business organizations. E.g. Banking and insurance
2. Centralized Management institutions are subjected to more reportorial and record-
keeping obligations under the Anti-Money Laundering Act.
A corporation’s management is centralized in the Board of
Directors, to whom are also granted all corporate powers 2. Lack of Personal Element and Abuse of Corporate
under Section 23 of the Corporation Code. By imposition of Management
law, and except in particularly designated instances,
stockholders are bound by the management decisions and There is ordinarily lack of personal element in view of the
transactions of the Board of Directors of the corporation. transferability of shares, and the vesting of management
powers in the Board of Directors who may be professional
The exercise of corporate powers rest in the Board of managers. This has spawned corporate irresponsibility under
Directors, save in those instances where the Corporation Code the theory that those vested with corporate powers have no
requires stockholders’ approval for certain specific acts. [Great personal or proprietary stake in the corporate business
Asian Sales Center Corp. v. CA, G.R. No. 105774, April 25, 2002] enterprise.
3. Limited Liability to Investors 3. Limited Liability Hits Innocent Victims
The liability of investors in a corporation is limited to their The limited liability feature of the corporation has often been
shares as distinguished from partnerships where even if abused in order to avoid having to provide adequate
assets of the partnership are already exhausted, creditors can protection and compensation for victims of the business
still go after the individual properties of the partners. ventures they undertake. This abuse has been countered by
the development in jurisprudence of the doctrine of piercing
One of the advantages of the corporation is the limitation of the veil of corporate fiction.
an investor’s liability to the amount of investment, which
flows from the legal theory that a corporate entity is separate 4. Double Taxation
and distinct from its stockholders. [San Juan Structural and
Steel Fabricators Inc. v. CA, G.R. No. 129459, September 29, 1998] While many of the previous tax laws that tended to make
corporate vehicles have been abolished, the Tax Reform Act
Where the creditor of the corporation sues not only the of 1997 imposed the following burdens on the means of doing
company but also all stockholders to reach their unpaid business through the medium of the corporation:
subscription which appear to be the only visible assets of the
company, then the controlling doctrine is that “a stockholder a. Re-imposition of final tax on cash and property

dividends received by individuals from domestic registration and licensing applications;

corporations;
d. Regulate, investigate or supervise the activities of
b. Imposition of minimum corporate income tax persons to ensure compliance;
(MCIT) at 2% of the gross income; and
e. Supervise, monitor, suspend or take over the
c. Improperly accumulated earnings tax (IAET) at the activities of exchanges, clearing agencies and other
rate of 10% of the defined improperly accumulated SROs;
taxable income. [Villanueva, 26-28]
f. Impose sanctions for the violation of laws and
THEORIES IN THE FORMATION OF CORPORATIONS rules, regulations and orders, and issued pursuant
thereto;
1. Theory of Concession – A corporation is a creature of
the state. It comes into existence and acquires juridical g. Prepare, approve, amend or repeal rules,
personality only upon the issuance of a certificate of regulations and orders, and issue opinions and
incorporation. provide guidance on and supervise compliance
with such rules, regulation and orders;
2. Theory of Enterprise Equity – A corporation is but an
association of individuals, allowed to transact under an h. Enlist the aid and support of and/or deputized any
assumed corporate name, and with a distinct legal and all enforcement agencies of the Government,
personality. In organizing itself as a collective body, it civil or military as well as any private institution,
waives no constitutional immunities and perquisites corporation, firm, association or person in the
appropriate to such a body. [PSE v. Court of Appeals, G.R. implementation of its powers and function under
No. 125469, October 27, 1997] its Code;
REGULATION OF CORPORATIONS i. Issue cease and desist orders to prevent fraud or

injury to the investing public;
Securities and Exchange Commission (SEC) – This Code
shall be administered by the Security and Exchange j. Punish for the contempt of the Commission, both
Commission (hereinafter referred to as the "Commission") as direct and indirect, in accordance with the pertinent
a Collegial body, composed of a chairperson and (4) provisions of and penalties prescribed by the Rules
Commissioners, appointed by the President for a term of (7) of Court;
seven years each and who shall serves as such until their
successor shall have been appointed and qualified. A k. Compel the officers of any registered corporation or
Commissioner appointed to fill a vacancy occurring prior to association to call meetings of stockholders or
the expiration of the term for which his/her predecessor was members thereof under its supervision;
appointed, shall serve only for the unexpired portion of their
terms under Presidential Decree No. 902-A. Unless the l. Issue subpoena duces tecum and summon witnesses
context indicates otherwise, the term "Commissioner" to appear in any proceedings of the Commission
includes the Chairperson. [Sec. 4, Securities Regulation Code] and in appropriate cases, order the examination,
search and seizure of all documents, papers, files
Jurisdiction over Corporations – The SEC shall have absolute and records, tax returns and books of accounts of
jurisdiction, supervision and control over all corporations, any entity or person under investigation as may be
partnerships or associations, who are the grantees of primary necessary for the proper disposition of the cases
franchise and/or a license or permit issued by the before it, subject to the provisions of existing laws;
government to operate in the Philippines; and in the exercise
of its authority, it shall have the power to enlist the aid and m. Suspend, or revoke, after proper notice and hearing
support of any and all enforcement agencies of the the franchise or certificate of registration of
government, civil or military. [Sec. 3, P.D. No. 902-A] corporations, partnership or associations, upon any
of the grounds provided by law; and
Powers and Functions of the SEC
n. Exercise such other powers as may be provided by
a. Have jurisdiction and supervision over all law as well as those which may be implied from, or
corporations, partnership or associations who are which are necessary or incidental to the carrying
the grantees of primary franchises and/or a license out of, the express powers granted the Commission
or a permit issued by the Government; to achieve the objectives and purposes of these
laws. [Sec. 5, Securities Regulation Code]
b. Formulate policies and recommendations on issues
concerning the securities market, advise Congress The Supervisory Power of the SEC
and other government agencies on all aspect of the
securities market and propose legislation and The word “supervision” under Sec. 5(a) of the Securities
amendments thereto; Regulation Code is interpreted to mean as follows:
c. Approve, reject, suspend, revoke or require 1. The business operations of corporations which are
amendments to registration statements, and grantees of secondary licenses or franchises by this

Commission, such as but not limited to financing complaints regarding their operations shall be
companies, investment companies, investment directed to their primary regulator.
houses, pre-need companies, brokers/dealers and
exchanges, shall be under the direct supervision of 4. Notwithstanding the foregoing, the Commission,
the Commission, i.e.: as provided in Section 5 of the SRC and the effective
provisions of PD 902-A, shall have the power to any
a. submission of reports required in different and all acts to carry out the effective
laws governing the type of activity engaged in implementation of the laws it is mandated to
by corporations; and enforce, i.e.: constitute a Management Committee;
appoint receivers; issue Cease and Desist Orders to
b. compliance with the provisions of the prevent fraud or injury to the public; and such other
Corporation Code including those provisions measures necessary to carry out its role as a
requiring the submission of documents to regulator [SEC Memo Circular No. 11, August 2003].
effect compliance.
Jurisdiction over Intra-Corporate Controversies
Additionally, the Commission exercises regulatory
authority over said companies. For corporations with The RTC has jurisdiction over the following civil cases:
registered/listed issues, compliance with registration
requirements and the conditions imposed by the a. Devices or schemes employed by the board of
Commission for their registration shall likewise be directors, business associates, officers or partners,
under its direct supervision. amount to fraud or misrepresentation which may
be detrimental to the interest of the public and/or
2. For all other business operations of companies with of the stockholders, partners, or members of any
certificates of registration with the SEC as corporation, partnership or association;
corporations but not requiring a secondary license
from the SEC, the extent of its supervision and b. Controversies arising out of intra-corporate,
monitoring shall be limited to their compliance partnership, or association relations, between and
with the Corporation Code, i.e.: among stockholders, members or associates; and
between, any or all of them and the corporation,
a. submission of financial statements; partnership, or association of which they are
stockholders, members, or associates, respectively;
b. submission of General Information Sheets
(GIS); c. Controversies in the election or appointment of
directors, trustees, officers, or managers of
c. compliance with provisions in their by-laws corporations, partnerships, or associations;
on:
d. Derivative suits; and
1. number of directors
e. Inspection of corporate books; [A.M. No. 01-2-04-
2. qualifications, compensation of directors SC, March 13, 2001]
3. holding of meetings, etc. CLASSES OF CORPORATION

d. declaration of dividends; IN RELATION TO THE STATE
e. inspection of books; and 1. Public Corporation
f. other provisions of the Code requiring ▪ Those formed or organized for the government or
submission of documents to effect a portion of the State [Act No. 1459, Sec. 3]
compliance.
▪ Public corporations are those created for political
3. The business operations of corporations which are purposes or created with the public good in the
grantees of secondary licenses or franchises of other administration of the civil government. Public
government agencies such as but not limited to corporations therefore are essentially municipal
banking and quasi-banking institutions, building corporations, or those formed and organized by the
and loan associations, trust companies and other State for government, such as the barangay,
financial intermediaries, insurance companies, municipality, city and province.
public utilities, educational institutions, and other
corporations governed by special laws, shall not be ▪ A municipal corporation possesses a two-fold
under the direct supervision of the SEC, but under character; (a) public or governmental character, in
the direct supervision of the concerned government which it acts as agent of the state and exercises, by
agency granting such secondary license or delegation a part of the sovereignty of the state; (b)
franchise. The extent of the Commission’s a private, corporate or proprietary character, in
supervisory powers over such corporations hall be which it acts as a private or business corporation,
limited to those mentioned in Item No. 2 hereof. All

and stands for the community in the administration citizens and corporations to do business in its own
of its local affairs wholly beyond the sphere of country or State. It shall have the right to transact
public purposes for which its governmental powers business in the Philippines after it shall have
are conferred. [Villanueva, 71] obtained a license to transact business in the
country in accordance with this Code and a
2. Private Corporation certificate of authority from the appropriate
government agency. [Sec. 123, Corporation Code]
▪ Those formed for some private purpose, benefit,
aim or end. [Act No. 1459, Sec. 3] ▪ The objectives of the statutory provisions
prescribing conditions under which foreign
▪ Private corporations are divided into stock corporations are permitted to do business in a state
corporations and non-stock corporations. other than that of their creation:
Corporations which have a capital stock divided
into shares and are authorized to distribute to the a. To place them on an equality with domestic
holders of such shares dividends or allotments of corporations;
the surplus profit on the basis of the shares held are
stock corporations. All other private corporations b. To subject them to inspection so that their
are non-stock corporations. condition may be known; and
▪ Private corporations may be classified according to c. To protect the residents of the state doing
their purposes: business with them by subjecting them to the
courts of the state. [Villanueva, 77]
1. The Business corporation, or the profit-
seeking corporations; AS TO LEGAL STATUS
2. Religious corporations; and 1. De Jure Corporation
3. Eleemosynary corporations or those ▪ A corporation has de jure existence if there is a full

organized for charitable, scientific or or substantial compliance with the requirements of
vocational corporations. [Villanueva, 72] an existing law permitting organization of such
corporation as by proper articles of incorporation
3. Government-Owned or Controlled Corporations duly executed and filed. Generally, its juridical
personality is not subject to attack on the courts
▪ These are agencies organized as stock or non-stock from any source. [Villanueva, 78]
corporations, vested with functions relating to
public needs whether governmental or proprietary 2. Corporation De Facto
in nature, and owned by the government directly
or through instrumentalities either wholly or to the ▪ A corporation has a de facto existence where there
extent of at least a majority of its outstanding is a bona fide attempt to incorporate, colorable
capital stock. [GOCC Governance Act of 2011, Sec. compliance with the statute and user of corporate
3(o)] powers.
4. Quasi-Public Corporations ▪ Its juridical personality, due incorporation and

right to exercise corporate powers cannot be
▪ These are private corporations that render public questioned collaterally in any private suit. The
service, supply public wants, or pursue other inquiry may be made by the Solicitor General in a
eleemosynary objectives. While purposely quo warranto proceeding. [Sec. 20, Corporation
organized for the gain or benefit of its members, Code]
they are required by law to discharge functions for
the public benefit. [Philippine Society for the ▪ Requisites for Application of the De Facto
Prevention of Cruelty to Animals v. COA, G.R. No. Doctrine:
169752, September 25, 2007]
a. The existence of a valid law under which the
AS TO THE PLACE OF INCORPORATION corporation may be incorporated;
1. Domestic Corporations b. Attempt in good faith to incorporate, or

existence of a “colorable compliance” with
▪ One incorporated under the laws of the Philippines provisions on incorporation; and
[Villanueva, 76]
c. Assumption by the enterprise of corporate
2. Foreign Corporations powers. [Villanueva, 152]
▪ A foreign corporation is one formed, organized or

existing under any of its laws other than those of
the Philippines and whose laws allow Filipino

▪ Examples of Defects Which Do Not Preclude the

Creation of a De Facto Corporation ▪ Corporations, which have a capital stock divided
into shares and are authorized to distribute to the
1. Defects in the incorporation papers – e.g. holders’ dividends. [Villanueva, 79]
incorrect or incomplete entries in the articles;
2. Non-Stock Corporations
2. Corporate name that resembles that of a pre-
existing corporation; ▪ One where no part of its income is distributable as
dividends to its members, trustees or officers,
3. Ineligibility of incorporators – the subject to the provisions on dissolution: Provided,
incorporators or a certain number of them are That any profit which a non-stock corporation may
not residents; obtain as an incident to its operations shall,
whenever necessary or proper be used for the
4. Defects in the execution of incorporation furtherance of the purpose or purposes for which
papers, the acknowledgement in the articles of the corporation was organized [Sec. 87]
incorporation, or certificate of incorporation is
insufficient or defective in form, or it was AS TO MANAGEMENT AND CONTROL
acknowledged before the wrong office.
[Villanueva, 155] 1. Holding Company
3. Corporation by Estoppel ▪ One that “controls another as a subsidiary or

affiliate by the power to elect its management…a
▪ All persons who assume to act as a corporation holding company is one which holds stocks in other
knowing it to be without authority to do so shall be companies for purposes of control rather than for
liable as general partners for all debts, liabilities mere investment.” [SEC Opinion, 30 September 1986]
and damages incurred or arising thereof. [Sec. 21,
Corporation Code] 2. Affiliate Company
▪ When Estopped ▪ A company which is subject to common control of

a mother or holding company and operated as part
a. When such ostensible corporation is sued on of a system [Ibid.]
any transaction entered by it as a corporation
or on any tort committed by it as such; ▪ Under the Financial Rehabilitation and Insolvency
[Corporation Code, Sec. 21] Act of 2010, an “affiliate” is “a corporation that
directly or indirectly, through one or more
b. When the corporation continues its business intermediaries, is controlled by, or is under the
after the expiration of the corporate term for common control of another corporation. [Sec. 4(b),
the purpose of being sued on its contracts; [De FRIA]
Leon, 203]
3. Parent and Subsidiary Companies
c. A third party who, knowing an association to
be unincorporated, nonetheless treated it as a ▪ When a corporation has a controlling financial
corporation and received benefits from it, may interest in one or more corporations, the one having
be likewise be barred. [Lim v. Philippine Fishing control is known as the “parent company” and the
Gear Industries, G.R. No. 136448, November 3, others are known as the “subsidiary companies.” A
1999] “subsidiary” of a specified person is an affiliate
controlled by such person, directly or indirectly,
▪ EXCEPTIONS: through one or more intermediaries [Sec. 4(b),
FRIA].
a. The said person is not trying to escape liability
from the contract but rather is the one
NATIONALITY OF CORPORATIONS
claiming from the contract. [International
Express Travel & Tour Services Inc. v. CA, G.R.
No. 119002, October 19, 2000] PLACE OF INCORPORATION TEST
▪ A corporation is considered a national of the country

b. The conflict does not involve third parties and
under whose laws it has been organized and registered.
it is only among those assuming the form of a
[Villanueva, 55]
corporation. [Lozano v. De Los Santos, G.R. No.
125221, June 19, 1997]
▪ This is the primary test in determining nationality
AS TO THE SHARES OF STOCKS because the Philippines adheres to the doctrine that a
corporation is a creature of the State. [SEC-OGC Opinion
1. Stock Corporations No. 11-42, 2011]

Nationality under RA 7042, the Foreign Investments Act of Required Percentage of Filipino Ownership is Applicable
1991 to Both:
▪ Engaging in nationalized activities and exploiting a. The total number of outstanding shares of stock
natural resources depend on the nationality per se
entitled to vote in the election of directors; and
of the corporation as incorporated and on the
citizenship of the stockholders.
b. The total number of outstanding shares of stock,
whether or not entitled to vote in the said election.
▪ Sec. 2, Article XII of the 1987 Constitution limits the [SEC Memorandum Circular No. 8, May 22, 2013]
exploration, development and utilization of natural
resources to Filipino citizens or corporations at Other Requirements
least 60% of whose capital is owned by such
citizens. The 60% requirement ensures that
corporations allowed to exploit natural resources a. Beneficial Ownership – Filipinos are the principal
are controlled by Filipinos. beneficiaries in the exploitation of natural
resources;
▪ Capital, under the constitutional proscription,
refers to shares of stock which are entitled to vote b. Situs of Control. [DOJ Opinion No. 130, October 7,
in the election of directors or that of controlling 1985]
interest. In the absence of provisions in the Articles,
preferred shares are presumed to have the same CONTROL TEST
voting rights as common shares. [Gamboa v. Tevez,
G.R. No. 176579, June 28, 2011] ▪ The nationality of a corporation is determined by the
nationality of its stockholders. Shares belonging to
A Corporation is Considered a Philippine National When: corporations where at least 60% of the capital is Filipino-
owned shall be considered of Philippine nationality.
a. It is organized under the laws of the Philippines There is no need to further trace the nationality of the
and at least 60% of the capital stock outstanding 60% stockholdings since it is already deemed Filipino.
and entitled to vote is owned and held by [DOJ Opinion No. 20, May 5, 2005]
Philippine citizens;
▪ The control test is the prevailing mode of determining
b. It is organized abroad and registered as doing the nationality of a corporation for purposes of
business in the Philippines under the Corporation nationalized activities. [Narra Nickel Mining and
Code. 100% of its capital stock outstanding and Development Corp. v. Redmont Consolidated Mines Corp.,
entitled to vote is wholly owned by the following: G.R. No. 195580, January 28, 2015]
1. Filipinos; GRANDFATHER RULE
▪ The combined totals in the investing corporation and the

2. Trustee of funds for retirement or
investee corporation must be traced or grandfathered to
separation benefits;
determine the total percentage of Filipino ownership.
[SEC-OGC Opinion No. 07-22, December 7, 2007]
3. Trustee must be a Philippine national;
▪ If the percentage of Filipino ownership in the
4. At least 60% of the fund must be for the
corporation is less than 60%, only the number of shares
benefit of Philippine nationals; [Sec. 3,
R.A. No. 7042] corresponding to such percentage shall be counted as
Philippine nationality. [1967 SEC Rules]
Double 60% Rule
▪ The Control Test must first be complied with before the
Where a corporation and its non-Filipino stockholders own Grandfather Rule is applied. If the Filipino equity of the
stocks in a SEC-registered enterprise, the following must second layer corporation (or the corporation that owns
concur for the latter enterprise to be considered a Philippine shares in another) falls below 60%, it is immediately
national: considered foreign-owned and there is no need to apply
the Grandfather Rule. Otherwise, when there is doubt
a. At least 60% of capital stock outstanding and (i.e. foreign investors practically manage the said
entitled to vote of both corporations must be owned company and provide all the financial and technological
and held by Filipino citizens; support), the Grandfather Rule may then be applied.
[Narra Nickel Mining and Development Corp. v. Redmont
Consolidated Mines Corp., G.R. No. 195580, January 28,
b. At least 60% of the Board of Directors of BOTH
2015]
corporations must be Filipino citizens. [Sec. 3, R.A.
No. 7042]
Note: The Control Test and Grandfather Rule apply when the
subject Philippine corporation is owned by another
Philippine corporation that has foreign stockholders.

Nationality of Non-Stock Corporations the offense shall be charged and penalized for the crime,
precisely because of the nature of the crime and the penalty
[SEC Memorandum Circular no. 10 (2016)] therefor. A corporation cannot be arrested and imprisoned;
hence, cannot be penalized for a crime punishable by
A SEC-registered non-stock corporation is considered a imprisonment. However, a corporation may be charged and
Philippine national if: prosecuted for a crime if the imposable penalty is fine. Even
if the statute prescribes both fine and imprisonment as
a. All of its members are Philippine citizens; or penalty, a corporation may be prosecuted and, if found guilty,
may be fined. [Ching v. Secretary of Justice, G.R. No. 164317,
b. 60% of its members entitled to vote are Philippine February 6, 2006]
citizens; or
RECOVERY OF MORAL DAMAGES
c. At least 60% of its member’s total numbers of votes
as broadened in the By-laws are held by Philippine Moral damages cannot be awarded in favor of a corporation
citizens; or because, being an artificial person and having existence only
in legal contemplation, it has no feelings, no emotions, no
d. All members of a foreign non-stock corporation senses. It cannot, therefore, experience physical suffering and
licensed to do business by the SEC are Philippine mental anguish, which can be experienced only by one having
citizens. a nervous system.
CORPORATE JUDICIAL PERSONALITY Note: The findings in People v. Manero and Mambulao Lumber
Co. v. Philippine National Bank, G.R. No. L-22973, January 30,
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY 1968 that a corporation may recover moral damages if it has a
good reputation that is debased, resulting in social
A corporation is a juridical entity with legal personality humiliation is an obiter dictum. [ABS-CBN Broadcasting Corp.
separate and distinct from those acting for and in its behalf vs. CA, 301SCRA 589, G.R. No. 128690. January 21, 1999]
and, in general, from the people comprising it; and that
obligations incurred by the corporation, acting through its DOCTRINE OF PIERCING THE CORPORATE VEIL
directors, officers and employees are its sole liabilities. [Santos
v. NLRC, G.R. No. 101699, March 13, 1996] It is an equitable doctrine developed to address situations
where the separate corporate personality of a corporation is
LIABILITY FOR TORTS AND CRIMES used for wrongful purposes. The corporate existence may be
disregarded where the entity is formed or used for non-
A corporation is civilly liable for torts in the same manner as legitimate purposes, such as to evade a just and due
natural persons, because the rules governing the liability of a obligation, or to justify a wrong, to shield or perpetrate fraud
principal for a tort committed by an agent are the same or to carry out similar or inequitable considerations, other
whether the principal be a natural person or a corporation, unjustifiable aims or intentions, in which case, the fiction will
and whether the agent be a natural or artificial person. [PNB be disregarded and the individuals composing it and the two
v. CA, G.R. No. L-27155, May 18, 1978] corporations will be treated as identical. [Livesey v. Binswanger
Phils Inc., G.R. No. 177493, March 19, 2014]. In effect,
Rules on Liability for Torts: Individuals who compose the corporation are held directly
liable.
a. Liable for all contracts and default that arise from
those entered into by its agent within the scope of GENERAL RULE: Obligations incurred by the corporation,
his authority, or even those outside the scope of his acting through its directors, officers, and employees, are its
authority if ratified by the corporation; sole liabilities.
b. Acting officer is solidarily liable with the EXCEPTIONS:

corporation with the damages resulting from his
negligence as a joint-tortfeasor. a. When directors and trustees or, in appropriate
cases, the officers of a corporation vote/assent to
GENERAL RULE: Corporations cannot be proceeded against patently unlawful acts of the corporation, act in bad
as defendants or accused in criminal proceedings because faith or gross negligence in directing corporate
there are no existing laws by which to support such a process. affairs or are guilty of conflict of interest to the
Ultimately, a crime committed in the name of a corporation is prejudice of the corporation, its stockholders or
actually committed by the individuals who act for and in members, and other persons;
behalf of such corporation. [Villanueva, 44]
b. When a director or officer has consented to the
issuance of watered stocks or who, having
EXCEPTION: Under the Anti-Money Laundering Act
knowledge thereof, did not forthwith file with the
(AMLA) a corporation may be considered as an offender and
corporate secretary his written objection thereto;
may be meted out with the penalty of suspension or
revocation of license.
c. When a director, trustee or officer has contractually
agreed or stipulated to hold himself personally and
Note: If the crime is committed by a corporation, the directors,
solidarily liable with the corporation; or
officers, employees or other officers thereof responsible for

creditors and third persons. [Martinez v. CA, G.R.

d. When a director, trustee or officer is made, by no. 131673, September 10, 2004]
specific provision of law, personally liable for his
corporate action. [Shrimp Specialists, Inc., vs. Fuji- 3. Alter Ego
Triumph Agri-Ind’l Corp., G.R. No. 168756, December
7, 2009] ▪ Where a corporation is a merely a farce since it is a
mere alter ego or business conduit of a person, or
GROUNDS FOR APPLICATION OF DOCTRINE where the corporation is so organized and
controlled and its affairs are so conducted as to
1. Fraud make it merely an instrumentality, agency, conduit
or adjunct of another corporation. [Philippine
▪ When the corporation is used to commit fraud or National Bank v. Hydro Resources Contractors
wrong, to perpetuate the violation of a statutory or Corporation, G.R. no. 167530, March 13, 2013]
other positive legal duty, or dishonest and unjust
act in contravention of another’s legal rights. CLASSIFICATIONS OF PIERCING THE CORPORATE
[Philippine National Bank v. Hydro Resources VEIL
Contractors Corporation, G.R. no. 167530, March 13,
2013] 1. When the corporate entity is used to commit FRAUD or
to justify a wrong, or to defend a crime;
▪ Elements:
2. When the corporate entity is used merely as a mere
a. There must have been fraud or an evil motive ALTER EGO, business conduit or instrumentality of a
in the affected transaction, and the mere proof person or another entity;
of control of the corporation by itself would
not authorize piercing; 3. When the corporate entity is used to defeat PUBLIC
CONVENIENCE, or justify wrong;
b. The corporate entity has been used in the
perpetration of the fraud or in the justification 4. When piercing of the corporate fiction is necessary to
of a wrong, or to escape personal liability; and achieve justice or EQUITY.
c. The main action should seek for the Note: Mere similarity and interrelation between two
enforcement of pecuniary claims pertaining to corporations, as well as the overlap of officers, do not warrant
the corporation against corporate officers or the piercing of the veil. The wrongdoing must be proven
stockholders, or vice versa. [Villanueva, 111] clearly and convincingly. [China Banking Corporation vs. Dyne-
Sem Electronics Corp. G.R. No. 149237, June 11, 2006]
▪ The Court pierced the veil of corporate fiction of
two corporations when there was a confluence of TEST IN DETERMINING APPLICABILITY
the following factors: [THREE-PRONGED CONTROL TEST]
a. A first corporation is dissolved 1. CONTROL, not mere majority or complete stock control,
but complete domination, not only of finances but of
b. The assets of the first corporation is policy and business practice in respect to the transaction
transferred to a second corporation to avoid a attacked so that the corporate entity as to this transaction
financial liability of the first corporation; and had at the time no separate mind, will or existence of its
own;
c. Both corporations are owned and controlled
by the same persons such that the second 2. Such control must have been used by the defendant to
corporation should be considered as a commit FRAUD or wrong, to perpetuate the violation of
continuation and successor of the first a statutory or other positive legal duty, or dishonest and
corporation. unjust act in contravention of plaintiff’s legal right; and
Note: There must be at least a substantial 3. HARM. The control and breach of duty must have
identity of stockholders for both corporations proximately caused the injury or unjust loss complained
in order to consider this factor to be of. [Pacific Rehouse Corporation v. CA, G.R. No. 199687,
constitutive of corporate identity. [Kukan Int’l March 24, 2014]
Corp. vs. Hon. Amor Reyes, et. al. G.R. No.
182729, Sept. 29, 2010] Note: All elements must concur.
2. Equity PROBATIVE FACTORS
▪ The veil of separate corporate personality may be The following are the probative factors that are to be
lifted when it is used as a shield to confuse considered when the corporate mask may be lifted and the
legitimate issues, or where lifting the veil is corporate veil pierced:
necessary to achieve equity or for the protection of
a. STOCK ownership by one or common ownership

of both corporations;
NUMBER AND QUALIFICATIONS OF
b. IDENTITY of directors and officers; INCORPORATORS
c. Manner of keeping CORPORATE BOOKS and a. Min. of 5 and max. 15 incorporators;

records; and
b. All natural persons (cannot be corporations);
d. Methods of CONDUCTING business. [Heirs of Fe
Tan Uy et al. v. International Exchange bank et al., G.R. c. Majority of incorporators must be residents of the
no. 166283, February 13, 2013] Philippines; and
CIRCUMSTANCES TO JUSTIFY THE APPLICATION OF Note: Each Incorporator Must Own At Least One (1) Share
THE DOCTRINE of The Capital Stock [Sec. 18, Corporation Code]
1. The parent corporation owns all or most of the capital

INCORPORATOR CORPORATOR
stock of the subsidiary;
Stockholders or members All stockholders or
2. The parent and subsidiary corporations have common mentioned in the articles of members, whether
directors or officers; incorporation as originally incorporators or joining the
forming and composing the corporation after its
3. The parent company finances the subsidiary; corporation and who are incorporation. [Campos, 50]
signatories thereof. [Campos,
4. The parent company subscribed to all the capital stock of 50]
the subsidiary or otherwise causes its incorporation;
Note: Only natural persons can be incorporators; juridical
5. The subsidiary has grossly inadequate capital; persons however can be stockholders or members.
[Government of the Philippine Islands v. El Hogar, G.R. No. L-
6. The subsidiary has substantially no business except with 26649, July 13, 1927]
the parent corporation or no assets except those
conveyed to or by the parent corporation; It is possible for a business to be wholly owned by one
individual. The validity of its incorporation is not affected
7. The papers of the parent corporation or in the statements when such individual gives nominal ownership of only one
of its officers, the subsidiary is described as a department share of stock to each of the other four incorporators. This is
or division of the parent corporation, or its business of valid only among the incorporators privy to the agreement. It
financial responsibility is referred to as the parent does bind the corporation which, at the time the agreement is
corporation’s own; made, was non-existent. Thus, incorporators continue to be
stockholders of a corporation unless, subsequent to the
8. The parent corporation uses the property of the incorporation, they have validly transferred their
subsidiary as its own; subscriptions to the real parties in interest. As between the
corporation on the one hand, and its shareholders and third
9. The directors or executives of the subsidiary do not act persons on the other, the corporation looks only to its books
independently in the interest of the subsidiary, but take for the purpose of determining who its shareholders are.
their orders from the parent corporation; [Nautica Canning v. Yumul, G.R. No. 164588, October 19, 2005]
10. The formal legal requirements of the subsidiary are not EXCEPTIONS: Non-stock corporations may have more than
observed. [Philippine National Bank v. Ritratto Group Inc., 15 members, as fixed in its articles of incorporation or by-
G.R. No. 142616, July 31, 2001] laws. [Sec. 92, Corporation Code]
DUE PROCESS IS ESSENTIAL Note: A cooperative corporation may become an incorporator

of a rural banking corporation. [Rural Banks Act of 1992, Sec. 4]
▪ The court must acquire jurisdiction over the
corporations involved before their separate personalities Qualifications of Incorporators
are disregarded; and
a. Legal age
▪ Piercing can only be raised in a full-blown trial over a
cause of action commenced involving parties brought b. Philippine residents
under the authority of the court by way of service of
summons or what passes as service. [Kukan International c. Each must own at least 1 share
Corp. v. Reyes et al., G.R. No. 182729, September 29, 2010]
CORPORATE NAME – LIMITATIONS ON USE OF
INCORORATION AND ORGANIZATION CORPORATE NAME
It is through its corporation name that it can sue and be sued

and perform all legal acts. It is the only means of identifying
it not only from its members or stockholders, but also from

other entities. The Code therefor does not allow it to adopt a

name identical or deceptively or confusingly like that of any a. “Finance”, “Financing” or “Finance and
existing corporation or to any other name already protected Investment” by corporations or partnerships not
by law. [Campos, 62] engaged in the financing business [R.A. No. 5980, as
amended]
GENERAL RULE: A descriptive or geographical word or
phrase may be used by another corporation in its corporate b. “Engineer”, “Engineering” or “Architects” as part
name. of the corporate name [R.A. Nos. 546 and 1582]
EXCEPTION: Under the doctrine of secondary meaning, a c. “Bank”, “Banking”, “Banker”, “Building and Loan
word or phrase originally incapable of exclusive Association”, “Savings and Loan Association”,
appropriation might have been used so long and so “Trust Corporation”, “Trust Company” or words
exclusively by corporation that the word or phrase has come of similar import by corporations or associations
to refer it. [Lyceum of the Philippines v. CA, G.R. No. 101897, not engaged in banking business. [R.A. No. 337, as
March 5, 1993] amended]
Limitations on Use of Corporate Name d. “United Nations” in full or abbreviated form

cannot be part of a corporate or partnership name
a. Names which are identical, deceptively or [R.A. 266]
confusingly similar to that of any existing
corporation including internationally known e. “Bonded” for corporations or partnerships with
foreign corporation though not used in the unlicensed warehouse [R.A. No. 245]
Philippines;
As A Matter of Policy
b. Name already protected by law;
a. “Investment(s)” by corporations or partnerships
c. Name which is contrary to law, morals or public not organized as investment house, investment
policy. [Sec. 18, Corporation Code] company or a holding company.
Note: b. “National” by all stock corporations and

partnerships.
▪ The corporate name shall contain the word
“Corporation” or its abbreviation “Corp.” or c. “Asean”, “Calabarzon” and “Philippines 2000”.
“Incorporated”. or “Inc.”
Note:
▪ Terms descriptive of a business in the name shall be
indicative of the primary purpose. If there are two ▪ The name of a dissolved firm shall not be allowed
(2) descriptive terms, the first shall refer to the to be used by other firms within three (3) years after
primary purpose and the second shall refer to one the approval of the dissolution of the corporation
of the secondary purposes. by the Commission, unless allowed by the last
stockholders representing at least majority of the
▪ Business or tradename of any firm which is outstanding capital stock of the dissolved firm.
different from its corporate or partnership name [SEC Memorandum No. 14, 2000]
shall be indicated in the articles of Incorporation or
partnership of said firm. ▪ Registrant corporations or partnership shall submit
a letter undertaking to change their corporate or
▪ lf the name or surname of a person is used as part partnership name in case another person or firm
of a corporate or partnership name, the consent of has acquired a prior right to the use of the said firm
said person or his heirs must be submitted except if name or the same is deceptively or confusingly
that person is a stockholder, member, partner or a similar to one already registered unless this
declared national hero. If such person cannot be undertaking is already included as one of the
identified or non-existent, an explanation for the provisions of the articles of incorporation or
use of such name shall be required. partnership of the registrant. [SEC Memorandum No.
14, 2000]
▪ The meaning of initials in the name shall be
disclosed in writing by the registrant. CORPORATE TERMS
▪ Name containing a term descriptive of a business ▪ 50 years from date of incorporation.

different from the business of a registered company
whose name also bears similar term(s) used by the ▪ Extension of Corporate Term
former may be allowed. The following words shall
not be used as part of a corporate or partnership ➢ Term may be extended for a period not
names. exceeding 50 years by an amendment of the
articles of incorporation. The extension cannot
As Provided by Special Laws be made earlier than 5 years prior to the

expiration of the term. [Sec. 11, Corporation

Code] Nature and Functions of Articles
➢ There is no limit to the number of extensions Under the contract theory, the articles of incorporation
that may be made. [De Leon, 132] constitutes a contract of the corporation which is three-fold in
nature:
▪ Doctrine of Relations – No extension of term can be
effected once dissolution stage has been reached; a. Between the corporation and the State;
Provided, it was due to the fault of the corporation. The
filing of an extension constitutes a new corporation. b. Between the corporation and its stockholders;
However, there may still be a renewal where the delay is
due to the neglect of the officer with whom the certificate c. Between the stockholders among themselves;
is required to be filed, or to a wrongful refusal on his part [Government of the Philippine Islands v. Manila
to receive it. [Alhambra Cigar v. SEC, G.R. No. L-23606, Railroad Company, G.R. No. L-30646, January 30,
July 29, 1968] 1929]
Note: The corporation is deemed incorporated from the date Contents

the SEC issues a certificate of incorporation. [Corporation Code,
Sec. 19] Section 14 of the Corporation Code provides that all
corporations organized under the Code shall file with the SEC
MINIMUM CAPITAL STOCK AND SUBSCRIPTION articles of incorporation in any of the official languages duly
REQUIREMENTS signed and acknowledged by all the incorporators, containing
substantially the following matters:
25% of the authorized capital stock must be subscribed at time
of incorporation. [Sec. 13, Corporation Code] 1. Name of the corporation;
a. Minimum Paid-In Capital – At least Php 5,000; 2. Primary and/or secondary purposes for which the
25% of the total subscription must be paid. [Ibid.] corporation is/are being incorporated; provided that a
This applies only to par value shares because no non-stock corporation may not include a purpose
par value shares must be fully paid. [De Leon, 137] which would change or contradict its nature;
b. Capital Stock – The amount fixed in the articles of ▪ It confers and limits the powers which a
corporation procured to be subscribed and paid-in corporation may exercise. A corporation has only
at the organization of the corporation or such powers expressly granted to it by law and its
afterwards. It is the limit to the total par or issued articles of incorporation, those which may be
value of the shares which a corporation may issue. incidental to such conferred powers, those
[Campos, 80] reasonably necessary to accomplish its purposes
and those incidental to its existence. There are
c. Outstanding Capital Stock – The total shares of three reasons for requiring the purpose clause:
stock issued to subscribers or stockholders,
whether or not fully or partially paid (as long as a. So that prospective stockholders shall know
there is a binding subscription agreement), except within what lines of business his money will
treasury shares. [Sec. 137, Corporation Code] be risked;
d. Subscribed Capital Stock – It is the portion of the b. So that the management may know within
capital stock subscribed (i.e., procured to be paid) what lines of business it is authorized to act;
whether or not fully paid. [Villanueva, 208]
c. So that anyone who deals with the
e. Subscription – The mutual agreement of the corporation may ascertain if their
corporation and subscriber to take and pay for the contemplated transaction is within the
stock a corporation. [Ibid.] general authority of management; [Campos,
74]
Note: The Treasurer must make a sworn statement that the
minimum stock and subscription requirements have been Limitations
complied with. If found to be false, the articles of
incorporation will be disapproved and may be a ground for a. Cannot be created for purposes of which the
the revocation of the corporation’s certificate of registration. corporate body is incapable;
[Sec. 17, Corporation Code]
b. Must not be contrary to law, morals or public
ARTICLES OF INCORPORATION policy;
Constitutes the corporation’s charter and the basis by which c. Must not have a purpose that is contrary to its
to judge whether it exists for legal purposes [Villanueva, 184]. nature; [Aquino, 151]
It is the contract between the corporation and its stockholders
as well as the agreement among the stockholders. [Campos, 56] Note:

▪ Amount of its authorized capital stock in

▪ A corporation may have as many purposes as may lawful money of the Philippines;
be included in its articles. [Corporation Code, Sec.
14] ▪ Number of shares into which it is divided;
▪ The Code does not require that the secondary ▪ If par value shares, the par value of each share;
purposes be related to the main purpose. [Campos,
75] ▪ Original subscribers, and the amount paid and
subscribed by such subscribers.
▪ A corporation may not be formed to practice a
profession. Only persons who have passed the 9. Capitalization of non-stock corporation;
required government examinations and other
legal requirements can practice such professions. ▪ The amount of capital, names, nationalities
Sec. 88 of the Code, however, specifies that non- residences and amount contributed by the
stock corporations may be organized for contributors.
professional purposes. [Campos, 76]
10. Other matters not inconsistent with law which the
3. Place of principal office within the Philippines; incorporators may deem necessary and convenient.
▪ The articles must specify the province, city or Other Requirement

town where such principle office is located.
The name of the street need not be stated. a. Treasurer’s Affidavit – The SEC shall not accept
[Campos, 77] articles of incorporation of a tock corporation
unless accompanied by a sworn statement by the
▪ Since the principal place of business of a Treasurer that at least 25% of the total capital stock
corporation determines its residence or authorized is subscribed and at least 25% of such
domicile, then the place indicated in have been fully paid in cash or property. Such paid-
petitioner’s articles of incorporation becomes up capital shall be no less than Php 5,000.
controlling in determining the venue for the
filing of a case. [Hyatt Elevators and Escalators
b. Acknowledgement, Signature, Verification – The
Corporation v. Goldstar Elevators Phils., Inc., G.R.
articles of incorporation must be duly signed and
No. 161026, October 24, 2005]
acknowledged by all of the incorporators. [Sec. 14,
Corporation Code]
4. Term for which the corporation is to exist;
Amendment
5. Names, nationalities and residences of the
incorporators;
Any provision or matter stated in the articles may be
amended unless otherwise provided in the articles of by
▪ The personal action by a corporation should
special laws. [Sec. 16, Corporation Code]
be filed in its place of residence which is the
principal office indicated in its Articles of
Amendment is Made Through:
Incorporation. Jurisprudence has settled that
the place where the principal office of a
1. Majority vote of the Board of
corporation is located, as stated in the articles,
Directors/Trustees;
indeed establishes its residence. [Hyatt
Elevators Inc. vs. Goldstar Elevators. Phils., G.R.
No. 161026, Oct. 24, 2005] 2. Vote or written consent of the stockholders
representing at least 2/3 of the outstanding
6. Number of directors or trustees, which shall not capital stock; vote or written assent of at least
be less than 5 nor more than 15; 2/3 of the members in non-stock corporations;
and
▪ Aliens may be directors of a corporation, but
only in such number as may be proportional 3. Approval of the SEC or from the date of filing
to their allowable participation in such entity. if not acted upon within 6 months. (Ibid.)
[Campos, 79]
Grounds for Rejection:
7. Names, nationalities and residences of persons
who shall act as directors or trustees until the first a. It is not in accordance with the prescribed form;
regular directors or trustees are duly elected and
qualified; b. The purpose is patently unconstitutional, illegal,
immoral or contrary to government rules and
▪ Majority must be Philippine residents; regulations;
8. Capitalization of stock corporation; c. The Treasurer’s Affidavit concerning the amount of

subscribed and paid capital stock is false;

d. The percentage of ownership of the capital stock to corporation;

be owned by citizens of the Philippines has not
been complied with as required by existing laws or c. Refusal to comply with lawful order of SEC;
the Constitution. [Sec. 17, Corporation Code]
d. Continuous non-operation for at least 5 years;
Note: No articles or amendments thereto of banks, banking
and quasi-banking institutions, building and loan e. Failure to file by-laws within required period;
associations, trust companies and other financial
intermediaries, insurance companies, public utilities, f. Failure to file reports; and
educational institutions, and other corporations governed by
special laws shall be approved unless accompanied by a g. Similar grounds.
favorable recommendation of the appropriate government
agency. [Ibid.] ADOPTION OF BY-LAWS
Non-Amenable Items: Nature and Function of By-Laws
a. Names of the incorporators; ▪ By-laws are the product of the agreement of the
stockholders or members and establish the rules for
b. Names of the incorporating directors/trustees; the internal government of the corporation.
[Campos, 121]
c. Names of the original subscribers and their
subscribed and paid-up capital; ▪ The adoption and filing of the by-laws is a
condition subsequent. A corporation commences
d. Treasurer-in-trust elected by the original its corporate existence and juridical personality and
subscribers; is deemed incorporated upon issuance of the
certificate of incorporation. This may be done even
e. Members who contributed to the initial capital of a before filing of the by-laws. [Loyola Grand Villas
non-stock corporation; Homeowners v. CA, G.R. No. 117188, August 7, 1997]
f. Witnesses and acknowledgement thereof. [SEC Contents:

Opinions dated July 10, 1990, July 9, 1990, July 31,
1979 and May 24, 1983 as cited in Villanueva, 210] 1. The time, place and manner of calling and
conducting regular or special meetings of the
REGISTRATION AND ISSUANCE OF directors or trustees;
CERTIFICATE OF INCORPORATION
2. The time and manner of calling and conducting
Examination and Approval/Disapproval by the SEC regular or special meetings of the stockholders or
members;
▪ SEC shall examine if the provisions of the articles of
incorporation are in accordance with law. If not, SEC 3. The required quorum in meetings of stockholders
shall give the incorporators reasonable time to or members and the manner of voting therein;
correct or modify the objectionable portions. [Sec. 17,
Corporation Code]
4. The form for proxies of stockholders and members
▪ Upon satisfaction that all legal requirements have and the manner of voting them;
been met, SEC issues the certificate of incorporation.
Only then shall the corporation have a personality 5. The qualifications, duties and compensation of
separate and distinct from its stockholders or directors or trustees, officers and employees;
members. [Villanueva, 186]
6. The time for holding the annual election of
Special Rules for Banks directors of trustees and the mode or manner of
giving notice thereof;
▪ The SEC shall not register the articles of any bank
unless accompanied by a certificate of authority 7. The manner of election or appointment and the
issued by the Monetary Board, under its seal. There term of office of all officers other than directors or
must also be a certificate of authority issued by the trustees;
BSP before registering the articles. [General Banking
Law of 2000] 8. The penalties for violation of the by-laws;
When Can SEC Suspend or Cancel Certificate of 9. In the case of stock corporations, the manner of
Registration? issuing stock certificates; and
a. Fraud in procuring registration; 10. Such other matters as may be necessary for the
proper or convenient transaction of its corporate
b. Serious misrepresentation as to objectives of business and affairs. [Sec. 47, Corporation Code]

2. Corporate Directors and Officers – They are

Requisites of Valid By-Laws bound by the by-laws unless and until they are
discharged.
1. Adopted Prior To Incorporation:
Non-Binding Effect to Third Persons
a. By-laws signed and approved by all
incorporators; It is a generally accepted rule that third persons are not bound
by by-laws except when they have knowledge of the
b. Filed with the SEC together with the articles of provisions actually or constructively. [China Banking
incorporation. Corporation v. CA, G.R. No. 117604, March 26, 1997]
2. Adopted After Incorporation: AMENDMENT OR REVISION
a. Adopted within 1 month after receipt of Requisites:

official notice of issuance of certificate of
incorporation; a. The board of directors or trustees, by a majority
vote thereof, and the owners of at least a majority
b. With the affirmative vote of the stockholders of the outstanding capital stock, or at least a
representing at least a majority of the majority of the members of a non-stock
outstanding capital stock or at least a majority corporation, at a regular or special meeting duly
of the members; called for the purpose, may amend or repeal any
by-laws or adopt new by-laws.
c. Signed by stockholders or members voting for
them; The owners of 2/3 of the outstanding capital stock
or 2/3members in a non-stock corporation may
d. Countersigned by the secretary; delegate to the board of directors or trustees the
power to amend or repeal any by-laws or adopt
e. Filed with the SEC. [Sec. 46 Corporation Code] new by-laws. Any power delegated to the board of
directors or trustees to amend or repeal any by-
Note: laws or adopt new by-laws shall be considered as
revoked whenever the stockholders or the
▪ Failure to file by-laws within the prescribed period members shall so vote at a regular or special
is only a ground for suspension or revocation of the meeting.
certificate of registration. The SEC is empowered to
suspend or revoke, after proper notice and hearing, b. Such amendment or new by-laws shall be attached
the franchise or certificate of registration of a to the original by-laws in the office of the
corporation on the ground of failure to file by-laws corporation;
within the required period. [Loyola Grand Villas
Homeowners v. CA, G.R. No. 117188, August 7, 1997] c. A copy duly certified under oath by the corporate
secretary and a majority of the directors or trustees
▪ By-Law provisions cannot contravene the law, the shall be filed with the SEC; [Corporation Code, Sec.
charter and must be reasonable and non- 48]
discriminatory
By-Laws Vis-À-Vis Articles of Incorporation
Binding Effects
ARTICLES OF
BY-LAWS
1. Members and Shareholders – There is a INCORPORATION
conclusive presumption that they know the Condition precedent for Condition subsequent;
provisions of the by-laws by the fact of their being corporate existence;
such. [De Leon, 452] Charter or fundamental law Rules and regulations;
of the corporation;
Note: When the loss of membership in a non-stock Executed before Executed simultaneously
corporation also entails the loss of property rights incorporation; or after incorporation;
and the by-laws of a corporation fails to provide Amended by: Amended by:
any formal notice and hearing procedure before a (a) majority of the directors (a) majority vote of the
member’s share may be seized and sold, the or trustees; and (b) board; and
manner of deprivation of such property right stockholders representing (b) majority vote of the
should also be in accordance with the provisions of 2/3 of the outstanding outstanding capital stock
the Civil Code. [Valley Golf & Country Club, Inc., capital or 2/3 of members in or majority of members in
Rosa O. Vda. De Caram, G.R. No. 158805, April 16, a non-stock corporation; a non-stock corporation;
2009] Power to amend or repeal Power to amend or repeal
cannot be delegated to the may be delegated by the
board; 2/3 of the outstanding
capital stock or 2/3 of the

members in a non-stock the corporation if it be a nonstock corporation;

corporation;
7. To purchase, receive, take or grant, hold, convey,
CORPORATE POWERS sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including
securities and bonds of other corporations, as the
EXPRESS AND IMPLIED POWERS
transaction of the lawful business of the
corporation may reasonably and necessarily
A corporation has only such powers as are expressly granted
require, subject to the limitations prescribed by
to it by law and by its articles of incorporation (express
law and the Constitution;
powers), those which may be incidental to such conferred
powers, those reasonably necessary to accomplish its
When the corporation’s primary purpose is to
purposes (implied powers) and those which may be incident
market, distribute, export and import
to its existence as a juridical entity (incidental powers).
merchandise, the sale of land is not within the
[Pilipinas Loan Company Inc. v. SEC, G.R. No. 104720, April 4,
actual or apparent authority of the corporation
2001]
acting through its officers, much less when acting
DOCTRINE OF NECESSARY IMPLICATION through the treasurer. Articles 1874 and 1878 of
Civil Code requires that when land is sold through
In the determination of what businesses may be carried on by an agent, the agent’s authority must be in writing,
a corporation, reference must be had to its charter, and unless otherwise the sale is void. [San Juan Structural and
the power to carry on a particular business is either expressly Steel Fabricators v. CA, G.R. No. 129459, September
or impliedly conferred thereby, it does not exist. [SEC-OGC 29, 1998]
Opinion No. 11-33, 2011]
8. To enter into merger or consolidation with other
THEORY OF GENERAL CAPACITY corporations as provided in this Code;
A corporation may exercise any and all powers that may be 9. To make reasonable donations, including those for
exercised by persons. [Aquino, 53] the public welfare or for hospital, charitable,
cultural, scientific, civic, or similar purposes:
THEORY OF LIMITED CAPACITY Provided, That no corporation, domestic or
foreign, shall give donations in aid of any political
The corporation’s capacity is limited to such express, implied party or candidate or for purposes of partisan
and incidental powers. [Ibid.] political activity;
GENERAL POWERS 10. To establish pension, retirement, and other plans

for the benefit of its directors, trustees, officers and
Every corporation incorporated has the power and capacity: employees; and
1. To sue and be sued in its corporate name; 11. To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes
Under Sec. 36 in relation to Sec. 23 of Corporation as stated in the articles of incorporation:
Code, where a corporation is an injured party, its
power to sue is lodged with its Board of Directors. a. Extension or shortening of corporate term;
A minority stockholder who is a member of the [Sec. 37, Corporation code]
Board has no such power or authority to sue on
the corporation’s behalf. [Tam Wing Tak v. b. Increase or decrease capital stock or incur
Makasiar, G.R. No. 122452, January 29, 2001] bonded indebtedness; [Sec. 38, Corporation
Code]
2. Of succession by its corporate name for the period
of time stated in the articles of incorporation and c. Deny Pre-Emptive Right [Sec. 39, Corporation
the certificate of incorporation; Code]
3. To adopt and use a corporate seal; d. Sell, dispose, lease, encumber all or
substantially all of corporate assets; [Sec. 40,
4. To amend its articles of incorporation in Corporation Code]
accordance with the provisions of this Code;
e. Acquire own shares; [Sec. 41, Corporation
5. To adopt by-laws, not contrary to law, morals, or Code]
public policy, and to amend or repeal the same in
accordance with this Code; f. Declare dividends out of unrestricted
retained earnings; [Sec. 43, Corporation Code]
6. In case of stock corporations, to issue or sell stocks
to subscribers and to sell stocks to subscribers and g. Invest corporate funds in another corporation
to sell treasury stocks in accordance with the or business or for any other purpose other
provisions of this Code; and to admit members to than the primary purpose. [Sec. 44,

Corporation Code] of capital stock or number of shares of no-par

stock thereof actually subscribed, the names,
Note: The general powers granted by Section 36 are, under nationalities and residences of the persons
Section 23, to be exercised by the Board of directors, unless subscribing, the amount of capital stock or
otherwise provided by the Code. Thus, the power to decide number of no-par stock subscribed by each,
whether the corporation should sue or not properly belongs and the amount paid by each on his
to the board, but the power to amend the Articles of subscription in cash or property, or the
Incorporation and the by-laws are by express provision of the amount of capital stock or number of shares of
Code to be exercised by the stockholders or members. no-par stock allotted to each stock-holder if
[Campos, 284] such increase is for the purpose of making
effective stock dividend therefor authorized;
SPECIFIC POWERS
4. Any bonded indebtedness to be incurred,
1. Power to Extend or Shorten Corporate Term created or increased;
Requisites: 5. The actual indebtedness of the corporation on

the day of the meeting;
a. Approval by a majority of the board of directors or
trustees and; 6. The amount of stock represented at the
meeting; and
b. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to 7. The vote authorizing the increase or
each stockholder or member at his place of diminution of the capital stock, or the
residence; incurring, creating or increasing of any
bonded indebtedness.
c. Ratified at a meeting by the stockholders
representing at least two-thirds 2/3 of the d. Prior approval of the Securities and Exchange
outstanding capital stock or by at least 2/3 of the Commission;
members in non-stock corporations;
e. From and after approval by the Securities and
d. A copy of the amended articles including the Exchange Commission and the issuance by the
extended shortened corporate term is submitted to Commission of its certificate of filing, the capital
SEC for approval. It is deemed approved by SEC stock shall stand increased or decreased and the
inaction for 6 months; (Sec 37) incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing
Note: Dissenting stockholder may exercise appraisal right; may declare;
[Sec. 81, Corporation Code]
f. Non-stock corporations may incur or create bonded
2. Power to Increase Bonded Indebtedness indebtedness, or increase the same, with the
approval by a majority vote of the board of trustees
Requisites: and of at least two-thirds (2/3) of the members in a
meeting duly called for the purpose;
a. Approval by a majority of the board of directors
and, at a stockholder's meeting duly called for the g. Bonds issued by a corporation shall be registered
purpose, 2/3 of the outstanding capital stock; with the Securities and Exchange Commission,
which shall determine the sufficiency of the terms
b. Written notice of the proposed increase or thereof.
diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness Corporate Bond – It is an obligation to pay a definite sum of
and of the time and place of the stockholder's money at a future time at a fixed rate of interest, whether
meeting is to be considered, must be addressed to secured or unsecured, evidenced by a written debt instrument
each stockholder. called a bond or debenture.
c. A certificate in duplicate must be signed by a Bonded Indebtedness – It is a loan secured by a mortgage

majority of the directors of the corporation and on corporate property. [Villanueva, 248]
countersigned by the chairman and the secretary of
the stockholders' meeting, setting forth: Debenture – It is a debt secured only by the debtor’s earning
power, not by a lien on any specific asset. [Dizon, 10]
1. That the requirements of this section have
been complied with; Note:
2. The amount of the increase or diminution of ▪ No stock may be issued in excess of the amount
the capital stock; provided in the articles of incorporation;
3. If an increase of the capital stock, the amount

▪ In case of an increase in capital stock, there must latter offer. [Benito v. SEC, G.R. No. L-56655,
also be a Treasurer’s affidavit showing compliance July 25, 1983]
with the minimum subscribed and paid-up capital.
[SEC Opinion, February 19, 1981] ▪ There is a pre-emptive right when only a
specified portion of the authorized capital
▪ The required 25% minimum subscription shall be stock was offered for subscription upon the
based on the additional amount by which the corporation’s inception.
capital stock is increased. [SEC Opinion, July 29,
1993] f. Waiver by the stockholder.
3. Power to Increase or Decrease Capital Stock Remedies When Right is Wrongfully Ignored or Denied
Methods: a. Aggrieved stockholder may obtain an injunction

against the issue;
1. Retiring its own shares;
b. Aggrieved stockholder may obtain a mandamus to
2. Redeeming redeemable shares; allow him to exercise the right;
3. Accepting surrender of shares; c. SEC or the court may order the cancellation of the
shares, provided no innocent third parties are
4. Cancelling unissued shares; prejudiced;
5. Increasing or decreasing the par value of existing d. Derivative suit when the violation resulted in waste
shares; and management of the corporation assets or in
giving fraudulent directors control of the
6. Increasing or decreasing the number of shares. [De corporation. [Campos, 63]
Leon, 342]
5. Power to Sell or Dispose or Corporate Assets
4. Power to Deny Pre-Emptive Right
Requisites
This is the right of existing stockholders of a corporation to
subscribe to or purchase shares of stock in proportion to their a. Written notice of the proposed action and of the
respective shareholdings, before the shares of the corporation time and place of the meeting shall be addressed to
are offered to the general public. [Suarez, 242] each stockholder or member;
GENERAL RULE: All stockholders of a stock corporation b. Majority vote of its board of directors or trustees;
shall enjoy a pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their c. Authorized by the vote of the stockholders
respective shareholdings. representing at least 2/3 of the outstanding capital
stock, or in case of non-stock corporation, by the
EXCEPTIONS: vote of at least 2/3 of the members;
a. When such right is denied by the articles of d. Dissenting stockholder may exercise his appraisal
incorporation or an amendment; right. [Sec 40, Corporation Code]
b. Shares to be issued in compliance with laws A Sale or Other Disposition Shall Be Deemed to Cover
requiring stock offerings or minimum stock Substantially All the Corporate Property and Assets If:
ownership by the public;
a. The corporation would be rendered incapable of
c. Shares to be issued in good faith with the approval continuing the business; or
of the stockholders representing 2/3 of the
outstanding capital stock, in exchange for property b. Accomplishing the purpose for which it was
needed for corporate purposes or in payment of a incorporated. [Caltex v. PNOC Shipping, G.R. no.
previously contracted debt; 150711, August 10, 2006]
d. Shares issued with the approval of stockholders Note:

representing 2/3 of the outstanding capital stock, in
payment of previously contracted debts; ▪ After approval by the stockholders or members, the
board of directors or trustees may, abandon such
e. Additional issues of originally authorized shares; sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the
▪ If the shares of a corporation are offered and rights of third parties under any contract relating
not subscribed or purchased by the thereto, without further action or approval by the
stockholders and the shares are again being stockholders or members.
offered, there is not pre-emptive right with the

▪ Sec. 40 is not intended to restrict the power of a

corporation to sell or otherwise dispose of any of its c. Available unrestricted retained earnings;
property and assets without stockholders’ or
members’ approval if the same is in the regular There may be redemption in the absence of
course of business of the corporation or if the unrestricted retained earnings as long as the
proceeds of the disposition be appropriated for the corporation has sufficient assets to meet its
conduct of its remaining business. liabilities. [Republic Planters Bank v. Agana, G.R. No.
51765, March 3, 1997]
▪ Sec. 40 only covers the sale or disposition of all or
substantially all of the corporate assets or d. Good faith and without prejudice to the rights of
properties. creditors and stockholders;
▪ In non-stock corporations where there are no 7. Power to Invest Corporate Funds in another
members with voting rights, the vote of at least a Corporation
majority of the trustees in office will be sufficient
authorization for the corporation to enter into any Requisite to invest pursuant to primary purpose: Approval
transaction authorized by this section. of the majority of the board.
▪ The Corporation Code defines a sale or disposition Requisites to invest pursuant to secondary purpose
of substantially all assets and property of a
corporation as one by which the corporation a. Approval by a majority of the board of directors or
“would be rendered incapable of continuing the trustees;
business or accomplishing the purpose for which it
was incorporated” – any sale or disposition short of b. Ratified by the stockholders representing at least
this will not need stockholder ratification, and may 2/3 of the outstanding capital stock, or by at least
be pursued by the majority vote of the Board of two thirds 2/3 of the members in the case of
Directors. [Strategic Alliance Dev. Corp. v. Radstock nonstock corporations;
Securities Ltd., G.R. No. 178158, December 4, 2009]
c. Written notice of the proposed investment and the
6. Power to Acquire Own Shares time and place of the meeting shall be addressed to
each stockholder or member;
GENERAL RULE: A stock corporation may acquire its own
shares for a legitimate corporate purpose or purposes d. Any dissenting stockholder shall have appraisal
including but not limited to the following: right.
a. To pay dissenting or withdrawing stockholders Note:

entitled to payment for their shares under the
provisions of this Code. [Sec. 41] ▪ Where the investment by the corporation is
reasonably necessary to accomplish its primary
b. To eliminate fractional shares arising out of stock purpose as stated in the articles of incorporation,
dividends; [Sec. 41] the approval of the stockholders or members shall
not be necessary.
c. To acquire treasury shares;
▪ Dissenting stockholders may exercise their
d. To collect or compromise an indebtedness to the appraisal right. A stockholder may be exposed to a
corporation, arising out of unpaid subscription, in line of business not being pursued when he first
a delinquency sale, and to purchase delinquent invested in the company. [Aquino¸367]
shares sold during said sale; [Sec. 41]
8. Power to Declare Dividends
e. To effect a decrease of capital stock;
Dividends – Corporate profits allocated, lawfully declared
f. To acquire redeemable shares regardless of and ordered by the directors to be paid to the stockholders
existence of retained earnings; on demand or at a fixed time. [SEC Memorandum Circular No.
11, 2008]
g. Deadlock in the management of close corporations;
[Aquino, 363] Types of Dividends Which a Corporation May Declare:
Provided, the corporation has unrestricted retained earnings 1. CASH – Payable in cash;
in its books to cover the shares to be purchased or acquired.
▪ Cash dividends due on delinquent stock
Limitations shall first be applied to the unpaid
balance on the subscription plus costs
a. Capital must not be impaired; and expenses, while stock dividends
shall be withheld from the delinquent
b. Legitimate corporate purpose;

stockholder until his unpaid subscription b. Not covered by a restriction for dividend
is fully paid; declaration under a loan agreement; and
2. PROPERTY – Payable in real or personal property; c. Not required to be retained under special
circumstances obtaining in the corporation such as
3. STOCK– Payable in unissued or additional shares when there is a need for a special reserve for
out of the unrestricted retained earnings. probable contingencies; [SEC Memorandum Circular
No. 11, 2008]
▪ Declaration of stock dividends must be
approved by stockholders representing GENERAL RULE: Dividends cannot be declared out of the
not less than two-thirds (2/3) of the corporation’s capital.
outstanding capital stock at a regular or
special meeting; EXCEPTIONS:
▪ It is a distribution to the stockholders of a. Dividends to utilize a lease or patents;

the company’s own stock. The corporate
profits or earnings are transferred to b. Liquidating dividends;
capital stock and shares of stock
representing the increase in c. Dividends from investments wasting assets
capitalization are distributed. New corporations.
shares are issued in proportion to their
existing interest. [Campos, 209] Note: Stock dividends cannot be applied as payment for
unpaid subscription due to the trust fund doctrine; Further,
4. BOND – Payable in bonds of the corporations; the corporation would be otherwise acquiring its own shares
to be applied to the unpaid subscription balance which is
5. LIQUIDATING – Actual distributions of the prohibited under the Code. [SEC Opinion, July 4, 1984]
corporation assets upon dissolution;
9. Power to Enter Into Management Contracts
6. OPTIONAL– Stockholder is given an option to
receive cash or stock dividend; Management Contract – Contract to manage the day-to-day
affairs of the corporation just like a general manager does, in
7. COMPOSITE – Payable partly in cash and partly in accordance with the policies laid down by the Board of
stocks; Directors of the managed corporation. [Campos, 628]
8. CUMULATIVE – Payable at a certain rate at given GENERAL RULE: All corporate powers are to be exercised
periods; by the board. [Campos, 628]
9. PREFERRED – Payable to one class of stockholders EXCEPTION: The Board can and usually must delegate may
prioritized over another; of its functions, it cannot abdicate its responsibility to act as
the governing body by giving absolute powers to officers or
10. SCRIP – Certificate issued to stockholders in lieu of others, by way of a management contract or otherwise.
cash dividends, entitling them to a certain amount [Campos, 628]
at some future date. [Campos, 210]
Requirements:
Requisites for Declaration of Dividends
a. Approval by the board of directors and by
a. Availability of unrestricted retained earnings; and stockholders owning at least majority of the
outstanding capital stock, or by at least the majority
b. Resolution by the Board of Directors; of the members in the case of a non-stock
corporation, of both the managing and the
Retained Earnings - The accumulated profits realized out of managed corporation;
normal and continuous operations of the business after
deduction therefrom distributions to stockholders and b. Management contract must be approved by the
transfers to capital stock and other accounts. [SEC stockholders of the managed corporation owning at
Memorandum Circular No. 11, 2008] least 2/3 of the total outstanding capital stock
entitled to vote, or by at least 2/3 of the members in
Unrestricted Retained Earnings - The amount of the case of a non-stock corporation on these
accumulated profits and gains realized out of the normal and instances:
continuous operations of the company after deducting
therefrom distributions to stockholders and transfers to 1. Where a stockholder or stockholders
capital stock or other accounts, and which is: representing the same interest of both the
managing and the managed corporations own
a. Not appropriated by its Board of Directors for or control more than 1/3 of the total
corporate expansion projects or programs; outstanding capital stock entitled to vote of
the managing corporation; or

Applicability of Ultra Vires Doctrine

2. Where a majority of the members of the
board of directors of the managed corporation TEST: It is a question, therefore, in each case of the logical
also constitute a majority of the members of relation of the act to the corporate purpose expressed in the
the board of directors of the managed charter. If that act is one which is lawful in itself, and not
corporation; otherwise prohibited, is done for the purpose of serving
corporate ends, and is reasonably tributary to the promotion
c. No management contract shall be entered into for a of those ends, in a substantial, and not in a remote and fanciful
period longer than five years for any one term. sense, it may fairly be considered within charter powers. The
test to be applied is whether the act in question is in direct and
Note: immediate furtherance of the corporation's business, fairly
incident to the express powers and reasonably necessary to
▪ Sec. 43 (1) shall apply to any contract whereby a their exercise. If so, the corporation has the power to do it;
corporation undertakes to manage or operate all or otherwise, not. [Montelibano v. Bacolod-Murcia Milling Co, Inc.,
substantially all of the business of another G.R. No. 15092, May 18, 1962]
corporation, whether such contracts are called
service contracts, operating agreements or Consequences of Ultra Vires Acts
otherwise
a. On the Corporation
▪ Instead of appointing an individual general
manager, the Board of Directors may decide to 1. Under the rules of court, it can be dissolved
enter into a management contract with another under quo warranto proceeding;
corporation, under which the latter will perform all
the managerial functions usually pertaining to a 2. Enjoin further commission of the ultra vires
general manager. [Campos, 626] acts;
▪ The Board of the managed corporation retains 3. Suspend or revoke the certificate of
control of the basic corporate policies and the registration of any corporation. [Campos, 288]
power to recall the contract where the corporation’s
interest would greatly suffer from its continuance. b. On The Immediate Parties To The Ultra Vires
[ibid.] Contract
ULTRA VIRES ACT 1. Where the contract has been fully executed on
both sides, the parties will be left as they are
▪ An ultra vires act is one committed outside the object for and no resolution or rescission of the contract
which a corporation is created as defined by the law of will be granted;
its organization and therefore beyond the power
conferred upon it by law. The term “ultra vires” is 2. Where one party has performed his part, and
“distinguished from an illegal act for the former is the other has not, the latter, having benefited
merely voidable which may be enforced by from the former’s performance, is stopped
performance, ratification, or estoppel, while the latter is from claiming that the contract is ultra vires
void and cannot be validated. [Atrium Management and the contract will be enforced provided it
Corporation v. Ca, G.R. no. 109491, February 28, 2001] is not illegal. [Ibid.]
▪ A corporation has no power except those expressly c. On The Rights Of Stockholders

conferred on it by the Corporation Code, its charter, and
those that are implied or incidental to its existence. In 1. A stockholder may bring either an individual
turn, a corporation exercises said powers through its or derivative suit to enjoin a threatened ultra
Board of Directors and /or its duly authorized officers vires act or contract;
and agents. [Hermanos Agricultural Development
Corporation v. Monfort III, G.R. no. 152542, July 8, 2004] 2. Ultra vires acts may become binding by the
ratification of all the stockholders, unless third
Types of Ultra Vires Acts: parties are prejudiced thereby, or unless the
act is illegal. [Campos, 289]
a. Acts done beyond the powers of the corporation as
provided for in the law or its articles of Note:
incorporation;
▪ Acts which are merely ultra vires, or acts which are
b. Acts or contracts entered into in behalf of the not illegal, may be ratified by the stockholders of
corporation by persons who have no corporate the corporation. Ratification obliterates the
authority; and infirmity, thereby making the act perfectly valid
and enforceable. [Pirovano et al., v. De La Rama
c. Acts or contracts which are per se illegal as being Steamship Co., G.R. No. L-5377, December 29, 1954]
contrary to law.

▪ While as a rule an ultra vires act is one committed GENERAL RULE: The corporate powers of all corporations
outside the object for which a corporation is created formed under this Code shall be exercised, all business
as defined by the law of its organization and conducted and all property of such corporations controlled
therefore beyond the powers conferred upon it by and held by the board of directors or trustees to be elected
law, there are however certain corporate acts that from among the holders of stocks, or where there is no stock,
may be performed outside of the scope of the from among the members of the corporation, who shall hold
powers expressly conferred if they are necessary to office for 1 year until their successors are elected and
promote the interest or welfare of the corporation. qualified. [Sec. 23, Corporation Code]
[Republic of the Philippines v. Acoje Mining Company,
G.R. no. L-18062, February 28, 1963] EXCEPTIONS:
Remedies to an Ultra Vires Contract a. Close Corporations – shareholders may actively

manage the business if so provided in the articles of
1. By the State: incorporation [Sec. 97, Corporation Code]
a. Obtain a judgment of forfeiture; b. Executive Committee [Sec. 35, Corporation Code]
b. Quo Warranto; c. Management Contracts [Sec. 33, Corporation Code]
c. Suspension or revocation of certificate by 3. By the Officers

SEC;
GENERAL RULE: The general rule is that, in the absence of
2. By Stockholders: authority from the board of directors, no person, not even its
officers, can validly bind a corporation.
a. Injunction;
b. Derivative suit; EXCEPTION: However, a corporate officer or agent may
represent and bind the corporation in transactions with third
3. By Creditors: Nullification of contract. persons to the extent that the authority to do so has been
conferred upon him. This includes powers which have been
HOW EXERCISED intentionally conferred, and also such powers incidental to
the usual course of business, powers added by custom and
1. By the Shareholders usage, as usually pertaining to the particular officer or agent,
and such apparent powers as the corporation has caused
Both shareholders with voting and non-voting rights are persons dealing with the officer or agent to believe that it has
entitled to vote on the following matters: conferred. [Cebu Mactan Members Inc. v. Tsukahara, G.R. No.
159624, July 17, 2009]
a. Amendment of the articles of incorporation;
THEORY OF ESTOPPEL AND RATIFICATION
b. Adoption and amendment of by-laws;
The principle of estoppel precludes a corporation and its
c. Sale, lease, exchange, mortgage, pledge or other Board of Directors from denying the validity of the
disposition of all or substantially all of the transaction entered into by its officer with a third party who
corporate property; in good faith, relied on the authority of the former as manager
to act on behalf of the corporation. [Lipat v. Pacific Banking
d. Incurring, creating or increasing bonded Corporation, G.R. No. 142435, April 30, 2003]
indebtedness;
DOCTRINE OF LACHES
e. Increase or decrease of capital stock;
The principle of laches or “stale demands” provides that the
f. Merger or consolidation of the corporation with failure or neglect, for an unreasonable and unexplained
another corporation or other corporations; length of time, to do that which by exercising due diligence
could or should have been done earlier, or the negligence or
g. Investment of corporate funds in another omission to assert a right within a reasonable time, warrants
corporation or business in accordance with this a presumption that the party entitled to assert it either has
Code; and abandoned it or declined to assert it. [Rovels Enterprises Inc. v.
Ocampo, G.R. No. 136821, October 17, 2002]
h. Dissolution of the corporation. [Sec. 6, Corporation
Code] DOCTRINE OF APPARENT AUTHORITY
Except in the above cases, the vote necessary to approve a It is a familiar doctrine that if a corporation knowingly
particular corporate act as provided in the Corporation Code permits one of its officers, or any other agent, to act within the
shall be deemed to refer only to stocks with right to vote. [Ibid] scope of an apparent authority, it holds him out to the public
as possessing the power to do those acts; and thus, the
2. By rhe Board of Directors corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying

the agents authority. [Lapu-Lapu Foundation Inc. v. CA, G.R. a. Not appropriated by its Board of Directors for
No. 126006, January 29, 2004] corporate expansion projects or programs;
TRUST FUND DOCTRINE b. Not covered by a restriction for dividend

declaration under a loan agreement; and
▪ Subscription to the capital stock of a corporation
constitute a fund to which creditors have a right to look
up to for satisfaction of their claims, and that the c. Not required to be retained under special
assignee in insolvency can maintain an action upon any circumstances obtaining in the corporation such as
unpaid stock subscription in order to realize assets for when there is a need for a special reserve for
the payment of its debts. [Halley v. Printwell Inc., G.R. No. probable contingencies; [Ibid.]
157459, May 30, 2011]
BOARD OF DIRECTORS AND TRUSTEES
▪ Until the liquidation of the corporation, no part of the
subscribed capital stock may be turned over or released
▪ The governing body of a corporation is its board of
to the stockholder (except in the redemption of directors, in case of stock corporations, and the board of
redeemable shares) without violating this principle. trustees in case of non-stock corporations. The board
Thus, dividends must never impair the subscribed exercises almost all the corporate powers, lays down all
capital stock; subscription commitments cannot be
the corporate business policies, and is responsible for the
condoned or remitted; nor can the corporation buy its efficiency of management. [Campos, 340]
own shares using the subscribed capital as consideration
therefore. [NTC v. CA, G.R. No. 127937, July 28, 1999] ▪ Board of Directors is distinct from the corporate entity
and a body clothed with fiduciary character which:
Applicability
a. Exercises all powers provided for under the
GENERAL RULE: Dividends cannot be declared out of the
Corporation Code;
corporation’s capital.
b. Conducts all business of the corporation; and
The requirement of unrestricted retained earnings to cover
the shares is based on the trust fund doctrine which means
c. Controls and holds all property of the corporation.
that the capital stock, property and other assets of a [Hornilla v. Salunat, A.C. No. 5804, July 1, 2003]
corporation are regarded as equity in trust for the payment of
corporate creditors. The reason is that creditors of a Requirements:
corporation are preferred over the stockholders in the
distribution of corporate assets. There can be no distribution a. Every director must own at least 1 share of the
of assets among the stockholders without first paying capital stock which share shall stand in his name on
corporate creditors. Hence, any disposition of corporate funds the books of the corporation. Otherwise he shall
to the prejudice of creditors is null and void. Creditors of a cease to be a director.
corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will b. Trustees of non-stock corporations must be
not use the assets of the corporation to purchase its own stock. members thereof.
[Turner v. Lorenzo Shipping Corporation, G.R. No. 157479,
November 24, 2010]
c. A majority of the directors and trustees of all
corporations organized under this Code must be
EXCEPTIONS:
residents of the Philippines. [Sec. 23, Corporation
Code]
a. Dividends to utilize a lease or patents;
DOCTRINE OF CENTRALIZED MANAGEMENT
b. Liquidating dividends;
All businesses of the corporation shall be conducted and all
c. Dividends from investments wasting assets its properties shall be controlled and held by the Board of
corporations. Directors or Trustees. A corporation can act only through its
directors and officers. Acts of management pertain to the
Retained Earnings – The accumulated profits realized out of board and those of ownership to the stockholders or
normal and continuous operations of the business after members. [Tan v. Sycip, G.R. No. 153468, August 17, 2006]
deduction therefrom distributions to stockholders and
transfers to capital stock and other accounts. [SEC GENERAL RULE: The board has the sole power and
Memorandum Circular No. 11, 2008]
responsibility to decide whether a corporation should sue,
purchase and sell property, enter into any contract, or
Unrestricted Retained Earnings – The amount of perform any act. [Campos, 341]
accumulated profits and gains realized out of the normal and
continuous operations of the company after deducting
EXCEPTION: In instances where the Code expressly grants a
therefrom distributions to stockholders and transfers to specific power to the stockholders or members. [Ibid.]
capital stock or other accounts, and which is:

Note: Since the law has vested the responsibility of managing

the corporate affairs on the board, the stockholders must EXCEPTIONS:
abide by its decision. [Campos, 341]
a. When the director willfully and knowingly vote for
Remedy: In case the stockholders do not agree with the patently unlawful acts of the corporation;
policies of the board, their remedy is to wait for the next
election of directors and choose new ones to take their place. b. When he is guilty of gross negligence or bad faith
[Campos, 341] in directing the affairs of the corporation; and
Note: c. When he acquires any personal or pecuniary

interest in conflict with his duty as such directors.
▪ The board of directors of a corporation may validly [Secs. 31 and 34, Corporation Code]
delegate some of its functions to individual officers
or agents appointed by it. Thus, contracts or acts of Note:
a corporation must be made either by the board of
directors or by a corporate agent duly authorized ▪ If the cause of the losses is merely error in business
by the board. Absent such valid judgment, not amounting to bad faith or
delegation/authorization, the rule is that the negligence, directors and/or officers are not liable.
declarations of an individual director relating to the For them to be held accountable, the
affairs of the corporation, but not in the course of, mismanagement and the resulting losses on
or connected with, the performance of authorized account thereof are not the only matters to be
duties of such director, are held not binding on the proven; it is likewise necessary to show that the
corporation. [AF Reality and Development Inc. v. directors and/or officers acted in bad faith and
Ranullo, G.R. No. 111448, January 16, 2002] with malice in doing the assailed acts.
▪ The concentration in the board of the powers of ▪ Bad faith does not simply connote bad judgment or
control of corporate business and of negligence. It imports a dishonest purpose or some
appointment of corporate officers and managers is moral obliquity and conscious doing of a wrong, a
necessary for efficiency in any large organization. breach of a known duty through some motive or
Stockholders are too numerous, scattered and interest or ill-will partaking of the nature of fraud.
unfamiliar with the business of a corporation to [Filipinas Port Services Inc. v. Go, G.R. No. 161886,
conduct its business directly. And so the plan of March 16, 2007]
corporate organization is for the stockholders to
choose the directors who shall control and TERM OF DIRECTORS AND TRUSTEES
supervise the conduct of corporate business.
[Filipinas Port Services Inc. v. Go, G.R. No. 161886, 1. Stock Corporation
March 16, 2007]
▪ The term of a director is one year (Section 23,
BUSINESS JUDGMENT RULE Corporation Code). Moreover, the by-laws cannot
provide for a longer or shorter term than one (1)
▪ A resolution or transaction pursued within the corporate year nor can there be staggering of terms. [Campos,
powers and business operations of the corporation, and 463]
passed in good faith by the board of directors, is valid
and binding, and generally the courts have no authority ▪ A corporation must therefore hold an election
to review the same or substitute their own judgment, annually, but until such election is held and a new
even when the exercise of such power may cause losses set of directors is duly elected and qualified. The
to the corporation or decrease the profits of a latter in turn should hold office only until the next
department. [Villanueva] scheduled annual election. [Campos, 462]
▪ Directors cannot be held liable for mistakes or errors in 2. Non-stock Corporation

the exercise of their business judgment, provided they
have acted in good faith and with due care and ▪ A notable difference between stock and non-stock
prudence. [Campos, 642] corporations is that, unless the Articles of
Incorporation otherwise provide, the term of the
Coverage: trustee is three (3) years in all non-stock
corporations except educational corporations,
a. Resolutions and transactions entered into by the where the trustees’ term is five years. But their
Board of Directors within the powers of the terms should be staggered. [Campos, 463]
corporation cannot be reversed by the courts not
even on the behest of the stockholders of the CORPORATE OFFICERS
corporation; and
▪ Conformably with Section 25, a position must be
b. Directors and officers acting within such business expressly mentioned in the By-Laws in order to be
judgment cannot be held personally liable for the considered as a corporate office. Thus, the creation of an
consequences of such acts. [Villanueva] office pursuant to or under a By-Law enabling provision

is not enough to make a position a corporate office. corporate treasurer’s function. As a general rule,
[Matling Ind’l and Commercial Corp., et. al. Ricardo R. Coros, the acts of corporate officers within the scope of
G.R. No. 157802 Oct. 13, 2010] their authority are binding on the
corporation. But when these officers exceed their
▪ The corporate officers enumerated in the by-laws are the authority, their actions cannot bind the
exclusive officers of the corporation while the rest could corporation, unless it has ratified such acts or is
only be regarded as mere employees or subordinate estopped from disclaiming them. [San Juan
officials. The board of directors has no power to create Structural and Steel Fabricators Inc. v. CA, G.R. No.
other corporate offices without first amending the 129159, September 29, 1998]
corporate by-laws so as to include therein the newly
created corporate office. [MARC II Marketing, Inc. vs. Note: Any 2 or more positions may be held concurrently by
Alfredo M. Joson G.R. No. 171993, Dec. 12, 2011] the same person, except with respect to the president. [Sec.25]
Mandatory Corporate Officers (Sec. 25)

President Treasurer Secretary
1. PRESIDENT – shall also be a director; He cannot
be the treasurer or secretary concurrently; Receives and
keeps the funds
In the absence of a charter or bylaw provision to of the
Presides over
the contrary, the president is presumed to have corporation, and
all meetings
the authority to act within the domain of the disburses them Keeps the
of the board of
Function
general objectives of the corporation’s business in accordance corporate
directors or
and within the scope of his or her usual duties. with the records and
trustees as
Hence, it has been ruled in other jurisdiction that authority given has custody
well as all
the president of the corporation possesses the him by the board thereof
meetings of
power to enter into a contract for the corporation, or by the
stockholders
when the conduct on the part of both the properly
president and the corporation shows that he had authorized
been in the habit of acting in similar matters on officers.
behalf of the company and that the company had
(1) Must be a Must be
Requirements
authorized him so to act and had recognized,

director appointed at the Must be a
approved and ratified his former and similar
(2) cannot be time of the resident and a
actions. Furthermore, a party dealing with the
concurrently drafting of the citizen of the
president of a corporation is entitled to assume
be secretary Articles of Philippines
that he has the authority to enter, on behalf of the
or treasurer Incorporation
corporation, into contracts that are within the
scope of the powers of said corporation and that His duties are
do not violate any statute or rule on public policy. ministerial in
[People’s Aircargo and Warehousing Co. Inc. v. CA, - Impliedly
nature and he
G.R. No. 117847, October 7, 1998] vested by the
His powers are cannot bind
Responsibilities
Board of
limited and he the
2. SECRETARY – need not be a director; must be a Directors with
cannot bind the corporation by
citizen and resident of the Philippines; broad powers
corporation contract,
unless he is unless he is
In the absence of provisions to the contrary, the - Authorized
authorized to do also named
corporate secretary is the custodian of corporate to sign in the
so. manager
records—he keeps the stock and transfer book name of the
thereof, or is
and makes proper and necessary entries therein. corporation
otherwise
It is his duty and obligation to register valid authorized
transfers of stock in the books of the corporation; [Campos, 384-386]
and in the event he refuses to comply with such
duty, the transferor-stockholder may rightfully QUALIFICATIONS OF DIRECTORS AND TRUSTEES
bring suit to compel performance. [Torres, Jr. v.
CA, G.R. No. 120138, September 5, 1997] 1. Stock Corp: Owns at least one share, which should be
registered in his name on the books of the corporation;
3. TREASURER – need not be a director; [Corporation Code, Sec. 23]
A corporate treasurer’s function have generally He must hold legal title to the stock as shown by the
been described as “to receive and keeps funds of books of the corporation although some other person
the corporation, and to disburse them in may be the beneficial owner of the stock recorded in his
accordance with the authority given him by the name. [Corporation Code, Sec. 63]
board or the properly authorized officers.”
Unless duly authorized, a treasurer, whose It is not essential to the validity of the election of one as
power are limited, cannot bind the corporation in a director that he be a legal owner of the stock at the
a sale of its assets, which obviously is foreign to a time of the election. His subsequent acquisition of stock

before entering the duties of his office has the effect of Straight Voting – A stockholder may vote such number of
validating his election as director. [SEC Opinion, June 6, shares for as many persons as there are directors to be elected
1971] [Corporation Code, Sec. 24]
Co-owners are considered as one stockholder. [SEC Cumulative Voting

Opinion, September 4, 1990]
a. A stockholder may cumulate said shares and give
Non-stock Corp: Must be a member; [Corporation Code, one candidate as many votes as the number of
Sec. 23] directors to be elected multiplied by the number of
his shares shall equal; or
2. A majority of the directors or trustees must be residents
of the Philippines. [Corporation Code, Sec. 23] b. A stockholder may distribute them on the same
principle among as many candidates as he shall see
3. Must be a natural person; fit. [Ibid.]
4. Must be of legal age; Limitations:
Note: Although the by-laws may not do away with the a. The total number of votes cast by a stockholder
qualifications expressly laid down by law, they may provide shall not exceed the number of shares owned by
for additional qualifications for directors or trustees. They him as shown in the books of the corporation
may also impose disqualifications, since these are in effect multiplied by the whole number of directors to be
qualifications expressed in a negative way. [Campos, 442] elected;
Remedy: The proper remedy to question the legality and b. No delinquent stock shall be voted; (Ibid.)
proper qualification of persons elected to the board is a quo
warranto proceeding. [Ponce v. Encarnacion, G.R. No. L-5883, VOTING IN NON-STOCK CORPORATIONS
November 28, 1953]
1. Members of corporations which have no capital stock
DISQUALIFICATIONS may cast as many votes as there are trustees to be elected
unless otherwise provided in the articles of
1. Conviction by final judgment of an offense punishable incorporation or in the by-laws; [Ibid.]
by imprisonment for a period exceeding 6 years; or
2. A member may not cast more than one vote for one
2. A violation of the Corporation Code committed within candidate; [Ibid.]
five (5) years prior to the date of his election or
appointment. [Sec. 27, Corporation Code] 3. No person shall be elected as trustee unless he is a
member of the corporation; [Corporation Code, Sec. 92]
HOLDOVER
4. Officers of a non-stock corporation may be directly
Upon failure of a quorum at any annual meeting, the
elected by the members. Unless otherwise provided in
directorate naturally holds over and continues to function
the articles of incorporation or in the by-laws. [Ibid.]
until another directorate is chosen and qualified. Unless the
law or charter expressly provides than an office shall become
QUORUM
vacant upon expiration of the term of office for which the
officer was elected, the general rule is to allow the officer to
▪ The required quorum for a valid election of directors or
holdover until his successor is duly qualified. [The Government
trustees is a majority (50%+1) of the outstanding capital
of the Philippine Islands v. Filipino, G.R. No. L-16649, July 13,
stock, or if there be no capital stock, a majority of the
1927]
members entitled to vote. [Campos, 439]
ELECTIONS
▪ For stock corporations, the “quorum” referred to in
Section 52 is based on the number of outstanding voting
The underlying policy of the Corporation Code is that the
stocks. For nonstock corporations, only those who are
business and affairs of a corporation must be governed by a
actual, living members with voting rights shall be
board of directors whose members have stood for election,
counted in determining the existence of a quorum
and who have actually been elected by the stockholders, on
during members’ meetings. Dead members shall not be
an annual basis. Only in that way can the directors’ continued
counted. [Tan v. Sycip, G.R. No. 153468, August 17, 2006]
accountability to the shareholders, and the legitimacy of their
decisions that bind the corporation’s stockholders, be assured.
REMOVAL
The shareholder vote is critical to the theory that legitimizes
the exercise of power by the directors or officers over
A director holds a position of trust and confidence and
properties that they do not own. [Valle Verde Country Club v.
therefore the stockholders or members should feel free to
Africa, G.R. No. 151969, September 4, 2009]
remove him at any time that they have lost such trust in him,
whether or not they can prove the cause of such loss. [Campos,
466]

GENERAL RULE: Any director or trustee of a corporation holdover period is not part of the term of office of a
may be removed from office by a vote of the stockholders member of the board of directors. Consequently, when
holding or representing at least 2/3 of the outstanding capital during the holdover period, a director resigns from the
stock, or if the corporation be a non-stock corporation, by a board, the vacancy can only be filled-up by the
vote of at least 2/3 of the members entitled to vote. Removal stockholders, since there is no term left to fill-up
may be with or without cause. [Corporation Code, Sec. 28] pursuant to the provisions of Section 29 of the
Corporation which mandates that a vacancy occurring in
EXCEPTION: Removal without cause may not be used to the board of directors caused by the expiration of a
deprive minority stockholders or members of the right of member’s term shall be filled by the corporation’s
representation to which they may be entitled under Section 24 stockholders. That a director continues to serve after one
of this Code. [Ibid.] year from his election (i.e., on a holdover capacity),
cannot be considered as extending his term. This
Note: Removal without cause is allowed in the Corporation holdover period, however, is not to be considered as part
Code. However, if there is no cause, the power to remove of his term, which, as declared, had already expired.
cannot be used to render nugatory the right of representation [Valle Verde Country Club v. Africa, G.R. No. 151969,
of the minority through the use of cumulative voting. September 4, 2009]
[Campos, 466]
COMPENSATION
FILLING OF VACANCIES
GENERAL RULE: Absent of any provision in the by-laws
Any vacancy occurring in the board of directors or trustees fixing their compensation, the directors shall not receive any
other than by removal by the stockholders or members or by compensation, as such directors, except for reasonable per
expiration of term: diems.
a. If still constituting a quorum – vacancies may be EXCEPTIONS:

filled by the vote of at least a majority of the
remaining directors or trustees; a. Other compensation may be granted to directors by
the vote of the stockholders representing at least a
b. If not constituting a quorum - vacancies must be majority of the outstanding capital stock at a
filled by the stockholders in a regular or special regular or special stockholders' meeting;
meeting called for that purpose.
b. Compensation may be fixed in the by-laws.
When Stockholders’ Meeting is Necessary
Limitation: In no case shall the total yearly compensation of
The following cases require stockholders or members in a directors, as such directors, exceed ten (10%) percent of the
meeting for the purpose of filling up the vacancies: net income before income tax of the corporation during the
preceding year.
a. When the remaining directors or trustees do not
constitute a quorum; Directors or trustees, as the case may be, are not entitled to
salary or other compensation when they perform nothing
b. When the vacancy is caused by removal of a more than the usual and ordinary duties of their office. This
director or trustee; rule is founded upon a presumption that directors /trustees
render service gratuitously and that the return upon their
c. When the vacancy is caused by expiration of term; shares adequately furnishes the motives for service, without
compensation. However, members of the board may receive
d. When there is an increase in the number of directors compensation, in addition to reasonable per diems, when
or trustees because of an amendment in the articles; they render services to the corporation in a capacity other
than as directors/trustees. [Western Institute of Technology Inc.
e. When the matter of filling up vacancies is referred v. Salas, G.R. No. 113032, August 21, 1997]
to the stockholders or members by the board;
[Campos¸465] FIDUCIARIES DUTIES AND LIABILITY RULES
Note: Vacancies may occur in the board of directors by death, ▪ The directors elected by the stockholders act as a body in
resignation, removal, expiration of term, or abandonment of the formulation of all corporate policies and exercise all
office. [Campos, 464] powers of management. They are fiduciaries of the
corporation, and as such, they are expected to serve the
RESIGNATION corporation with reasonable diligence and skill and with
utmost loyalty to its interests. [Campos, 641]
▪ It may be made orally or in writing. There must be clear
and positive indication of the intention to resign, and it ▪ The members of the Board of Directors have a three-fold
must be absolute and unconditional. [Campos, 464] duty: duty of obedience, duty of diligence, and the duty
of loyalty. Accordingly, the members of the board of
▪ The remaining members of a corporation’s board of directors (1) shall direct the affairs of the corporation
directors cannot elect another director to fill in a vacancy only in accordance with the purpose for which it was
caused by the resignation of a hold-over director. The organized; (2) shall not willfully and knowingly vote for

or assent to patently unlawful acts of the corporation or corporation justly calls for protection. [Gokongwei v. SEC, G.R.
act in bad faith or with gross negligence in directing the No. L-45911, April 11, 1979]
affairs of the corporation; and (3) shall not acquire any
personal or pecuniary interest in conflict with their duty GENERAL RULE: Directors and officers are not solidarily
as such directors or trustees. [Strategic Alliance Dev. Corp. liable with the corporation.
v. Radstock Securities Ltd., G.R. No. 178158, December 4,
2009] EXCEPTIONS:
a. Criminal liability for a crime committed through
Duty of Obedience the officer’s act, default or omission;
▪ The directors or trustees and officers to be elected b. Solidary liability under specific provision of law;
shall perform the duties enjoined on them by law
and the by-laws of the corporation. [Sec. 25, c. Stipulation in a contract holding the officer
Corporation Code] personally liable with the corporation;
d. Consent to the issuance of watered stocks or having
▪ The duty of obedience imposes on the directors the knowledge thereof, fails to file objections;
obligation to act only within the corporate powers,
under the penalty of liability for damages unless e. Guilty of gross negligence or bad faith in directing
they acted in good faith and with due diligence. the affairs of the corporation;
[Campos, 641]
f. Acquiring any personal or pecuniary interest in
Duty of Diligence conflict with their duty;
▪ Directors or trustees who willfully and knowingly g. Willfully and knowingly vote for and assent to
vote for or assent to patently unlawful acts of the patently unlawful acts of the corporation.
corporation or who are guilty of gross negligence
or bad faith in directing the affairs of the WHEN PERSONAL LIABILITY ATTACHES
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors GENERAL RULE: The officer cannot be held personally liable
or trustees shall be liable jointly and severally for with the corporation, whether civilly or otherwise, for the
all damages resulting therefrom suffered by the consequences of his acts, if acted for and in behalf of the
corporation, its stockholders or members and other corporation, within the scope of his authority and in good
persons. [Sec. 31, Corporation Code] faith. [Rodolfo Laborte, et al. v. Pagsanjan Tourism Consumers’
Coop., et al., G.R. No. 183860, Jan. 15, 2014]
▪ Directors and officers are required to exercise due
care in the performance of their functions. The EXCEPTIONS: Personal liability of corporate directors,
standard of care is that of a reasonable prudent trustees or officers attaches only when:
person. (Aquino, 289)
a. they assent to a patently unlawful act of the
Duty of Loyalty corporation, or when they are guilty of bad faith or
gross negligence in directing its affairs, or when
▪ Directors or trustees who acquire any pecuniary or there is a conflict of interest resulting in damages to
personal interest in conflict with their duty as such the corporation, its stockholders or other persons;
shall be liable jointly and severally for all damages
resulting therefrom. b. they consent to the issuance of watered down
stocks or when, having knowledge of such
▪ When a director or trustee attempts to acquire or issuance, do not forthwith file with the corporate
acquires any interest adverse to the corporation in secretary their written objection;
respect of any matter which has been reposed in
him in confidence as to which equity imposes a c. they agree to hold themselves personally and
liability upon him to deal in his own behalf, he shall solidarily liable with the corporation; or
be liable as trustee for the corporation and must
account for all the profits which otherwise would d. they are made by specific provision of law
have accrued to the corporation. [Sec. 31, personally answerable for their corporate action.
Corporation Code] [Harpoon Marine Services, Inc., et al. v. Fernan H.
Francisco, G.R. No. 167751, March 2, 2011]
Doctrine of Corporate Opportunity – Corporate officers are
not permitted to use their position of trust and confidence to RESPONSIBILITY FOR CRIMES
further their private interests. The doctrine of “corporate
opportunity” is precisely a recognition by the courts that the ▪ Corporations cannot be held criminally liable within
fiduciary standards could not be upheld where the fiduciary Philippine jurisdiction since there is no law relating to
was acting for two entities with competing interest. The the practice and procedure in criminal actions whereby
doctrine rest fundamentally on the unfairness, in particular a corporation may be brought to court to be proceeded
circumstances, of an officer or director taking advantage of an against criminally. [West Coast Life Insurance Co. v. Hurd,
opportunity for his personal profit when the interest of the G.R. No. L-8527, March 30, 1914]

shareholdings by way of deceit practiced by means

▪ If the crime is committed by a corporation, the directors, of concealing his knowledge of important corporate
officers, employees or other officers thereof responsible affairs. [Strong v. Repide, 213 U.S. 419, May 3, 1909]
for the offense shall be charged and penalized for the
crime, precisely because of the nature of the crime and CONTRACTS
the penalty therefor. A corporation cannot be arrested
and imprisoned; hence, cannot be penalized for a crime A director is a fiduciary of the corporation, thus, in case of
punishable by imprisonment. However, a corporation conflict of his interest with those of the corporation, he cannot
may be charged and prosecuted for a crime if the sacrifice the latter without incurring liability for his disloyal
imposable penalty is fine. Even if the statute prescribes act. [Campos, 686]
both fine and imprisonment as penalty, a corporation
may be prosecuted and, if found guilty, may be fined. Self-Dealing Director – One situation where a director may
[Ching v. Secretary of Justice, G.R. No. 164317, February 6, gain undue advantage over his corporation is when he enters
2006] into a contract with the latter. [Campos, 687]
INSIDE INFORMATION GENERAL RULE: A contract of the corporation with one or

more of its directors or trustees or officers is voidable, at the
As insiders, directors and officers have access to confidential option of such corporation.
information relating to the business of the corporation. Their
fiduciary position prohibits them from using any such EXCEPTIONS:
information to benefit themselves or any competitor
corporation in which they may have a more substantial a. That the presence of such director or trustee in the
interest. [Campos, 725] board meeting in which the contract was approved
was not necessary to constitute a quorum for such
GENERAL RULE: It is unlawful for an insider to sell or buy a meeting;
security of the issuer or the security that is not generally
available to the public. b. That the vote of such director or trustee was not
necessary for the approval of the contract;
EXCEPTIONS:
c. That the contract is fair and reasonable under the
a. The insider proves that the information was not circumstances; and
gained from such relationship; or
d. That in case of an officer, the contract has been
b. If the other party selling to or buying from the previously authorized by the board of directors.
insider (or his agent) is identified, the insider
proves: Contract Remains Valid When:
1. That he disclosed the information to the other a. The corporation does not attack or question its
party; or validity;
2. That he had reason to believe that the other b. Ratified by the vote of the stockholders
party otherwise is also in possession of the representing at least 2/3 of the outstanding capital
information. [Sec. 27, Securities Regulation stock or at least 2/3 of the members; Provided:
Code]
1. There is full disclosure of the adverse interest
Note: of the director/trustee; and
▪ A purchase or sale of a security of the issuer made 2. The contract is fair and reasonable.
by an insider or such insider’s spouse or relatives
by affinity or consanguinity within the second Between Corporations with Interlocking Directors –
degree, legitimate or common-law, shall be Another situation which may involve the duty of loyalty of a
presumed to have been effected while in possession director is when he occupies such a position in two
of material nonpublic information if transacted corporations dealing with each other. [Campos, 766]
after such information came into existence but prior
to dissemination of such information to the public GENERAL RULE: A contract between two or more
and the lapse of a reasonable time for market to corporations having interlocking directors shall not be
absorb such information. [Ibid.] invalidated on that ground alone.
▪ When a director-majority stockholder, who is the EXCEPTION:

administrator of corporate affairs directly
negotiating the sale of corporate landholdings to a. Fraud;
the Government at great prices, purchases the
stocks of a shareholder without informing the latter b. Contract is unfair and unreasonable;
of the on-going negotiations, such director is
deemed to have fraudulently acquired the c. Interlocking directorship is prohibited by the by-

laws. The by-laws of a corporation may create an executive

committee, composed of not less than three members of the
Note: If the interest of the interlocking director in one board, to be appointed by the board. Said committee may act,
corporation is substantial (exceeding 20% of the outstanding by majority vote of all its members, on such specific matters
capital stock) and his interest in the other corporation or within the competence of the board, as may be delegated to it
corporations is merely nominal, he shall be subject to the in the by-laws or on a majority vote of the board, except with
provisions of the Sec. 32. respect to:
Ratification a. Approval of any action for which shareholders'

approval is also required;
The contract may be ratified by the vote of the stockholders
representing 2/3 of the outstanding capital stock or by the b. The filing of vacancies in the board;
vote of at least 2/3 of the members; Provided that:
c. The amendment or repeal of by-laws or the
a. Full disclosure of the adverse interest of the director adoption of new by-laws;
in the meeting;
d. The amendment or repeal of any resolution of the
b. The contract is fair and reasonable. board which by its express terms is not so
amendable or repealable; and
Note: The rule under Sec. 33 of Corporation Code allowing
annulment of contracts between corporations with e. A distribution of cash dividends to the
interlocking directors resulting in the prejudice to one of the shareholders.
corporation, has no application to cases where fraud is alleged
to have been committed to third parties. [DBP v. CA, G.R. No. Note:
126200, August 16, 2001]
▪ The board of directors may create committees for
Management Contracts – A management contract is a the performance of certain functions. As long as the
contract whereby a corporation undertakes to manage or board clearly specifies and limits the functions
operate all or substantially all of the business of another delegated, and the delegation does not legally go so
corporation, whether such contracts are called service far as to render the board of directors powerless
contracts. and free from all the responsibilities imposed on it
by law, such delegation will be valid. [Campos, 407-
GENERAL RULE: No corporation shall conclude a 408]
management contract with another corporation unless such
contract shall have been approved by the board of directors ▪ It is within the power of the Board of Directors to
and by stockholders owning at least the majority of the authorize any person or committee to undertake
outstanding capital stock, or by at least a majority of the corporate acts. The board has power to constitute
members in the case of a non-stock corporation, of both the even an executive committee, even when no such
managing and the managed corporation, at a meeting duly committee is provided for in the articles and by-
called for the purpose. laws of the corporation. [Filipinas Port Services Inc.
v. Go, G.R. No. 161886, March 16, 2007]
EXCEPTIONS:
MEETINGS
a. Where a stockholder or stockholders representing
the same interest of both the managing and the Regular and Special Meetings of Directors and Trustees –
managed corporations own or control more than
1/3 of the total outstanding capital stock entitled to a. Shall take place monthly, unless otherwise
vote of the managing corporation; or provided by the by-laws.
b. Where a majority of the members of the board of b. Anywhere in or outside of the Philippines, unless
directors of the managing corporation also the by-laws provide otherwise.
constitute a majority of the members of the board
of directors of the managed corporation, then the Notice – Written notice must be given to the director or
management contract must be approved by the trustee at least 1 day prior to the meeting, unless:
stockholders of the managed corporation owning at
least 2/3of the total outstanding capital stock a. A different period is required by the by-laws;
entitled to vote, or by at least 2/3 of the members in
the case of a non-stock corporation. b. Waived by the stockholders or members.
Note: No management contract shall be entered into for a Presided by the President – The president shall preside at
period longer than 5 years for any one term. all meetings of the directors or trustee as well as of the
stockholders or members, unless the by-laws provide
EXECUTIVE COMMITTEE otherwise.
Quorum –

GENERAL RULE: A majority of the number of directors or 12. Right to be furnished with the most recent financial
trustees as fixed in the articles of incorporation shall statements/reports; [Sec. 75]
constitute a quorum.
13. Right to recover stocks unlawfully sold for delinquent
EXCEPTIONS: payment of subscription; [Sec. 69]
a. The articles of incorporation or the by-laws provide 14. Right to file individual suit, representative suit and
for a greater majority; derivative suits.
b. The election of officers which shall require the vote Note: Heirs do not automatically become stockholders of the
of a majority of all the members of the board. corporation and acquire the rights and privileges of the
deceased as shareholder of the corporation. The stocks must
Rule of Abstention – In a board meeting, an abstention is be distributed first to the heirs in estate proceedings, and the
presumed to be counted as an affirmative vote in favor of the transfer of the stocks must be recorded in the books of the
majority insofar as it may be construed as an acquiescence in corporation. Section 63 of the Corporation Code provides that
the action of those who voted affirmatively; but such no transfer shall be valid, except as between the parties, until
presumption, being merely prima facie would not hold in the the transfer is recorded in the books of the corporation.
face of clear evidence to the contrary. [Lopez v. Ericta, G.R. No. During such interim period, the heirs stand as the equitable
L-32991, June 29, 1972] owners of the stocks, the executor or administrator duly
appointed by the court being vested with the legal title to the
Voting of Certain Shares – stock. Until a settlement and division of the estate is effected,
the stocks of the decedent are held by the administrator or
a. Delinquent shares are not entitled to vote; executor. Consequently, during such time, it is the
administrator or executor who is entitled to exercise the rights
b. Treasury shares are not entitled to vote while they of the deceased as stockholder. [Joselito Musni Puno vs. Puno
remain in the treasury; Enterprises, Inc., et. al., G.R. No. 177066, Sept. 11, 2009]
c. Fractional shares are not entitled to vote; Doctrine of Equality of Shares – Except as otherwise
provided in the articles of incorporation and stated in the
d. Escrow shares are not entitled to vote before the certificate of stock, each share shall be equal in all respects to
fulfillment of the condition imposed thereon; every other share. [Sec. 6, Corporation Code]
e. Unpaid shares are not entitled to vote if delinquent; Note: The doctrine applies when the articles of incorporation
and the certificate of stock do not make a distinction between
f. Shares jointly owned require the consent of all the shares. The presumption is that they have the same rights,
owner to vote privileges and liabilities.
STOCKHOLDERS AND MEMBERS PARTICIPATION IN MANAGEMENT
RIGHTS OF A STOCKHOLDER AND MEMBER Proxy – Stockholders and members may vote in person or by
proxy in all meetings of stockholders or members:
1. Direct or indirect participation in management; [Sec. 6]
a. It may refer to the person duly authorized by a
2. Voting rights; [Sec. 6] stockholder to vote in his behalf in a stockholders’
meeting; and
3. Right to remove directors; [Sec. 28]
b. It may refer to the document which evidences this
4. Proprietary rights; authority. [Campos, 514]
5. Right to dividends; [Sec. 43 and 71] Requirements:
6. Appraisal right; [Sec. 81] a. Proxies shall be in writing.
7. Right to issuance of stock certificate for fully paid shares; b. Signed by the stockholder or member and filed
[Sec.64] before the scheduled meeting with the corporate
secretary.
8. Proportionate participation in the distribution of assets
in liquidation; [Sec. 122] c. Unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended.
9. Right to transfer of stocks in corporate books; [Sec. 74]
d. No proxy shall be valid and effective for a period
10. Pre-emptive right; [Sec. 69] longer than 5 years at any one time.
11. Right to inspect books and records; [Sec. 74]

Note: Failure to comply with these requirements will render

the proxy void and ineffective, and a vote or presence in a Note:
meeting which is counted on the basis of such a void proxy
may result in the invalidation of any action decided in such ▪ A proxy may act for another although he himself is
meeting, unless the number of shares required for quorum or disqualified to vote.
voting is otherwise present. [Campos, 515]
▪ The same person may act as a proxy for several
GENERAL RULE: A stockholder cannot be deprived of his stockholders or members.
right to use of proxies by any by-law. [Campos, 515]
▪ Directors or trustees cannot attend or vote by proxy
EXCEPTION: However, in non-stock corporations, the Code at board meetings but they may still act as proxies
allows a waiver of such right provided this is made in the in stockholder meetings. [De Leon, 494]
Articles of Incorporation or in the by-laws. [Campos, 515]
Voting Trusts – It is a trust agreement whereby a stockholder
Classifications of Proxies remains the beneficial or equitable owner of the shares but
legal ownership is transferred to the trustee who will exercise
1. General Proxy voting rights. [Campos, 562]
a. Task of attending the annual stockholders’ Requirements:

meeting;
a. It must be in writing and notarized;
b. Given the power to vote for directors and
all ordinary matters which may properly b. A certified copy must be filed with the corporation
be taken in the meeting; as well as with the SEC;
c. Does not include the power to vote for an c. It must not be for a period longer than five years,
amendment to the Articles of although it may be renewed each time for not more
Incorporation or other unusual than five years;
transactions. [Campos, 516]
d. The certificates of stock must be cancelled, and new
2. Limited Proxy – Restricts the authority to vote to ones issued to the trustee stating therein that they
specified matters only and may direct the vote to were issued in pursuance of the voting trust
be cast in a certain way. [Ibid.] agreement;
3. Specific Proxy - Authority is for a particular e. The transfer must be entered on the corporate
meeting on a specific date. [Lopez] books with a similar statement;
4. Continuing Proxy - Authority to represent the f. The trustee should issue voting trust certificates in
stockholder at all meetings unless revoked. favor of the transferring stockholders;
[Lopez]
g. The voting trust should not be for an illegal
Termination of Proxy purpose. [Campos, 564]
1. By expiration of the period - The proxy may fix the Note:

period during which it may be used, but it cannot
exceed 5 years, renewable for not more than 5 ▪ In the case of a voting trust specifically required as
years for each renewal. Where the proxy does not a condition in a loan agreement, said voting trust
fix any period, then it expires after the meeting for may be for a period exceeding 5 years but shall
which it was given. [Campos, 516] automatically expire upon full payment of the loan.
▪ Any other stockholder may transfer his shares to

2. By revocation - A proxy is revocable even before the same trustee or trustees upon the terms and
the period fixed therein has expired and even conditions stated in the voting trust agreement, and
where it expressly provides for irrevocability, thereupon shall be bound by all the provisions of
unless it is coupled with an interest. [Campos, 516] said agreement.
Revocation may be made through: ▪ The voting trustee or trustees may vote by proxy
unless the agreement provides otherwise.
a. Formal notice;
▪ By its very nature, a voting trust agreement results
b. Verbal communication; in the separation of the voting rights of a
stockholder from his other rights such as the right
c. Conduct; [SEC Opinion, October 28, 1991] to receive dividends, the right to inspect the books
of the corporation, the right to sell certain interests
3. By death of the stockholder; in the assets of the corporation and other rights to

which a stockholder may be entitled until the case the secretary fails or refuses to call the
liquidation of the corporation. [Lee v. CA, G.R. No. special meeting or refuse to give notice, or if
93695, February 4, 1992] there is no secretary.
Three tests to distinguish a voting trust agreement from ▪ Notice of the time and place, and the purpose
proxies and other voting pools and agreements: for such meeting must be given by publication
or by written notice prescribed in the Code.
1. The voting rights of the stock are separated from
the other attributes of ownership; 5. Granting compensation other than per diems to
directors
2. The voting rights granted are intended to be
irrevocable for a definite period of time; and GENERAL RULE: The directors shall not receive
any compensation.
3. The principal purpose of the grant of voting rights
is to acquire voting control of the corporation. EXCEPTION: For reasonable per diem, provided
[Ibid.] that any compensation other than per diems may
be granted to directors by vote of the stockholders
Cases When Stockholders’ Vote is Required – representing at least a majority of the outstanding
capital stock at a regular or special meeting
a. Majority Vote
Note: Directors’ annual compensation shall not
1. Power to enter into Management Contracts (See exceed 10% of the net income before income tax of
above) the corporation during the preceding year
2. Amendments to by-laws 6. Consideration for no-par-shares
▪ Amendments to by-laws requires majority ▪ The issued price of no-par value shares may
vote of the directors or trustees, and majority be fixed in the articles of incorporation or by
vote of the outstanding capital stock, or at the board of directors pursuant to authority
least majority vote of the members of a non- conferred upon it by the articles of
stock corporation, at a regular or special incorporation or the by-laws, or in the absence
meeting duly called for the purpose. thereof, by the stockholders representing at
least a majority of the outstanding capital
3. Revocation of delegation to the Board of the stock at a meeting duly called for the purpose.
power to amend or repeal or adopt by-laws
b. By a Two-Thirds Vote
▪ The required vote for the revocation of the
powers delegated to the directors or trustees 1. Amendment of the Articles of Incorporation
to amend or repeal any by-laws or adopt new
by-laws shall be majority vote of the GENERAL RULE: The articles of incorporation
outstanding capital stock of the stockholders may be amended by a majority vote of the board of
or majority vote of the members in non-stock directors or trustees and the vote or written assent
corporations. of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, without
4. Calling a meeting to remove directors prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of
Requisites: this Code, or the vote or written assent of at least
two-thirds (2/3) of the members if it be a non-stock
a. There must be a regular meeting or special corporation.
meeting called for such purpose;
EXCEPTION: If the Code prescribes or by special
b. There must be notice to stockholders or law
members of the intention to propose such
removal at the meeting. Note: The amendments shall take effect upon
approval by the SEC or from the date of filing with
▪ A special meeting called for the removal of the said Commission if not acted upon within 6
directors or trustees must be called by the months from the date of filing for a cause not
secretary on order of the president or on attributable to the corporation.
written demand of representing or holding at
least majority of the outstanding capital stock 2. Delegating the power to amend or repeat by-laws
of stockholders or majority vote of the or adopt new by-laws
members.
▪ The owners of two-thirds (2/3) of the
▪ The call for the meeting may be addressed outstanding capital stock or two-thirds (2/3)
directly to the stockholders or members in of the members in a non-stock corporation

may delegate to the board of directors or members in a meeting duly called for the
trustees the power to amend or repeal any by- purpose.
laws or adopt new by-laws.
5. Issuance of shares not subject to pre-emptive right
▪ The required vote for the revocation of the
powers delegated to the directors or trustees GENERAL RULE: All stockholders of a stock
to amend or repeal any by-laws or adopt new corporation shall enjoy pre-emptive right to
by-laws shall be majority vote of the subscribe to all issues or disposition of shares of any
outstanding capital stock of the stockholders class, in proportion to their respective
or majority vote of the members in non-stock shareholdings.
corporations.
EXCEPTION: if such right is denied by the articles
▪ The amended or new by-laws shall only be of incorporation or an amendment
effective upon the issuance by the Securities
and Exchange Commission of a certification Note: That such pre-emptive right shall not extend
that the same are not inconsistent with the to shares to be issued in compliance with laws
Code. requiring stock offerings or minimum stock
ownership by the public; or to shares to be issued
3. Extending/shortening corporate term in good faith with the approval of the stockholders
▪ A private corporation may extend or shorten exchange for property needed for corporate
its term as stated in the articles of purposes or in payment of a previously contracted
incorporation when approved by a majority debt
vote of the board of directors or trustees and
ratified at a meeting by the stockholders 6. Sale/disposition of all or substantially all of
representing at least two-thirds (2/3) of the corporate assets
outstanding capital stock or by at least two-
thirds (2/3) of the members in case of non- ▪ When authorized by the vote of the
stock corporations. stockholders representing at least 2/3 of the
outstanding capital stock, or by vote of 2/3 of
▪ A written notice of the proposed action and of the members, in a stockholder's or member's
the time and place of the meeting shall be meeting duly called for the purpose. That any
addressed to each stockholder or member at dissenting stockholder may exercise his
his place of residence as shown on the books appraisal right under the conditions provided
of the corporation. in the Code.
▪ In case of extension of corporate term, any 7. Investment of funds in another business

dissenting stockholder may exercise his
appraisal right under the conditions provided ▪ A private corporation may invest its funds in
in this code. any other corporation or business or for any
purpose other than the primary purpose for
4. Increasing/decreasing capital stock and Incurring, which it was organized when approved by a
creating, increasing bonded indebtedness majority of the board of directors or trustees
and ratified by the stockholders representing
▪ Increasing or decreasing capital stock requires at least 2/3 of the outstanding capital stock, or
approval by a majority vote of the board of by at least 2/3of the members in the case of
directors and, at a stockholder's meeting duly non-stock corporations, at a stockholder's or
called for the purpose, 2/3 of the outstanding member's meeting duly called for the purpose.
capital.
Provided, however, that where the investment
▪ Written notice must be addressed to each by the corporation is reasonably necessary to
stockholder at his place of residence as shown accomplish its primary purpose as stated in
on the books of the corporation. the articles of incorporation, the approval of
the stockholders or members shall not be
▪ Any increase or decrease in the capital stock or necessary.
the incurring, creating or increasing of any
bonded indebtedness shall require prior 8. Dividend declaration
approval of the Securities and Exchange
Commission. ▪ No stock dividend shall be issued without the
approval of stockholders representing not less
▪ Non-stock corporations may incur or create than 2/3 of the outstanding capital stock at a
bonded indebtedness, or increase the same, regular or special meeting duly called for the
with the approval by a majority vote of the purpose.
board of trustees and of at least 2/3) of the

9. Power to enter into management contracts (See the majority vote of board of directors of trustees
exception above) of all the constituent corporation and ratified
by the affirmative vote of 2/3 of the
10. Removal of directors or trustees outstanding capital stock of the stockholders
or 2/3 members of each constituent
▪ Any director or trustee of a corporation may corporation.
be removed from office by a vote of the
stockholders holding or representing at least 14. Distribution of assets in non-stock corporations
2/3 of the outstanding capital stock, or if the
corporation be a non-stock corporation, by a ▪ A plan of distribution shall be adopted upon
vote of at least 2/3 of the members entitled to approval of at least 2/3 of the members having
vote. voting rights present or represented by proxy
at such meeting.
▪ Removal may be with or without cause.
Provided that removal without cause may not 15. Incorporation of a religious society
be used to deprive minority stockholders or
members of the right of representation to ▪ Upon written consent and/or by an
which they may be entitled under Section 24 affirmative vote at a meeting called for the
of the Corporation Code. purpose of at least 2/3 of its membership,
incorporate for the administration of its
11. Ratifying contracts with respect to dealings with temporalities or for the management of its
directors/trustees affairs, properties and estate by filing with the
SEC, articles of incorporation verified by the
▪ A contract of dealings of directors or trustees affidavit of the presiding elder, secretary, or
may be ratified by the vote of the stockholders clerk or other member of such religious
representing at least 2/3 of the outstanding society or religious order, or diocese, synod, or
capital stock or of at least 2/3 of the members district organization of the religious
in a meeting called for the purpose. denomination, sect or church.
▪ Provided that full disclosure of the adverse 16. Voluntary dissolution of a corporation
interest of the directors or trustees involved is
made at such meeting, and that the contract is ▪ If dissolution of a corporation does not
fair and reasonable under the circumstances. prejudice the rights of any creditor having a
claim against it, the dissolution may be
12. Ratifying acts of disloyalty of a director effected by majority vote of the board of
directors or trustees, and by a resolution duly
▪ Where a director acquires for himself a adopted by the affirmative vote of the
business opportunity which should belong to stockholders owning at least 2/3 of the
the corporation he must account to the latter outstanding capital stock or of at least 2/3 of
for all such profits by refunding the same, the members of a meeting to be held upon call
unless his act has been ratified by a vote of the of the directors or trustees after publication of
stockholders owning or representing at least the notice of time, place and object of the
2/3 of the outstanding capital stock. meeting.
13. Stockholders’ approval of the plan of merger or ▪ Where the dissolution of a corporation may
consolidation prejudice the rights of any creditor, the
petition for dissolution shall be filed with the
▪ The approval of the plan of merger or SEC. The petition shall be signed by a majority
consolidation made by the directors or of its board of directors or trustees or other
trustees is subject for approval by the officers having the management of its affairs,
affirmative vote of stockholders representing verified by its president or secretary or one of
at least 2/3 of the outstanding capital stock of its directors or trustees, and shall set forth all
each corporation or at least 2/3 of the claims and demands against it, and that its
members. dissolution was resolved upon by the
affirmative vote of the stockholders
▪ Any dissenting stockholder in stock representing at least 2/3 of the outstanding
corporations may exercise his appraisal right capital stock or by at least 2/3 of the members
in accordance with the Code. Provided, That if at a meeting of its stockholders or members
after the approval by the stockholders of such called for that purpose.
plan, the board of directors decides to
abandon the plan, the appraisal right shall be c. By Cumulative Voting
extinguished.
▪ Any stockholder may vote the number of voting
▪ In case of an amendment to the plan of merger shares owned by him for as many persons as there
or consolidation, it shall be approved by are directors to be elected or he may cumulate said

shares and give one candidate as many votes equal or of extending or shortening the term of corporate
to the number of his shares multiplied by the existence; [Sec. 16]
number of directors to be elected, or he may
distribute them on the same principle among as b. In case of sale, lease, exchange, transfer, mortgage,
many candidates as he shall see fit. pledge or other disposition of all or substantially all
of the corporate property and assets as provided in
Provided, that the total number of votes cast by him the Code; and [Sec. 40]
shall not exceed the number of shares owned by
him as shown in the books of the corporation c. In case of merger or consolidation; [Sec. 77]
multiplied by the whole number of directors to be
elected. d. In case of investment of corporate funds in another
corporation or business or for any other purpose;
PROPRIETARY RIGHTS [Sec. 42]
1. Right to Dividends – e. In case of close corporations, a stockholder may, for

any reason, compel the corporation to purchase his
▪ Stockholders have no individual or property shares; Provided, the corporation has sufficient
interest in the profits of the corporation and are not assets in its books to cover its debts and liabilities.
entitled to any portion of the accumulated earning [Sec. 105]
until the declaration of dividend or its equivalent.
[Suarez, 255] How Appraisal Right is Exercised –
▪ Declaration of a dividend creates a debt from the a. Stockholder must make a written demand on the
corporation to the stockholder, who becomes a corporation within 30 days after the date on which
general creditor until fund is actually set aside for the vote was taken for the payment of the fair value
payment of the dividend, when he becomes a of his shares.
preferred creditor. [Suarez, 256]
b. If the propose corporate action is implemented, the
▪ The term “dividend” in its technical sense and corporation must pay the stockholder within 10
ordinary acceptation is that part of portion of the days after demand and upon surrender of the
profits of the enterprise which the corporation, by certificate of stock.
its governing agents, sets apart for ratable division
among the holders of its capital stock—it is a c. Upon payment of the price, the stockholder must
payment, and the right thereto is an incident of transfer his shares to the corporation.
ownership of stock. [Cojuangco v. Sandiganbayan,
G.R. No. 183278, April 24, 2009] Effect of demand and termination of appraisal right –
▪ Dividends are payable to the stockholders of ▪ From the time of demand for payment of the fair
record as of the date of the declaration of value of a stockholder's shares until either the
dividends or holders of record on a certain future abandonment of the corporate action involved or
date, as the case may be, unless the parties have the purchase of the said shares by the corporation
agreed otherwise. And a transfer of shares which is all rights, including voting and dividend rights,
not recorded in the books of the corporation is valid shall be suspended.
only as between the parties, hence, the transferor
has the right to dividends as against the When Right to Payment Ceases –
corporation without notice of transfer but it serves
as trustee of the real owner of the dividends, subject GENERAL RULE: No demand for payment may be
to the contract between the transferor and withdrawn.
transferee as to who is entitled to receive the
dividends. [Ibid.] EXCEPTIONS:
a. Corporation consents to the withdrawal;
2. Right to Appraisal –
b. Proposed corporate action is disapproved by the
▪ Dissenting stockholders are given appraisal right SEC where approval is necessary;
(the right to withdraw). A stockholder has the right
to dissent and demand payment of the fair value of c. Proposed corporate action is abandoned or
his shares. rescinded by the corporation;
Instances of Appraisal Right – d. SEC determines that the stockholder is not entitled
to appraisal right.
a. In case any amendment to the articles of
incorporation has the effect of changing or Who Bears the Costs of the Appraisal –
restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect GENERAL RULE: It shall be borne by the corporation.
superior to those of outstanding shares of any class,

EXCEPTION: The stockholder shall pay for the expenses

when the fair value ascertained by the appraisers is Time of Examination
approximately the same as the price which the corporation
may have offered to pay the stockholder. ▪ The stockholder can exercise his right only at
reasonable hours on business days throughout the
Note: year. Further, the inspection should be made in
such a manner as not to impede the efficient
▪ In the case of an action to recover such fair value, operations of the corporation. [Campos, 786]
all costs and expenses shall be assessed against the
corporation, unless the refusal of the stockholder to Place of Examination
receive payment was unjustified.
▪ Sec. 74 enjoins the corporation to keep all its records
▪ No payment shall be made to any dissenting in the principal office. By implication, the
stockholder unless the corporation has unrestricted inspection has to take place at such office. A
retained earnings in its books to cover the payment. stockholder cannot demand that he be allowed to
[Philip Turner, et. al. vs. Lorenzo Shipping Corp., G.R. take corporate books out of the corporation’s
No. 157479, Nov.24, 2010] principal office for the purpose of inspecting them.
[Ibid.]
3. Right to Inspect
Exercised by whom
GENERAL RULE: Stockholders are entitled to inspect
corporate books and records at a proper time and place and ▪ Such right could be exercised by stockholders or
for a proper purpose. [Suarez, 323] their personal representatives, and either with or
without the presence of the stockholder [Suarez,
EXCEPTION: When the stockholder has made no effort to 324]
prove or even allege that the information he desired to obtain
was necessary to protect his interests as a stockholder, or that ▪ Where there is a voting trust agreement, both the
it was for a specific and honest purpose, and not to gratify voting trustee as well as the transferor have the
curiosity, nor for speculative or vexatious purposes. Neither right of inspection. [Campos, 791]
can secret formulas be examined by stockholders. [Suarez,
323] Elements for application of Sec 144 penal provision in
relation to violation of right to inspect books/records:
Note: The stockholder’s right of inspection of corporate books
and records is based on his ownership of the assets and a. A director, trustee, stockholder or member has
property of the corporation. It is therefore an incident of made a prior demand in writing for a copy of
ownership of the corporate property, whether this ownership excerpts from the corporation’s records or minutes
or interest be termed an equitable ownership, a beneficial
ownership or a quasi-ownership. The right of inspection is b. Any officer or agent of the concerned corporation
predicated upon the necessity of self-protection on the part of shall refuse to allow the said director, trustee,
the stockholder. [Gokongwei v. SEC, G.R. No. L-45911, April 11, stockholder or member of the corporation to
1979] examine and copy said excerpts;
Extent – c. If such refusal is made pursuant to a resolution or

order of the board of directors or trustees, the
a. Due to bank secrecy, stockholders of a bank do not liability under this section for such action shall be
have access to the records of depositors; Except imposed upon the directors or trustees who voted
upon written consent of the depositor or in cases or for such refusal; and
impeachment, bribery, dereliction or where the
money deposited is the subject matter of litigation. d. Where the officer or agent of the corporation sets
up the defense that the person demanding to
b. A stockholder is entitled to know the basis for the examine and copy excerpts from the corporations
amounts in the financial reports. Considering that records and minutes has improperly used any
records may be voluminous and he may find them information secured through any prior
difficult to interpret, a stockholder may make examination of the records or minutes of such
copies, extracts and memoranda of such records. corporation or of any other corporation OR was not
acting in good faith or for a legitimate purpose in
c. The minutes of directors’ meetings would inform making his demand, the contrary must be shown or
the stockholder of all policies laid down by the proved. [Ma. Belen Flordeliza Ang-Abaya, et. al. vs.
board. However, the stockholder does not have a Eduardo G. Ang, G.R. No. 178511, Dec. 4, 2008]
right to a copy until the minutes have been
approved. Note:
d. A stockholder cannot demand that he be furnished ▪ This is the right of existing stockholders of a
with such list but that he should instead directly corporation to subscribe to or purchase shares of
examine the books of the corporation. [Campos¸784] stock in proportion to their respective

shareholdings, before the shares of the corporation plans of the corporation by exercising their
are offered to the general public. [Suarez, 242] pre-emptive right. [Campos, 58]
▪ Its basis is to preserve the existing proportional ▪ The stockholders must be given a reasonable
rights of the stockholders. [Campos, 56] time within which to exercise their pre-
emptive rights. Upon the expiration of said
4. Pre-Emptive Right period, any stockholder who has not exercised
such right will be deemed to have waived it.
a. When the capital stock of a corporation is increased [Ibid.]
and new shares are issued;
Note:
b. When shares from the unsubscribed portion of the
original or authorized capital stock are issued. ▪ Where the shares are issued in exchange for
[Suarez, 242] property needed for corporate purposes, or for a
debt previously contracted, the stockholder cannot
Note: The right includes the disposition of not only new demand his pre-emptive right. Otherwise, it might
shares issued in pursuance of an increase of capital stock, but greatly prejudice the interest of the corporation.
would cover the issue of previously unissued shares which [Campos, 55]
form part of the existing authorized capital stock, as well as
treasury shares. [Campos, 54] ▪ Where the shares are issued by one corporation in
exchange for shares in another corporation in
EXCEPTIONS: pursuance of a merger, the pre-emptive right does
not exist, provided of course that the issue is made
a. When such right is denied by the articles of with the approval of the stockholders representing
incorporation or an amendment; 2/3 of the authorized capital stock, and is not made
in bad faith. [Ibid.]
b. Shares to be issued in compliance with laws
requiring stock offerings or minimum stock ▪ The pre-emptive right of stockholders in close
ownership by the public; corporations is broadened to include all issues,
without exception, unless otherwise denied or
c. Shares to be issued in good faith with the approval limited by the articles of incorporation. [Corporation
of the stockholders representing 2/3 of the Code, Sec. 102]
outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a Remedies When Wrongfully Ignored or Denied –
previously contracted debt;
a. Aggrieved stockholder may obtain an injunction
d. Shares issued with the approval of stockholders against the issue;
payment of previously contracted debts; b. Aggrieved stockholder may obtain a mandamus to
allow him to exercise the right;
e. Additional issues of originally authorized shares;
c. SEC or the court may order the cancellation of the
▪ If the shares of a corporation are offered and shares, provided no innocent third parties are
not subscribed or purchased by the prejudiced;
stockholders and the shares are again being
offered, there is not pre-emptive right with the d. Derivative suit when the violation resulted in waste
latter offer. [Benito v. SEC, G.R. No. L-56655, and management of the corporation assets or in
July 25, 1983] giving fraudulent directors control of the
corporation. [Campos, 63]
▪ There is a pre-emptive right when only a
specified portion of the authorized capital 5. Right to Vote
stock was offered for subscription upon the
corporation’s inception. ▪ The right to vote is incident to membership. [Suarez,
335]
f. Waiver by the stockholder;
▪ The stockholders or members may vote in person,
▪ Any prior waiver or denial should appear in by proxy, or by mail, if authorized by the by-laws
the articles of incorporation. A waiver through with the approval of the SEC.
an amendment to the articles would only need
a 2/3 vote of the outstanding capital stock, 6. Right of First Refusal
and would bind not only the other 1/3 who
may have dissented, but also all subsequent ▪ Section 63 contemplates no restriction as to whom
stockholders. It should be made part of the the stocks may be transferred. It does not suggest
articles, otherwise it may be possible for future that any discrimination may be created by the
stockholders to disrupt subsequent financial corporation in favor of, or against a certain

purchaser. The owner of shares, as owner of acts or transactions subject of the action occurred
personal property, is at liberty, under said section and at the time the action was filed;
to dispose them in favor of whomever he pleases,
without limitation in this respect, than the general b. Bona fide ownership by a stockholder of stock in
provisions of law. [Fleischer v. Botica Nolasco Co. his own right suffices to invest him with standing
Inc., G.R. No. L-23241, March 14, 1925] to bring a derivative suit. The number of his shares
is immaterial because he is not suing in his own
REMEDIAL RIGHTS behalf. [Campos, 821]
Individual suit c. He exerted all reasonable efforts, and alleges the

same with particularity in the complaint, to exhaust
▪ It is an action filed in court by a stockholder against all remedies available under the articles of
the corporation seeking redress of a wrong which is incorporation, by-laws, laws or rules governing the
a direct violation of his rights as a stockholder. The corporation or partnership to obtain the relief he
following are some instances: desires;
1. When a stockholder is denied of his right to d. No appraisal rights are available for the act or acts
inspect corporate books; complained of; and
2. When a stockholder is denied of his right to
vote; e. The suit is not a nuisance or harassment suit. [Rule
8, Interim Rules of Procedure Governing Intra-
3. When a stockholder is deprived of his share in Corporate Controversies]
the dividends declared by the corporation;
[Suarez, 292] Nuisance and harassment suits are prohibited, and in
determining whether a suit is a nuisance or harassment suit,
Representative Suit the court shall consider:
▪ Where the wrong is done to a group of a. The extent of the shareholding or interest of the
stockholders, as where preferred stockholders’ initiating stockholder or member;
rights are violated, a class or representative suit will
be proper for the protection of all stockholders b. Subject matter of the suit;
belonging to the same group. [Campos, 819]
c. Legal and factual basis of the complaint;
Derivative Suit
d. Availability of appraisal rights for the act or acts
▪ It is an action filed by a stockholder on behalf of complained of; and
himself and other stockholders and for the benefit
of the corporation, to redress a wrong which is e. Prejudice or damage to the corporation. In case of
primarily to the corporation, and for which it has a nuisance or harassments suits, the court may motu
cause of action [Suarez, 293] proprio or upon motion dismiss the case. [Ang v.
Ang, G.R. No. 201675, June 19, 2013]
▪ A derivative action is a remedy designed by equity
and has been the principal defense of the minority Note:
shareholders against abuses by the majority. It is
enough that a member or a minority of ▪ A “family” corporation is not exempt from
stockholders file a derivative suit for and in behalf complying with the clear requirements and
of a corporation. An individual stockholder is formalities of the rules for filing a derivative suit.
permitted to institute a derivative suit on behalf of There is nothing in the pertinent laws or rules
the corporation wherein he holds stock in order to which state that there is a distinction between
protect or vindicate corporate rights, whenever family corporations and other types of corporations
officials of the corporation refuse to sue or are the in the institution by a stockholder of a derivative
ones to be sued or hold the control of the suit. [Ibid.]
corporation. In such actions, the suing stockholder
is regarded as the nominal party, with the ▪ Under Sec. 36, in relation to Sec. 23, a corporation’s
corporation as the party in interest. [Maj. power to sue is lodged with its board of directors or
Stockholders of Ruby Ind’l. Corp. vs. Miguel Lim, et. al., trustees. An individual stockholder is permitted to
G.R. No. 165887, June 6, 2011] institute a derivative suit on behalf of the
corporation wherein he holds stocks in order to
Requisites: protect or vindicate corporate rights, whenever the
officials of the corporation refuse to sue, or are the
A stockholder or member may bring an action in the name of ones to be sued, or hold the control of the
a corporation or association, as the case may be, provided, corporation. In such actions, the suing stockholder
that: is regarded as a nominal party, with the
corporation as the real party in interest. [Chua v. CA,
a. He was a stockholder or member at the time the G.R. No. 150793, November 19, 2004]

OBLIGATIONS OF A STOCKHOLDER c. Subsequent transferee – Same position as transferor

notwithstanding good faith.
1. Liability to the corporation for unpaid subscription
d. Transferor – liable for damages. [De Leon, 568]
▪ Subject to the provisions of the contract of
subscription, the board of directors of any stock MEETINGS
corporation may at any time declare due and
payable to the corporation unpaid subscriptions to
Regular Meetings of Stockholders or Members
the capital stock and may collect the same or such
percentage thereof, in either case with accrued
Purpose: Principally for election of new directors or trustees.
interest, if any, as it may deem necessary.
When –
Effect of failure to pay –
a. Annually on the date fixed in the by-laws;
a. Subscription contract with fixed date – Entire
balance becomes due and payable with interest. b. If not so fixed, on any date in April of every year as
Shares become delinquent 30 days therefrom and
determined by the board of directors or trustees.
subject to sale unless otherwise declared by the
board;
Where: In the city or municipality where the principal office
is located.
b. No fixed date – Board can make the call for
payment and specify the due date. Special Meetings of Stockholders or Members
c. Notice of call is a resolution or formal declaration When –

of the board that unpaid subscriptions are due and
payable. It is mandatory although it may be waived 1. Any time deemed necessary; or
by the subscribed. [De Leon, 596]
2. As provided in the by-laws.
Note: Call is not necessary when the corporation is
insolvent. Where: In the city or municipality where the principal office
is located.
2. Liability for interest on unpaid subscription
Notice Requirement –
▪ Subscribers for stock shall pay to the corporation
interest on all unpaid subscriptions from the date Regular: Written notice must be given to the stockholders or
of subscription, if so required by, and at the rate of members at least 2 weeks prior to the meeting, unless:
interest fixed in the by-laws. If no rate of interest is
fixed in the by-laws, such rate shall be deemed to a. A different period is required by the by-laws;
be the legal rate.
b. Waived by the stockholders or members.
▪ The corporation may waive the right to collect
interest; Provided, that no corporate creditors are Special: Written notice must be given to the stockholders or
prejudiced by such waiver. If payment is required members at least 1 week prior to the meeting, unless:
by the by-laws, waiver may only be done by
amending the by-laws. [SEC Opinion, March 20, a. A different period is required by the by-laws;
1980]
b. Waived by the stockholders or members.
3. Liability for watered stock
Who Calls the Meetings –A petitioning stockholder or
▪ A watered stock is a stock issued not in exchange member, in the absence of any other person authorized to call
for its equivalent, either in cash, property, stock a meeting, may call a meeting of a corporation upon showing
dividend or services. [Suarez, 313] good cause and upon an order issued by the SEC. [Corporation
Code, Sec. 50]
Whom liable –
Quorum – A quorum shall consist of the stockholders
a. Consenting director or officer – solidary liability representing a majority of the outstanding capital stock or a
with the participating stockholder for the majority of the members in the case of non-stock
difference between the fair value received at the corporations.
time of the issuance of the stock and the part or the
issued value of the same. Minutes of the Meetings
b. Subscriber – May be called upon to contribute to the Every corporation shall keep and carefully preserve at its
extent of the difference between the amount paid principal office a record of all business transactions and
and the par or issued value of the shares. minutes of all meetings of stockholders or members, or of the

board of directors or trustees, in which shall be set forth in which represent relatively long-term investment in the
detail: corporation. [Campos, 2]
a. the time and place of holding the meeting; Capital – It is the actual property of the corporation, including
cash, real and personal property. [Campos, 5]
b. how authorized;
Capital Stock – It is the amount fixed, usually by the
c. the notice given; corporate charter, to be subscribed and paid in or secured to
be paid in by the shareholders of a corporation. [Ibid]
d. whether the meeting was regular or special;
SUBSCRIPTION AGREEMENTS
e. if special, its object;
▪ It is a contract for the acquisition of unissued stock in an
f. those present and absent; and existing corporation or a corporation still to be formed.
[Sec 60]
g. every act done or ordered done at the meeting. [Sec.
74, Corporation Code] ▪ In effect, it is a contribution or a promised contribution
to the capital of a corporation. The subscription price
Upon the demand of any director, trustee, stockholder or need not be paid in full at the time of the contract. It is
member: not a sale covered by the Statue of Frauds. [Campos, 34]
a. the time when any director, trustee, stockholder or Pre-incorporation Subscription

member entered or left the meeting must be noted
in the minutes; ▪ It is a subscription for shares of stock of a
corporation still to be formed.
b. the yeas and nays must be taken on any motion or
proposition, and a record thereof carefully made; ▪ It is irrevocable for at least 6 months from the date
of subscription unless:
c. The protest of any director, trustee, stockholder or
member on any action or proposed action must be a. All other subscribers consent to the
recorded in full on his demand. revocation; or
The records of the minutes of any meetings shall be open to b. Incorporation fails to materialize within the
inspection by any director, trustee, stockholder or member of given period stipulated in the contract.
the corporation at reasonable hours on business days and he
may demand, in writing, for a copy of excerpts from said ▪ No pre-incorporation subscription may be revoked
records or minutes, at his expense. after the submission of the articles of incorporation
to the SEC.
Any officer or agent of the corporation who shall refuse to
allow the examination and copying of minutes shall be liable CONSIDERATION FOR STOCKS
to such director, trustee, stockholder or member:
Stocks shall not be issued for a consideration less than the par
a. For damages; or issued price. Consideration for the issuance of stock may
be any or a combination of any two or more of the following:
b. For offense which shall be punishable under
Section 144 of this Code. 1. Cash actually paid to the corporation;
Refusal upon Order of the Board – If such refusal is made ▪ Payment using other currencies [SEC July 1986]
pursuant to a resolution or order of the board of directors or
trustees, the liability shall be imposed upon the directors or ▪ Shares of stock cannot be issued in exchange for
trustees who voted for such refusal promissory notes. [Sec. 62]
Proper Defense - It shall be a defense that the person 2. Outstanding Shares;

demanding to examine and copy excerpts from the
corporation’s records and minutes has improperly used any ▪ Outstanding shares may be exchanged for
information secured through any prior examination of the stocks in the event of reclassification or
records or minutes of such corporation or of any other conversion from one class to another. [Sec. 62]
corporation, or was not acting in good faith or for a legitimate
purpose in making his demand. 3. Property, tangible or intangible;
▪ General Requisites:
CAPITAL STRUCTURE
a. Actually received by the corporation;
The capital structure of the corporation refers to the aggregate
of the securities issued by the corporation – the instruments b. Necessary or convenient for its use and

lawful purposes;
▪ Compensation for services actually rendered to
c. Fair valuation equal to the par or issued the corporation is credit which is property and
value of stock; whose value is ascertainable. [SEC Opinion, 2
April 1976]
d. Capable of pecuniary estimation;
6. Incurred Indebtedness
e. Transferable to the corporation;
▪ Requisites to convert liability into subscription
▪ Property co-ownership may be alienated as payment:
payment subject to the following:
a. There is an already incurred indebtedness;
a. The property is something reasonably
necessary in the pursuit of its business; b. The amount of the indebtedness is at least
equal to the par value of the shares to be
b. Interest in the co-ownership must have a issued;
pecuniary value that is capable of
ascertainment at a fair valuation equal c. Submission of documents to the SEC:
issued or par value of stock;
1. Detailed schedule of liabilities to be
c. The right over the property must be offset;
actually transferred;
2. Deed of assignment executed by the
d. No creditors of the properties held in creditors;
common shall be prejudiced by the
transfer; 3. Updates book of accounts for
examination;
e. The transfer is subject to the light of legal
redemption and pre-emption under the 4. Report by an independent CPA if the
Civil Code; [SEC-OGC Opinion No. 08-02, principal office is located in the
2008] province; [SEC-OGC Opinion No. 13-
03, 2013]
▪ Receivables may be treated as property
payment subject to the following: SHARES OF STOCK
a. Existence and collectability is verified by ▪ Shares of stock are units into which the capital stock is
the SEC; divided. [Campos, 6]
b. Shares to be issued shall be held in escrow Nature of Stock

until actual payment of the amount; [SEC
Opinion 5-11, 2005] ▪ Shares of stock are personal property which may be
transferred, mortgaged, pledged, or disposed.
▪ Valuation of intangible property:
a. Initially determined by the Board of ▪ It represents the interest of the holder to participate
Directors; in the management of the corporation, to share
proportionally in the profits of the business and,
b. Subject to SEC approval; [Sec. 62] upon liquidation, to obtain an aliquot part of the
corporate assets after all corporate debts have been
▪ Property includes services which have already paid. [Campos, 6]
been performed as long as they are capable of
valuation and are fairly valued. [Campos, 141] ▪ A share of stock only typifies an aliquot part of the
corporation’s property, or the right to share in its
4. Unrestricted Retained Earnings proceeds to that extent when distributed according
to law and equity, but the holder is not the owner
▪ Dividends shall be declared out of the of any part of the capital [properties] of the
unrestricted retained earnings of the corporation, nor is he entitled to the possession of
corporation. The existence of surplus profits any definite portion of its assets. The stockholder is
from the operation of the corporate business is not a co-owner of corporate property. [Stockholders
a condition precedent. [SEC Memorandum of F. Guanzon and Sons Inc. v. Register of Deeds of
Circular No. 11, 2008] Manila, G.R. No. L-182216, October 30, 1962]
5. Service actually rendered to the corporation; Consideration for Shares of Stock
▪ Shares of stock cannot be issued in exchange for a. Cash actually paid to the corporation;
future services. [Sec. 62]

b. Outstanding Shares; such release; and as against creditors, a reduction of the

capital stock can take place only in the manner and under the
c. Property, tangible or intangible; conditions prescribed by the statute or the charter or the
articles of incorporation. Moreover, strict compliance with the
d. Unrestricted Retained Earnings; statutory regulations is necessary. [Philippine Trust Co. v.
Rivera, G.R. No. L-19761, January 29, 1923
e. Service actually rendered to the corporation;
Situs of the Shares of Stock
f. Incurred Indebtedness.
▪ The actual situs of the shares of stock is the country
Watered Stock of domicile of the corporation. [Wells Fargo Bank &
Union Trust Company vs CIR, G.R. No. L-46720, June
▪ Watered stocks are shares issued as fully paid up 28, 1940]
although there was no consideration paid in any
form or the consideration was inadequate because Classes of Shares of Stock
it was not equal to the par or issued value of the
shares. [Campos, 142] 1. Common Stocks
Liability of Directors for Watered Stocks ▪ It is the most commonly issued share by
corporations. It entitles the owner of such stocks to
▪ Any director or officer of a corporation consenting an equal pro rata division of profits. [Campos, 8]
to the issuance of stocks for a consideration less
than its par or issued value or for a consideration in ▪ A common stock represents the residual ownership
any form other than cash, valued in excess of its fair interest in the corporation. It is a basic class of stock
value, or who, having knowledge thereof, does not ordinarily and usually issued without
forthwith express his objection in writing and file extraordinary rights or privileges and entitles the
the same with the corporate secretary, shall be shareholder to a pro rata division of profits. [CIR v.
solidarily liable with the stockholder concerned to CA, CTA and A. Soriano Corp., G.R. No. 108,576,
the corporation and its creditors for the difference January 20, 1999]
between the fair value received at the time of
issuance of the stock and the par or issued value of 2. Preferred Stocks
the same. [Sec. 65, Corporation Code]
▪ A class of stock that entitles the holder to preference
Note: Fraud is not an element. in the dividends or in the distribution of assets
upon liquidation of the corporation. The given
Trust Fund Doctrine for Liability for Watered Stocks preferences must be stated in the articles of
incorporation and in the certificate of stock. They
Stock watering causes injury to the following: can be issued only with a stated par value. [Campos,
9]
a. Corporation – It is deprived of the needed capital
and the opportunity to market its securities. Preference as to dividends
b. Existing and future shareholders – There is a ▪ Participating: Shareholder is entitled to participate

dilution of the proportionate interests in the in the distribution of the excess common shares.
corporation of those who paid the full value of their
shares. ▪ Non-Participating: The shareholder will only
receive the stipulated preferred dividends.
c. Present and future creditors – The corporation is Preferred stocks are non-participating unless
deprived of assets and capital required to be otherwise provided. [Campos, 10]
contributed by all shareholders as substitute for
individual liability for corporate debts. ▪ Cumulative: The shareholder is entitled to the
current dividends and the arrears. Such arrears
d. Anyone who deals with the corporation – Stock must be paid in subsequent years before dividends
watering is accompanied by misleading corporate can be paid to the common stocks.
accounts and financial statements caused by an
overstatement of asset values. [Ballantine, 794] ▪ Non-Cumulative: The shareholder is entitled only
to the payment of current dividends that are paid
Note: It is an established doctrine that subscriptions to the from unrestricted retained earnings, and lose
capital of a corporation constitute a fund to which creditors whatever agreed rate of return in any year where
have a right to look for satisfaction of their claims and that the there was no available unrestricted retained
assignee in insolvency can maintain an action upon any earnings. [Villanueva]
unpaid stock subscription in order to realize assets for the
payment of its debts. A corporation has no power to release ▪ Discretionary dividend type: The right of a
an original subscriber to its capital stock from the obligation stockholder to receive dividends in a given year
of paying for his shares, without a valuable consideration for

depends on the discretion of the board of directors, corporation as a treasury share, it does not
regardless of the annual profits. [Campos, 11] participate in dividends because dividends cannot
be declared by the corporation to itself; Nor in the
▪ Mandatory dividend type: The contract may meetings as voting stock, for otherwise equal
impose a positive duty on directors to declare distribution of voting powers among stockholders
preferred dividends every year that profits are will be lost. [CIR v. Manning, G.R. No. L-28398,
earned. Failure to do so will not deprive the holder August 6, 1975]
his right to dividends. [Campos, 11]
5. Redeemable Shares
▪ Earned cumulative or dividend credit type: This
contract gives a right to arrears in dividends where ▪ Issued only when expressly so provided in the
profit was earned during the years when dividends Articles of Incorporation, those shares may be
were not declared. It postpones the receipt of deprived of voting rights and are classified as non-
dividends to a later date. [Campos, 11] voting shares.
As to Voting Rights ▪ When redeemable: Upon the expiration of the

period fixed, regardless of the existence of
▪ Voting shares are a class of shares which entitles the unrestricted retained earnings in the books of the
holder to vote in the meeting of the corporation. corporation. Unless retired or cancelled, shares
[Suarez] redeemed by the corporation are considered
treasury shares. [Suarez, 185]
▪ Preferred stocks are usually denied the right to
vote. But unless such right is clearly withheld, a ▪ Redemption may not be made where the
preferred stockholder would have the right to vote corporation is insolvent or the redemption may
since it is incident to stock ownership. [Campos, 12] cause insolvency. Moreover, corporations that
issued redeemable shares must maintain a sinking
Preference upon liquidation fund to accumulate the necessary amount to meet
the redemption price of the shares. Lastly, the
▪ A preferred stockholder may be given preference redemption must be made in good faith and
not only in the dividends but also in the without prejudice to the rights of other creditors or
distribution of the corporate assets upon shareholders. [SEC-OGC Opinion No. 09-21, 2009]
liquidation of the business. In absence of any
provision granting preference, he participates pro ▪ When the certificates of stock recognizes
rata with common stockholders. [Campos, 17] redemption, but the option to do so is clearly vested
in the corporation, the redemption is clearly the
Preferred stockholder is not a creditor type known as “optional” and rest entirely with the
corporation, and that the stockholder is without
▪ A preferred stockholder is an equity holder and not right to either compel or refuse the redemption of
a creditor of the corporation. His investment is his shares of stock. [Republic Planters Bank v. Agana,
therefore subject to all the risks of ownership. G.R. No. 51765, March 3, 1997]
[Campos]
▪ A redemption by the corporation of its stock is, in a
3. Par and no-par shares sense, a repurchase of it for cancellation. While
redeemable shares may be redeemed regardless of
▪ Par value shares are those with a fixed value in the the existence of unrestricted retained earnings, this
articles of incorporation and certificates of stock. is subject to the condition that the corporation has,
after such redemption, assets in its books to cover
▪ No par shares are those whose issued price is not debts and liabilities inclusive of capital stock.
stated in the certificate, but which may be fixed in Redemption, therefore, may not be made where the
the articles of incorporation, or by the board of corporation is insolvent or if such redemption will
directors when so authorized by said articles or by cause insolvency or inability of the corporation to
the by-laws, or in the absence thereof, by the meet its debts as they mature. [Ibid.]
shareholders themselves. [Campos, 29]
6. Founder’s Shares
4. Treasury Shares
▪ These are shares classified as such in the articles of
▪ These are shares already issued and fully paid but incorporation. If the exclusive right to vote and be
subsequently reacquired by the issuing corporation voted for in the election of directors is granted, it
by purchase, redemption, donation or some other must be for a limited period of 5 years, commencing
lawful means. Such shares may again be disposed from the date of approval by the SEC.
of for a reasonable price fixed by the board of
directors. 7. Stock Warrants
▪ Treasury shares do not have the status of being ▪ A type of security which entitles the holder the
outstanding shares. As long as it is held by the right to subscribe to, the unissued capital stock of a

corporation or to purchase issued shares in the

future, evidenced by a Warrant Certificate, whether ▪ A call is usually expressed in the form of a
detachable or not, which may be sold or offered for resolution adopted by the board of directors,
sale to the public but does not apply to a right specifying the proportion of the unpaid
granted under an Option Plan duly approved by subscription which it is desired to call in and the
the SEC for the benefit of employees, officers time or times when it is to be payable. The entire
and/or directors of the issuing corporation. amount of the unpaid subscription may be called at
[Villanueva] once or it may be made payable by installments, at
stated intervals, or by successive calls. [Villanueva]
Two types of warrant certificates:
▪ There are 2 instances when call is not necessary to
1. Detachable warrant - It may be sold, make the subscriber liable for payment of the
transferred or assigned to any person by the unpaid subscription:
warrant holder separate from, and
independent of, the corresponding a. When, under the terms of the subscription
Beneficiary Securities. contract, subscription is payable, not upon
call, but immediately, or on a specified day, or
2. Non-Detachable warrant – It cannot be sold, when it is payable in installments at specified
transferred or assigned to any person by the times; and
warrant holder separate from, or independent
of the Beneficiary Securities. [Ibid.] b. If the corporation becomes insolvent, which
makes the liability on the unpaid subscription
8. Stock Options due and demandable regardless of any
stipulation to the contrary in the subscription
▪ A privilege granted to subscribe a certain portion of agreement. [Villanueva]
the unissued capital stock of a corporation within a
specified period and under the terms and Notice Requirement
conditions of the grant, exercisable at any time
within the period granted. [Villanueva] ▪ The provisions of the old Corporation Law on
notice of call and delinquency sale proceedings are
PAYMENT OF SUBSCRIPTION BALANCE mandatory in nature and must strictly be complied
with; when not complied with, the call would be
▪ Any unpaid balance would be a debt owed by the unlawful and ineffective. The Court further held
subscriber to the corporation, for which he may be liable that "the reason for the mandatory provision is not
to pay interest. He may not be released from such only to assure notice to all subscribers, but also to
obligation to pay the unpaid balance, unless it is with the assure equality and uniformity in the assessment
consent of all the stockholders, without prejudice to on stockholders. [Villanueva citing Lingayen Gulf
creditors, and upon adequate consideration. [Campos, Electric Power Co. v. Baltazar (1953)]
158]
▪ It is mandatory although it may be waived by the
Effect of failure to pay subscribed. [De Leon, 596]
a. Subscription contract with fixed date – Entire Sale of Delinquent Shares

balance becomes due and payable with
interest. Shares become delinquent 30 days ▪ If the subscriber becomes delinquent, the stock
therefrom and subject to sale unless otherwise shall be sold at public auction to the highest bidder.
declared by the board; Before the sale, a board resolution shall be passed
ordering the sale, and the amount due plus accrued
b. No fixed date – Board can make the call for interest, date, time and place of sale which shall not
payment and specify the due date. be less than 30 days nor more than 60 days from the
date the stock becomes delinquent.
▪ Subscribers for stock shall pay to the corporation interest
on all unpaid subscriptions from the date of ▪ The sale of delinquent stock is the non-payment of
subscription, if so required by, and at the rate of interest the subscription price for the share of stock itself
fixed in the by-laws. If no rate of interest is fixed in the and the stockholder has yet to fully pay for the
by-laws, such rate shall be deemed to be the legal rate. value of the shares subscribed. When the share has
[Sec. 66, Corporation Code] been fully paid, the stockholder no longer has any
outstanding obligation to deprive him of full title to
▪ The corporation may waive the right to collect interest; his share. Sec. 69 will only be applicable if the
Provided, that no corporate creditors are prejudiced by stockholder still has not fully paid for the share and
such waiver. If payment is required by the by-laws, the non-stock corporation decided to sell such share
waiver may only be done by amending the by-laws. as a consequence. [Calatagan Golf Club, Inc. vs. Sixto
[SEC Opinion, March 20, 1980] Clemente, JR., G.R. No. 16544, April 16, 2009]
Call by Board of Directors Call by Resolution of the Board of Directors

c. The complaint was filed within 6 months from the

▪ The board must issue a resolution ordering the sale sale;
of delinquent stock. The resolution must contain
the ff: CERTIFICATE OF STOCK
a. Amount due on each subscription; ▪ A certificate of stock, although not a condition precedent
to the acquisition of the rights and status of a
b. Accrued interest; stockholder, is nevertheless the best evidence thereof
and is convenient for purposes of transfer, either by way
c. Date, time and place of sale; Sale must not be of collateral or by absolute sale. [Campos, 206]
less than 30 days no more than 60 days from
the date the stocks become delinquent. ▪ It certifies that the person named therein is a holder or
owner of a stated number of shares in the corporation. It
Notice of Sale also indicates the kind of shares issued to him, the date
of issuance and the par value thereof, if they are par
a. Sent to every delinquent stockholder, either value shares. It is signed by the proper officers of the
personally or by registered mail; corporation and bears the corporate seal. [Ibid.]
b. Published: ▪ A certificate of stock is prima facie evidence of a holder’s

interest and status in a corporation. It is a written
1. Once a week for two consecutive weeks; instrument signed by the proper officer of a corporation
stating or acknowledging that the person named in the
2. In a newspaper of general circulation; document is the owner of a designated number of shares
of its stock. Mere inclusion in the GIS does not make one
3. In the province or city where the a stockholder of a corporation, for this may have come
principal office of the corporation is to pass by mistake, expediency or negligence. [David C.
located; Lao and Jose C. Lao vs. Dionisio C. Lao, G.R. No. 170585,
October 6, 2008]
Auction Sale to the Highest Bidder
Nature of the Certificate
▪ Delinquent stock shall be sold at public auction to
the highest bidder offering to pay the full amount ▪ A certificate of stock is treated as a quasi-negotiable
of the balance of subscription, accrued interest and instrument as having some attributes and
costs of advertisement and expenses of sale, for the partaking of the character of negotiable
smallest/fraction number of shares. instruments. [Suarez]
▪ Transfer of ownership must be recorded in the ▪ The stock certificate expresses the contract between
books of the corporation and issuance of certificate the corporation and the stockholder, but it is not
of stock to the highest bidder. essential to the existence of a share in stock or the
creation of the relation of shareholder to the
Note: corporation. [Tan v. SEC, G.R. No. 95696, March 3,
1992]
▪ Remaining shares are credited to the delinquent
stockholder who shall be entitled to the issuance of Uncertificated Shares
a certificate of stock covering such shares.
▪ Security evidenced by electronic or similar records.
▪ The corporation may bid when there are no [Securities Regulation Code, Sec. 3.14]
bidders, and the total amount due shall be credited
as paid in full in the books of the corporation. ▪ Uncertificated shares may be issued by a
corporation whose securities are registered or listed
▪ Title to all the shares of stock covered by the on securities exchange if:
subscription shall be vested in the corporation as
treasury shares and may be disposed of by said a. Resolved by the board of directors and agreed
corporation in accordance with the provision of the by a shareholder, investor or securities
Corporation Code. intermediary, to be issued in the name of said
shareholders.
Questioning the Delinquency Sale
b. Provided in its articles of incorporation and
a. There is irregularity or defect in the notice of sale or by-laws, subject to a condition that investors
in the sale of the delinquent stock; may not require the corporation to issue a
certificate in respect of any shares recorded in
b. The party seeking to maintain the action tenders to their name. [Sec. 43, Securities Regulation Code]
the party holding the stock the sum for which the
same was sold with interest from the date of sale; ▪ Transfer of uncertificated shares shall only be valid,
so far as the corporation is concerned, when a

transfer is recorded in the books of the corporation with interest and expenses (in case of delinquent
so as to show the names of the parties to the transfer shares), if any is due, has been paid.
and the number of shares transferred. [Ibid.]
Doctrine of Indivisibility of Subscription
Negotiability
▪ A certificate of stock is one, entire and indivisible
▪ As a quasi-negotiable instrument, it may be contract. It cannot be divided into portions, so that
transferred by indorsement, coupled with delivery. the stockholder shall not be entitled to a certificate
The holder takes it without prejudice to such rights until he has remitted the full payment of his
or defenses as the registered owner’s or transferor’s subscription together with any interest or expenses,
creditor may have under the law except insofar as if any is due. [SEC Opinion, November 12, 1993]
such rights or defenses are subject to the limitations
imposed by the principles governing estoppels. [De Payment Pro-Rata
Los Santos v. McGrath, G.R.No. L-4818, February 28,
1955] ▪ A corporation may, in the absence of provisions in
their by-laws to the contrary, apply payments made
Requirements for Valid Transfer of Stocks by the subscribers-stockholders either as:
a. There must be delivery of the stock certificate; a. Full payment for the corresponding number of
stock the par value of each of which is covered
b. The certificate must be endorsed by the owner or by such payment; or
his attorney-in-fact or other persons legally
authorized to make the transfer; and b. As payment pro-rata to each and all the entire
number of shares subscribed for. [Baltazar v.
c. The transfer must be recorded in the books of the Lingayen Gulf Electric Power, Co. Inc., G.R. No.
corporation to be valid against third parties and the L-16236, June 30, 1965]
corporation itself. [Rural Bank of Lipa v. CA, G.R.No.
124535, September 28, 2001] ▪ The present rule on the matter is that all partial
payments on one subscription shall be deemed
▪ The rule is that the endorsement of the certificate of applied proportionately among the number of
stock by the owner or his attorney-in-fact or any shares. To permit the issuance of stock certificate
other person legally authorized to make the for payment of a subscription that does not cover
transfer shall be sufficient to effect the transfer of the entire number and value of the shares
shares only if the same is coupled with delivery. subscribed would violate Section 64. [SEC Opinion
The delivery of the stock certificate duly endorsed No. 06-13, 2006]
by the owner is the operative act of transfer of
shares from the lawful owner to the new transferee. Lost or Destroyed Certificates
But to be valid against third parties, the transfer
must be recorded in the books of the corporation. Procedure for the issuance by a corporation of new certificates
[Bitong v. CA, G.R. No. 123553, July 13, 1998] of stock in lieu of those which have been lost, stolen or
destroyed:
▪ When a stock certificate is endorsed in blank by the
owner thereof, it constitutes what is termed as 1. The registered owner of a certificate of stock in a
"street certificate," so that upon its face, the holder corporation or his legal representative shall file with the
is entitled to demand its transfer his name from the corporation an affidavit setting forth, if possible:
issuing corporation. [Simny G. Guy, et. al. vs. The
Hon. Ofelia C. Calo, G.R. No. 189486, Sept. 5, 2012] a. Circumstances as to how the certificate was lost,
stolen or destroyed;
▪ In a sale of shares of stock, physical delivery of a
stock certificate within a reasonable time is one of b. Number of shares represented by such certificate;
the essential requisites for the transfer of ownership
of the stocks purchased. [Fil-Estate Golf and Dev. c. Serial number of the certificate and the name of the
Inc., et al. v. Vertex Sales and Trading, Inc., G.R. No. corporation which issued the same;
202079, June 10, 2013]
d. Such other information and evidence which he may
▪ Until the transfer is registered, the transferee is an deem necessary;
outsider and any action he may wish to bring
against the corporation must be brought before the 2. The corporation shall verify the affidavit and other
regular courts. [Campos, 302] information and evidence with the books of the
corporation.
Issuance
3. Said corporation shall publish a notice in a newspaper of
▪ No certificate of stock shall be issued to a subscriber general circulation published in the place where the
until the full amount of his subscription together corporation has its principal office, once a week for 3
consecutive weeks at the expense of the registered owner

of the certificate of stock which has been lost, stolen or

destroyed. The notice shall state: Contents
a. The name of said corporation; a. All stocks in the name of the stockholders
alphabetically arranged;
b. The name of the registered owner;
b. Amount paid and unpaid on all stocks and the date
c. The serial number of said certificate; and of payment of any installment;
d. The number of shares represented by such c. Alienation, sale, or transfer or stocks;

certificate;
d. Other entries prescribed by the by-laws.
4. There shall be a 1 year waiting period from the date of
the last publication during which a contest can be
interposed. Who May Make Valid Entries
5. No contest after 1 year: ▪ Only the corporate secretary is duly authorized to

make entries on the stock and transfer book. Hence,
a. The right to make such contest shall be barred. entries made by the Chairman or President are
invalid. [Torres v. CA, G.R. No. 120138, September 5,
b. The corporation shall cancel in its books the 1997]
certificate of stock which has been lost, stolen or
destroyed and issue in lieu thereof new certificate DISPOSITION AND ENCUMBRANCE OF SHARES
of stock;
Sale of Partially Paid Shares
6. Contest or court action regarding ownership: Issuance of
the new certificate of stock in lieu thereof shall be ▪ No shares of stock against which the corporation
suspended until the final decision by the court regarding holds any unpaid claim shall be transferrable in the
the ownership of said certificate of stock which has been books of the corporation. [Corporation Code, Sec. 63]
lost, stolen or destroyed.
Sale of a Portion of Shares Not Fully Paid
7. A new certificate may be issued even before the
▪ There can be no transfer in view of the doctrine of
expiration of the waiting period if the registered owner
indivisibility. [Villanueva]
files a bond or other security in lieu thereof as may be
required, effective for a period of 1 year for such amount
Sale of All Shares Not Fully Paid
and in such form and with such sureties as may be
satisfactory to the board of directors. (Sec 73)
▪ The entire subscription may be transferred to a
single transferee, who must assume the unpaid
Note:
balance. It is necessary, however, to secure the
consent of the corporation since the transfer of
▪ Except in case of fraud, bad faith, or negligence on
subscription rights and obligations contemplates a
the part of the corporation and its officers, no action
novation of contract which under Article 1293 of
may be brought against any corporation which
the Civil Code cannot be made without the consent
shall have issued certificate of stock in lieu of those
if the creditor. [Villanueva]
lost, stolen or destroyed pursuant to the procedure
above-described.
Sale of Fully Paid Shares
▪ The procedure is not applicable where no certificate ▪ It is personal property and may be transferred by
was ever issued by the corporation or where the delivery of the certificate indorsed by the owner or
certificate was lost by the corporation. [De Leon, his attorney-in-fact or other person legally
631] authorized to make the transfer. [Villanueva]
STOCK AND TRANSFER BOOK
Allowable Restrictions on the Sale of Shares
The stock and transfer book records the names and addresses GENERAL RULE: Free transferability.
of all stockholders arranged alphabetically, the installments
paid and unpaid on all stock for which subscription has been EXCEPTION: In close corporations, restrictions on the right
made, and the date of payment thereof, a statement of every to transfer shares will not be binding upon a purchaser in
alienation, sale or transfer of stock made the date thereof and good faith unless they are indicated in the following:
by and to whom made, and such other entries as may be
prescribed by law. A stock and transfer book, like other a. Articles of incorporation;
corporate books and records, is not in any sense a public
record, and thus is not exclusive evidence of the matters and b. By-laws;
things which ordinarily are or should be written therein.
[Lanuza v. CA, G.R. No. 131394, March 28, 2005] c. Certificate of stock.

▪ Dissolution means that the corporation ceases to be a

Note: juridical person and consequently can no longer
continue transacting its business. However, for the
▪ Said restrictions grant the existing stockholders or purpose only of winding up its affairs and liquidating its
the corporation the option to purchase the shares of assets, its corporate existence continues for a period of
the transferring stockholders with reasonable three years from such dissolution. [Campos, 367]
terms, conditions or period stated therein.
▪ The Certificate of Dissolution issued by the SEC is the act
▪ Restrictions shall not be more onerous than of the state which will legally affect the dissolution. Since
granting the existing stockholders or the the state grants the corporation the right to exist, it is
corporation the option to purchase the shares of the only the state which can allow it to terminate its
transferring stockholder with such reasonable existence. Except for the expiration of its term, no
terms, conditions or period stated. dissolution can be effective without some act of the state.
[Campos¸369]
▪ If upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the MODES OF DISSOLUTION
option to purchase, the transferring stockholder
may sell his shares to any third person. [Corporation 1. Voluntary
Code, Sec. 98]
a. Where No Creditors Are Affected (Sec.118)
▪ A close corporation’s articles of incorporation may
provide such restrictions as long as they are not ▪ Requirements:
more onerous than granting the existing
stockholders or the corporation the option to a. Majority vote of the board of directors or
purchase the shares of the transferring stockholder trustees; and
with such reasonable terms, conditions or period. If
the existing stockholders or corporation fails to b. By a resolution duly adopted by the
exercise the option to purchase, the transferring affirmative vote of the stockholders
stockholder may sell his shares to any third person. owning at least 2/3 of the outstanding
[SEC-OCG Opinion No. 10-01, January 15, 2010] capital stock or of at least 2/3 of the
members of a meeting to be held upon
Requisites of a Valid Transfer call of the directors or trustees;
▪ It may be transferred by delivery of the certificate c. Publication of the notice of time, place
or certificates endorsed by the owner of his attorney and object of the meeting for 3
in fact or other person legally authorized to make consecutive weeks in a newspaper
the transfer. [Villanueva] published in the place where the
principal office of said corporation is
▪ Recorded in the books of the corporation: located; and if no newspaper is
published in such place, then in a
1. Names of the parties newspaper of general circulation in the
Philippines;
2. Date of transfer
d. Notice sent to each stockholder or
3. Number of certificate/s member either by registered mail or by
personal delivery at least thirty (30) days
4. Number of shares transferred. [Sec prior to said meeting;
63]
e. A copy of the resolution authorizing the
Involuntary Dealings with Shares dissolution shall be certified by a
Pledge Mortgage and Other Encumbrances majority of the board of directors or
trustees and countersigned by the
▪ Shares of stock are personal property and the secretary of the corporation.
owner has the inherent right to transfer at will,
including the power to encumber. The right of a f. SEC shall thereupon issue the certificate
stockholder to pledge, mortgage or otherwise of dissolution.
encumber his shares is recognized under Sec. 55 of
the Corporation Code, which regulates the manner Note: Provided no creditors are prejudiced, a corporation
of voting on pledged or mortgaged shares. may choose to dissolve prior to the expiration of its term by
However, its registration in the stock and transfer following the provision of section 118. [Campos, 369]
book is not essential either for validity or as a
species of notifying third parties. [Villanueva] b. Where Creditors Are Affected (Sec.119)
DISSOLUTION AND LIQUIDATION ▪ Requirements:

a. Petition for dissolution shall be filed with

the SEC; a. By Expiration of Corporate Term
b. Signed by a majority of its board of ▪ Once such period expires, the corporation is
directors or trustees or other officers automatically dissolved without any other
having the management of its affairs; proceeding, and it cannot be considered even
a de facto corporation. [Campos, 367]
c. Verified by its president or secretary or
one of its directors or trustees; ▪ Where the corporate life of a corporation as
stated in its articles of incorporation expired,
d. Petition sets forth all claims and without a valid extension having been
demands against the corporation; effected, it was deemed dissolved by such
expiration without need of further action on
e. Dissolution was resolved upon by the the part of the corporation. [Majority
affirmative vote of the stockholders Stockholders of Ruby Industrial Corporation v.
representing at least 2/3 of the Lim, G.R. No. 165887, June 6, 2011]
outstanding capital stock or by at least
2/3 of the members. b. Failure to Organize and Commence Business
Within 2 years from Incorporation (Sec 22)
Note:
▪ If a corporation does not formally organize
▪ If the petition is sufficient in form and substance, and commence the transaction of its business
the Commission shall, by an order reciting the or the construction of its works within 2 years
purpose of the petition, fix a date on or before from the date of its incorporation, its corporate
which objections thereto may be filed by any powers cease and the corporation shall be
person, which date shall not be less than 30 days deemed dissolved.
nor more than 60 days after the entry of the order.
▪ A corporation is formally organized by the
▪ Before such date, a copy of the order shall be adoption of its by-laws, the election of its
published at least once a week for 3 consecutive directors and the election of its officers. All
weeks in a newspaper of general circulation these steps must be taken within two years
published in the municipality or city where the from the date of incorporation, otherwise the
principal office of the corporation is situated, or if corporation will be deemed dissolved. If the
there be no such newspaper, then in a newspaper corporation does not elect directors for two
of general circulation in the Philippines, and a years but the incorporating directors have
similar copy shall be posted for 3 consecutive commenced and continued the corporate
weeks in 3 public places in such municipality or business, then the stockholders must be
city. deemed to have acquiesced to their acts as
directors as if they had been duly elected in
▪ Upon 5 days notice, given after the date on which accordance with law, at least for the purpose
the right to file objections as fixed in the order has of determining whether the corporation
expired, the Commission shall proceed to hear the “failed to organize.”[Campos, 383]
petition and try any issue made by the objections
filed; and if no such objection is sufficient, and the c. Legislative Dissolution
material allegations of the petition are true, it shall
render judgment dissolving the corporation and ▪ Congress has the reserved power to dissolve
directing such disposition of its assets as justice corporations. Section 76 of the Old
requires, and may appoint a receiver to collect such Corporation Law provided that “any or all
assets and pay the debts of the corporation. corporations created by virtue of this Act may
be dissolved by legislative enactment.”
c. By Shortening of Corporate Term (sec. 120)
Limitations on the power to dissolve by legislative
▪ The corporation will be automatically enactment:
dissolved upon the happening of either:
a. Repeal the corporate franchise of public utility
only when the common good so requires;
a. The approval of the amended articles of
[Sec.11, ART.XII, CONST]
incorporation;
b. Under Sec. 145 of the Code, no right or remedy
b. Expiration of the shortened term as
in favor of or against any corporation, its
already approved;
stockholders, members, directors, trustees, or
Note: There is no need of any further proceedings, subject to officers, nor any liability incurred by any such
corporation, stockholders, members,
the liquidation of its assets. [Campos, 369]
directors, trustees, or officers, shall be
2. Involuntary removed or impaired either by the subsequent

dissolution of said corporation or by any ▪ The authority of the board to manage the corporate
subsequent amendment or repeal of this Code affairs is broad enough to include the power to
or of any part thereof; undertake the liquidation. The board has only a
period of 3 years within which to finish its work of
c. While Congress may provide for the liquidation. [Campos, 415]
dissolution of a corporation, it cannot impair
the obligation of existing contracts between Conveyance to a Trustee within a Three-Year Period
the corporation and third persons, or take
away the vested rights of its creditors. [De ▪ If this method is used, the three-year limitation will
Leon, 738] not apply provided the designation of the trustees
or trustees is made within said period. If the
d. Dissolution By The Sec On Grounds Under corporation initially used the first method (by the
Existing Laws corporation itself) and the board of directors should
subsequently find that the liquidation cannot be
▪ A corporation may be dissolved by the finished within the three-year period, and then all
Securities and Exchange Commission upon its assets may be conveyed to a trustee who can take
filing of a verified complaint and after proper over the liquidation. Unless the trusteeship is
notice and hearing on grounds provided by limited in its duration by the deed of trust, there is
existing laws, rules and regulations. no time limit within which the trustee must finish
[Corporation Code, Sec. 121] liquidation, and he may sue and be sued as such
even beyond the three-year period. [Campos, 415-
▪ The SEC has the power suspend, or revoke, 416]
after proper notice and hearing, the franchise
or certificate of registration of corporations, ▪ For purposes of dissolution and liquidation of a
partnerships or associations, upon any of the corporation, the term “trustee” should include
grounds provided by law, including the counsel of record who may be deem to have
following: authority to pursue pending litigation after the
expiration of the 3-year liquidation period. [Sps.
a. Fraud in procuring its certificate of Gelano v. CA, G.R. No. L-39050, February 24, 1981]
registration;
▪ The trustee of a corporation may continue to
b. Serious misrepresentation as to what the prosecute a case commenced by the corporation
corporation can do or is doing to the within three years from its dissolution until
great prejudice of or damage to the rendition of the final judgment, even if such
general public; judgment is rendered beyond the three-year period
allowed by Section 122. However, there is nothing
c. Refusal to comply or defiance of any in the said cases which allows an already defunct
lawful order of the Commission corporation to initiate a suit after the lapse of the
restraining commission of acts which said three-year period. [Alabang Development
would amount to a grave violation of its Corporation v. Alabang Hills Village Association, G.R.
franchise; No. 187456, June 2, 2014]
d. Continuous inoperation for a period of at ▪ Intra-corporate disputes remain even when the
least five (5) years; corporation is dissolved as a corporation that has
been dissolved is allowed to wind up its affairs
e. Failure to file by-laws within the w/in 3 years of its dissolution. The board is not
required period; rendered functus officio and can still operate for a
limited purpose to handle affairs left behind by the
f. Failure to file required reports in dissolved corporation. Jurisprudence has even
appropriate forms as determined by the recognized the board's authority to act as trustee for
Commission within the prescribed persons in interest beyond the said three-year
period. [Sec. 6, P.D. No. 902-A] period. However, such actions may not be equal to
the corporation doing business. [Vitaliano N.
METHODS OF LIQUIDATION Aguirre II , et. al. vs. FQB+, Inc., et. al., G.R. No.
170770, Jan. 9, 2013]
Winding up the affairs of the corporation means the collection
of all the assets, the payment of all its creditors, and the By Management Committee or Rehabilitation Receiver
distribution of the remaining assets. The manner of
liquidation or winding up may be provided for in the ▪ The liquidation is conducted by the receiver who
corporate by-laws and this would prevail unless it is may have been appointed by the SEC upon its
inconsistent with the law. [Campos, 415] decreeing the dissolution of the corporation. The
three-year period does not apply because the
By the Corporation Itself corporation is substituted by the receiver, who may
sue and be sued even after such period. However,
mere appointment of a receiver, without anything

more, does not result in the dissolution of the devoted for their eleemosynary purpose.
corporation nor bar it from the exercise of its [Villanueva, 883]
corporate rights. [Campos, 416]
Distribution of Assets upon Dissolution
Liquidation after Three years
Rules on distribution and application of assets:
▪ The disposition of the remaining undistributed
assets must necessarily continue even after the 3 a. All liabilities and obligations of the corporation
year period given by the Corporation Code to a shall be paid, satisfied and discharged, or adequate
dissolved corporation to continue as a body provision shall be made therefore;
corporate for purposes of liquidation. It should be
allowed to continue liquidating its remaining assets b. Assets held by the corporation upon a condition
to complete the process of dissolving the requiring return, transfer or conveyance, and
corporation. Likewise, it should be allowed to which condition occurs by reason of the
distribute the proceeds to tits stockholders or dissolution, shall be returned, transferred or
creditors if any. A contrary interpretation would be conveyed in accordance with such requirements;
unjust and absurd. [SEC OGC Opinion No. 14022,
2014] c. Assets received and held by the corporation subject
to limitations permitting their use only for
OTHER CORPORATIONS charitable, religious, benevolent, educational or
similar purposes, but not held upon a condition
NON-STOCK CORPORATIONS requiring return, transfer or conveyance by reason
of the dissolution, shall be transferred or conveyed
A nonstock corporation is one where no part of its income is to one or more corporations, societies or
distributable as dividends to its members, trustees, or officers, organizations engaged in activities in the
subject to the provisions of this Code on dissolution. (Sec 87) Philippines substantially similar to those of the
dissolving corporation according to a plan of
Purposes distribution adopted pursuant to this chapter;
Nonstock Corporations may be formed or organized for the d. Assets other than those mentioned in the preceding
following purposes: paragraphs, if any, shall be distributed in
accordance with the provisions of the articles of
a. Cultural; incorporation or the by-laws, to the extent that the
articles of incorporation or the by-laws, determine
b. Charitable; the distributive rights of members, or any class or
classes of members, or provide for distribution; and
c. Civic service;
e. In any other case, assets may be distributed to such
d. Religious; persons, societies, organizations or corporations,
whether or not organized for profit, as may be
e. Educational; specified in a plan of distribution. (Sec.94)
f. Professional; Plan of distribution of assets
g. Fraternal; a. The board of trustees shall, by majority vote, adopt

a resolution recommending a plan of distribution
h. Literary; and directing the submission thereof to a vote at a
regular or special meeting of members having
i. Similar purposes like trade, industry and voting rights.
chambers. (Sec. 88)
b. Written notice setting forth the proposed plan of
Treatment of profits distribution or a summary thereof and the date,
time and place of such meeting shall be given to
▪ That any profit which a nonstick corporation may each member entitled to vote, within the time and
obtain as an incident to its operation shall, in the manner provided in this Code for the giving
whenever necessary or proper, be used for the of notice of meetings to members.
furtherance of the purpose or purposes for which
the corporation was organized, subject to the c. Such plan of distribution shall be adopted upon
provisions of the Corporation Code. (Sec. 87) approval of at least two-thirds (2/3) of the members
having voting rights present or represented by
▪ The non-incurring of profit is not determinative for proxy at such meeting. (Sec.95)
an entity to be classified as “non-profit”
corporation. Non-stock and non-profit Note: Therefore, in a regular non-stock corporation it is
corporations may earn profits as an incident to their possible for its net assets, as well as the accumulated
primary operations, and so long as the profits are “earnings” from its years of operations, to inure to the benefit

of private individuals, like its own members, or entities for investor;

profit, but only as a consequence of dissolution. [Villanueva,
885] b. Having a nominee director or officer to represent its
interests in such corporation;
Conversion of Non-Stock Corporation to Stock Corporation
c. Appointing a representative or distributor
▪ The SEC has ruled that while an existing stock domiciled in the Philippines which transacts
corporation may be converted into a non-stock business in its own name and for its own account.
corporation by mere amendment of its articles of
incorporation, an existing corporation cannot be d. The appointment of a distributor in the Philippines
converted into a stock corporation by the simple is not sufficient to constitute "doing business"
process of amending its articles of incorporation. unless it is under the full control of the foreign
[Villanueva, 901] corporation. [Steelcase, Inc. vs. Design International
Selections, Inc.,G.R. No. 171995 April 18, 2012]
FOREIGN CORPORATIONS
Jurisprudential Tests of Doing Business
▪ One formed, organized or existing under any laws other
than those of the Philippines and whose laws allow 1. Twin Characterization Test:
Filipino citizens and corporations to do business in its
own country or state. (Sec. 123) a. Nature of the act or transaction (Substance
Test) – the performance of acts or works or the
▪ One formed and organized under laws than those of the exercise of some of the functions normally
Philippines, regardless of the citizenship of the incident to, and in progressive prosecution of,
incorporators and stockholders. [Campos, 483] the purpose and object of its organization;
Bases of Authority over Foreign Corporations - b. Existence of a continuing intent (Continuity

Test) – a continuity of commercial dealings
Consent and arrangements so as to distinguish it from
isolated transactions
▪ A foreign corporation is not prevented from acting
or doing business in another State with the latter’s 2. Contracts Test – Whether the contract was
express or implied consent. In our jurisdiction, executed in the Philippines or whether salient
consent to foreign corporations is governed by Secs. points of the contract are performed within the
125 and 126 of the Corporation Code which deal Philippine territory.
with the application and issuance of licenses. [De
Leon, 768] Summary of Rulings on Doing Business
Doctrine of “Doing Business” under the Foreign The principles regarding the right of a foreign corporation to
Investment Act bring suit in Philippine courts may thus be condensed in four
statements:
a. Soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches; a. If a foreign corporation does business in the
Philippines without a license, it cannot sue before
b. Appointing representatives or distributors Philippine courts;
domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods b. If a foreign corporation is not doing business in the
totaling one hundred eighty (180) days or more; Philippines, it needs no license to sue before
Philippine courts on an isolated transaction or on a
c. Participating in the management, supervision or cause of action entirely independent of any
control of any domestic business, firm, entity or business transaction;
corporation in the Philippines;
c. If a foreign corporation does business in the
d. Any other act or acts that imply a continuity of Philippines without a license, a Philippine citizen
commercial dealings or arrangements, and or entity which has contracted with said
contemplate to that extent the performance of acts corporation may be estopped from challenging the
or works, or the exercise of some of the functions foreign corporation’s corporate personality in a suit
normally incident to, and in progressive brought before the Philippine courts; and
prosecution of, commercial gain or of the purpose
and object of the business organization. d. If a foreign corporation does business in the
Philippines with the required license, it can sue
It shall not include: before Philippine courts on any transaction. (Mr.
Holdings Ltd. V. Bajar, G.R. No. 138104, April 11,
a. Mere investment as a shareholder by a foreign
2002)
entity in domestic corporations duly registered to
do business, and/or the exercise of rights as such

Necessity of a License to Do Business - of the country or state of the applicant allow

Filipino citizens and corporations to do business
Requisites for Issuance of a License: therein, and that the applicant is an existing
corporation in good standing. If such certificate is
a. Foreign Corporation shall submit to the SEC a copy in a foreign language, a translation thereof in
of its articles of incorporation and by-laws, and English under oath of the translator shall be
their translation to an official language of the attached thereto.
Philippines if necessary.
d. A statement under oath of the president or any
b. Application shall be under oath and, unless already other person authorized by the corporation,
stated in its articles of incorporation, shall showing to the satisfaction of the Securities and
specifically set forth: Exchange Commission and other governmental
agency in the proper cases that the applicant is
1. The date and term of incorporation; solvent and in sound financial condition, and
setting forth the assets and liabilities of the
2. The address, including the street number, of corporation as of the date not exceeding 1 year
the principal office of the corporation in the immediately prior to the filing of the application.
country or state of incorporation;
e. Foreign banking, financial and insurance
3. The name and address of its resident agent corporations shall, in addition to the above
authorized to accept summons and process in requirements, comply with the provisions of
all legal proceedings and, pending the existing laws applicable to them.
establishment of a local office, all notices
affecting the corporation; f. In the case of all other foreign corporations, no
application for license to transact business in the
4. The place in the Philippines where the Philippines shall be accepted by the Securities and
corporation intends to operate; Exchange Commission without previous authority
from the appropriate government agency,
5. The specific purpose or purposes which the whenever required by law.
corporation intends to pursue in the
transaction of its business in the Philippines: Rationale: The purpose of the law (on the need to obtain a
Provided, That said purpose or purposes are license to do business is to subject the foreign corporation
those specifically stated in the certificate of doing business in the Philippines to the jurisdiction of our
authority issued by the appropriate courts. [Villanueva, 944 citing Marshall-Wells v. Elser (1924)]
government agency;
Resident Agent
6. The names and addresses of the present
directors and officers of the corporation; ▪ A resident agent is appointed as an indispensable
requirement to the issuance of the SEC license.
7. A statement of its authorized capital stock and Should the foreign corporation be sued, someone
the aggregate number of shares which the must be duly authorized to receive summons and
corporation has authority to issue, itemized by other legal processes, so that the Philippine courts
classes, par value of shares, shares without par may acquire jurisdiction over such corporation.
value, and series, if any;
▪ The resident agent may refer to:
8. A statement of its outstanding capital stock
and the aggregate number of shares which the a. An individual, who must be of good moral
corporation has issued, itemized by classes, character and of sound financial standing,
par value of shares, shares without par value, residing in the Philippines; or
and series, if any;
b. A domestic corporation lawfully transacting
9. A statement of the amount actually paid in; business in the Philippines designated in a
and written power of attorney by a foreign
corporation authorized to do business in the
10. Such additional information as may be Philippines. (Sec. 128)
necessary or appropriate in order to enable the
Securities and Exchange Commission to ▪ A foreign company that merely imports goods from
determine whether such corporation is a Philippine exporter, without opening an office or
entitled to a license to transact business in the appointing an agent in the Philippines, is not doing
Philippines, and to determine and assess the business in the Philippines. [Cargill, Inc. vs. Intra
fees payable. Strata Assurance Corp., G.R. No. 168266 March 15,
2010]
c. A duly executed certificate under oath by the
authorized official or officials of the jurisdiction of Personality to Sue
its incorporation, attesting to the fact that the laws

GENERAL RULE: No foreign corporation transacting be made by publication. [Lingner & Fisher GMBH v.
business in the Philippines without a license, or its successors IAC, G.R. No. L-63557, October 28 1983]
or assigns, shall be permitted to maintain or intervene in any
action, suit or proceeding in any court or administrative ▪ Contracts entered into by a foreign corporation
agency of the Philippines; but such corporation may be sued doing business here without a license are not
or proceeded against before Philippine courts or necessarily null and void, and that the lack of
administrative tribunals on any valid cause of action capacity to sue at the time of the execution of the
recognized under Philippine laws. [Sec.133] contracts is cured by the subsequent registration
and licensing of said corporation. Such contracts
Estoppel may therefore become enforceable after such
subsequent registration. [Campos, 499]
▪ A party is estopped from questioning the capacity
of a foreign corporation to institute an action in our Instances When Unlicensed Foreign Corporations May Be
courts where it had obtained benefits from its Allowed to Sue Isolated Transaction -
dealings with such foreign corporations and
thereafter committed a breach or sought to renege Doctrine of Isolated Transactions
on its obligations.
▪ Foreign corporations, even unlicensed ones, can
Suability of Foreign Corporations sue or be sued on a transaction set apart from their
common business in the sense that there is no
▪ The following principles laid down by the Supreme intention to engage in a progressive suit for the
Court under the Corporation Law would still be purpose and object of business transaction. [Eriks
applicable under Section 133 of the Corporation PTE Ltd. v. CA, G.R. No. 118843, February 6, 1997]
Code:
Grounds for Revocation of License:
a. A foreign corporation doing business in the
Philippines whether with or without a license, a. Failure to file its annual report or pay any fees as
can be sued before Philippine courts. required by the Code;
b. And since a counterclaim partakes of the b. Failure to appoint and maintain a resident agent in
nature of a complaint against the plaintiff, the Philippines;
even if the latter is a foreign corporation doing
business in the Philippines without a license, c. Failure, after change of its resident agent or his
the defendant who has questioned the address, to submit to the SEC a statement of such
plaintiffs’ capacity to sue will not, by filing the change;
counterclaim be deemed to have admitted
such legal capacity. d. Failure to submit to the SEC an authenticated copy
of any amendment to its articles of incorporation or
c. If a foreign corporation is not doing business by-laws or of any articles of merger or
in the Philippines, it cannot be sued here consolidation within the time prescribed;
because Philippine courts cannot acquire
jurisdiction over it. e. A misrepresentation of any material matter in any
application, report, affidavit or other document
d. It needs no license to sue before Philippine submitted by such corporation pursuant to the
courts on an isolated transaction for provisions of the Code;
infringement of trademark and unfair
competition, or on a cause of action entirely f. Failure to pay any and all taxes, imposts,
independent of any business transaction. assessments or penalties, if any, lawfully due to the
[Campos, 498] Philippine Government or any of its agencies or
political subdivisions;
▪ The object of the statute is not to prevent the foreign
corporation from performing single acts, but to g. Transacting business in the Philippines outside of
prevent the foreign corporation from acquiring a the purposes authorized under its license;
domicile for the purpose of business without taking
the steps necessary to render it amenable to suit in h. Transacting in the Philippines as agent in behalf of
the local courts. any foreign entity not duly licensed to do business
in the Philippines;
▪ However, where there is a stipulation that all legal
settlements within the contract entered into shall i. Any other grounds as would render it unfit to
fall under the jurisdiction of Philippine courts, the transact in the Philippines. [Sec. 134, Corporation
Supreme Court has held that foreign corporations Code]
could be sued in the jurisdiction of the Philippines
despite the fact that it was not doing business in the The Monetary Board may revoke the license to transact
Philippines, and in such cases summons on it could business in the Philippines of any foreign bank, if it finds that:

a. The foreign bank is insolvent or in imminent

danger thereof or a. Stockholders of record do not exceed 20;
b. That its continuance in business will involve
probable loss to those transacting business with it. b. Shares subject to restrictions on transfer;
[Sec. 78, General Banking Law of 2000]
c. Shares not listed or publicly offered;
Withdrawal of license by foreign corporation:
d. Stockholders may directly manage the business if
a. Filing a petition for withdrawal; so provided in the Articles of Incorporation.
b. All claims accrued in the Philippines have been Note: This is just the exception not the rule. The default is still
paid, compromised or settled; active management by the Board of Directors or Trustees
under Sec. 23.
c. All taxes, imposts, assessments and penalties
lawfully due to the Philippine government or any Validity of Restrictions on Transfer of Shares
of its agencies or political subdivisions have been
paid; Restrictions must appear in the:
d. The petition for withdrawal has been published a. Articles of Incorporation

once a week for 3 consecutive weeks in a
newspaper of general circulation in the Philippines. b. By-laws; and
CLOSE CORPORATIONS c. Certificate of stock (Sec.98)
▪ One whose articles provide that: Note: See I.7.b on Allowable Restrictions on the Sale of Shares.
a. All of the corporation’s issued stock of all Conclusive presumption of notice of disqualification or
classes, exclusive of treasury shares, shall be restrictions
held of record by not more than a specified
number of persons, not exceeding 20; a. If the certificate of stock conspicuously shows the
qualifications of the persons entitled to be holders
b. All of the issued stock of all classes shall be of record thereof and it is issued to a person not
subject to one or more specified restrictions on qualified or eligible;
transfer permitted by Title XII of the
Corporation Code; and b. If the issuance or transfer of stock to any person
would cause the stock to be held by more than such
c. The corporation shall not list in any stock specified number of persons in the articles;
exchange or make any public offering of any
of its stock of any class. [Villanueva, 850] c. If a stock certificate of any close corporation
conspicuously shows a restriction on transfer of
▪ The concept of a close corporation organized for the stock of the corporation;
purpose of running a family business or managing
family property has formed the backbone of Philippine If such presumption is present, the corporation may refuse
commerce and industry. Through this device, Filipino to register the transfer unless:
families have been able to turn their humble, hard-
earned life savings into going concerns capable of a. the transfer has been consented to by all the
providing them and their families with a modicum of stockholders of the close corporation, or
material comfort and financial security as a reward for
years of hard work. A family corporation should serve b. if the close corporation has amended its articles of
as a reward for years of hard work— as a rallying point incorporation.
for family unity and prosperity, not as a flashpoint for
familial strife. It is hoped that people reacquaint Unnecessary or Improperly Held Board Meeting (Sec.101)
themselves with the concepts of mutual aid and security
that are the original driving forces behind the formation Unless the by-laws provide otherwise, any action by the
of family corporations and use these tenets in order to directors of a close corporation without a meeting is still valid
facilitate more civil, if not more amicable, settlements of if:
family corporate disputes. [Gala v. Ellice Agro-Industrial
Corporation, G.R. No. 156819, December 11, 2003] a. Before or after such action is taken, written consent
thereto is signed by all the directors; or
Note: A corporation shall not be deemed a close corporation
when at least 2/3 of its voting stock or voting rights is owned b. All the stockholders have actual or implied
by or controlled by another corporation which is not a close knowledge of the action and make no prompt
corporation. objection thereto in writing; or
Characteristics of a Close Corporation c. The directors are accustomed to take informal

action with the express or implied acquiescence of

all the stockholders; or Note:
d. All the directors have express or implied ▪ A provisional director may be appointed to break
knowledge of the action in question and none of the tie. In this regard the provisional director shall
them makes prompt objection thereto in writing. have all the rights and powers of a duly elected
director of the corporation. [Villanueva, 871]
Note: If a director’s meeting is held without proper call or
notice, an action taken therein within the corporate powers is ▪ The provisional director shall be an impartial
deemed ratified by a director who failed to attend, unless he person who is neither a stockholder nor a creditor
promptly files his written objection with the secretary of the of the corporation or any subsidiary or affiliate of
corporation after having knowledge thereof. the corporation, and who further qualifications, if
any, may be determined by the SEC.
Pre-Emptive Right
Powers of the SEC in cases of deadlock
▪ The pre-emptive rights of stockholders in close
corporations shall extend to all stock to be issued, a. Arbitrate the dispute; and
including re-issuance of treasury shares, unless the
articles of incorporation provide otherwise. b. Make orders:
(Sec.102)
1. Canceling or altering any provision contained
Note: The restrictions of the exercise of pre-emptive in the articles of incorporation, by laws, or any
right enumerated under Sec. 39 of the Corporation stockholder's agreement;
Code are not applicable to close corporations
because of delectus personae in close corporations. 2. Canceling, altering or enjoining any resolution
or other act of the corporation or its board of
▪ Pre-emptive right under Sec. 39 shall not extend to: directors, stockholders, or officers;
a. Shares to be issued in compliance with laws 3. Directing or prohibiting any act of the
requiring stock offerings or minimum stock corporation or its board of directors,
ownership by the public; or to stockholders, officers, or other persons party
to the action;
b. Shares to be issued in good faith with the
approval of the stockholders representing 2/3 4. Requiring the purchase of their fair value of
of the outstanding capital stock, in exchange shares of any stockholder, either by the
for property needed for corporate purposes or corporation regardless of the availability of
in payment of a previously contracted debt. unrestricted retained earnings in its books, or
by the other stockholders;
Amendment of Articles of Incorporation
5. Appointing a provisional director;
Affirmative vote of at least 2/3 of the outstanding capital
stock, whether with or without voting rights, or of such 6. Dissolving the corporation;
greater proportion of shares as may be specifically provided
in the articles of incorporation is required for the following 7. Granting such other relief as the
amendments to be valid: circumstances may warrant. [Sec. 104]
a. One seeking to delete or remove any provision CORPORATION SOLE

required by this Title (Close Corporations) to be
contained in the articles of incorporation; or Corporation sole is one formed by the chief archbishop,
bishop, priest, minister, rabbi or other presiding elder of a
b. One seeking to reduce a quorum or voting religious denomination, sect, or church, for the purpose of
requirement stated in said articles of incorporation administering or managing, as trustee, the affairs, properties
(Sec.103) and temporalities of such religious denomination, sect or
church. [Iglesia Evangelica Metodista En Las Islas Filipinas, Inc.
Deadlocks v. Juane, G.R. Nos. 172447, Sept 18, 2009]
a. If the directors or stockholders are so divided MERGERS AND CONSOLIDATION

respecting the management of the corporation’s
business and affairs that the votes required for any MERGER
corporate action cannot be obtained; and
A union whereby one or more existing corporations are
b. With the consequence that the business and affairs absorbed by another corporation which survives and
of the corporation can no longer be conducted to continues the combined business. (A + B = A or B) [Campos,
the advantage of the stockholders generally 441]
(Sec.104)

CONSOLIDATION
d. Where the transaction amounts to a consolidation
The union of two or more existing corporations to form a new or merger of the corporations. [Edward J. Nell
corporation called the consolidated corporation. It is a Company v. Pacific Farms Inc., G.R. No. L-20850,
combination by agreement between two or more corporations November 29, 1965]
by which their rights, franchises, privileges and property are
united and become those of a single, new corporation, Note: The mere fact that a stockholder sells his shares of stock
composed generally, although not necessarily, of the in the corporation during the pendency of a collection case
stockholders of the original corporations. (A +B = C) [Campos, against the corporation does not make such stockholder
440] personally liable for the corporate debt. The disposing
stockholder has no personal obligation to the creditor and it
Note: is the inherent right of the stockholder to dispose of his shares
of stock anytime he so desires. [Remo v. IAC, G.R. No. L-67626,
▪ In both cases, there is no liquidation of the assets of April 18, 1989]
the dissolved corporation, and the surviving or
consolidated corporation assumes ipso jure the Non-Assumption of Liabilities
liabilities of the dissolved corporations, regardless
of whether the creditors have consented or not to GENERAL RULE: When one corporation buys all the shares,
such merger or consolidation. [Villanueva, 661 citing stocks or property of another, this will not dissolve the other
Sec. 80 of the Corporation Code] and as the two corporations still maintain their separate
corporate entities, one will not answer for the debts of
▪ In the realm of corporate acquisitions, sales and another.
transfers, however, both practice and jurisprudence
have recognized that apart from the special EXCEPTIONS:
corporate processes of mergers and consolidations, a. Purchase was in fraud of creditors;
there are three (3) levels by which the acquisition or
transfers may be effected. [Villanueva, 644] b. Express assumption of liabilities;
When Acquisition or Transfers May be Effected c. Consolidation or merger;
a. Assets-Only – Purchaser is only interested in in the d. Purchaser is merely a continuation of the seller.
raw assets and properties of the business. He would
not be liable for the debts and liabilities of his Constituent Corporations
transferor since there is no privity of contract over
debt obligations between the transferee and the ▪ Parties to a merger or consolidation
transferor’s creditors.
Consolidated Corporations
b. Business-Enterprise - The transferee merely ▪ The surviving corporation in a merger or

continues the same business of the transferor since consolidation acquiring all properties, rights and
he obtains the earning capability of the venture. He franchises and their stock holders usually become
is liable for the debts and liabilities of the transferor. its stockholders. It assumes automatically the
liabilities of the dissolved corporations, regardless
c. Equity – The purchaser takes control and whether the creditor consented or not in the merger
ownership of the business by purchasing the or consolidation. [Campos, 441]
shareholdings of the corporate owner. He obtains
the ability to elect the members of the board of the PLAN OF MERGER OR CONSOLIDATION
corporation who runs the business. [Villanueva,
646] The board of directors or trustees of each corporation, party
to the merger or consolidation, shall approve a plan of merger
As a rule, a corporation that purchases the assets of another or consolidation setting forth:
will not be liable for the debts of the selling corporation,
provided the former acted in good faith and paid adequate a. Names of the constituent corporations;
consideration for such assets, except when any of the
following circumstances is present: b. Terms and mode of carrying out the merger or
consolidation;
a. Where the purchasers expressly or impliedly agrees
to assume the debts; c. Statement of the changes:
b. Where the selling corporation fraudulently enters 1. In the articles of incorporation of the surviving
into the transactions to escape liability for those corporation in case of merger; and
debts;
2. All the statements required to be set forth in
c. Where the purchasing corporation is merely a the articles of incorporation of corporations
continuation of the selling corporation; and organized under the code in case of

consolidation; 5. If necessary, the SEC shall set a hearing, notifying all

corporations concerned at least two weeks before.
d. Such other provisions deemed necessary or [Sec.79(2)]
desirable. (Sec. 76)
6. Issuance of certificate of merger or consolidation. Only
upon issuance shall the merger or consolidation be
ARTICLES OF MERGER OR CONSOLIDATION effective. [Sec.79] [Campos, 446-447]
Articles of merger or articles of consolidation shall be EFFECTIVITY

executed by each of the constituent corporations setting forth:
Upon issuance of Certificate
a. The plan of merger or the plan of consolidation;
▪ If the Commission is satisfied that the merger or
b. As to stock corporations, the number of shares consolidation of the corporations concerned is not
outstanding, or in the case of non-stock inconsistent with the provisions of this Code and
corporations, the number of members; and existing laws, it shall issue a certificate of merger or
of consolidation, at which time the merger or
c. As to each corporation, the number of shares or consolidation shall be effective.
members voting for and against such plan,
respectively. (Sec. 78) ▪ The SEC will set a hearing if upon investigation, the
SEC has reason to believe that the proposed merger
PROCEDURE or consolidation is contrary to or inconsistent with
the Code or existing laws. Notice will be given to
1. The board of each corporation draws up a plan of merger eat constitute corporation at least 2 weeks before
or consolidation. Such plan must include any the hearing. (Sec 79)
amendment, if necessary, to the articles of incorporation
of the surviving corporation, or in case of consolidation, ▪ A merger shall only be effective upon the issuance
all the statements required in the articles of of a certificate of merger by the SEC, subject to its
incorporation of a corporation. prior determination that the merger is not
inconsistent with the Corporation Code or existing
2. Approval of the plan [Sec.77] laws. [Mindanao Savings and Loan Asso., vs. Edward
Willkom, et. al, G.R. No. 178618 Oct. 11, 2010]
a. By majority vote of each of the board of directors or
trustees of the constitute corporations of the plan of LIMITATIONS
merger or consolidation;
The favorable recommendation of the appropriate
b. The plan will be submitted for approval by the government agency must first be obtained in the case of
stockholders or members of each of such merger or consolidation of the following:
corporations;
a. Banking institutions;
▪ Notice shall be sent to all stockholders or
members at least 2 weeks prior to the date of b. Building and loan associations;
the meeting, either personally or by registered
mail. c. Trust companies;
▪ Notice shall state the purpose of the meeting d. Insurance companies;

and include a copy or summary of the plan of
merger or consolidation; e. Public utilities;
c. Affirmative vote of stockholders representing at f. Educational institutions;

least 2/3 of the outstanding capital stock of each
corporation in the case of stock corporations or at g. Other special corporations governed by special
least 2/3 of the members in the case of non-stock laws.
corporations;
EFFECTS
d. Any dissenting stockholder may exercise his
appraisal right; 1. Constituent corporations shall become a single
corporation. The surviving corporation is the one so
3. Execution of the formal agreement, referred to as the designated in the plan of consolidation or merger.
articles of merger or consolidation, by the corporate
officers of each constituent corporation. [Sec.78] 2. The separate existence of the constituent corporations
other than the surviving or consolidated corporation
4. Submission of the articles of merger or consolidation to shall cease.
the SEC for approval. [Sec.79(1)]
3. The surviving or consolidated corporation shall have the

rights, privileges, immunities, powers, duties and

liabilities of a corporation under the Code.
4. The surviving or the consolidated corporation shall

possess the rights, privileges, immunities and franchises
of each of the constituent corporations and all property,
real or personal, and all receivables due to each
constituent corporation without further act or deed.
5. The surviving or consolidated corporation shall be liable

for the liabilities and obligations of each of the
constituent corporations; and any pending claim, action
or proceeding may be prosecuted by or against the
surviving or consolidated corporation. (Sec. 80)
Note:
▪ The rights of creditors or liens upon the property of

any of such constituent corporations shall not be
impaired by such merger or consolidation.
▪ The absorbed or constituent corporations are ipso

facto dissolved by operation of law without
necessity of any further act or deed but there is no
winding up or liquidation of their assets for the
surviving corporation automatically acquires all
the liabilities of the constituent corporation.
[McLeod v. NLRC, G.R. No. 146667, January 23, 2007]
▪ Employment contracts are automatically assumed

by the surviving corporation in a merger, even in
the absence of an express stipulation in the plan.
[BPI v. BPI Employees Union, G.R. No. 164301,
October 19, 2011]

Mercantile Law Securities Regulation Code
STATE POLICY AND PURPOSE
DECLARED STATE POLICY
The State shall:
a. Establish a socially conscious, free market that

regulates itself;
b. Encourage the widest participation of ownership in

enterprises;
c. Enhance the democratization of wealth;
d. Promote the development of the capital market;
e. Protect investors;
f. Ensure full and fair disclosure about securities;
g. Minimize if not totally eliminate insider trading
SECURITIES
and other fraudulent or manipulative devices and
practices which create distortions in the free
market. [Sec. 2, SRC]
REGULATION PURPOSE
CODE
The Securities Regulation Code (SRC) is termed as a “Blue Sky
Law”, enacted to protect the public from unscrupulous
promoters, who stake business or venture claims which have
(REPUBLIC ACT
no real basis, and sell shares or interests therein to investors,
who are then left holding certificates representing nothing
more than a claim to a square of the blue sky. [Villanueva, 860]
NO. 8799) SECURITIES AND EXCHANGE

COMMISSION
SEC AS A COLLEGIAL BODY
The SRC is administered by the SEC as a collegial body

composed of 1 Chairperson and 4 Commissioners, appointed
by the President, with a term of 7 years.
Qualifications:
a. At least 40 y/o for the Chairperson, and 35 y/o for

the Commissioners;
b. Of good moral character;
c. Of unquestionable integrity;
d. Of known probity and patriotism;
e. Recognized competence in social and economic

disciplines.
Note: Majority of the Commissioners, including the

Chairperson, must be lawyers. [Sec. 4, SRC]
POWERS AND FUNCTIONS

1. Have jurisdiction and supervision over all corporations,

partnerships or associations who are the grantees of Note:
primary franchises and/or a license or permit issued by
the Government; ▪ The intention of the lawmakers is to make the
registration and issuance of securities dependent,
2. Formulate policies and recommendations on issues to a certain extent, on the merits of the securities
concerning the securities market, advise Congress and themselves, and of the issuer, to be determined by
other Government agencies on all aspects of the the Securities and Exchange Commission. This
securities market and propose legislation and measure was meant to protect the interest of the
amendments thereto; investing public against fraudulent and worthless
securities, and the SEC is mandated by law to
3. Approve, reject, suspend, revoke or require safeguard these interests, following the policies and
amendments to registration statements, and registration rules therefore provided. [PSE v. Court of Appeals,
and licensing applications; G.R. No. 125469, October 27, 1997]
4. Regulate, investigate or supervise the activities of ▪ The SEC cannot reverse the decision of the
persons to ensure compliance; Philippine Stock Exchange in matters of application
for listing in the market unless judgment is
5. Supervise, monitor, suspend or take over the activities of attended by bad faith. [PSE v. Court of Appeals, G.R.
exchanges, clearing agencies and other SROs; No. 125469, October 27, 1997]
6. Impose sanctions for the violation of laws and the rules, DEFINITION OF SECURITIES
regulations and orders issued pursuant thereto;
DEFINITION
7. Prepare, approve, amend or repeal rules, regulations
and orders, and issue opinions and provide guidance on Securities are shares, participation or interests in a
and supervise compliance with such rules, regulations corporation or in a commercial enterprise or profit-making
and orders; venture and evidenced by a certificate, contract, instrument,
whether written or electronic in character. It includes:
8. Enlist the aid and support of and/or deputize any and
all enforcement agencies of the Government, civil or a. Shares of stocks, bonds, debentures, notes,
military as well as any private institution, corporation, evidences of indebtedness, asset-backed securities;
firm, association or person in the implementation of its
powers and functions under this Code; b. Investment contracts, certificates of interest or
participation in a profit sharing agreement,
9. Issue cease and desist orders to prevent fraud or injury certificates of deposit for a future subscription;
to the investing public;
c. Fractional undivided interests in oil, gas or other
10. Punish for contempt of the Commission, both direct and mineral rights;
indirect, in accordance with the pertinent provisions of
and penalties prescribed by the Rules of Court; d. Derivatives like option and warrants;
11. Compel the officers of any registers corporation or e. Certificates of assignments, certificates of
association to call meetings of stockholders or members participation, trust certificates, voting trust
thereof under its supervision; certificates or similar instruments;
12. Issue subpoena duces tecum and summon witnesses to f. Propriety or non-propriety membership certificates
appear in any proceedings of the Commission and in in corporations; and
appropriate cases, order the examination, search and
seizure of all documents, papers, files and records, tax g. Other instruments as may in the future be
returns, and books of accounts of any entity or person determined by the Commission. [Sec. 3, SRC]
under investigation as may be necessary for the proper
disposition of the cases before it, subject to the HOWEY TEST
provisions of existing laws;
▪ An investment contract is a contract, transaction or
13. Suspend, or revoke, after proper notice and hearing the scheme whereby a person invests his money in a
franchise or certificate of registration of corporations, common enterprise and is led to expect profits primarily
partnerships or associations, upon any of the grounds from the efforts of others.
provided by law;
▪ Under the Howey Test, it requires a transaction,
14. Exercise such other powers as may be provided by law contract, or scheme whereby a person:
as well as those which may be implied from, or which
are necessary or incidental to the carrying out of, the a. Makes an investment of money;
express powers granted the Commission to achieve the
objectives and purposes of these laws. [Sec. 5.1, SRC] b. In a common enterprise;

5. Any security issued by a bank except its own shares of

c. With the expectation of profits; stock;
d. To be derived solely from the efforts of others. 6. The Commission may, by rule or regulation after public
[Power Homes Unlimited v. SEC, G.R. no. 164182, hearing, add to the foregoing any class of securities if it
February 26, 2008] finds that the enforcement of this Code with respect to
such securities is not necessary in the public interest
PARTIES/ENTITIES INVOLVED and for the protection of the investors. [Sec. 9, SRC]
1. Issuer – The originator, maker, obligor, or creator of the EXEMPT TRANSACTIONS

security;
1. Any judicial sale, or sale by an executor, administrator,
2. Promoter – A person who, acting alone or with others, guardian or receiver or trustee in insolvency or
takes initiative in founding and organizing the business bankruptcy;
or enterprise of the issuer and receives consideration
therefor; 2. By or for the account of a pledge holder, or mortgagee or
any of a pledge lien holder selling of offering for sale or
3. Broker – A person engaged in the business of buying and delivery in the ordinary course of business and not for the
selling securities for the account of others; purpose of avoiding the provision of this Code, to
liquidate a bona fide debt, a security pledged in good faith
4. Dealer – Any person who buys and sells securities for as security for such debt;
his/her own account in the ordinary course of business.
3. An isolated transaction in which any security is sold,
5. Exchange – An organized market place or facility that offered for sale, subscription or delivery by the owner
brings together buyers and sellers and executes trade of therefore, or by his representative for the owner’s
securities and/or commodities; account, such sale or offer for sale or offer for sale,
subscription or delivery not being made in the course of
6. Underwriter – A person who guarantees on a firm repeated and successive transaction of a like character by
commitment and/or declared best effort basis the such owner, or on his account by such representative and
distribution and sale of securities of any kind by another such owner or representative not being the underwriter
company. [Sec. 3, SRC] of such security;
KINDS OF SECURITIES 4. Distribution by a corporation actively engaged in the

business authorized by its articles of incorporation, of
EXEMPT SECURITIES securities to its stockholders or other security holders as a
stock dividend or other distribution out of surplus;
The following securities may be sold or offered for sale or
distribution without the need for registration: 5. Sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or other
1. Any security issued or guaranteed by the Government remuneration is paid or given directly or indirectly in
of the Philippines, or by any political subdivision or connection with the sale of such capital stock;
agency thereof, or by any person controlled or
supervised by law, and acting as an instrumentality of 6. Issuance of bonds or notes secured by mortgage upon real
said Government; estate or tangible personal property, when the entire
mortgage together with all the bonds or notes secured
2. Any security issued or guaranteed by the government thereby are sold to a single purchaser at a single sale;
of any country with which the Philippines maintains
diplomatic relations, or by any state, province or 7. Issue and delivery of any security in exchange for any
political subdivision thereof on the basis of reciprocity. other security of the same issuer pursuant to a right of
Provided: that the Commission may require conversion entitling the holder of the security
compliance with the form and content of disclosures the surrendered in exchange to make such conversion:
Commission may prescribe; Provided, That the security so surrendered has been
registered under this Code or was, when sold, exempt
3. Certificates issued by a receiver or by a trustee in from the provision of this Code, and that the security
bankruptcy duly approved by the proper adjudicatory issued and delivered in exchange, if sold at the conversion
body; price, would at the time of such conversion fall within the
class of securities entitled to registration under this Code.
4. Any security or its derivatives the sale or transfer of Upon such conversion the par value of the security
which, by law, is under the supervision and regulation surrendered in such exchange shall be deemed the price
of the Office of the Insurance Commission, Housing at which the securities issued and delivered in such
and Land Use Regulatory Board, or the Bureau of exchange are sold;
Internal Revenue;
8. Broker’s transaction, executed upon customer’s orders,
on any registered Exchange or other trading market;

9. Subscriptions for shares of the capitals stocks of a FORMAL APPLICATION FOR EXEMPTION
corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stocks Any person applying for an exemption shall file with the SEC
under the Corporation Code, when no expense is a notice identifying the exemption relied upon on such form
incurred, or no commission, compensation or and as such time as the SEC, by rule, may prescribe, and with
remuneration is paid or given in connection with the sale such notice, shall pay to the SEC a corresponding fee.
or disposition of such securities, and only when the [Villanueva, 874]
purpose for soliciting, giving or taking of such
subscription is to comply with the requirements of such NON-EXEMPT
law as to the percentage of the capital stock of a
corporation which should be subscribed before it can be ▪ An investment contract that is a security under R.A. No.
registered and duly incorporated, or its authorized, 8799 must be registered with the Securities and
capital increase; Exchange Commission before its sale or offer for sale or
distribution to the public.
Note: The exemption refers to the issuance of shares of
stock in the course of increasing the authorized capital ▪ The strict regulation of securities is founded on the
stock- not the already authorized but unissued stock. premise that the capital markets depend on the investing
Otherwise, there may still be an exemption if registration public’s level of confidence in the system. [Power Homes
is not necessary where issuance involves only a small Unlimited Corporation vs. SEC, G.R. No. 164182, February
mount of stock or the potential buyers are very limited in 26, 2008]
number and are capable of protecting themselves. [Nestle
Philippines v. Court of Appeals, G.R. no. 86738, November 13, PROCEDURE FOR REGISTRATION OF
1991]
SECURITIES
10. Exchange of securities by the issuer with the existing
MANDATORY REGISTRATION
security holders exclusively, where no commission or
other remuneration is paid or given directly or indirectly
Securities shall not be sold or offered for sale or distribution
for soliciting such exchange;
within the Philippines, without a registration statement duly
filed with and approved by the Commission. [Sec. 8.1, SRC]
11. The sale of securities by an issuer to fewer than 20 persons
in the Philippines during any twelve-month period;
PROCEDURE
12. The sale of securities to any number of the following
1. Filing by the issuer in the main office of the Commission
qualified buyers:
of a sworn registration statement with the respect to such
securities;
a. Bank;
▪ The registration statement shall include any
b. Registered investment house;
prospectus required or permitted to be delivered.
[Sec. 12, SRC]
c. Insurance company;
▪ The prospectus is a document made by or on behalf
d. Pension fund or retirement plan maintained by the
of an issuer, underwriter or dealer to sell or offer
Government of the Philippines or any political
securities for sale to the public. [Sec. 3, SRC]
subdivision thereof or manage by a bank or other
persons authorized by the Bangko Sentral to engage
2. Upon filing of the registration statement, the issuer shall
in trust functions;
pay to the Commission a fee of not more than one-tenth
1/10 of one per centum 1%of the maximum aggregate
e. Investment company or;
price at which such securities are proposed to be offered.
f. Such other person as the Commission may rule by
3. Notice of the filing of the registration statement shall be
determine as qualified buyers, on the basis of such
immediately published by the issuer, at its own expense,
factors as financial sophistication, net worth,
in 2 newspapers of general circulation in the Philippines,
knowledge, and experience in financial and business
once a week for 2 consecutive weeks, or in such other
matters, or amount of assets under management.
manner as the Commission by the rule shall prescribe,
reciting that a registration statement for the sale of such
13. Other transactions found by the SEC not necessary in the
securities has been filed, and that aforesaid registration
public interest or for the protection of the investors such
statement, as well as the papers attached thereto are open
as by the reason of the small amount involved or the
to inspection at the Commission during business hours,
limited character of the public offering. [Sec. 10, SRC]
and copies thereof, photostatic or otherwise, shall be
furnished to interested parties at such reasonable charge
Note: Exemption from the registration does not exempt an
as the Commission may prescribe.
entity from complying with the reasonable disclosure
regulations issued by the SEC. [Union Bank v. SEC, G.R. No.
4. Within 45 days after the date of filing of the registration
138949, June 6, 2001]
statement, or by such later date to which the issuer has

consented, the Commission shall declare the registration a. Has been judicially declared insolvent;
statement effective or rejected, unless the applicant is
allowed to amend the registration statement; b. Has violated any of the provision of the SRC, rules
promulgate pursuant thereto, or any SEC order of
5. Issuance of order declaring the registration statement to which the issuer has notice in connection with the
be effective if it finds that the registration statement offering for which a registration statement has been
together with all the other papers and documents filed;
attached thereto, is on its face complete and that the
requirements have been complied with. [Sec. 12, SRC] c. Has been or is engaged or is about to engage in
fraudulent transactions;
Note:
d. Has made any false or misleading representation of
▪ The Commission may impose such terms and material facts in any prospectus concerning the
conditions as may be necessary or appropriate for issuer or its securities;
the protection of the investors.
e. Has failed to comply with any requirements that
▪ An uncertificated security is one evidenced by the Commission may impose as a condition for
electronic or similar records. [Sec. 3, SRC] registration of the security for which the
registration statement has been filed; or
REGISTRATION STATEMENT
2. The registration statement is on its face incomplete or
The registration statement shall be signed by: inaccurate in any material respect or includes any untrue
statements of a material fact required to be stated therein
a. Issuer’s executive officer; or necessary to make the statement therein not
misleading; or
b. Principal operating officer;
3. The issuer, any officer, director or controlling person
performing similar functions, or any under writer has
c. Principal financial officer; been convicted, by a competent judicial or
administrative body, upon plea of guilty, or otherwise,
d. Comptroller; of an offense involving moral turpitude and /or fraud or
is enjoined or restrained by the Commission or other
e. Principal accounting officer; competent or administrative body for violations of
securities, commodities, and other related laws. [Sec.
f. Corporate secretary; or 13.1, SRC]
g. Other persons performing similar functions WITHDRAWAL

accompanied by a duly verified resolution of the
board of directors of the issuer corporation. A registration statement may be withdrawn by the issuer only
with the consent of the SEC. [Sec. 13.6, SRC]
Other accompanying documents:
PROHIBITIONS ON FRAUD,
a. Written consent of the expert named as having MANIPULATION AND INSIDER
certified any part of the registration statement or
any document used in connection therewith; TRADING
b. Written certification by selling shareholders as to MANIPULATION OF SECURITY PRICES

the accuracy of any part of the registration
statement contributed to by such selling It shall be unlawful for any person acting for himself or
shareholders shall be filed. through a dealer or broker, directly or indirectly:
Note: Upon affectivity of the registration statement, the issuer a. Wash Sales – To create a false or misleading
shall state under oath in every prospectus that all registration appearance of active trading in any listed security
requirements have been met and that all information are true traded in an Exchange of any other trading market:
and correct as represented by the issuer or the one making the
statement. Any untrue statement of fact or omission to state a 1. By effecting any transaction in such security
material fact required to be stated herein or necessary to make which involves no change in the beneficial
the statement therein not misleading shall constitute fraud. ownership thereof;
[Sec. 12, SRC]
2. By entering an order or orders for the
GROUNDS FOR REJECTION AND REVOCATION OF purchase or sale of such security with the
REGISTRATION OF SECURITIES knowledge that a simultaneous order or
orders of substantially the same size, time and
1. The issuer: price, for the sale or purchase of any such

security, has or will be entered by or for the

same or different parties; or 10. Such Other Similar Devices. [Villanueva, 889-
890]
3. By performing similar act where there is no
change in beneficial ownership. c. To circulate or disseminate information that the
price of any security listed in an Exchange will or is
b. To effect, alone or with others, a securities or likely to rise or fall because of manipulative market
transactions in securities that: (I) Raises their price operations of any one or more persons conducted
to induce the purchase of a security, whether of the for the purpose of raising or depressing the price of
same or a different class of the same issuer or of the security for the purpose of inducing the
controlling, controlled, or commonly controlled purpose of sale of such security;
company by others; or (iii) Creates active trading to
induce such a purchase or sale through d. To make false or misleading statement with respect
manipulative devices such as: to any material fact, which he knew or had
reasonable ground to believe was so false or
1. Marking the Close – Buying and selling misleading, for the purpose of inducing the
securities at the close of the market in an effort purchase or sale of any security listed or traded in
to alter the closing price of the security. an Exchange.
2. Painting the Tape – Engaging in a series of e. To effect, either alone or others, any series of
transactions that are reported publicly to give transactions for the purchase and/or sale of any
the impression of activity or price movement security traded in an Exchange for the purpose of
in a security. pegging, fixing or stabilizing the price of such
security; unless otherwise allowed by this Code or
3. Squeezing the Float – Taking advantage of a by rules of the Commission.
shortage of securities in the market by
controlling the demand side, and exploiting Note: No person shall use or employ, in connection with the
market congestion during such shortages in a purchase or sale of any security any manipulative or
way as to create artificial prices. deceptive device or contrivance. Neither shall any short sale
be effected nor any stop-loss order be executed in connection
4. Hype and Dump – Engaging in buying with the purchase or sale of any security except in accordance
activity at increasingly higher prices and the with such rules and regulations as the Commission may
selling the securities in the market at higher prescribe as necessary or appropriate in the public interest for
prices. the protection of investors. [Sec. 24, SRC]
5. Boiler Room Operations – A well-organized FRAUDULENT TRANSACTION

operation where in a room, there would be
well-trained salesmen operating over several It shall be unlawful for any person, directly or indirectly, in
phones and using high-pressure sales talk to connection with the purchase or sale of any securities to:
get investors to invest in securities offered.
a. Employ any device, scheme, or artifice to defraud;
6. Improper Matched Orders – Engaging in
transactions where both the buy and sell b. Obtain money or property by means of any untrue
orders are entered at the same time with the statement of a material fact of any omission to state
same price and quantity by different but a material fact necessary in order to make the
colluding parties. statements made, in the light of the circumstances
under which they were made, not misleading; or
7. Scalping – Where a person, like an investment
advisor, purchases securities for his own c. Engage in any act, transaction, practice or course of
account before recommending that security, business which operates or would operate as a
and then sells the share at a profit upon the fraud or deceit upon any person. [Sec. 26, SRC]
rise in the market price following the
recommendation. INSIDER TRADING
8. Daisy Chain – A pattern of fictitious trading Who are considered insiders?

activity by a group of persons who lures
innocent people into the scheme. a. Issuer;
9. Flipping – Operated where one office buys a b. Director or officer (or person performing similar
particular stock for customers, while another functions) of, or a person controlling the issuer;
office simultaneously recommends that its
customers sell the stock, with the stock being c. Person whose relationship to the issuer gives or
shifted from one office to another, and the firm gave him access to material information about the
makes a profit, and the brokers earn their issuer or the security that is not generally available
commissions. to the public;

nonpublic information relating to such

d. Government employee, or director, or officer of an tender offer, to buy or sell the securities
exchange, clearing agency and/or self-regulatory of the issuer that are sought or to be
organization who has access to material sought by such tender offer if such
information about an issuer or a security that is not person knows or has reason to believe
generally available to the public; or that the information is nonpublic and has
been acquired directly or indirectly from
e. Person who learns such information by a the tender offeror, those acting on its
communication from any of the foregoing insiders. behalf, the issuer of the securities sought
[Sec. 3.8, SRC] or to be sought by such tender offer, or
any insider of such issuer; and
Rules Regarding Insider Trading
▪ Any tender offeror, those acting on its
It shall be unlawful for an insider: behalf, the issuer of the securities sought
or to be sought by such tender offer, and
a. To sell or buy a security of the issuer, while in any insider of such issuer to
possession of material information with respect to communicate material nonpublic
the issuer or the security that is not generally information relating to the tender offer to
available to the public, unless: any other person where such
communication is likely to result in a
1. The insider proves that the information was violation of Subsection 27.4 (a)(I).
not gained from such relationship; or
2. For purposes of this subsection the term
2. If the other party selling to or buying from the "securities of the issuer sought or to be sought
insider (or his agent) is identified, the insider by such tender offer" shall include any
proves: securities convertible or exchangeable into
such securities or any options or rights in any
▪ That he disclosed the information to the of the foregoing securities.
other part; or
Note: The insider’s misuse of nonpublic and undisclosed
▪ That he had reason to believe that the information is the gravamen of illegal conduct. The intent of
other party otherwise is also in the law is the protection of investors against fraud, committed
possession of the information. when an insider, using secret information, takes advantage of
an uninformed investor. Insiders are obligated to disclose
Presumption: A purchase or sale of a security of the material information to the other party or abstain from
issuer made by an insider or such insider’s spouse trading the shares of his corporation. This duty to disclose or
or relatives by affinity or consanguinity within the abstain is based on two factors: first, the existence of a
second degree, legitimate or common-law, shall be relationship giving access, directly or indirectly, to
presumed to have been effected while in possession information intended to be available only for a corporate
of material nonpublic information if transacted purpose and not for the personal benefit of anyone;
after such information came into existence but prior and second, the inherent unfairness involved when a party
to dissemination of such information to the public takes advantage of such information knowing it is
and the lapse of a reasonable time for market to unavailable to those with whom he is dealing. [SEC vs.
absorb such information. [Villanueva, 892] Interport Resources Corporation, G.R. No. 135808, October 6,
2008]
Note: This presumption shall be rebutted upon a
showing by the purchaser or seller that he was Material Nonpublic Information
aware of the material nonpublic information at the
time of the purchase or sale. a. Information that has not been generally disclosed
to the public and would likely affect the market
b. To communicate material nonpublic information price of the security after being disseminated to the
about the issuer or the security to any person who, public and the lapse of a reasonable time for the
by virtue of the communication, becomes an market to absorb the information; or
insider, where the insider communicating the
information knows or has reason to believe that b. Information that would be considered by a
such person will likely buy or sell a security of the reasonable person important under the
issuer whole in possession of such information; circumstances in determining his course of action
whether to buy, sell or hold a security.
c. It shall be unlawful:
Note:
1. Where a tender offer has commenced or is
about to commence for: ▪ Under the law, what is required to be disclosed is
a fact of “special significance” which may be:
▪ Any person (other than the tender
offeror) who is in possession of material

a. a material fact which would be likely, on being

made generally available, to affect the market Note: Acquisition must not result to a 50% or more
price of a security to a significant extent; or ownership of securities sufficient to gain control of
the board;
b. one which a reasonable person would
consider especially important in determining b. Any purchase of securities from an increase in
his course of action with regard to the shares authorized capital stock;
of stock.
c. Purchase in connection with foreclosure
▪ A fact is material if it induces or tends to induce or proceedings involving a duly constituted pledge or
otherwise affect the sale or purchase of its security arrangement where the acquisition is made
securities. [SEC vs. Interport Resources Corporation, by the debtor or creditor;
G.R. No. 135808, October 6, 2008]
d. Purchases in connection with a privatization
PROTECTION OF INVESTORS undertaken by the government;
TENDER OFFER RULE e. Purchases in connection with corporate

rehabilitation under court supervision;
Definition
f. Purchases in the open market at the prevailing
Tender offer is a publicly announced intention by a person market price; and
acting alone or in concert with other persons to acquire equity
securities of a public company. The coverage of the g. Merger or consolidation.
mandatory tender offer rule covers not only direct acquisition
but also indirect acquisition or “any type of acquisition.” Note: The rule is applicable if the acquisition is intended to
[Cemco Holdings, Inc. vs. National Life Insurance Company of the circumvent or defeat the objects of the tender offer rules. [Sec.
Philippines, Inc. G.R. No. 171815. August 7, 2007] 19.3, SRC IRR
Obligations for Tender Offers How Tender Offer is Made:
It is mandatory upon the following acquisitions by a person a. Filling with the Commission a declaration to that
or group of persons: effect;
a. 15% of equity securities in a public company in one b. Furnishing the issuer a statement containing such
or more transactions within a 12-month period; of the information required in Section 17 of this
Code as the Commission may prescribe, including
b. 35% of the outstanding voting shares or such subsequent or additional materials; and
outstanding voting shares that are sufficient to gain
control of the board in a public company in one or Note: This includes annual reports and periodical
more transactions within a 12-month period; reports for interim fiscal periods.
c. 35% of the outstanding voting shares or such c. Publishing all requests or invitations for tender, or
outstanding voting shares sufficient to gain control materials making a tender offer or requesting or
of the board in a public company directly from one inviting letters of such security. [Villanueva, 884]
or more stockholders;
Withdrawal of Securities Deposited Pursuant to Tender
d. Any acquisition that would result in ownership of Offer
over 50% of the total outstanding equity securities
A tender offer shall, unless withdrawn, remain open until the
of a public company. [Sec. 19.2, SRC IRR]
expiration of:
Public company:
a. At least 20 business days from its commencement;
Provided that an offer as much as possible be
a. Any corporation with a class of equity securities
completed within 60 days from the date of the
listed on Exchange; or
intention to make such offer is publicly announced;
b. With assets in excess of Php 50,000,000.00 and has
b. At least 10 business days from the date the notice of
200 ore more shareholders each holding at least 100
change in the percentage of the class of securities
shares of a class of its equity securities. [Sec. 3.1.16,
being sought or in the consideration offered is first
SRC IRR]
published, sent or given to security holders. [Sec.
19.9, SRC]
Exemptions from Mandatory Tender Offer Requirement
Dissemination Requirements
a. Any purchase of securities from the unissued
capital stock;

a. Offeror or Issuer shall publish the terms and 4. No broker or dealer shall give any proxy, consent or any
condition of the tender offer in 2 national authorization, in respect of any security carried for the
newspapers of general circulation in the account of the customer, to a person other than the
Philippines on the date of commencement of the customer, without written authorization of such
tender offer and for 2 consecutive days after customer;
sending a report to security holders;
5. A broker or dealer who holds or acquire the proxy for
b. If a material change occurs in the information at least 10% or such percentage as the commission may
published, sent or given to security holders, the prescribe of the outstanding share of such issuer, shall
Offerror shall disseminate promptly a disclosure of submit a report identifying the beneficial owner of ten
such change in a manner reasonable calculated to days after such acquisition, for its own account or
inform the security holders. [Sec. 19.8, SRC IRR] customer, to the issuer of security, to the exchange
where the security is traded and to the Commission.
When Securities Offered Exceed Offer Made [Sec. 20, SRC]
Where securities offered exceed that which person or group Solicitation includes:
of persons are bound or willing to take up and pay for, the
securities that are subject of tender offer shall be taken up as a. Any request for a proxy or authorization;
nearly as may be pro rata, disregarding fractions, according to
the number of securities deposited by each depositor. b. Any request to execute or not to execute, or to
[Villanueva, 885] revoke, a proxy or authorization; or
When the Term of Tender Offer Vary c. The furnishing of a form of proxy or other
communication to security holders under
Where the terms of the tender offer vary before the expiration circumstances reasonable calculated to result in the
thereof by increasing consideration offered to holders of such procurement, withholding or revocation of a proxy;
securities, such person shall pay increased consideration to [Sec. 20.2.2., SRC IRR]
each security holder whose securities are taken up and paid
for, whether or not such securities have been taken up by such FULL DISCLOSURE RULE
person before the variation of the tender offer or request or
invitation. [Villanueva, 885] All companies, listed or applying for listing, are required to
divulge truthfully and accurately, all material information
Unlawful and Prohibited Acts Relating to Tender Offers about themselves and the securities they sell, for the
protection of the investing public, under the pain of
The following acts are prohibited in any tender offer: administrative, criminal and civil sanctions. [PSE v. Court of
Appeals, G.R. No. 125469, October 27, 1997]
a. To employ any device, scheme, or artifice to
defraud any person; MARGIN TRADING
b. To make any untrue statement of a material fact or
DEFINITION
to omit to state a material fact necessary in order to
make the statements made, in the light of the
Margin trading or trading on credit as in arrangement where
circumstances under which they were made, not investors pay only a portion of the purchase price of securities
misleading; or
while their broker advances for them the balance of the
purchase price and keeps the securities as collateral for the
c. To engage in any act, practice or course of business
loan. The brokers would take the securities to the bank and
which operates or would operate as a fraud or
borrow the balance on it.
deceit upon any person. [Sec. 19.23, SRC IRR]
LIMITATION
RULES ON PROXY SOLICITATION
1. Standard for extension of credit – whichever is the
1. Proxies must be issued and proxy solicitation must be
higher of:
made in accordance with rules and regulations to be
issued by the Commission;
a. 65% of the current market price of the security; or
2. Proxies must be in writing, signed by the stockholder or
b. 100% of the lowest market price of the security
his duly authorized representative and file before the
during the preceding 36 calendar months but not
scheduled meeting with the corporate secretary;
more than 75% of the current market price; [Sec. 48,
SRC]
3. Unless otherwise provided in the proxy, it shall be valid
only for the meeting for which it is intended. No proxy
2. A broker dealer shall not extend credit to a customer in
shall be valid only for the meeting for which it is
an amount that exceeds 50% of the current market value
intended. No proxy shall be valid and effective for a
of the security at the time of the transaction.
period longer than 5 years at one time;

3. In no event shall new or additional credit be extended to INDEPENDENT DIRECTOR

an account in which the equity is less than Php 50,000.00.
[Sec. 48.1.1, SRC IRR] An independent director is a person other than an officer or
employee of the corporation, its parent or subsidiaries, or any
4. The margin maintained in a margin account of a other individual having a relationship with the corporation,
customer shall be no less than 35% of the current market which would interfere with the exercise of independent
value of all the securities “long” in the account and 30% judgment in carrying out the responsibilities of a director.
of the current market value of securities in the “short”
account. [Sec. 48.1.2, SRC IRR] There must be at least 2 independent directors or such
independent directors constituting 20% of the members of
5. The broker dealer shall make a call for additional margin such board, whichever is lesser, in:
when there is insufficiency of margin.
a. Any corporation with a class of equity securities
▪ Call for initial must be satisfied within 5 business listed for trading on an Exchange;
days from the receipt of the call;
b. Any corporation with assets in excess of Php
- May be extended for 7 days upon written 50,000,000.00 and having 200 or more holders, at
application to an Exchange or the SEC. least 200 of which are holding at least 100 shares of
a class of its equity securities; or
▪ Call for maintenance margin must be satisfied
within 24 hours from receipt of the call; c. Any corporation which has sold a class of equity
securities to the public pursuant to an effective
▪ No purchase or sell order until satisfaction of the registration statement. [Sec. 38, SRC]
call;
CIVIL LIABILITY
▪ The broker dealer shall liquidate securities
sufficient to meet the call if it is not satisfied
CIVIL LIABILITIES ON ACCOUNT OF FALSE
within the prescribed time. [Sec. 48.1.3-48.1.5,
REGISTRATION STATEMENT
SRC IRR]
GENERAL RULE:
6. Credit should not be maintained or extended to or for
any customer if there is no collateral or any collateral
Any person:
other than securities, except:
a. acquiring a security, the registration statement of
a. To maintain a credit initially extended in
which or any part thereof contains on its effectivity
conformity with the rules and regulations of the
an untrue statement of a material fact or omits to
SEC; and
state a material fact required to be stated therein or
necessary to make such statements not misleading;
b. Extension or maintenance of credit is not for the
and
purpose of purchasing or carrying securities or of
evading or circumventing the rules. [Sec. 48.2.2,
b. who suffers damage
SRC IRR]
may sue and recover damages from the following
Note: Increasing margins, i.e., decreasing amounts which
enumerated persons:
brokers may lend for the speculative purchase and carrying
of stocks is the most direct and effective method of
a. The issuer and every person who signed the
discouraging an abnormal attraction of funds into the
registration statement;
stockmarket and achieving a more balanced use of such
resources. [Abacus Securities v. Ampil, G.R. No. 160016,
b. Every person who was a director of, or any other
February 27, 2006]
person performing similar functions, or a partner
in, the issuer at the time of the filing of the
EXEMPTION
registration statement or any part, supplement or
amendment thereof with respect to which his
The rules on margin and credit to not apply to:
liability is asserted;
a. Credit extensions made by a person not in the
c. Every person who is named in the registration
ordinary course of business;
statement as being or about to become a director of,
or a person performing similar functions, or a
b. Loans to a dealer to aid in the financing of te
partner in, the issuer and whose written consent
distribution of securities to customers not through
thereto is filed with the registration statement;
the medium of an Exchange; or
c. Such other credit extensions as the SEC shall d. Every auditor or auditing firm named as having
certified any financial statements used in
exempt. [Sec. 48.3, SRC IRR]

connection with the registration statement or b. failing in the burden of proof that he did not know,
prospectus; and in the exercise of reasonable care could not
have known, of such untruth or omission.
e. Every person who, with his written consent, which
shall be filed with the registration statement, has shall be liable to the buyer of such security from him.
been named as having prepared or certified any [Villanueva, 881]
part of the registration statement, or as having
prepared or certified any report or valuation which CIVIL LIABILITY OF FRAUD IN CONNECTION WITH
is used in connection with the registration SECURITIES TRANSACTIONS
statement, with respect to the statement, report, or
valuation, which purports to have been prepared or Any person who engages in any act or transaction in violation
certified by him; of:
f. Every selling shareholder who contributed to and a. Section 19.2 – untrue statement of a material fact or
certified as to the accuracy of a portion of the omission of any material fact or to engage in any
registration statement, with respect to that portion fraudulent, deceptive or manipulative acts or
of the registration statement which purports to practices, in connection with any tender offer or
have been contributed by him; solicitation;
g. Every underwriter with respect to such security. b. Section 20 – rules proxy solicitation;
EXCEPTION: Unless it is proved that at the time of such c. Section 26 – fraudulent transactions; or
acquisition he knew of such untrue statement or omission
d. Any rule or regulation of the Commission.
Note: If the person who acquired the security did so after the
issuer has made generally available to its security holders an shall be liable to any other person who purchases or sells
income statement covering a period of at least 12 months any security, grants or refuses to grant any proxy,
beginning from the effective date of the registration consent or authorization, or accepts or declines an
statement, then the right of recovery shall be conditioned on invitation for tender of a security, as the case may be, for
proof that such person acquired the security relying upon the damages sustained by such other person as a result
such untrue statement in the registration statement or relying of such act or transaction. [Sec. 58, SRC]
upon the registration statement and not knowing of such
income statement, but such reliance may be established CIVIL LIABILITY FOR MANIPULATION OF SECURITY
without proof of the reading of the registration statement by PRICES
such person.
Any person who willfully participates in manipulation of
CIVIL LIABILTIES ARISING IN CONNECTION WITH security prices shall be liable to any person who shall
PROSPECTUS, COMMUNICATIONS, AND REPORTS purchase or sell any security at a price which was affected by
such act or transaction, and the person so injured may sue to
Any person who: recover the damages sustained as a result of such act or
transaction. [Sec. 59, SRC]
a. Offers to sell or sells a security in violation of the
provisions on registration of securities (Chapter III, CIVIL LIABILITY WITH RESPECT TO COMMODITY
SRC); or FUTURES CONTRACTS AND PRE-NEED PLANS
b. Offers to sell or sells a security, whether or not ▪ Any person who engages in any act or transactions in
exempted willful violation of any rule on commodity futures
contracts and pre-need plans, which the Commission
by the use: denominates at the time of issuance as intended to
prohibit fraud in the offer and sale of pre-need plans or
a. of any means or instruments of transportation or to prohibit fraud, manipulation, fictitious transactions,
communication; or undue speculation, or other unfair or abusive practices
with respect to commodity future contracts, shall be
b. of a prospectus or other written or oral liable to any other person sustaining damages as a result
communication, which includes an untrue of such act or transaction.
statement of a material fact or omits to state a
material fact necessary in order to make the ▪ As to each such rule or regulation so denominated, the
statements, in the light of the circumstances under Commission by rule shall prescribe the elements of proof
which they were made, not misleading required for recovery and any limitations on the amount
of damages that may be imposed. [Sec. 60, SRC]
with the purchaser:
CIVIL LIABILITY ON ACCOUNT OF INSIDER
a. not knowing of such untruth or omission; and TRADING

▪ Any insider who violates the prohibition against insider have been liable to make the same payment, unless the
trading and any person who buys or sells a security former was guilty of fraudulent representation and the
while in possession of material information not latter was not.
generally available to the public, shall be liable in a suit
brought by any investor who, contemporaneously with ▪ Notwithstanding any provision of law to the contrary,
the purchase or sale of securities that is the subject of the all persons, including the issuer, held liable under the
violation, purchased or sold securities of the same class provisions on civil liability shall contribute equally to the
unless such insider, or such person in the case of a tender total liability adjudged herein. In no case shall the
offer, proves that such investor knew the information or principal stockholders, directors and other officers of the
would have purchased or sold at the same price issuer or persons occupying similar positions therein,
regardless of disclosure of the information to him; recover their contribution to the liability from the issuer.
However, the right of the issuer to recover from the
▪ He shall be jointly and severally liable with, and to the guilty parties the amount it has contributed under this
same extent as, the insider, or person in the case of a Section shall not be prejudiced. [Sec. 63, SRC]
tender offer, to whom the communication was directed
and who is liable by reason of his purchase or sale of a CEASE AND DESIST ORDER
security. [Sec. 61, SRC]
▪ The Commission, after proper investigation or
LIMITATION OF ACTIONS verification, motu proprio or upon verified complaint by
any aggrieved party, may issue a cease and desist order
1. Actions for the following must be filed within 2 years without the necessity of a prior hearing if in its judgment
after the discovery of the violation: the act or practice, unless restrained, will operate as a
fraud on investors or is otherwise likely to cause grave
a. Civil liabilities on account of false registration or irreparable injury or prejudice to the investing public.
statement;
▪ Until the Commission issue a cease and desist order, the
i. Otherwise, must be brought within 5 years fact that an investigation has been initiated or that a
after security was bone fide offered to the complaint has been filed, including the contents of the
public; complaint, shall be confidential. Upon issuance of a
cease and desist order, the Commission shall make
b. Civil liabilities arising in connection with public such order and a copy thereof shall be
prospectus, communications and reports; immediately furnished to each person subject to the
order.
c. Offers to sell or sale of security in violation of
registration rules. ▪ Any person against whom a cease and desist order was
issued may, within five (5) days from receipt of the
order, file a formal request for a lifting thereof. Said
i. Otherwise, must be brought within 5 years request shall be set for hearing by the Commission not
after security was bone fide offered to the later than fifteen (15) days from its filing and the
public; resolution thereof shall be made not later than ten (10)
days from the termination of the hearing. If the
2. No action shall be maintained to enforce any liability Commission fails to resolve the request within the time
created under any other provision of the Code unless herein prescribed, the cease and desist order shall
brought within 2 years after the discovery of the facts automatically be lifted. [Sec. 63, SRC]
constituting the cause of action and within 5 years after
such cause of action accrued. [Sec. 62, SRC] ▪ There are two essential requirements that must be
complied with by the SEC before it may issue a cease and
AMOUNT OF DAMAGES TO BE AWARDED desist order:
▪ The Regional Trial Court, which shall have exclusive a. First, it must conduct proper investigation or
jurisdiction to hear and decide such suits for civil verification; and
liability. The Court is hereby authorized to award
damages in an amount not exceeding triple the amount b. Second, there must be a finding that the act or
of the transaction plus actual damages. Exemplary practice, unless restrained, will operate as a fraud
damages may also be awarded in cases of bad faith, on investors or is otherwise likely to cause grave or
fraud, malevolence or wantonness in the violation of this irreparable injury or prejudice to the investing
Code or the rules and regulations promulgated public.
thereunder. The Court is also authorized to award
attorney’s fees not exceeding 30% of the award; ▪ A clarificatory conference undertaken by the SEC
regarding a corporation’s business operations cannot be
▪ The persons specified in the provision on civil liability considered a proper investigation or verification process
shall be jointly and severally liable for the payment of to justify the issuance of a Cease and Desist Order.
damages. However, any person who becomes liable for
the payment of such damages may recover contribution ▪ The investigation, to be proper, must be conducted by
from any other person who, if sued separately, would the SEC before, not after, issuing the Cease and Desist

Order. The probability of grave, irreparable injury or

prejudice to the investing public is determined only after
a proper investigation. [SEC v. Performance Foreign
Exchange Corporation. G.R. No. 154131. July 20, 2006]

Mercantile Law Banking Laws
THE NEW CENTRAL BANK ACT

(R.A. NO. 7653)
STATE POLICIES
▪ 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. [Sec. 1, R.A. No. 7653]
▪ In line with this, the BSP is:
a. The central monetary authority;
b. An independent and accountable body; and
c. A government-owned corporation that enjoys

fiscal and administrative autonomy. [Secs. 1
and 2, R.A. No. 7653]
The Banko Sentral ng Pilipinas
▪ There is hereby established an independent central

monetary authority, which shall be a body
corporate known as the Bangko Sentral ng
BANKING Pilipinas. [Sec. 2, R.A. No. 7653]
RESPONSIBILITY AND PRIMARY OBJECTIVE OF THE
LAWS BSP
Primary Objectives
a. To maintain price stability conducive to balanced

and sustainable economic growth.
b. To promote and maintain monetary stability and

the convertability of the peso.
Other Responsibilities
a. To provide policy directions in the areas of money,

banking and credit;
b. To supervise operations of banks;
c. Regulates finance companies and non-bank

financial institutions performing quasi-banking
functions. [Sec. 3, R.A No. 7653]
MONETARY BOARD – POWERS AND FUNCTIONS
The Monetary Board
▪ The body through which the powers and functions

of the BSP are exercised. (R.A. No. 7653, Sec. 6)
Powers and Functions
a. Issue rules and regulations it considers necessary

for the effective discharge of the responsibilities
and exercise of the powers vested in it;

b. Direct the management, operations, and a. Direct connection with any multilateral banking or
administration of the BSP, reorganize its personnel financial institution;
and issue such rules and regulations as it may deem
necessary or desirable for this purpose; b. Substantial interest in any private bank in the PH,
within 1 year prior to his appointment. [Sec. 8, R.A.
c. Establish a human resource management system No. 7653]
which governs the selection, hiring, appointment,
transfer, promotion, or dismissal of all personnel; LEGAL TENDER POWER
d. Adopt an annual budget for and authorize such All notes and coins issued by the BSP shall be fully
expenditures by BSP as are in the interest of the guaranteed by the Government of the Republic of the
effective administration and operations of Bangko Philippines and shall be legal tender in the Philippines for all
Sentral in accordance with applicable laws and debts, both public and private. [Sec. 52, R.A. No. 7653]
regulations;
Limitation: Coins shall be legal tender in amounts not
e. Indemnify its members and other officials of the exceeding Php 50 for denominations of 25 centavos and
BSP, including personnel of the departments above, and in amounts not exceeding Php 20 for
performing supervision and examination denominations of 10 centavos or less.
functions, against all costs and expenses reasonably
incurred by such persons in connection with an Exception: Monetary Board may fix otherwise.
civil or criminal action, suit or proceeding, to which
any of them may be made a party by reason of the BSP Circular 537, Series of 2006
performance of his functions or duties, unless such
members or other officials is found to be liable for Maximum amount of coins to be considered as legal tender
negligence or misconduct. [Sec. 15, R.A. No. 7653] is:
a. P1000 – for denominations of 1-Piso, 5-Piso and 10-
Composition Piso coins; and
▪ The MB shall be composed of 7 members appointed b. P100 – for denominations of 1-sentimo, 5-sentimo,
by the President with a 6-year term. [Sec. 6, R.A. No. 10-sentimo, and 25-sentimo coins.
7653]
FOREIGN EXCHANGE OPERATIONS
Members
Purchases and Sales of Foreign Exchange
a. The BSP Governor or his designated alternate;
The Bangko Sentral:
b. A Cabinet member to be designated by the
President; a. May buy and sell foreign notes and coins, and
documents and instruments of types customarily
c. 5 Members from the private sector (bankers). [Sec. employed for the international transfer of funds;
6, R.A. No. 7653]
b. May engage in future exchange operations;
Qualifications
c. May engage in foreign exchange transactions with
a. Natural born-citizen;
the following entities only:
b. Governor – at least 40 y/o; members – Other
1. banking institutions operating in the
members at least 35 y/o;
Philippines;
c. Of good moral character;
2. the Government, its political subdivisions and
instrumentalities;
d. Of unquestionable integrity;
3. foreign or international institutions;
e. Of known probity and patriotism;
4. foreign governments and their
f. With recognized competence in social and
instrumentalities; and
economic disciplines. [Sec. 8, R.A. No. 7563]
5. other entities or persons which the MB is
Disqualifications
hereby empowered to authorize as foreign
exchange dealers. [Sec. 70, R.A. No. 7653]
In addition to the disqualifications under the Code of
Conduct and Ethical Standards for Public Officials and
Employees (R.A. No. 6713), a member of the MB is disqualified Convertibility of the Peso
by:

▪ In order to maintain the convertibility of the peso, 2. Closed Bank – A bank placed under liquidation by the
the BSP may, at the request of any banking Monetary Board.
institution operating in the PH, buy any quantity of
foreign exchange offered, and sell any quantity of 3. Liquidation – Refers to the proceedings under Sections
foreign exchange demanded, by such institution, 12 to 16 of R.A. No 3591, as amended.
provided that the foreign currencies so offered or
demanded are freely convertible into gold or 4. Liquidation Court – Refers to the Regional Trial Court of
United State dollars. This requirement shall not general jurisdiction where the petition for assistance in
apply to demands for foreign notes and coins. [Sec. the liquidation of a closed bank is filed and given due
70, R.A. No. 7653] course.
Emergency Restrictions 5. Petition for Assistance in the Liquidation of a Closed

Bank – Refers to the petition filed by the receiver with
In order to: the RTC in accordance with Sec. 16 of R.A. No. 3591 as
amended.
a. Achieve the primary objective of the BSP; or
6. Receiver – Refers to the Philippine Deposit Insurance
b. Protect the international reserves of the BSP, in the Corporation (PDIC) or any of its duly constituted agents
imminence of, or during an exchange crisis; or acting as receiver of a closed bank. [Sec. 5, R.A. No. 3591,
as amended]
c. In time of national emergency and to give the MB
and the Government time in which to take CONSERVATORSHIP
constructive measures to forestall, combat, or
overcome such crisis or emergency the MB, with Definition
the concurrence of at least five (5) of its members,
and with the approval of the President, may: Conservatorship involves the appointment of a conservator to
preserve the assets of a bank or quasi-bank and take measures
1. Temporarily suspend or restrict sales of whenever the latter is in a state of continuing liability or is
exchange by the BSP; unwilling to maintain a condition of liquidity deemed
adequate to protect the interest of depositors and creditors for
2. May subject all transactions in gold and a period not exceeding 1 year.
foreign exchange to license by the BS;
Requisites:
3. May require that any foreign exchange
thereafter obtained by any person residing or a. A report must be submitted by the appropriate
entity operating in the PH be delivered to the supervising or examining department of the BSP;
BS or to any bank or agent designated by the
BS, for the purpose, at the effective exchange b. A positive finding of the grounds for
rate. conservatorship;
Except: The foreign currency deposits made under c. The Board of Directors must be informed in writing
RA 6426 shall be exempt from these requirements. the Order of the MB.
BANKS IN DISTRESS Grounds for Conservatorship:

(R.A. NO. 10846) a. In a state of continuing inability;
Note: Republic Act No. 3591, otherwise known as the b. Unwillingness to maintain a condition of liquidity
Philippine Deposit Insurance Corporation Act (PDIC Act) has deemed adequate to protect the interest of
been amended by R.A. Nos. 7400, 9302, and 9576. R.A. No. depositors and creditors. [Sec. 29, R.A. No. 7653]
10846 further amends the PDIC Act, as amended, as well as
other laws. Termination:
DEFINITION OF TERMS UNDER R.A. NO. 3591 AS a. When the Monetary Board is satisfied that the
AMENDED institution can continue to operate on its own and
the conservatorship is no longer necessary;
1. Bank and Banking Institution – Includes banks,
commercial banks, savings banks, mortgage banks, rural b. When, on the basis of the report of the conservator
banks, development banks, cooperative banks, stock or its own findings, the MB determines that the
savings and loan associations and branches and agencies continuance in business of the institution would
in the Philippines of foreign banks and all other involve probable loss to its depositors or creditors.
corporations authorized to perform banking functions in
the Philippines. Note: In such case, the institution will be placed
under receivership.

Powers and Duties of Conservator: Requisites:
a. To take charge of the assets, liabilities, and the a. Report of the head of the supervising department
management thereof; involving the bank;
b. To reorganize the management; b. Finding of the MB of the existence of any of the

grounds for receivership;
c. To collect all monies and debts due said institution;
c. Order by the MB to forbid the institution from
d. To exercise all powers necessary to restore its doing business (may be summary);
viability;
d. Notice in writing, informing the Board of Directors
e. To report and be responsible to the MB; of the institution of the order.
f. To overrule or revoke the actions of the previous Grounds for Receivership:

management and board of directors of the
institution. [Sec. 29, R.A. No. 7653] a. Unable to pay its liabilities as they become due in
the ordinary course of business, except for inability
CLOSURE to pay caused by extraordinary demands induced
by financial panic in the banking community;
“Close now, hear later” Doctrine
b. Has insufficient realizable assets, as determined by
The Monetary Board may summarily and without need for the BSP, to meet its liabilities;
prior hearing close a bank and place it under receivership.
c. Cannot continue in business without involving
Grounds: probable losses to its depositors or creditors;
a. Notifies the BSP or publicly announces a bank d. Has willfully violated a Cease and Desist Order
holiday; or under Sec. 37 (NCBA) that has become final,
involving acts or transactions which amount to
b. Suspends the payment of its deposit liabilities fraud or a disposition of assets of the institution.
continuously for more than 30 days in any manner.
[Sec. 53, R.A. 8791] Special Rule: In this case, the MB may act
summarily and without hearing. [Sec. 30, R.A. No.
c. Persistence in conducting business in an unsafe or 7653]
unsound manner. [Sec. 56, R.A. No. 8791]
Power and Duties of Receiver:
d. Unable to pay its liabilities as they become due in
the ordinary course of business, except for inability a. Immediately gather and take charge of all the assets
to pay caused by extraordinary demands induced and liabilities of the institution;
by financial panic in the banking community;
b. Administer the assets for the benefit of the
e. Has insufficient realizable assets, as determined by creditors;
the BSP, to meet its liabilities;
c. Exercise the general powers of a receiver under the
f. Cannot continue in business without involving Rules of Court;
probable losses to its depositors or creditors;
d. Not to pay or commit any act that will involve the
g. Has willfully violated a Cease and Desist Order transfer or disposition of any asset of the
under Sec. 37 of R.A. No. 7653 that has become institution.
final, involving acts or transactions which amount
to fraud or a disposition of assets of the institution. Except:
Special Rule: In this case, the MB may act a. Administrative expenditures;

summarily and without hearing. [Sec. 30, R.A. No.
7653] b. Receiver may deposit or place funds in non-
speculative investments.
RECEIVERSHIP
e. Subject to prior approval of the MB, determine, as
Definition soon as possible, but not later than 90 days from the
take-over, whether the institution may be
Refers to the stage within which the PDIC manages the affairs rehabilitated or otherwise placed in such a
of the closed bank and preserves its assets for the benefit of condition so that it may be permitted to resume
creditors. [Sec. 10 (a, b), R.A. No. 9302] business with safety to its depositors and creditors
and the general public.

exceeding 3 months, from available funds of

Except: the closed bank;
a. Administrative expenditures; 8. Collect loans and other claims of the closed

bank and for this purpose, modify,
b. Receiver may deposit or place funds in non- compromise or restructure the terms and
speculative investments. [Sec. 30, R.A. No. conditions of such loans or claims as may be
7653] deemed advantageous to the interests of the
creditors of the closed bank;
Main duty: Within 90 days from takeover,
determine WON the institution can be 9. Hire or retain private counsel as may be
rehabilitated, otherwise, it will be liquidated. necessary;
Authorities of the Receiver Under R.A. No. 3591, as 10. Borrow or obtain a loan, or mortgage, pledge
amended by R.A. No. 10846 or encumber any asset of the closed bank,
when necessary to preserve or prevent
a. The receiver is authorized to adopt and implement, dissipation of the assets, or to redeem
without need of consent of the stockholders, board foreclosed assets of the closed bank, or to
of directors, creditors or depositors of the closed minimize losses to its depositors and
bank, any or a combination of the following modes creditors;
of liquidation:
11. If the stipulated interest rate on deposits is
1. Conventional liquidation; and unusually high compared with prevailing
applicable interest rates, the PDIC as receiver,
2. Purchase of assets and/or assumption of may exercise such powers which may include
liabilities. a reduction of the interest rate to a reasonable
rate;
b. In addition to the powers of a receiver provided
under existing laws, the PDIC, as receiver of a Note: Any modifications or reductions shall
closed bank, is empowered to: apply only to earned and unpaid interest;
1. Represent and act for and on behalf of the 12. Utilize available funds of the bank, including
closed bank; funds generated by the receiver from the
conversion of assets to pay for reasonable
2. Gather and take charge of all the assets, costs and expenses incurred for the
records and affairs of the closed bank, and preservation of the assets, and liquidation of,
administer the same for the benefit of its the closed bank, without need for approval of
creditors; the liquidation court;
3. Convert the assets of the closed bank to cash Note: For banks with insufficient funds, the
or other forms of liquid assets, as far as PDIC is authorized to advance the foregoing
practicable; costs and expenses, and collect payment, as
and when funds become available.
4. Bring suits to enforce liabilities of the
directors, officers, employees, agents of the 13. Charge reasonable fees for the liquidation of
closed bank and other entities related or the bank from the assets of the bank;
connected to the closed bank or to collect,
recover, and preserve all assets, including Note: Payment of these fees, including any
assets over which the bank has equitable unpaid advances under the immediately
interest; preceding paragraph, shall be subject to
approval by the liquidation court;
5. Appoint or hire persons or entities of
recognized competence in banking, finance, 14. Distribute the available assets of the closed
asset management or remedial management, bank, in cash or in kind, to its creditors in
as its deputies, assistants or agents, to perform accordance with the Rules on Concurrence
such powers and functions of the PDIC as and Preference of Credits under the Civil
receiver of the closed bank, or assist in the Code or other laws;
performance thereof;
15. Dispose records of the closed bank that are no
6. Appoint or hire persons or entities of longer needed in the liquidation in accordance
recognized competence in forensic and fraud with guidelines set by the PDIC Board of
investigations; Directors, notwithstanding the laws on
archival period and disposal of records; and
7. Pay accrued utilities, rentals and salaries of
personnel of the closed bank for a period not

16. Exercise such other powers as are inherent d. When the circumstances so warrant, the local
and necessary for the effective discharge of the government unit and law enforcement agencies
duties of the Corporation as receiver. concerned shall, upon request, immediately
provide assistance to the receiver during the service
Note: The Board of Directors shall adopt such of notice of closure and actual takeover operations
policies and guidelines as may be necessary to ensure the orderly conduct thereof and the
for the performance of the above powers by security and safety of the personnel of the receiver
personnel, deputies, assistants and agents of and the employees of the closed bank. [Sec. 14, R.A.
the Corporation. No. 3591, as amended by R.A. No. 10846]
c. After the payment of all liabilities and claims LIQUIDATION

against the closed bank, the PDIC shall pay surplus,
if any, dividends at the legal rate of interest from Definition
date of takeover to date of distribution to creditors
and claimants of the closed bank in accordance ▪ After undergoing conservatorship, closure, and/or
with the Rules on Concurrence and Preference of receivership, if the bank cannot be rehabilitated, it
Credits under the Civil Code or other laws before shall be liquidated.
distribution to the shareholders of the closed bank.
▪ Refers to the recovery and conversion of assets into
d. The officers, employees, deputies, assistants and cash for distribution to all creditors in accordance
agents of the receiver shall have no liability and with the rules on concurrence and preference of
shall not be subject to any action, claim or demand credits.
in connection with any act done or omitted to be
done by them in good faith in connection with the Liquidation of a Closed Bank:
exercise of their powers and functions under R.A.
No. 3591, as amended, and other applicable laws, ▪ Whenever a bank is ordered closed by the
or other actions duly approved by the court. [Sec. Monetary Board, the PDIC shall be designated as
13 (a-d), R.A. No. 3591, as amended by R.A. No. 10846] receiver and it shall proceed with the takeover and
liquidation of the closed bank in accordance with
Notice of Closure and Takeover Activities the provisions of R.A. No. 3591, as amended.
a. Upon the designation of the PDIC as receiver of a ▪ Banks closed by the Monetary Board shall no longer
closed bank, it shall serve a notice of closure to the be rehabilitated. [Sec. 12, R.A. No. 3591, as amended
highest-ranking officer of the bank present in the by R.A. No. 10846]
bank premises, or in the absence of such officer,
post the notice of closure in the bank premises or on Kinds:
its main entrance. The closure of the bank shall be
deemed effective upon the service of the notice of a. Voluntary Liquidation;
closure. Thereafter, the receiver shall takeover the
bank and exercise the powers of the receiver as b. Involuntary Liquidation.
provided by R.A. No. 3591, as amended.
Modes of Liquidation Under R.A. No. 3591, as amended
b. The receiver shall have authority to use reasonable
force, including the authority to force open the a. Conventional liquidation; and
premises of the bank, and exercise such acts
necessary to take actual physical possession and b. Purchase of assets and/or assumption of liabilities.
custody of the bank and all its assets, records, [Sec. 13 (a), R.A. No. 3591, as amended by R.A. No.
documents, and take charge of its affairs upon the 10846]
service of the notice of closure.
Stages in Conventional Liquidation
c. Directors, officers, employees or agents of a bank
hold money and other assets of the bank in trust or a. Asset Management and Conversion;
under administration or management by them for
the bank in their fiduciary capacity. b. Petition for Assistance in the Liquidation of a
Closed Bank; and
Upon service of the notice of closure to the bank, all
directors, officers, employees or agents of the c. Winding-Up. [Sec. 16, R.A. No. 3591, as amended by
closed bank shall have the duty to immediately R.A. No. 10846]
account for, surrender and turn over to the receiver,
and provide information relative to, the assets, Grounds for Liquidation:
records, and affairs of the closed bank in their
possession, custody, administration or a. The institution is insolvent;
management.
b. Continuance would involve probable loss to
creditors;

the closed bank for the benefit of all its

c. Monetary Board determines that the institution creditors.
cannot be rehabilitated.
c. On the assets
Effects of Liquidation:
▪ Upon service of notice of closure as provided
a. Retention of juridical personality; in Sec. 14 of R.A. No. 3591, as amended, all the
assets of the closed bank shall he deemed in
b. Suspension of operations; custodia legis in the hands of the receiver, and
as such, these assets may not be subject to
c. Assets are deemed in custodia legis; attachment, garnishment, execution, levy or
any other court processes.
d. Stay of execution of judgment to prevent depletion
of bank assets; ▪ A judge, officer of the court or any person who
shall issue, order, process or cause the
e. Bank is not liable to pay interest on deposits which issuance or implementation of the
accrued during the period of suspension of garnishment order, levy, attachment or
operations; execution, shall be liable under Sec. 27 of R.A.
No. 3591, as amended.
f. Restriction of bank’s capacity to conduct new
business, but with obligation to collect pre-existing Note:
obligations;
▪ Collaterals securing the loans and
g. Deposits do no become preferred credits. advances granted by the BSP shall
not be included in the assets of the
Effects of the Placement of a Bank Under Liquidation as closed bank for distribution to other
Provided by R.A. No. 8591, as amended by R.A. No. 10846 creditors.
The placement of a bank under liquidation shall have the ▪ The proceeds in excess of the
following effects: amount secured shall be returned
by the BSP to the receiver.
a. On the corporate franchise or existence
▪ Any preliminary attachment or garnishment
▪ It shall continue as a body corporate until the on any of the assets of the closed bank existing
termination of the winding-up period under at the time of closure shall not give any
Sec. 16 of R.A. No. 3591, as amended. preference to the attaching or garnishing
party.
▪ Such continuation as a body corporate shall
only be for the purpose of liquidating, settling ▪ Upon motion of the receiver, the preliminary
and closing its affairs and for the disposal, attachment or garnishment shall be lifted
conveyance or distribution of its assets. and/or discharged.
▪ The receiver shall represent the closed bank in d. On labor relations

all cases by or against the closed bank and
prosecute and defend suits by or against it. ▪ Notwithstanding the provisions of the Labor
Code, the employer-employee relationship
▪ In no case shall the bank be reopened and between the closed bank and its employees
permitted to resume banking business after shall be deemed terminated upon service of
being placed under liquidation. the notice of closure of the bank.
b. On the powers and functions of its directors, ▪ Payment of separation pay or benefits
officers and stockholders provided for by law shall be made from
available assets of the bank in accordance with
▪ The powers, voting rights, functions and the Rules on Concurrence and Preference of
duties, as well as the allowances, Credits under the Civil Code or other laws.
remuneration and perquisites of the directors,
officers, and stockholders of such bank are e. On contractual obligations
terminated upon its closure.
▪ The receiver may cancel, terminate, rescind or
▪ The directors, officers, and stockholders shall repudiate any contract of the closed bank that
be barred from interfering in any way with the is not necessary for the orderly liquidation of
assets, records, and affairs of the bank. the bank, or is grossly disadvantageous to the
closed bank, or for any ground provided by
▪ The receiver shall exercise all authorities as law.
may be required to facilitate the liquidation of

f. On interest payments ▪ Payment of docket and other court fees

relating to all cases or actions filed by the
▪ The liability of a bank to pay interest on receiver with any judicial or quasi-judicial
deposits and all other obligations as of closure bodies shall be deferred until the action is
shall cease upon its closure by the Monetary terminated with finality.
Board without prejudice to the first paragraph
of Section 85 of the NCBA. ▪ Any such fees shall constitute as a first lien on
any judgment in favor of the closed bank or in
Note: The receiver shall have the authority, case of unfavorable judgment, such fees shall
without need for approval of the liquidation be paid as liquidation costs and expenses
court, to assign, as payment to secured during the distribution of the assets of the
creditors, the bank assets serving as collaterals closed bank.
to their respective loans up to the extent of the
outstanding obligations, including interest as l. All assets, records, and documents in the
of date of closure of the hank, as validated by possession of the closed bank at the time of its
the receiver. The valuation of the asset shall be closure are presumed held by the bank in the
based on the prevailing market value of the concept of an owner.
collaterals as appraised by an independent
appraiser on an ‘as is where is’ basis. m. The exercise of authority, functions, and duties by
the receiver under R.A. No. 3591, as amended, shall
g. Liability for penalties and surcharges for late be presumed to have been performed in the regular
payment and nonpayment of taxes course of business.
▪ From the time of closure, the closed bank shall n. Assets and documents of the closed bank shall
not be liable for the payment of penalties and retain their private nature even if administered by
surcharges arising from the late payment or the receiver. Matters relating to the exercise by the
nonpayment of real property tax, capital gains receiver of the functions under R.A. No. 3591, as
tax, transfer tax and similar charges. amended, shall be subject to visitorial audit only by
the Commission on Audit. [Sec. 13 (e), R.A. No. 3591,
h. Bank charges and fees on services as amended by R.A. No. 10846]
▪ The receiver may impose, on behalf of the Conventional Liquidation

closed bank, charges and fees for services
rendered after bank closure, such as, but not A. Asset Management and Conversion
limited to, the execution of pertinent deeds
and certifications. a. The assets gathered by the receiver shall be
evaluated and verified as to their existence,
i. Actions pending for or against the closed bank ownership, condition, and other factors to
determine their realizable value.
▪ Except for actions pending before the
Supreme Court, actions pending for or against Note: In the management, preservation and
the closed bank in any court or quasi-judicial disposition of assets, the receiver shall be guided by
body shall, upon motion of the receiver, be cost-benefit considerations, resources of the closed
suspended for a period not exceeding 180 bank, and potential asset recovery.
days and referred to mandatory mediation.
b. The conversion of the assets of the closed bank shall
▪ Upon termination of the mediation, the case be carried out in a fair and transparent manner in
shall be referred back to the court or quasi- accordance with the rules and procedures as may
judicial body for further proceedings. be determined by the receiver.
j. Final decisions against the closed bank c. In the management and/or conversion of the assets
of the closed bank, the receiver shall have the
▪ The execution and enforcement of a final authority to:
decision of a court other than the liquidation
court against the assets of a closed bank shall 1. Represent the closed bank before the Land
be stayed. Registration Authority (LRA), the Bureau of
Lands, the Register of Deeds, the Land
▪ The prevailing parly shall file the final Transportation Office (LTO), the Assessor’s
decision as a claim with the liquidation court Office or other appropriate office of the local
and settled in accordance with the Rules on government unit, the Securities and Exchange
Concurrence and Preference of Credits under Commission (SEC), or such other similar
the Civil Code or other laws. government agencies or private entities in:
k. Docket and other court fees ▪ Verifying the authenticity of ownership

documents;

promissory notes, evidence of indebtedness or

▪ Registering the interest of the closed investments shall immediately turn over
bank on a specific property; custody of said assets and records to the
receiver. Such obligation shall cover evidence
▪ Consolidating ownership over an asset of of deposit such as passbooks or certificates of
the closed bank; deposit issued by the bank to its depositors.
Pending turnover, all persons or entities in
▪ Securing certified true copies of custody or possession of any asset or record of
documents held by the foregoing the closed bank shall hold the said assets or
agencies/entities in relation to an asset of records in trust for the receiver.
the closed bank;
3. The persons or entities in custody or
▪ Securing the appropriate certification possession of such asset shall not allow,
from the foregoing agencies/entities in authorize or cause the withdrawal, transfer,
relation to an asset of the closed bank; disposition, removal, conversion,
and concealment, or other transaction involving or
relating to the subject asset, unless otherwise
▪ Performing other related activities; directed by the receiver.
2. Conduct a physical or ocular inspection of the e. The receiver shall have the authority to invest funds
properties owned by, or mortgaged to, the received from the conversion of the assets of the
closed bank, to determine their existence and closed bank in government securities, other
present condition; government-guaranteed marketable securities or
investment-grade debt instruments.
3. Determine the disposal price of assets in
accordance with generally accepted valuation f. The proceeds of the sale of the bank and branch
principles, standards and practices, subject to licenses shall be for the benefit of the creditors of
such guidelines as the receiver may the closed bank which shall be distributed in
determine; accordance with this Act and the Rules on
Concurrence and Preference of Credits under the
4. Dispose real or personal properties of the Civil Code or other laws. [Sec. 16 (a-f), R.A. No. 3591,
closed bank through bidding, negotiated sale as amended by R.A. No. 10846]
or any other mode including lease with option
to purchase, whether by piece or by lot, as may B. Petition for Assistance in the Liquidation of a Closed
be reasonably determined by the receiver Bank
based on cost-benefit considerations and to
allow efficient distribution of assets to a. A petition for assistance in the liquidation is a
creditors; and special proceeding for the liquidation of a closed
bank, and includes the declaration of the
5. Engage third parties to assist in the concomitant right of its creditors and the order of
liquidation, manage and/or dispose the payment of their valid claims in the disposition of
assets, handle cases filed against or by the its assets.
closed bank, subject to such guidelines as
determined by the receiver. Note: Any proceeding initiated under Sec. 16 of
R.A. No. 3591, as amended, shall be considered in
d. Notwithstanding any provision of law to the rem. Jurisdiction over all persons affected by the
contrary, the following rules shall apply to the proceeding shall be considered as acquired upon
management and/or conversion by the receiver of publication of the order setting the case for initial
the assets of the closed bank: hearing in any newspaper of general circulation in
the Philippines.
1. Upon notification of the closure of a bank, the
LRA, the Bureau of Lands, the Register of b. The liquidation court shall have exclusive
Deeds, the LTO, the assessor’s office or other jurisdiction to adjudicate disputed claims against
appropriate office of the local government the closed banks, assist in the enforcement of
unit, or such other similar government individual liabilities of the stockholders, directors
agencies shall not allow any transaction and officers and decide on all other issues as may
affecting the assets of the closed bank without be material to implement the distribution plan
the consent of the receiver. adopted by the PDIC for general application to all
closed banks.
2. Upon issuance by the Monetary Board of the
resolution ordering the closure of a bank, any c. The provisions of the Securities Regulation Code,
person or entity in custody or possession of and Supreme Court Administrative Matter No. 00-
assets or records of the closed bank, including, 8-10-SC, titled, ‘The Rules of Procedure on
but not limited to, the closed bank’s deposit Corporate Rehabilitation’, shall not be applicable to
accounts, titles to real property, collaterals,

the petition for assistance in the liquidation of the payment shall be deemed as abandonment or
closed bank. waiver of his or her right to payment.
d. The petition shall be filed in the RTC which has b. The individual stockholders of record or their duly-
jurisdiction over the principal office of the closed authorized representative or the court-appointed
bank or the principal office of the receiver, at the stockholders’ representative shall have a period of
option of the latter. 6 months from publication of notice of the approval
by the court of the final asset distribution plan of
e. The petition shall be filed ex parte within a the closed bank within which to claim the residual
reasonable period from receipt of the Monetary assets. During this 6-month period, the receiver
Board Resolution placing the bank under shall hold as trustee the assets allocated in the final
liquidation. asset distribution plan for said stockholders of
record.
f. All persons or entities with claims against the assets
of the closed bank shall file their claims with the Note: Failure by the individual stockholders of
receiver within 60 days from the date of publication record or their duly-authorized representative or
of the notice of closure. Claims filed outside the the court-appointed stockholders’ representative to
foregoing prescribed period shall be disallowed. comply with the documentary requirements within
the prescribed period and/or refusal to accept the
Note: Claims denied by the receiver shall be filed residual assets in kind shall be deemed as
with the liquidation court within 60 days from abandonment or waiver of right to receive the
receipt of the final notice of denial of claim. residual assets.
g. A claim whose validity has not yet been c. After the lapse of the 6-month period, all assets
determined with finality at the time of the which remain unclaimed by the creditors and/or
submission of the final asset distribution plan, stockholders of record shall be turned over to the
either by reason of a pending suit or for whatever Bureau of Treasury.
reason, shall be considered as contingent claim and
shall not be paid under the proposed final asset d. The receiver shall continue to keep all the pertinent
distribution plan. records of the closed bank for a period of 6 months
from the date of publication of the approval of the
h. Upon finality of the order approving the final asset final asset distribution plan.
distribution plan, the petition for assistance in the
liquidation of a closed bank shall be, for all intents Note: After the lapse of this period, the receiver is
and purposes, considered closed and terminated authorized to dispose of the same in accordance
and the receiver, its officers, employees or agents, with the rules and regulations to be prescribed by
are forever discharged from any and all claims the receiver.” [Sec. 16, (q-t), R.A. No. 3591, as
and/or liability arising from or in connection with amended by R.A. No. 10846]
the liquidation of the closed bank.
Purchase of Assets and Assumption of Liabilities
i. The receiver shall submit a final report on the
implementation of the approved final asset a. The receiver shall have the authority to facilitate
distribution plan to the Monetary Board and the and implement the purchase of the assets of the
SEC after the expiration of the winding-up period. closed bank and the assumption of its liabilities by
another insured bank, without need for approval of
j. The Supreme Court shall promulgate the the liquidation court.
appropriate procedural rules to implement this
section. [Sec. 16 (g-p), R.A. No. 3591, as amended by Note:
R.A. No. 10846]
▪ The exercise of this authority shall be in
C. Winding-Up accordance with the Rules on
Concurrence and Preference of Credits
a. The creditors shall have a period of 6 months from under the Civil Code or other laws,
the date of publication of notice of the approval by subject to such terms and conditions as
the court of the final asset distribution plan of the the PDIC may prescribe.
closed bank within which to claim payment of the
principal obligations and surplus dividends. ▪ The disposition of the branch licenses
During this 6-month period, the receiver shall hold and other bank licenses of the closed
as trustee the assets allocated in the final asset bank shall be subject to the approval of
distribution plan for said creditors. the BSP.
Note: Failure by the creditor to comply with the b. Such action of the receiver to determine whether a
documentary requirements within the prescribed bank may be the subject of a purchase of assets and
period and/or refusal to accept the asset as assumption of liabilities transaction shall be final
and executory, and may not be set aside by any

court. [Sec. 15, R.A. No. 3591, as amended by R.A. No. c. Upon order of competent court in cases of bribery
10846] and dereliction of duty;
LAW ON SECRECY OF BANK DEPOSITS d. In cases where the money deposited or invested is
(R.A. NO. 1405, AS AMENDED) the subject matter of litigation.
Others:
PURPOSE
a. The Commissioner of Internal Revenue can inquire
1. To encourage the people to deposit their money in into the bank accounts of the following taxpayers:
banks;
1. A decedent in order to determine his gross
2. To discourage private hoarding, so that the funds can be estate; or
used by the bank to grant loans to assist in economic
development. 2. A taxpayer who has filed an application to
compromise his tax liability on the ground of
Note: The absolute confidentiality rule in R.A. No. 1405 financial incapacity;
actually aims at protection from unwarranted inquiry or
investigation if the purpose of such inquiry or investigation is 3. A taxpayer, information on whose account is
merely to determine the existence and nature, as well as the requested by a foreign tax authority.
amount of the deposit in any given bank account. [China
Banking Corp v. Ortega, G.R. No. L-34964, January 31, 1973] b. Unexplained wealth under Sec. 8 of R.A. No. 3019;
PROHIBITED ACTS c. Cases under the AMLA (R.A. No. 9194)
1. Examination, inquiry, or looking into deposits by 1. Under the Human Security Act of 2007:
persons, government officials, bureaus, or offices. [Sec. 2,
R.A. No. 1405] ▪ Kidnapping for Ransom;
2. Disclosure by banking institutions’ officials or ▪ Dangerous Drug;

employees to unauthorized persons regarding
information about covered accounts. [Sec. 3, R.A. No. ▪ Hijacking and other violations of RA
1405] 6235;
DEPOSITS COVERED ▪ Destructive arson and murder.
GENERAL RULE: All deposits of whatever nature with banks d. BSP inquiry or examination in the course of its
or banking institutions in the Philippines are considered as of periodic or special examination of the bank. [Sec. 11,
an absolute confidential nature. [Sec. 2, R.A. No. 1405] R.A. No. 9160]
Note: This includes investments in bonds issued by the e. Disclosure of certain information about bank
Government of the Philippines, its political subdivisions and deposits which have been dormant for at least 10
its instrumentalities. Note that investments in bonds in years, to the Treasurer of the Philippines in a sworn
foreign currency are still covered by RA 1405, and have not statement, a copy of which is posted in the bank
been exempted by the Foreign Currency Deposit Act. premises. [Sec. 2, Act No. 3926]
EXCEPTIONS: f. The PDIC and/or the BSP can inquire into or

examine deposit accounts and all information
a. Foreign Currency Deposits, which are governed by related thereto in case there is a finding of unsafe
the Foreign Currency Deposit Act; and unsound banking practice. [Sec. 8, par. 8, R.A.
No. 3591, as amended by R.A. No. 9586]
b. Funds placed in a bank not in the nature of a
deposit by private individuals. However, these Not an exception: Power of the Ombudsman to examine and
may also not be disclosed, under Sec. 55.1 of the have access to bank accounts and records under Sec. 15, par.
GBL of 2000. (See Ejercito v. Sandganbayn) 8, RA 6770. (See Marquez v. Desierto)
EXCEPTIONS GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN

DEPOSITS
Deposits:
GENERAL RULE: The prohibition against examination of or
a. Upon written permission of the depositor; inquiry into a bank deposit under RA 1405 does not preclude
its being garnished to insure satisfaction of a judgment.
b. In cases of impeachment;
EXCEPTION: Foreign Currency Deposits

▪ The foreign currency deposits shall be exempt from customers as are not incompatible with banking
attachment, garnishment, or any other order or business;
process of any court, legislative body, government
agency or any administrative body whatsoever. d. Upon prior approval of the MB, act as managing
[Sec. 8, Foreign Currency Deposit Act] agent, adviser, consultant or administrator of
investment/management/advisory/consultancy
GENERAL BANKING LAW OF 2000 accounts; and
(R.A. NO. 8791)
e. Rent out safety deposit boxes. [Sec. 53, R.A. No.
8791]
DEFINITION AND CLASSIFICATION OF BANKS
3. Thrift Bank – Thrift Banks are banks that focus on basic
Definition banking services for their clients, with an emphasis on
individuals and small businesses; primarily governed by
Banks refer to entities engaged in the lending of funds R.A. No. 7906 or the Thrift Bank Act. Thrift Bank
obtained in the form of deposits. [Sec. 3, par. 1, R.A. No. 8791] includes;
Classification of Banks a. Savings and mortgage banks;
1. Universal Bank - A universal bank shall have the b. Savings and loan associations;
authority to exercise, in addition to the powers
authorized for a commercial bank in Sec. 29, the powers c. Private development banks.
of an investment house as provided in existing laws and
the power to invest in non-allied enterprises. 4. Rural Banks – Banks that are formed for the purpose of
providing adequate credit facilities to farmers and
2. Commercial Bank – A commercial bank shall have, in merchants, or to cooperatives of such farmers and
addition to the general powers incident to corporations, merchants in general, the people of the rural
all such powers as may be necessary to carry on the communities. Primarily governed by R.A. No. 7353, or
business of commercial banks such as: the Rural Bank Act.
a. Accepting drafts and issuing letters of credit; 5. Cooperative Banks – Banks which are organized as
cooperatives under R.A. No. 6938, the Cooperatives
b. Discounting and negotiating PNs, drafts, bills of Code.
exchange, and other evidence of debts;
6. Islamic Banks – Banks that aims to provide banking
c. Accepting or creating demand deposits; under the Shari’a principles governing banking. TRIVIA:
There is only one Islamic Bank in the PH – the Al-
d. Receiving other types of deposits and deposit Amanah Islamic Bank
substitutes;
7. Other Banks Classified by the BSP – Land Bank of the
e. Buying and selling foreign exchange and gold or Philippines, Veteran’s Bank, and the Development Bank
silver bullion; of the Philippines
f. Acquiring marketable bonds and other debt DISTINCTION OF BANKS FROM QUASI-BANKS AND
securities; TRUST ENTITIES
g. Extending credit, subject to such rules as the MB ▪ Quasi-Banks – refer to entities engaged in the borrowing
may promulgate. These rules may include the of funds through the issuance, endorsement or
determination of bonds and other debt securities assignment with recourse or acceptance of deposit
eligible for investment, the maturities and substitutes as defined in Sec. 95 of the NCBA for the
aggregate amount of such investment. [Sec. 29, R.A. purposes of re-lending or purchasing of receivables and
No. 8791] other obligations.
In addition to the operations authorized, a bank may ▪ Trust Entities – refer to a bank or a non-bank financial
perform the following services: institution, through its specifically designated business
unit to perform trust functions; or a trust corporation,
a. Receive in custody funds, documents and valuable authorized by the BSP to engage in trust and other
objects; fiduciary business under the GBL or to perform
investment management services under Sec. 53 of GBL.
b. Act as financial agent and buy and sell, by order of
and for the account of their customers, shares,
BANK POWERS AND LIABILITIES
evidence of indebtedness and all types of securities;
c. Make collections and payments for the account of 1. Corporate Powers:

others and perform such other services for their

a. Sue and be sued in its corporate name; 3. Demand Deposit/Current Deposit – All
those liabilities of the BSP and of other
b. Succession; banks which are denominated in
Philippine currency and are subject to
c. Adopt and use a corporate seal; payment in legal tender upon demand by
the presentation of checks. [Sec. 58,
d. Amend its AOI; NCBA] No interest is paid by the bank
because the depositor can take out his
e. Adopt and amend By-Laws; funds any time. [Villanueva, Commercial
Law Review, 2012]
f. For stock corporations – issue or sell stocks to
subscribers and sell treasury stocks; for non-profit 4. Negotiable Order of Withdrawal
corporation – admit members to the corporation. Accounts – Interest-bearing deposit
g. Purchase, receive, take or grant, hold, convey, sell, accounts that combine the payable on
lease, pledge, mortgage and otherwise deal with demand feature of checks and
such real and personal property, pursuant to its investment feature of savings accounts.
lawful business; [Manual of Regulations for Banks]
h. Enter into merger or consolidation with other e. Buying and selling foreign exchange and gold or
corporations as provided in the Code; silver bullion;
i. Make reasonable donations, including those for the f. Acquiring marketable bonds and other debt
public welfare or for hospital, charitable, cultural, securities;
scientific, civic or similar purposes: Provided, no
corporation, domestic or foreign, shall give g. Extending credit, subject to such rules as the MB
donations in aid of any political party or candidate may promulgate. These rules may include the
or for purposes of partisan political activity; determination of bonds and other debt securities
eligible for investment, the maturities and
j. Establish pension, retirement, and other plans for aggregate amount of such investment. [Sec. 29,
the benefit of its directors, trustees, officers and GBL]
employees; and
“Know Your Customer” Rule:
k. Exercise such other powers as may be essential or
necessary to carry out its purposes. ▪ Before granting a loan or other credit
accommodation, a bank must ascertain that the
2. Banking and Incidental Powers: debtor is capable of fulfilling its commitments to
the bank.
a. Accepting drafts and issuing letters of credit;
▪ The bank may demand from its credit applicants a
b. Discounting and negotiating PNs, drafts, bills of statement of their assets and liabilities and of their
exchange, and other evidence of debts; income and expenditure and such information as
may be prescribed by law or by rules and
c. Accepting or creating demand deposits; regulations of MB to enable the bank to properly
evaluate the credit application which includes the
GENERAL RULE: Only Universal and Commercial corresponding financial statements submitted for
Banks can accept or create demand deposits. taxation purposes to the BIR. [Sec. 40, GBL]
EXCEPTION: Banks with prior approval of, and Material Misrepresentation:

subject to such conditions and rules as may be
prescribed by the Monetary Board. [Sec. 33, GBL] If there is Material Misrepresentation, the bank:
d. Receiving other types of deposits and deposit a. May terminate any loan or other credit
substitutes; accommodation granted on the basis of said
statements;
▪ Types of Deposits:
b. Shall have the right to demand immediate
1. Time Deposit – Interest rate stipulated repayment or liquidation of the obligation. [Sec. 40,
depending on the number of days. GBL]
During this period, the money deposited
may not be withdrawn without incurring Limits on Loans, Credit Accommodation and Guarantees –
penalty. High interest rates.
1. Against Real Estate:
2. Savings Deposit – bank pays an interest
rate, but not as high as time deposits. GENERAL RULE: Not exceed 75% of the appraised
value of the respective real estate security, plus 60% of

the appraised value of the insured improvements, and

such loans may be made to the owner of the real estate ▪ The banking is so impressed with public interest where
or to his assignees. the trust and confidence of the public in general is of
paramount importance such that the appropriate
EXCEPTION: Where the MB otherwise prescribes. [Sec. standard of diligence must be a high degree of diligence,
37, GBL] if not the utmost diligence. [Bank of America v. Philippine
Racing Club, G.R. No. 150228, June 30, 2009]
2. On Security of Chattels and Intangible Properties (IPS)
NATURE OF BANK FUNDS AND BANK DEPOSITS
GENERAL RULE: Not exceed 75% of the appraised
value of the appraised value of the security, and such ▪ The contract between the bank and its depositor is
loans and other credit accommodations may be made to governed by the provisions of the NCC on simple loan.
the title holder of the chattels and intangible properties [Consolidated Bank and Trust Corporation v. CA, G.R. No.
or to his assignees. 138569, September 11, 2003]
EXCEPTION: Where the MB otherwise prescribes. [Sec. ▪ Bank deposits are in the nature of irregular deposits,
38, GBL] thus, the prohibition on compensation when one of the
debts arises from depositum does not apply. [Serrano v.
Grant of Loans: Central Bank, G.R. No. L-30511, February 14, 1980]
a. Only in amounts and for the periods of time ▪ The relationship being contractual in nature, mandamus
essential for the effective completion of the is therefore not an available remedy since mandamus
operations to be financed; and does not lie to enforce the performance of contractual
obligations. [Maclaring Lucman v. Alimantar Malawi, G.R.
b. Consistent with safe and sound banking practices. No. 159794, December 19, 2006]
[Sec. 39, GBL]
STIPULATION ON INTERESTS
Purpose of Loans:
▪ The Monetary Board, may, similarly in accordance with
▪ The purpose shall be stated in the application and the authority granted to it in Section 106 of the New
in the contract between the bank and the borrower. Central Bank Act, and taking into account the
[Sec. 39, GBL] requirements of the economy for the effective utilization
of long-term funds, prescribe the maturities, as well as
Effect of Usage of Loan Proceeds for Purposes Other than related terms and conditions for various types of bank
Those Agreed Upon with the Bank loans and other credit accommodations. Any change by
the Board in the maximum maturities shall apply only to
▪ The bank shall have the right to terminate the loan loans and other credit accommodations made after the
or other credit accommodation and demand date of such action.
immediate repayment of the obligation. [Sec. 39,
GBL] ▪ The Monetary Board shall regulate the interest imposed
on micro-finance borrowers by lending investors and
DILIGENCE REQUIRED OF BANKS similar lenders such as, but not limited to, the
unconscionable rates of interest collected on salary loans
▪ The State recognizes the vital role of banks providing an and similar credit accommodations. [Sec. 43, GBL]
environment conducive of the sustained development of
the national economy and the fiduciary nature of GRANT OF LOANS AND SECURITY REQUIREMENTS
banking that requires high standards of integrity and A SINGLE BORROWER’S LIMITS
performance. In furtherance thereof, the State shall
promote and maintain a stable and efficient banking and 1. Ratio of Net Worth to Total Risk Assets
financial system the is globally competitive, dynamic
and responsive to the demands of a developing ▪ The Monetary Board shall prescribe the minimum
economy. [Sec. 2, GBL] ratio which the net worth of a bank must bear to its
total risk assets which may include contingent
▪ BSP Circular 857 provides that financial institutions accounts.
must adhere to the highest service standards.
▪ For purposes of this section, the Monetary Board
▪ These standards apply not only to the bank per se, but may require such ratio be determined on the basis
also to its employees. [Cadiz v. CA, G.R. No. 153784, of the net worth and risk assets of a bank and its
October 25, 2005] subsidiaries, financial or otherwise, as well as
prescribe the composition and manner of
▪ The fiduciary nature of banking requires banks to determining the net worth and total risk assets of
assume a degree of diligence higher than that of a good banks and their subsidiaries: Provided, that in the
father of a family. [People v. Go, G.R. No. 168539, March exercise of this authority, the Monetary Board shall,
25, 2014] to the extent feasible conform to the internationally

accepted standards, including those of the Bank for a. the direct liability of the maker or acceptor of
International Settlements (BIS), relating to risk- paper discounted with or sold to such bank
based capital requirements: Provided further, that and the liability of a general endorser, drawer
it may alter or suspend compliance with such ratio or guarantor who obtains a loan or other credit
whenever necessary for a maximum period of one accommodation from or discounts paper with
year: Provided, finally, that such ratio shall be or sells paper to such bank;
applied uniformly to banks of the same category.
b. In the case of an individual who owns or
▪ In case a bank does not comply with the prescribed controls a majority interest in a corporation,
minimum ratio, the Monetary Board may limit or partnership, association or any other entity,
prohibit the distribution of net profits by such bank the liabilities of said entities to such bank;
and may require that part or all of the net profits be
used to increase the capital accounts of the bank c. In the case of corporation, all liabilities to such
until the minimum requirement has been met. The bank of all subsidiaries in which such
Monetary Board may, furthermore, restrict or corporation owns or controls a majority
prohibit the acquisition of major assets and the interest; and
making of new investments by the bank, with the
exception of purchases of readily marketable d. In the case of a partnership, association or
evidence of indebtedness of the Republic of the other entity, the liabilities of the members
Philippines and of the Bangko Sentral and any thereof to such bank.
other evidence of indebtedness or obligations the
servicing and repayment of which are fully ▪ Even if a parent corporation, partnership,
guaranteed by the Republic of the Philippines, until association, entity or an individual who owns or
the minimum required capital ratio has been controls a majority interest in such entities has no
restored. liability to the bank, the Monetary Board may
prescribe the combination of the liabilities of
▪ In case of a bank merger or consolidation, or when subsidiary corporations or members of the
a bank is under rehabilitation under a program partnership, association entity or such individual
approved by the Bangko Sentral, Monetary Board under certain circumstances, including but not
may temporarily relieve the surviving bank, limited to, any of the following situations:
consolidated bank, or constituent bank or
corporations under rehabilitation from full a. The parent corporation, partnership,
compliance with the required capital ratio under association, entity or individual guarantees
such conditions as it may prescribe. [Sec. 34, GBL] the repayment of the liabilities;
2. Single Borrower’s Limit b. The liabilities were incurred for the

accommodation of the parent corporation or
▪ Except as the Monetary Board may otherwise another subsidiary or of the partnership or
prescribe for reasons of national interest, the total association or entity or such individual; or
amount of loans, credit accommodations and c. The subsidiaries though separate entities
guarantees as may be defined by the Monetary operate merely as departments or divisions of
Board that may be extended by a bank to any a single entity.
person, partnership, association, corporation or
other entity shall at no time exceed twenty-five ▪ For purposes of this Section, loans, other credit
percent (25%) of the net worth of such bank accommodations and guarantees shall exclude:
(previously 20%, amended by MB Circular No.
425). The basis for determining compliance with a. Loans and other credit accommodations
single borrower limit is the total credit commitment secured by obligations of the BSP or of the
of the bank to the borrower. Philippine Government;
▪ Unless the Monetary Board prescribed otherwise, b. Loans and other credit accommodations
the total amount of loans, credit accommodations covered by assignment of deposits maintained
and guarantees prescribed in the preceding in the lending bank and held in the
paragraph may be increased by an additional ten Philippines;
percent (10%) of the net worth of such bank
provided the additional liabilities of any borrower c. Loans and other credit accommodations
are adequately secured by trust receipts shipping covered by assignment of deposits maintained
documents, warehouse receipts or other similar in the lending bank and held in the
documents transferring or securing title covering Philippines;
readily marketable, non-perishable goods which
must be fully covered by insurance. d. Loans, credits accommodations and
acceptances under letters of credit to the
▪ The above prescribed ceilings shall include; extent covered by margin deposits;

e. Other loans or credit accommodations which granted in accordance with rules as may be
the Monetary Board may from time to time, prescribed by the Monetary Board shall not be
specify as non-risk items. subject to the individual limit.
Loans and other credit accommodations, ▪ The Monetary Board shall define the term “related
deposits maintained with, and usual interests.”
guarantees by a bank to any other bank or
non-bank entity, whether locally or abroad, ▪ The limit on loans, credit accommodations and
shall be subject to the limits as herein guarantees prescribed herein shall not apply to
prescribed. loans, credit accommodations and guarantees
extended by a cooperative bank to its cooperative
Certain types of contingent accounts of shareholders.
borrowers may be included among those
subject to these prescribed limits as may be
determined by the Monetary Board. [Sec. 35,
GBL]
3. Restrictions on Bank Exposure to DOSRI (Directors,

Officers, Stockholders and Their Related Interests)
▪ No director or officer of any bank shall, directly and

indirectly, for himself or as the representative or
agent of others, borrow from such bank nor shall he
become a guarantor, endorser or surety for loans
from such bank to others, or in any manner be an
obligor or incur any contractual liability to the bank
except with the written approval of the majority of
all the directors of the bank, excluding the director
concerned: Provided, that such written approval
shall not be required for loans, other credit
accommodations and advances granted to officers
under fringe benefit plan approved shall be entered
upon the records of the bank and a copy of such
entry shall 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 NCBA.
▪ 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
advances to officers in the form of fringe benefits

Mercantile Law Intellectual Property Code
GENERAL
STATE POLICIES
Under Republic Act No. 8293, as amended by Republic Act

No. 9150, the Intellectual Property Code (IPC) recognizes:
a. Effective intellectual and industrial property

system is vital to the development of domestic and
creative activity, facilitates the transfer of
technology, attract foreign investments, and
ensures market access to Philippine products;
b. Need to protect and secure exclusive rights of

scientists, inventors, artists, and other gifted
citizens to their intellectual property and creations;
c. Use of intellectual property bears a social function,

hence the State shall promote the diffusion of
knowledge and information for the promotion of
INTELLECTUAL
national development and the common good;
d. Need to streamline administrative procedures of
PROPERTY
registering patents, trademarks and copyrights, to
liberalize the registration on the transfer of
technology, and to enhance the enforcement of
LAW
intellectual property rights in the Philippines.
[Villanueva, 1140]
(R.A. No. 8293, as

Note:
▪ IPC was enacted to strengthen the intellectual and
amended by R.A.
industrial property system in the Philippines as
mandated by the country’s accession to the World
Trade Organization (WTO) [Mirpuri v. Court of
No. 9150)
Appeals, G.R. No. 114508, November 19, 1999]
▪ Intellectual property protection is a means for

making society benefit from the creation of its men
and women of talent and genius [ABS-CBN v.
Philippine Multi-Media System, G.R. Nos. 175769-70,
January 19, 2009]
RECIPROCITY RULE
Any person who is a national of, or is domiciled in, or has real

and effective industrial establishment in, a country:
a) Which is a party to any convention, treaty or

agreement relating to intellectual property rights or
the repression of unfair competition, to which the
Philippines is also a party; or
b) Its laws extend reciprocal rights to Philippine
nationals;
shall be entitled to benefits to the extent necessary to give

effect to such convention, treaty, or reciprocal law, in addition
to the rights which any owner of an intellectual property right
is otherwise entitled under IPC.
However, any condition imposed by a foreign country on a

Philippine national seeking protection of intellectual property
rights in that country, shall be reciprocally be enforceable

upon that country’s nationals in Philippine jurisdiction. industrially applicable.

[Villanueva, 1140-1141] [Sec. 21, IPC]
COVERAGE OF INTELLECTUAL PROPERTY RIGHTS INTELLECTUAL PROPERTY OFFICE

Intellectual property rights include the following:
POWERS OF THE IPO
a. Patents; IPO, as headed by a Director General, administers and
implements the declared State policies, which shall have the
b. Trademarks and Service (Topographies) Marks; following functions:
c. Copyrights; a. Examine applications for grant of letters of patent

for inventions and register utility models and
d. Geographic Indications; industrial designs; registration of marks,
geographic indications and integrated circuits;
e. Industrial Designs;
b. Registers, settle disputes relating to, develop and
f. Layout-Designs for Integrated Circuits; implement strategies to promote, and facilitate
technology transfer arrangements (TTAs);
g. Protection of Undisclosed Information.
c. Regularly publish in IPO Gazette issue or approved
Note: The term “intellectual property rights” no longer intellectual property rights, and registered TTAs;
includes trade names and business names. [Villanueva, 1142] and
DIFFERENCES BETWEEN COPYRIGHTS,
d. Adjudicate contested proceedings affecting
TRADEMARKS, AND PATENTS
intellectual property rights applying when
applicable equitable principles of laches, estoppel,
A copyright is a right
and acquiescence. [Villanueva, 1141-1142]
granted by statute to the
author or originator of
DISQUALIFIFCATION OF OFFICERS AND EMPLOYEES
literary, scholarly,
scientific, or artistic All IPO officers and employees are disqualified from:
productions, including
computer programs. A a. Submitting any applications with the IPO;
Copyright copyright gives him the
legal right to determine b. Acting as attorney and/or patent agent of an IPO
how the work is used and application;
to obtain economic benefits
from the work. [Rule 2, c. Acquiring, except for hereditary succession, any
Copyright Safeguards and
intellectual property, or any right, title or interest
Regulations] during their employment, and for 1 year thereafter.
▪ A trademark is any [Villanueva, 1142]
visible sign capable of
distinguishing the
goods (trademark) or
PATENTS
services (service
NOTABLE CONCEPTS
mark) of an enterprise
and shall include a
Trademark 1. Inventor – any person who, at the filing date of the
stamped or marked
application, had the right to the patent.
container of goods.
[Sec. 121.1, IPC]
2. Novelty – an invention shall not be considered ‘new’ if
it forms part of ‘prior art.’
▪ In relation thereto, a
trade name means the
3. Prior Art – consists of the following:
name or designation
identifying or
a. Everything made publicly available anywhere in
distinguishing an
the world, before filing or priority date of
enterprise. [Sec. 121.3,
application claiming the invention; and
IPC]
A patent is a protection or
b. Whole contents of an application of patent, utility
right given to any technical
model, or industrial designs registration, published
solution of a problem in
in accordance with IPC, filed or effective in the
Patent any field of human activity
Philippines, with a filing or priority date earlier
which is new, involves an
than filing or priority date of application. Provided:
inventive step, and is

The following are non-patentable inventions:

▪ Application which has validly claimed filing
date of an earlier application under Section 31 a. Discoveries, scientific theories and mathematical
of IPC, shall be prior art with effect as of the methods;
filing date of such earlier application;
b. Schemes, rules and methods of performing mental
▪ Applicant or inventor identified in both acts, playing games or doing business, and
applications are not one and the same. programs for computers;
4. Priority Date – date of filing of foreign application for c. Methods for treatment of human or animal body by
same invention referred to in Sec. 31 of IPC on ‘priority surgery or therapy, and diagnostic methods
rights.’ practiced on the human or animal body;
5. Inventive Step – an invention involves an inventive step Note: Products and composition for use in any of
if, having regard to prior art, it is not obvious to a person these methods are patentable.
skilled in the art at filing date, or priority date of
application claiming the invention. d. Plant varieties or animal breeds or essentially
biological process for the production of plants or
6. Industrial Applicability – an invention can be produced animals;
and used in any industry shall be industrially applicable.
[Villanueva, 1144-1145] Note: Microorganisms and non-biological and
microbiological processes are patentable.
PATENTABLE INVENTIONS
e. Aesthetic creations;
Definition
f. Anything which is contrary to public order or
Any technical solution of a problem in a field of human morality. [Villanueva, 1146]
activity, which may be related to a products, a process, or an
improvement of any of the foregoing: new, involves an NOVELTY AND NON-PREJUDICIAL DISCLOSURE
inventive step, and is industrially applicable.
Disclosure of information in the application during the 12
Requisites: months preceding filing date or priority date of application
shall not prejudice applicant on the ground of lack of novelty
a. Must be new; if such disclosure was made by:
b. Must involve an inventive step; and a. Inventor;
c. Must be industrially applicable. b. A patent officer and the information was contained:
Note: 1. In another application filed by inventor and

should not have been disclosed by the office;
▪ Novelty is an essential requisite of patentability of or
an invention of discovery. If a devise or process has
been known or used by others prior to its invention 2. In an application filed without the knowledge
or discovery by applicant, the patent application or consent of the inventor by a third party
should be denied. If application has been granted, which obtained the information directly or
the court, in a judicial proceeding, in which the indirectly from the inventor;
validity of the patent is drawn in question, will hold
it void and ineffective. An invention must possess c. Third party who obtained information directly
the elements of novelty, originality and precedent, from the inventor. [Villanueva, 1146]
and for the patentee to be entitled to the protection,
the invention must be new to the world. [Manzano OWNERSHIP OF PATENT
v. Court of Appeals, G.R. No. 113388, September 5,
1997] Right to Patent
▪ An inventor must possess the essential elements of The right to patent belongs to the inventor, his heirs, or
novelty, originality and precedence to be entitled to assigns. When two or more persons have jointly made an
protection. No injunction will issue unless validity invention, rights shall belong to them jointly. [Villanueva,
of patent in relation to issue of novelty and 1147]
originality of invention is clear and beyond
question. [Maguan v. Court of Appeals, G.R. No. L- First to File Rule
45101, November 28, 1986]
▪ If two or more persons have made the same
NON-PATENTABLE INVENTIONS invention separately and independently from each

other, right shall belong to the applicant who has

the earliest filing date or earliest priority date. b. Patent does not disclose invention in a manner
sufficiently clear or complete for it to be carried out
▪ If filed in a foreign country which by treaty, by any person skilled in the art; or
convention, or law affords similar privileges to
Filipino citizens, it shall be considered as filed as of c. Patent is contrary to public order or morality.
the date of filing the foreign application, provided
that: Note:
a. Local application expressly claims priority; ▪ Where grounds for cancellation relate to some of
claims or parts of claim, cancellation may be
b. Filed within 12 months from date earliest effected to such extent only.
foreign application was filed;
▪ Cancellation shall terminate, with notice of
c. Certified copy of foreign application together cancellation published in the IPO Gazette, the
with English translation field within 6 months rights conferred by patent or any specified claim(s).
from date of Philippine filing. [Villanueva,
1147] ▪ GENERAL RULE: A decision or order to cancel by
the Director of Legal Affairs is immediately
Inventions Created Pursuant to Commission executory, even pending appeal.
▪ The person who commissions the work shall own ▪ EXCEPTION: Unless restrained by the Director
the patent, unless the contract otherwise provides. General. [Villanueva, 1150]
▪ If employee made the invention in the course of his REMEDIES

employment contract, the patent shall belong to:
Application by Person Not Having the Right to Patent
a. Employee – if the inventive activity is not part
of his regular duties even if employee uses If a person other than the applicant is declared by final court
time, facilities and materials of the employer. order or decision as having the patent right, such person may,
within 3 months after decision has become final:
b. Employer – if invention results from the
performance of his regularly-assigned duties, a. Prosecute application as his own in place of
unless there is an agreement, express or applicant;
implied, to the contrary. [Villanueva, 1147]
b. File new patent application in respect of same
Procedure of Granting Patent invention;
1. Application – patent application must be in Filipino or c. Request that application be refused; or

English. The inventor must be identified. If inventor is
not resident, applicant may appoint and maintain a d. Seek cancellation of patent, if already been issued.
resident agent/representative upon whom notice will be [Villanueva, 1150-1151]
served.
Remedies of True and Actual Inventor
2. Publication and Search – must be published in the IPO
Gazette together a search document established by or on When the true and actual inventor is deprived of patent
behalf of the IPO. without his consent or through fraud, and so declared by final
court order:
3. Grant of Letter of Patent – shall take effect on the date
of publication of grant of patent in IPO Gazette. a. Court shall order for his substitution as patentee; or
4. Maintenance of Patent through Annual Fees – to be b. At the option of the true inventor, cancel patent;
paid upon expiration of 4 years from the date application and
was published, and on each subsequent anniversary
date. If not paid, patent application deemed withdrawn c. Award actual and other damages in his favor as
or lapsed. [Villanueva, 1148-1150] warranted.
GROUNDS FOR CANCELLATION OF PATENTS Note: Such action must be filed within 1 year from date of
publication. [Villanueva, 1151]
An interested party may, upon petition and payment of
required fee, petition to cancel patent or any claim, or parts of RIGHTS CONFERRED BY A PATENT
claim on any of the following grounds:
The following are the exclusive rights conferred by patent on
a. What is claimed as an invention is not new nor its owner:
patentable;

a. Where Patent Covers Product - to restrain, prohibit a. using patent products which has been put on
and prevent any unauthorized person or entity Philippine market by owner of the product, or with
from making, using, offering for sale, selling or his express consent, insofar as such use is
importing that product; performed after the product has been put out;
b. Where Patent is a Process – to restrain, prevent, or b. Where act is done privately and on a non-
prohibit any unauthorized person or entity from commercial scale for a non-commercial purpose:
using process, and from manufacturing, dealing in, provided it does not significantly prejudice owner’s
using, selling or offering for sale, or importing any economic interest;
product obtained directly or indirectly from such
process; c. Where act consists of making or using exclusively
for purpose of experiments that relate to subject
c. To assign, or transfer by succession, conclude matter of patent invention;
licensing contracts on, the patent.
d. Where act consists of preparation for individual
▪ Entitlement to All Property Right Under the cases, in a pharmacy or by a medical professional,
Civil Code – Patents or applications for or a medicine in accordance with a medical
patents and invention to which they relate, prescription or acts concerning medicine so
shall be protected in the same way as the prepared;
rights of other property under the Civil Code.
e. Where invention is used in any ship, vessel, aircraft,
d. If joint owners – each co-owner of the patent and or land vehicle of any other country entering
invention covered shall be entitled to personally Philippine territory temporarily or accidentally.
make use, sell, or import the invention for his own [Villanueva, 1152-1153]
profit. But neither may grant licenses or assign his
right, title or interest or part thereof, without Prior User
consent of other owner(s), or without
proportionally dividing proceeds therewith. ▪ Any prior user, who, in good faith was using the
[Villanueva, 1151-1152] invention or has undertaken serious preparations
to use the invention in his enterprise or business,
ASSIGNMENT OF PATENTS before filing date or priority date of application on
which a patent is granted, shall have the right to
What May Be Assigned? continue use thereof.
Assignment may be of: ▪ Right of prior user may only be transferred or

assigned together with the enterprise or business,
a. entire patent and invention covered; or or with the part of the enterprise or business in
which use or preparations for use have been made.
b. an undivided share of entire patent and invention, [Villanueva, 1153]
in which event parties become joint owners; or
Use of Invention of the Government
c. assignment to specified territory
A government agency or a third person authorized by the
Form Government may exploit invention even without agreement
of patent owner where:
Assignment must be in:
a. Public interest, national security, nutrition, health
a. writing; or the development of other sectors, as determined
by the appropriate government agency, so requires;
b. notarized; or
c. and recorded with the IPO. b. Judicial or administrative body has ruled anti-
competitive exploitation of patent by owner or
Note: Otherwise it is void against any subsequent purchaser licensee. [Villanueva, 1153]
or mortgage without notice, unless recorded in IPO within 3
months from date of instrument, or prior to subsequent PATENT INFRINGEMENT
purchase or mortgage. [Villanueva, 1152]
What Constitutes Patent Infringement?
LIMITATION OF PATENT OWNER’S RIGHTS
Patent infringement constitutes:
Limits
a. Making, using, offering for sale, selling, or
Patent owners have no right to prevent third parties from importing patented products, or obtained directly
performing the following: or indirectly from patented process; or

b. Use of patented process without authorization of

patentee. [Villanueva, 1153] Burden of Proof
Note: ▪ Burden of proof to substantiate patent infringement

rests on the plaintiff [Smith Kline Beckman Corp. v.
▪ No patent means no patent rights can be conferred Court of Appeals, G.R. No. 126627, August 14, 2003]
to protect an invention. Lacking a patent, the
contraption is not legally protected from the ▪ Burden of proof is upon the producer of identical
manufacture or commercial use of third persons or fake product to show that his product was
[Pearl & Dean v. Shoemart, G.R. No. 148222, August produced without the use of patented process
15, 2003] [Tañada v. Angara, G.R. No. 118295, May 2, 1997]
▪ A patentee shall have exclusive rights to make, use Tests to Determine Infringement
or sell patented machine, article or product for
purpose of industry or commerce, throughout the a. Literal Infringement – courts must juxtapose the
Philippines. The making, using or selling by any claims of patent and accused product within the
person without authorization for patentee shall overall context of claims and specification, to
constitute infringement. [Del Rosario v. Court of determine whether there is exact identity of all
Appeals, G.R. No. 115206, March 15, 1996] material elements.
▪ To infringe a patent, machine or device must b. Doctrine of Equivalents – infringement also occurs
perform the same function, or accomplish the same when a device appropriates a prior invention by
result by identical or substantially identical means incorporating its innovative concept and, albeit
and the principle or mode of operation must be with some modification and change, performs
substantially the same. [Del Rosario v. Court of substantially the same function in substantially the
Appeals, G.R. No. 115206, March 15, 1996] same way to achieve substantially the same result
(Function-Means-and-Result Test). [Godines v.
Rights of Patentee in Case of Infringement Court of Appeals, G.R. No. L-97343, September 13,
1993]
In case of infringement, the patentee has the following rights:
Defenses in Action for Infringement
a. Bring civil action before courts to recover from
infringer such damages sustained thereby, plus The defendant may show invalidity of the patent, or any claim
attorney’s fees and other expenses of litigation; and thereof, on any grounds on which a petition for cancellation
can be brought. [Villanueva, 1156]
b. Secure an injunction for the protection of his rights.
[Villanueva, 1153] LICENSING
Voluntary Licensing –
c. If foreign national – may bring action of
infringement, but must meet requirement of
a. Purpose
Section 3 of IPC and must not be engaged in
business in the Philippines. [Villanueva, 1156]
The purpose of Voluntary Licensing Contract is to:
Courts may:
1. encourage transfer and dissemination of
technology;
a. If damages are inadequate or cannot be
reasonably ascertained – may award by way of
2. prevent or control practices and conditions
damages a sum equivalent to reasonable royalty.
that may, in particular cases, constitute an
abuse of intellectual property rights having an
b. According to the circumstances of the case –
adverse effect on competition and trade;
award damages in a sum above the amount found
as actual damages sustained; but not to exceed
3. ensure all technology transfer arrangements
three (3) times the amount of actual damages.
comply with the IPO. [Villanueva, 1156]
c. In its discretion, order that infringing goods,
b. Technology Transfer Arrangements
materials and implements predominantly be
disposed of outside the channels of commerce or Technology transfer arrangements (TTA) refers to:
destroyed without compensation. [Villanueva 1153-
1154] 1. Contracts or agreements involving transfer of
systematic knowledge for the manufacturing
d. If infringement is repeated – offender may be held
of a product, application of a process, or
criminally liable without prejudice to the rendering of a service including management
institution of civil action for damages. Criminal contracts;
action shall prescribe in three (3) years from date of
commission of the crime. [Villanueva, 1156]

2. Transfer, assignment or licensing of all forms process to be anti-competitive. [Villanueva,

of intellectual property rights, including 1160]
licensing of computer software, except
computer software developed for mass 3. Interdependence of Patents –
market. [Villanueva, 1156]
▪ Invention claimed in the second patent
Compulsory Licensing – involves an important technical advance
of considerable economic significance;
a. Grounds – IPO Director of Legal Affairs may
grant license to exploit patented invention, even ▪ First patent owner entitled to cross-
without the agreement of patent owner in favor of license on reasonable terms to use
person who has shown his capability to exploit invention claimed in second patent;
invention under any of the following
circumstances: ▪ Use authorized in respect of first patent
shall be non-assignable except with
1. National emergency, or other circumstances assignment of second patent; and
of extreme urgency;
▪ Must comply with all the requirements
2. Where public interest, in particular, national and conditions. [Villanueva, 1160-1161]
security, nutrition, health or development of
other vital sectors of national economy as c. Amendment, Cancellation, Surrender of
determined by the appropriate agency of the Compulsory License – Director of Legal Affairs
Government so requires; may amend, cancel or surrender compulsory license
if:
3. Where a judicial or administrative body has
determined that manner of exploitation by 1. Ground for grant of compulsory license no
patent owner or his licensee is anti- longer exists and unlikely to recur;
competitive;
2. Licensee has neither begun to supply domestic
4. In case of public non-commercial use of patent market nor made serious preparation;
by patentee, without satisfactory reason; or
3. Licensee not complied with prescribed terms
5. If patented invention is not being worked in of license.
the Philippines on commercial scale, although
capable of being worked without satisfactory d. Licensee’s Exemption from Liability – Any person
reason. who works a patented product, substance, and/or
process under compulsory license, shall be free
Note: Importation of patented article shall from any liability of infringement. Without
constitute working or using the patent. [Villanueva, prejudice to rightful patent owner to recover from
1159] licensor whatever he may receive as royalties under
the license. [Villanueva, 1161]
b. Requirement to Obtain License on:
UTILITY MODELS
1. Reasonable Commercial Terms – license will
only be granted after petitioner has made DEFINITION
unsuccessful efforts to obtain authorization
from patent owner on reasonable commercial A utility model is a technical solution to a problem in any field
terms and conditions within a reasonable of human activity which is new and industrially applicable. It
time, except: essentially refers to an invention in the mechanical field. [Ching
v. Salinas, Jr., G.R. No. 161295, June 29, 2005]
▪ Where petition for compulsory license
seeks to remedy a practice determined by APPLICABILITY OF PATENT PROVISIONS
judicial/administrative process as anti-
competitive; Provisions governing patents shall apply mutatis mutandis to
the registration of utility models, however:
▪ In situations of national emergency or
other circumstances of extreme urgency; a. Where patent right conflicts with right to utility
model, said provision shall apply as if patent were
▪ In cases of public non-commercial use. replaced by patent or utility model registration.
[Villanueva, 1159]
b. An invention qualifies for registration as utility
2. Semi-Conductor Technology – license may model if its new and industrially applicable.
only be granted in case of public non-
commercial use or to remedy a practice
determined after judicial or administrative

c. Patentable inventions shall apply except the

reference to inventive step as a condition of Mark
protection.
Any visible sign capable of distinguishing goods (trademark)
d. A utility model registration shall expire, without or services (service mark) of an enterprise and shall include a
any possibility or renewal, at the end of the seventh stamped or marked container of goods.
(7th) year after date of filing of filing of application.
[Villanueva, 1162] Collective Mark
Note: Any new model of implements or tools of any industrial Any visible sign capable of distinguishing the origin or any
product even if not possessed of the quality of invention, but other common characteristic, including the quality of goods
which is of practical utility is entitled to a patent for utility or services of different enterprises which use the sign under
model. However, a utility model shall not be considered ‘new’ the control of the registered owner of the collective mark.
if before application for a patent it as been publicly known or
publicly used or has been described in a printed publication Trade Name
circulated within the country, or if it is substantially similar to
any other utility model so known, used or described within Name or designation identifying or distinguishing an
the Philippines. [Del Rosario v. Court of Appeals, G.R. No. enterprise. [Villanueva, 1165]
115206, March 15, 1996]
PURPOSE
PATENT APPLICATION CONVERSION TO UTILITY
MODEL REGISTRATION There are three distinct functions of a trademark. They are
to:
Any time before grant or refusal of patent, applicant may
convert application into one (1) registration of utility model a. Indicate origin of ownership of articles to which
(but only once), and vice-versa, and which shall be accorded they are attached;
filing date of initial application.
b. Guarantee that those articles come up to certain
PROHIBITION ON PARALLEL APPLICATIONS standard of quality; and
Applicant may not file two applications for the same subject, c. Advertise articles they symbolize.
one for utility model registration, and the other for the grant
of a patent, whether simultaneously or consecutively. Today a trademark is an effective agent for actual creation and
[Villanueva, 1162] protection of goodwill. [Mirpuri v. Court of Appeals, G.R. No.
114508, November 19, 1999]
INDUSTRIAL DESIGN ACQUISITION OF OWNERSHIP OF MARK OR
TRADENAME
DEFINITION
Rules and Principles
Any composition of lines and colors or any three-dimensional
form, whether or not associated with lines or colors. Provided, ▪ Rights in the mark shall be acquired through
such composition or form gives a special appearance to, and registration made in accordance with the legal
can serve as pattern for an industrial product or handicraft. provisions.
[Villanueva, 1163]
▪ Any person who shall procure registration of mark
INTEGRATED CIRCUIT by a false or fraudulent declaration or
representation, or by any false means, shall be liable
A product in its final form, or an intermediate form, in which in civil action by any person injured thereby for any
the elements, at least one of which is an active element and damages sustained as a consequence thereof.
some or all of the interconnections are integrally formed in
and/or on a piece of material, and which is intended to ▪ Once registered, the mark’s validity and the
perform an electronic function. [Villanueva, 1163] registrant’s ownership are prima facie presumed.
[Ong v. People, G.R. No. 169440, November 23, 2011]
LAYOUT DESIGN / TOPOGRAPHY
▪ Ownership of a mark or trade name may be
Three-dimensional disposition, however expressed, of acquired not necessarily by registration but by
elements, at least one (1) of which is an active element, and of adoption and use in trade or commerce. As
some or all of the interconnections of an integrated circuit, or between actual use of a mark without registration,
such a three-dimensional disposition prepared for an and registration of the mark without actual use
integrated circuit intended for manufacture. [Villanueva, 1163] thereof, the former prevails over the latter. For a
rule widely accepted and firmly entrenched,
TRADEMARKS because it has come down through the years, is that
actual use in commerce or business is a pre-
DEFINITION requisite to the acquisition of the right of

ownership. [Shangri-La Int’l Hotel v. Developers c. While adherence to the protection granted by the
Group of Companies, G.R. No. 159938] Paris Convention of 1965 is acknowledges, it must
nevertheless be deemed qualified by provision of
Test of Ownership Section 2 and 2-A of Trademark law which
provides that protection is accorded only to
▪ In order to register a trademark, one must be the trademark actually in use in commerce in the
owner thereof and must have actually used the Philippines. [Villanueva, 1167]
mark in commerce in the Philippines for two (2)
months prior to the application for registration. NON-REGISTRABLE MARKS
[Sec. 2, RA No. 166]
A mark cannot be registered if it:
▪ One may be an owner of a mark due to its actual
use but may not yet have the right to register such a. Consists of:
ownership here due to the owner’s failure to use the
same in the Philippines for 2 months prior to 1. Immoral, deceptive or scandalous matter.
registration.
2. Matter which may disparage or falsely
Note: Under the Paris Convention to which the Philippines is suggest a connection with persons, living or
a signatory, a trade name of a national of a State that is a party dead, institutions, beliefs, or national symbols,
to the Paris Convention, whether or not the trade name forms or bring them into contempt or disrepute;
part of a trademark, is protected “without the obligation of
filing or registration". [Cordon Blue of the Philippines v. Renaud 3. Flag, coat of arms, or other insignia of the
Cointreau & Cie, G.R. No. 185830, June 5, 2013] Philippines or any of its political subdivisions,
or of any foreign nation, or any simulation
First-to-File Rule thereof;
▪ IPC espouses the first-to-file rule, and removed the 4. Name, portrait or signature identifying:
previous requirement of proof of actual use prior to
the filing of an application for registration of a ▪ A particular living individual except by
mark, proof of prior and continuous use is his written consent;
necessary to establish ownership of a mark. In fact,
the prior and continuous use of a mark may even ▪ Of a deceased Philippine President,
overcome the presumptive ownership of the during the life of his widow, if any,
registrant and be held as the owner of the mark. except by written consent of the widow;
[E.Y. Industrial Sales v. Shen Dar Electricity, G.R. No.
184850, October 20, 2010] 5. Shapes that may be necessitated by technical
factors, by nature of goods themselves, or
▪ It is the registration of the mark that is the operative factors that affect their intrinsic value;
act. IPC no longer provides for the doctrine of prior
use as the basis for priority right or registration of a 6. Color alone, unless defined by a given form.
right of a trademark or service mark [Shangri-La
Int’l Hotel v. Developers Group of Companies, G.R. No. b. Consists exclusively of signs or of indication that:
159938]
1. Are generic for the goods or services that they
Modified or Abandoned Doctrines in Trademarks seek to identify;
The following doctrines are deemed modified or even 2. Have become customary or usual to designate
abrogated in trademarks and service marks: goods or services in everyday language, or in
a bona fide and established trade practice;
a. Trademark is a creation of use, and therefore actual
use is a prerequisite to exclusive ownership, and 3. May serve in trade to designate the kind,
therefore its registration with the Philippine Patent quality, quantity, intended purpose, value,
Office is a mere administrative confirmation of geographic origin, time or production of
existence of such right. goods or rendering of services.
b. Use for a long time under the doctrine of secondary c. Is identical with registered mark belonging to
use means continuous use of such period for at least different proprietor or mark with an earlier filing or
five (5) years. Once registered, protection is priority date, in respect of:
afforded for 20 years renewable another 20 years
provided every five (5) years, an affidavit is filed 1. Same goods;
showing use of registered trademark or trade name
or reason for non-use. Mere temporary non-use 2. Closely-related goods or services; or
cannot constitute abandonment when non-use is
beyond owner’s control. 3. If it nearly resembles such mark as to be likely
to deceive or cause confusion.

Registration of a common name or a geographical location

d. Is identical with, or confusingly similar to, or may be permitted under the doctrine of secondary meaning.
constitutes a translation of, a mark which is It is applied where it is proven that:
considered:
a. This common term has been in use for many years;
1. By Philippine competent authority whether or and
not it is registered here, as being already the
mark of a person, and used for identical or b. The public has associated the products of applicant
similar goods or services; with this common name. [De La Rama Steamship Co.
v. National Development Co., G.R. No. L-26966,
2. Well-known, and registered in the Philippines October 30, 1970]
with respect to goods or services which are not
similar to those with respect to which TRADEMARK DILUTION
registration is applied for.
▪ Trademark dilution is the capacity of a famous mark to
e. Is likely to mislead public, particularly as to nature, identify and distinguish goods or services.
quality, characteristics or geographical origin of
goods or services; ▪ To be eligible for the protection from dilution, there has
to be finding of the following:
f. Is contrary to public order or morality. [Villanueva,
1168-1169] a. The trademark sought to be protected is famous
and distinctive;
Note:
b. The use by another began after the owner’s mark
▪ Nature of the goods to which the mark is applied became famous; and
will not constitute an obstacle to registration.
c. Such subsequent use defames the owner’s mark.
▪ The name and container of a beauty cream product [Levi Strauss & Co. v. Clinton Apparelle, G.R. No.
subject to trademark, and neither patent nor 138900, September 20, 2005]
copyright. [Kho v. Court of Appeals, G.R. No. 115758,
March 19, 2002] FILING DATE OF TRADEMARKS
▪ Distinctiveness is a requirement for a valid Filing date of an application shall be the date when IPO
registration of a trademark. A name may not be received the following indications and elements:
registered if it lacks such element. [Ang v.
Wellington Department Store, G.R. No. L-4531, a. An express or implicit indication that the
January 10, 1953] registration of a mark is sought;
▪ Whether or not a trademark is ‘well-known’ or not b. Identity of applicant;

is factual in nature. Hence decisions of quasi-
administrative agencies like the IPO are not only c. Indications sufficient to contract the applicant or
accorded with respect, but sometimes finality his representatives, if any;
because of their expertise. [Sehwani v. In-N-Out
Burger, G.R. No. 171053, October 15, 2007] d. Reproduction of marks who registration is sought
and
▪ Application for registration of trademark or label
which is almost the same or that very closely e. List of the goods or services for which the
resembles one already used and registered by registration is sought.
another should be rejected and dismissed outright
[Dermaline v. Myra Pharmaceuticals, G.R. No. 190065, Note: No filing date is accorded until all the required fees are
August 16, 2010] paid.
▪ A mark is valid if it is distinctive, and not barred by PRIORITY RIGHT OF FOREIGN APPLICANT
registration under Sec. 4 of R.A. 166. But once
registered, not only the mark’s validity but also the An application of a foreign person who previously duly filed
registrant’s ownership of the mark is prima facie an application for registration of the same mark, shall be
presumed. [McDonald’s v. L.C. Big Mak Burger, G.R. considered as filed as of the day the application was first filed
No. 143993, August 18, 2004] in the foreign country. However:
▪ Moreover, a registered trademark can be used for a. No registration of mark in the Philippines shall be
other products of the registrant. [Dermaline v. Myra granted until such mark has been registered in the
Pharmaceuticals, G.R. No. 190065, August 16, 2010] applicant’s country of origin.
DOCTRINE OF SECONDARY MEANING

b. Nothing shall entitle owner of registration to sue licensee in connection with which the mark is used.
for acts committed prior to date on which his mark Otherwise, the license is invalid.
was registered.
▪ It shall have no effect on third parties until such
Notwithstanding foregoing, owner of a well-known mark not recording is effected with IPO. [Villanueva, 1176]
registered in the Philippines may oppose the registration of
an identical or confusingly similar mark by: USE OF INDICATIONS BY THIRD PARTIES FOR
OTHER PURPOSES
a. Opposing the registration; or
The registration of the mark shall not confer on registered
b. Petition the cancellation of its registration; or owner the right to preclude third parties the use of their bona
fide names, addresses, pseudonyms, a geographical name, or
exact indications concerning kind, quality, quantity,
c. Sue for unfair competition. [Villanueva, 1172-1173] destination, value, place or origin, time of production or of
supply, of their goods and services as such is confined to mere
CERTIFICATE OF REGISTRATION identification or information. [Villanueva, 1176]
A certificate of registration of a mark shall be prima facie CANCELLATION

evidence of:
A petition to cancel a mark registration may be filed with the
a. Validity of the registration; Bureau of Legal Affairs by any person who believe that he is
or will be damaged by the registration of mark as follows:
b. Registrant’s ownership of the mark; and
a. Within five (5) years from the date of the
c. Registrant’s exclusive right to use in connection registration of the mark;
with the goods or services specified in the
certificate. [Villanueva, 1173] b. At any time, if the registered mark:
Note: 1. Becomes generic name;
▪ A certificate of registration gives rise to a 2. Has been abandoned;

presumption of its validity and the right to the
exclusive use of the trademarks [Levi Strauss 3. Its registration was obtained fraudulently or
(Phils.), Inc. v. Vogue Traders Clothing Co., G.R. No. contrary to the IPC;
132993, June 29, 2005]
▪ The certificate of registration shall remain in force 4. If the registered mark shall not be deemed to
for 10 years. It may be renewed for another 10 be generic name of goods and services solely
years. because such mark is also used as a name of or
to identify a unique product or service;
RIGHTS CONFERRED FROM CERTIFICATE OF
REGISTRATION c. At any time, if the registered owner of the mark,
without legitimate reason, fails to use the mark
The following are the rights conferred from the certificate of within the Philippines by virtue of a license during
registration: an uninterrupted period of 3 years or longer.
[Villanueva, 1176-1177]
a. Exclusive right to prevent all third parties not
having owner’s consent from using in the course of INFRINGEMENT
trade, identical or similar signs or containers for
goods or services, where such use would result in a How Committed
likelihood of confusion; and
▪ Infringement takes place at any moment any of the
b. Exclusive right extends to goods and services specified acts are committed regardless of whether there
which are not similar to those in respect of which is actual sale of goods or services using the infringing
the mark is registered. Provided the use of the mark material.
in relation to those goods and services would
indicate a connection between such goods and ▪ There is infringement when, any person who shall,
services to the owner of the registered mark, and without the consent of the owner of the registered mark:
that the interest of the owner is likely to be
damaged by such use. [Villanueva 1174-1175] a. Use in commerce any reproduction, counterfeit,
copy or colorable imitation of a registered mark or
LICENSE CONTRACTS the same container or a dominant feature thereof in
connection with the sale or other commercial
▪ Any license contract concerning registration of mark, or dealings; or
an application thereof, shall provide for effective control
by the licensor of the quality of the goods or services of

b. Apply such reproduction, counterfeit, copy of percentage based up the amount of gross sales
colorable imitation to labels, signs, prints, of the defendant or the value of the services in
packages, wrappers, receptacles or advertisements connection with which the mark or trade
intended to be used in commerce upon or in name was used in the infringement.
connection with the sale or other commercial
dealings. ▪ Owner of the registered mark shall not be
entitled to recover profits or damages unless
shall be liable in a civil action for infringement by the the acts have been committed with knowledge
registrant for the remedies hereinafter set forth. that such imitation is likely to cause confusion,
[Villanueva, 1178-1179] or to cause mistake, or to deceive.
Elements b. On complainant’s application, the court may

impound sales invoices and other documents
Under the IPC, the elements of trademark infringement are as evidencing sales/
follows:
c. In cases where actual intent to mislead the public or
a. Trademark infringed is registered in the IPO, to defraud the complainant is shown, damages may
however in infringement of trade name, the same be doubled.
need not be registered;
d. The complainant, upon proper showing, may also
b. Trademark or trade name is reproduced, be granted injunction.
counterfeited, copied, or colourably imitated by the
infringer; e. The court may order that goods found to be
infringing be, without compensation of any sort,
c. Infringing mark or trade name is used in disposed of outside the channels of commerce in
connection with the sale, offering for sale, or such a manner as to avoid any harm caused to the
advertising of any goods, business or services, or is right holder, or destroyed.
applied to labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to be used Note: With regard to counterfeit goods, simple
upon or in connection with such goods, business or removal of the trademark affixed shall not be
services; sufficient other than in exceptional cases which
shall be determined by the Regulations, to permit
d. Use or application of the infringing mark or trade the release of the goods into the channels of
name is likely to cause confusion or mistake or to commerce. [Villanueva, 1186-1187]
deceive purchasers or others as to the goods or
services themselves or as to the source or origin of Requirement of Notice
such goods or services or the identity of such
business; and ▪ In any suit for infringement, the owner of the registered
mark shall not be entitled to recover profits or damages
e. It is without the consent of the trademark or trade unless the acts have been committed with knowledge
name owner or the assignee. [Prosource International that such imitation is likely to cause confusion, or to
v. Horphag Research Management, G.R. No. 180073, cause mistake, or to deceive.
November 25, 2009]
▪ Such knowledge is presumed if the registrant gives
Remedies: Actions, Damages, and Injunction notice that his mark is registered by displaying with the
mark the words "Registered Mark" or the letter R within
Owner of a registered mark that has been infringed has the a circle or if the defendant had otherwise actual notice of
following remedies: the registration. [Sec. 158, IPC]
a. Recover damages from any person who infringes TEST TO DETERMINE CONFUSING SIMILARITY
his rights, and the measure of the damages suffered BETWEEN MARKS
shall be either:
1. Dominancy Test – focuses on the similarity of the
1. Reasonable profit which the complaining prevalent features of the competing trademarks which
party would have made, had the defendant might cause confusion or deception, and thus
not infringed his rights; or infringement.
2. Profit which the defendant actually made out 2. Holistic Test – requires that the entirely of the marks in
of the infringement. question be considered in resolving confusing similarity.
[Mighty Corp. v. E&J Gallo Winery, G.R. No. 154342, July
Note: 14, 2004]
▪ If measure of damages cannot be readily COLOURABLE IMITATION

ascertained with reasonable certainty, court
may award as damages a reasonable

▪ Colourable imitation is such a close or ingenious

imitation as to be calculated to deceive ordinary COPYRIGHTS
purchasers, or such resemblance of the infringing mark
to the original as to deceive an ordinary purchaser giving BASIC PRINCIPLES
such attention as a purchaser usually gives, and to cause
him to purchase the one supposing it to be the other. Works Protected by Copyright
[Emerald Garment v. Court of Appeals, G.R. No. 100098,
December 29, 1995] Works are protected by copyright by the sole fact of their
creation, irrespective of their mode or form of expression, as
▪ The following factors shall be used in determining well as of their content, quality and purpose. [Sec. 172.2, IPC]
whether goods are related:
It includes:
a. Classification of the goods;
a. Literary or artistic works – original intellectual
b. Nature of the goods; creations in the literary and artistic domain
protected from the moment of their creation.
c. Descriptive properties, physical attributes, or
essential characteristics of the goods, with reference b. Derivative works
to their form, composition, texture or quality; and
c. Published Edition of Work
d. Style of distribution and marketing of the goods,
including how the goods are displayed and sold Works not Protected
[Societe De Produits Nestle S.A. v. Dy, Jr., G.R. No.
172276, August 8, 2010] The following are unprotected subject matter where no
protection is extended upon:
UNFAIR COMPETITION
a. Any idea, procedure, system, method of operation,
Definition concept, principle, discovery of mere data as such,
even if they are expressed, explained, illustrated or
Act of any person who employs deception or any other means embodied in a work;
contrary to good faith by which he shall pass-off the goods
manufactured by him or in which he deals, or his business, or b. News and other miscellaneous facts having the
services for those of the one having established such goodwill, character of mere items of press information;
or who shall commit any acts calculated to produce such
results. [Villanueva, 1191] c. Official text of legislative, administrative or legal
nature, as well as any official translation thereof.
Unfair Competition v. Trademark Infringement [Sec. 175, IPC]
Unfair Competition Trademark Infringement Work by Government

▪ Passing off of one’s ▪ Unauthorized use of a
goods as those of trademark No copyright shall subsist in any work of the Government of
another ▪ Fraudulent intent is the Philippines. However, prior government approval shall
▪ Fraudulent intent is unnecessary be necessary for exploitation of such work for profit, which
essential ▪ Prior registration of may, require payment of royalties. [Sec. 176.1, IPC]
▪ Registration is not the trademark is a
necessary prerequisite to the Copyright and Material Object
action
[Mighty Corp. v. E&J Gallo Winery, G.R. No. 154342, July 14, ▪ The copyright is distinct from the property in the
2004] material object subject to it. Consequently, the transfer or
assignment of the copyright shall not itself constitute a
TRADE SECRETS transfer of the material object.
A ‘trade secret’ is: ▪ Nor shall a transfer or assignment of the sole copy or of
one or several copies of the work imply transfer or
a. plan or process, tool, mechanism or compound assignment of the copyright. [Sec. 181, IPC]
known only to its owner and those of this
employees to whom it is necessary to confide it. COPYRIGHTABLE WORKS
b. Or a secret formula or process not patented, but Original Works

known only to certain individuals using it in
compounding some article of trade having a Literary and artistic works, hereinafter referred to as "works",
commercial value. are original intellectual creations in the literary and artistic
domain protected from the moment of their creation and shall
Note: Trade secrets are of privileged nature, and Philippines include in particular:
protects such secret.

a. Books, pamphlets, articles and other writings; new work shall not affect the force of any
subsisting copyright upon the original works
b. Periodicals and newspapers; employed or any part thereof, or be construed
to imply any right to such use of the original
c. Lectures, sermons, addresses, dissertations works, or to secure or extend copyright in
prepared for oral delivery, whether or not reduced such original works. [Sec. 173.2, IPC]
in writing or other material form;
b. Published Edition of Work – Published Edition of
d. Letters; Work. - In addition to the right to publish granted
by the author, his heirs or assigns, the publisher
e. Dramatic or dramatico-musical compositions; shall have a copy right consisting merely of the
choreographic works or entertainment in dumb right of reproduction of the typographical
shows; arrangement of the published edition of the
work. [Sec. 174, IPC]
f. Musical compositions, with or without words;
NON-COPYRIGHTABLE WORKS
g. Works of drawing, painting, architecture,
sculpture, engraving, lithography or other works of 1. Works Not Protected [Sec. 175, IPC]; and
art; models or designs for works of art;
2. Work by the Government. [Sec. 176, IPC]
h. Original ornamental designs or models for articles
of manufacture, whether or not registrable as an RIGHT OF COPYRIGHT OWNER
industrial design, and other works of applied art;
Copyright or economic rights shall consist of the exclusive
i. Illustrations, maps, plans, sketches, charts and right to carry out, authorize or prevent the following acts:
three-dimensional works relative to geography,
topography, architecture or science; a. Reproduction of work or substantial portion of the
work;
j. Drawings or plastic works of a scientific or
technical character; b. Dramatization, translation, adaptation,
abridgement, arrangement or other transformation
k. Photographic works including works produced by of the work;
a process analogous to photography; lantern slides;
c. First public distribution of original and each copy
l. Audiovisual works and cinematographic works of the work by sale or other forms of transfer o
and works produced by a process analogous to ownership;
cinematography or any process for making audio-
visual recordings; d. Rental of original or copy of an audiovisual or
cinematographic work, a work embodied in a
m. Pictorial illustrations and advertisements; sound recording, a computer program, a
compilation of data and other materials or a
n. Computer programs; and musical work in a graphic form, irrespective of the
ownership of the original or the copy which is the
o. Other literary, scholarly, scientific and artistic subject of the rental;
works. [Sec. 172.1, IPC]
e. Public display of original or copy of the work;
Derivative Works
f. Public performance of the work; and
a. Derivative Works – The following derivative
works shall also be protected by copyright and as g. Other communication to the public of the work.
new works: [Sec. 177, IPC]
1. Dramatizations, translations, adaptations, RULES ON COPYRIGHT OWNERSHIP

abridgments, arrangements, and other
alterations of literary or artistic works; and Copyright ownership pertains to the following:
2. Collections of literary, scholarly or artistic a. In original literary and artistic works – copyright
works, and compilations of data and other shall belong to the author;
materials which are original by reason of the
selection or coordination or arrangement of b. In joint ownership – co-authors shall be the
their contents. [Sec. 173.1, IPC] original owners of the copyright and in the absence
of an agreement, their rights shall be governed by
Note: The works referred to in paragraphs (a) the rules of co-ownership.
and (b) of Subsection 173.1 shall be protected
as a new works: Provided however, That such

c. In work created by an author during and in the 5. Since copyright is distinct from the material object
course of his employment: subject to it:
1. Employee, if the creation of object of copyright a. Transfer or assignment of copyright shall not
is not part of his regular duties even if itself constitute a transfer of the material
employee uses time, facilities and materials of object;
the employer.
b. Transfer or assignment of the sole company,
2. Employer, if work results from the or of one or several copies of the work, shall
performance of his regularly-assigned duties, not imply transfer or assignment of the
unless there is an agreement, express or copyright.
implied, to the contrary.
6. Copyright owners of their heirs may designate a society
d. In case of commissioned work – the person who so of artists, writers or composers to enforce their economic
commissioned work shall have its ownership, but rights and moral rights on their behalf. [Villanueva, 1205]
copyright shall remain with the creator unless there
is a written stipulation to the contrary; LIMITATIONS OF COPYRIGHT
e. In case of audiovisual work – it shall belong to the Acts Not Considered Copyright Infringement
producer, author of the scenario, composer of the
music, film director, and author of the work Notwithstanding recognition of economic rights, the
adapted. following acts shall not constitute infringement of copyright:
f. In respect to letters – it shall belong to the writer a. Recitation or performance once it has been lawfully
subject to the provisions of Art. 723 of the Civil made accessible to the public, if done privately and
Code. [Sec. 178, IPC] free of charge or if made strictly for a charitable or
religious institution or society;
g. In respect to anonymous & pseudonymous work
– The publisher shall be deemed to represent the b. Making of quotations from a published work that
authors of articles and writings published without is compatible with fair use. Provided the source and
their names or under pseudonyms except: name of author, if appearing on the work, are
mentioned;
1. When contrary appears;
c. Reproduction or communication to the public by
2. Pseudonyms or adopted name leaves no mass media of articles on current political, social,
doubt as to author’s identity; or economic, scientific or religious topic, lectures,
addresses and other works of the same nature,
3. If author of anonymous works discloses his which are delivered in public if such use is for
identity. [Sec. 179, IPC] information purposes and has not been expressly
reserved. Provided, that the source is given;
PRESUMPTION OF AUTHORSHIP
d. Reproduction and communication to the public of
A natural person whose name is indicted in a work in the literary, scientific or artistic works as part of reports
usual manner as the author of the work, is presumed to be the of current events by means of photography,
maker of said work. [Villanueva, 1204] cinematography or broadcasting to the extent
necessary for the purpose;
TRANSFER OR ASSIGNMENT
e. Inclusion of a work in a publication, broadcast, or
1. Copyright may be assigned in whole or in part, which other communication to the public, sound
would entitle assignee to all rights and remedies which recording or film, if such inclusion is made by way
assignor had with respect to the copyright. of illustration for teaching purposes and is
compatible with fair use. Provided that source and
2. Copyright is not deemed assigned inter vivos, unless name of the author, if appearing in the work, are
there is a written indication of such intention. mentioned;
3. Unless greater right is expressly granted, submission of f. Recording made in school universities or
a literary, photographic or artistic work to a newspaper, educational institutions. Provided such recordings
magazine or periodical for publication shall constitute must be deleted within a reasonable period after
only a license to make a single publication. they were first broadcast;
4. If two or more persons jointly own a company or any g. Making of ephemeral recordings by a broadcasting
part thereof, neither of owners shall be entitled to grant organization by means of its own facilities and for
licenses without prior written consent of other owner(s). the use of its own broadcast;

h. Use made by or under the direction or control of the

Government, by National Library or by a. Two 2 complete copies of reproductions of the
educational, scientific or professional institutions work in such form as the directors of said libraries
where such use is in the public interest and is may prescribe.
compatible with fair use;
2. Certificate of deposit shall be issued.
i. Public performance or communication to the
public, in a place where no admission fee is charged 3. Each copy of a work published or offered for sale may
by a club or institution for charitable or educational contain a notice bearing:
purpose only, whose aim is nor profit-making;
a. Name of copyright owner;
j. Public display of the original or a copy of the work
not made by means of film, slide, television image b. Year of first publication;
or otherwise on screen or by means of any other
devise of process. Provided, when either work has c. Copies produced after creator’s death; and
been published or original or the copy displayed
has been sold, given away or otherwise transferred d. Year of creator’s death.
to another person by author or his successor in title;
4. The submissions shall become property of the
k. Use made for purpose of any judicial proceeding or Government, and shall be open for public inspection.
for giving of professorial advice by legal [Sec. 191, IPC]
practitioner. [Sec. 184, IPC]
MORAL RIGHTS
Fair Use Doctrine
Scope
▪ Fair use of a copyrighted work for criticism,
comment, news reporting, teaching, including The scope of moral rights are the following:
multiple copies for classroom use, scholarship,
research, and similar purposes, is not an a. Require that authorship of works be attributed to
infringement of copyright. him, in particular, right that his name, as far as
practicable, be indicated in a prominent way on
▪ Fair use includes decompilation or the reproduction copies, and in connection with the public use of his
of the code of translation of the forms of the work;
computer program to achieve the inter-operability
of an independently-created computer program b. Make any alterations of his work prior to, or to
with other programs. withhold it from publication;
▪ Factors to be considered in determining Fair Use: c. Object to any distortion, mutilation or other
modification of, or other derogatory action in
a. The purpose and character of the use, relation to, his work which would be prejudicial to
including whether such use is of a commercial his honor or reputation; and
nature or is for non-profit education purposes;
d. Restrain use of his name with respect to any work
b. The nature of the copyrighted work; not of his own creation or in a distorted version of
his work. [Sec. 193, IPC]
c. The amount and substantiality of the portion
used in relation to the copyrighted work as a Term
whole; and
The term of moral rights:
d. The effect of the use upon the potential market
for or value of the copyrighted work. a. Shall last during author’s lifetime;
▪ The fact that a work is unpublished shall not by b. Shall last for 50 years after his death;
itself bar a finding of fair use if such finding is made
upon consideration of all the above factors. [Sec. c. Shall not be assignable or subject to license.
185, IPC]
TERMS OF PROTECTION
REGISTRATION AND DEPOSIT WITH NATIONAL
LIBRARY AND THE SUPREME COURT 1. Joint Authorship – protected during the life of the last
surviving author, and for 50 years after his death.
1. Within 3 weeks after first public dissemination or
performance by the authority of the copyright owner of 2. Anonymous or Pseudonymous Works – 50 years from
literary or artistic work, there shall be registered and date on which work was first lawfully published.
deposited with the National Library, and the Supreme
Court Library: 3. Works of Applied Art – 25 years from date of making.

4. Photographic Works – 50 years from publication; if

unpublished, 50 years from the making.
5. Audiovisual Works – 50 years from publication; if

unpublished, 50 years from the making.
COPYRIGHT INFRINGEMENT
Remedies
Any person infringing a right protected under this law shall

be liable:
a. To an injunction restraining such infringement. The

court may also order the defendant to desist from
an infringement, among others, to prevent the entry
into the channels of commerce of imported goods
that involve an infringement, immediately after
customs clearance of such goods.
b. Pay to the copyright proprietor or his assigns or

heirs such actual damages, including legal costs
and other expenses, as he may have incurred due to
the infringement as well as the profits the infringer
may have made due to such infringement, and in
proving profits the plaintiff shall be required to
prove sales only and the defendant shall be
required to prove every element of cost which he
claims, or, in lieu of actual damages and profits,
such damages which to the court shall appear to be
just and shall not be regarded as penalty.
c. Deliver under oath, for impounding during the

pendency of the action, upon such terms and
conditions as the court may prescribe, sales
invoices and other documents evidencing sales, all
articles and their packaging alleged to infringe a
copyright and implements for making them.
d. Deliver under oath for destruction without any

compensation all infringing copies or devices, as
well as all plates, molds, or other means for making
such infringing copies as the court may order.
e. Such other terms and conditions, including the

payment of moral and exemplary damages, which
the court may deem proper, wise and equitable and
the destruction of infringing copies of the work
even in the event of acquittal in a criminal case. [Sec.
216, IPC]

Mercantile Law Special Commercial Laws
ANTI-MONEY LAUNDERING ACT

(R.A. No. 9160, as amended by R.A. No.
9194)
POLICY OF THE LAW
There are 2 declared policies:
a. Protect and preserve the integrity and

confidentiality of bank accounts to ensure that the
Philippines shall not be used as a site for unlawful
money laundering activities;
b. Pursue the State’s foreign policy to extend

cooperation in transnational investigations and
prosecutions of persons involved in money
laundering activities. [Villanueva, 1010]
COVERED INSTITUTIONS
Covered persons, natural or juridical, refer to:
a. BSP-regulated entities: Banks, non-banks, quasi-

banks, trust entities, foreign exchange dealers,
SPECIAL pawnshops, money changers, remittance and

transfer companies and other similar entities and
all other persons and their subsidiaries and
COMMERCIAL b.
affiliates supervised or regulated by the BSP;
Insurance companies, pre-need companies and all
LAWS other persons supervised or regulated by the

Insurance Commission;
c. SEC-regulated entities:
1. Securities dealers, brokers, salesmen,

investment houses and other similar persons
managing securities or rendering services as
investment agent, advisor, or consultant;
2. Mutual funds, close-end investment

companies, common trust funds, and other
similar persons; and
3. 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 SEC;
d. Jewelry dealers in precious metals, who, as a

business, trade in precious metals, for transactions
in excess of Php 1 million;
e. Jewelry dealers in precious stones, who, as a

business, trade in precious stones, for transactions
in excess of Php 1 million;
f. Company service providers which, as a business,

provide any of the following services to third
parties:

1. acting as a formation agent of juridical

persons; b. Preserve and safely store records of all closed
accounts on customer identification, account files
2. acting as (or arranging for another person to and business correspondence for at least 5 years
act as) a director or corporate secretary of a from the date they were closed.
company, a partner of a partnership, or a
similar position in relation to other juridical 3. Reporting of Covered and Suspicious Transactions
persons;
a. Report all covered and suspicious transactions to
3. providing a registered office, business address the AMLC within 5 working days from occurrence
or accommodation, correspondence or thereof unless the AMLC prescribes a different
administrative address for a company, a period not exceeding 15 workings days;
partnership or any other legal person or
arrangement; and b. Lawyers and accountants acting as independent
legal professionals are not required to report if
4. acting as (or arranging for another person to information is subject to professional secrecy;
act as) a nominee shareholder for another
person; and c. Covered institutions, including officers and
employees thereof, are prohibited from
g. Persons who provide any of the following services: communicating any information in relation to the
report to any other person or entity. [Sec. 9, AMLA]
1. Managing of client money, securities or other
assets; COVERED TRANSACTIONS
2. Management of bank, savings or securities ▪ These are transactions involving a total amount in excess
accounts; of Php 500k in one day whether in cash or any other
money instrument. [Sec. 3(b), AMLA]
3. Organization of contributions for the creation,
operation or management of companies; and ▪ Monetary Instrument refers to the following:
4. Creation, operation or management of a. Coins or currency of legal tender of the Philippines

juridical persons or arrangements, and buying or of any other country;
and selling business entities. [Sec. 3(a), AMLA]
b. Drafts, checks and notes;
Note: Lawyers and accountants, authorized to practice in the
Philippines, acting as independent legal professionals in c. Securities, negotiable instruments, bonds,
relation to information concerning their clients are excluded. commercial papers, deposit certificates, trust
They are subject to the provisions of their respective codes of certificates, custodial receipts or deposit substitute
conduct. [Villanueva, 1071-1072] instruments, trading orders, transaction tickets and
confirmations of sale or investments and money
OBLIGATIONS OF COVERED INSTITUTIONS marked instruments; and
1. Customer Identification d. Other similar instruments where title thereto

passes to another by endorsement, assignment or
a. Establish and record the true identity of its clients delivery. [Sec. 3(c), AMLA]
based on official documents;
SUSPICIOUS TRANSACTION
b. Maintain a system of verifying the true identity of
their clients; and These are transactions with covered institutions where any of
the following circumstances exist:
c. In case of corporate clients, require a system of 1. No underlying legal or trade obligation, purpose or
verifying the following: economic justification;
i. legal existence; 2. Client is not property identified;
ii. organizational structure; 3. Amount involved is not commensurate with the

business or financial capacity of the client;
iii. authority and identification of all
persons purporting to act on their behalf; 4. Client’s transaction is structured to avoid being the
subject of reporting requirements based on the
2. Record Keeping known circumstances;
a. Maintain and safely store records of all transactions

for 5 years from the date thereof;

5. Any circumstance relating to the transaction which

deviates from the client profile and/or past 7. Piracy on the high seas;
transactions;
8. Qualified theft;
6. Transaction is in a way related to an unlawful
activity or offense under the AMLA that is about to 9. Swindling;
be, is being or has been committed;
10. Smuggling;
7. Similar or analogous to the foregoing; [Sec. 3(b-1),
AMLA] 11. Violations of the E-Commerce Act of 2000;
MONEY LAUNDERING 12. Hijacking and other violations under R.A. 6235
(Civil Aviation); destructive arson and murder;
How Committed
13. Terrorism and conspiracy to commit terrorism;
It is committed by any person who, knowing that the money
instrument or property represents, involves, or relates to the 14. Financing of terrorism;
proceeds of any unlawful activity:
15. Bribery and corruption of public officers;
a. Transacts said monetary instrument or property;
16. Frauds and illegal exactions and transactions;
b. Converts, transfers, disposes of, moves, acquires,
possesses or uses said monetary instrument or 17. Malversation of public funds and property;
property;
18. Forgery and counterfeiting;
c. Conceals or disguises the true nature, source,
location, disposition, movement, ownership, or 19. Trafficking of persons;
rights with respect to said monetary instrument or
property; 20. Illegal logging;
d. Attempts or conspires to commit money 21. Illegal fishing;

laundering offenses referred to in (a), (b) or (c);
22. Illegal mining;
e. Aids the commission of the money laundering
offenses referred to in (a), (b) or (c); and 23. Illegal trading in wildlife;
f. Performs or fails to perform any act as a result of 24. Illegal extraction and altering of national caves;
which he facilitates the offense of money
laundering referred to (a), (b) or (c). [Sec. 4, AMLA] 25. Carnapping;
Jurisdiction 26. Illegal possession of firearms;
a. RTC; 27. Fencing;
b. Sandiganbayan if committed by public officers and 28. Illegal recruitment;

private persons in conspiracy with such public
officers. [Sec. 5, AMLA] 29. Violation of the Intellectual Property Code;
30. Photo and video voyeurism;

UNLAWFUL ACTIVITIES OR PREDICATE CRIMES
31. Child pornography;
They are acts or omissions or combinations thereof involving
the following: 32. Child abuse;
1. Kidnapping for ransom; 33. Fraudulent practices under the SRC;
2. Drug trafficking; 34. Offenses of a similar nature punishable under the

penal laws of other countries. [Sec. 3(i), AMLA]
3. Graft and corrupt practices;
Note:
4. Plunder;
▪ A person may be charged and convicted of both
5. Robbery and extortion; money laundering and the offense constituting
unlawful activity. The prosecution of a violation
6. Jueteng and Masiao;

under the AMLA shall proceed independently. j. Enlist the assistance of any branch, department,
[Sec. 6, AMLA] bureau, office, agency, or instrumentality of the
government, including government-owned and -
▪ A charge for an unlawful activity shall be given controlled corporations, in undertaking any and all
precedence over the money laundering charge, anti-money laundering operations, which may
without prejudice to freeze orders and other include the use of its personnel, facilities and
remedies. [Villanueva, 1075] resources for the more resolute prevention,
detection, and investigation of money laundering
ANTI-MONEY LAUNDERING COUNCIL (AMLC) offenses and prosecution of offenders; and
Composition k. Impose administrative sanctions for the violation of

laws, rules, regulations, and orders and resolutions
a. Chairman - BSP Governor; issued pursuant thereto. [Sec. 7, AMLA]
b. Members – Commissioner of the Insurance

Commission and SEC Chairman. [Sec. 7, AMLA] FREEZING OF MONETARY INSTRUMENT OR
PROPERTY
FUNCTIONS OF THE AMLC
▪ A freeze order is an extraordinary and interim relief to
The AMLC shall act unanimously in the discharge of the its prevent the dissipation, removal, or disposal of
functions, to wit: properties that are suspected to be the proceeds of or
related to unlawful activities.
a. Require and receive covered/suspicious
transaction reports from covered institutions; ▪ The relief is pre-emptive in character, meant to prevent
the owner from disposing his property and thwarting
b. Issue orders to the appropriate supervising the State’s effort in building its case and eventually filing
authority or covered institution or request civil forfeiture proceedings and/or prosecuting the
assistance from a foreign State in determining the owner.
true identity of the owner of any monetary
instrument or property subject of a Requisites
covered/suspicious transaction relating to the
proceedings of an unlawful activity on the basis of a. Ex parte application by the AMLC;
substantial evidence;
b. Determination of probable cause by the Court of
c. Institute civil forfeiture proceedings and all other Appeals.
remedial proceedings through the OSG;
Probable Cause
d. Cause the filing complaints with the DOJ or the
Ombudsman for the prosecution of money ▪ Such facts and circumstances which would lead a
laundering offenses; reasonable discreet, prudent or cautious man to
believe than an unlawful activity and/or money
e. Investigate suspicious transactions and covered laundering offense is about to be, is being or has
transactions deemed suspicious after an been committed and that the account, monetary
investigation by AMLC, money laundering instrument or property sought to be frozen is
activities and other violations of this Act; related. [Ligot v. Republic, G.R. No. 176944, March 6,
2013]
f. Apply before the CA, ex parte, for the freezing of
any monetary instrument or property alleged to be Note: The court must act on the petition within 24 hours.
laundered or instrumentalities in any unlawful
activity; Effectivity
g. Implement such measures as may be necessary and ▪ Immediate and shall not exceed 6 months.
justified to counteract money laundering;
Note: No court shall issue a TRO or writ of injunction against
h. Receive and take action in respect of, any request any freeze order, except the Supreme Court. [Sec. 10, AMLA]
from foreign states for assistance in their own anti-
money laundering operations provided in this Act; Who Issues?
i. Develop educational programs on the pernicious ▪ The Court of Appeals has sole authority to issue a
effects of money laundering, the methods and freeze order and extend its effectivity; Provided, it
techniques used in the money laundering, the does not exceed 6 months. [Republic v. First Pacific
viable means of preventing money laundering and Network, G.R. No. 156646, November 19, 2014]
the effective ways of prosecuting and punishing
offenders; Lifting of Freeze Order

a. Ipso Facto - no case filed against a person whose

account or property is frozen within the period of ▪ The offender or any other person claiming an
time determined by the court; interest on forfeited may apply for a declaration
that the same legitimately belongs to him and for
b. Motion to Lift – filed by the person whose account exclusion by verified petition within 15 days from
has been frozen and court must resolve it before the the finality of the order of forfeiture.
expiration of the freeze order. [Sec. 10, AMLA]
▪ The court may enforce the order of forfeiture by
Extension ordering the offender to pay an equal amount when
the order cannot be effected on the subject
▪ File the necessary motion before the expiration of monetary instrument or property. [Sec. 12, AMLA]
the given period, explain the failure to file an
appropriate, case and justify the period of extension AUTHORITY TO INQUIRE INTO BANK DEPOSITS
sought.
▪ The AMLC may inquire into or examine any particular
▪ Reason for rule: Individual’s right to due process. deposit or investment with any banking institution or
[Ligot v. Republic, G.R. No. 176944, March 6, 2013] non-bank financial institution.
CIVIL FORFEITURE ▪ GENERAL RULE: There must be a court order with a

finding that there is probable cause that the deposits are
How? related to unlawful activity or a money laundering
offense.
▪ AMLC shall file with the court, through the OSG, a
verified ex parte petition for forfeiture. ▪ EXCEPTION: No court order is necessary in cases
involving the following:
When?
a. Kidnapping for ransom;
▪ After determination by the AMLC that probable
cause exists that any monetary instrument or b. Drug trafficking;
property is in any way related to an unlawful
activity or a money laundering offense. [Sec. 12, c. Terrorism. [Sec. 11, AMLA]
AMLA]
▪ No ex parte bank inquiry –Both the freeze order (Sec. 10)
Where? and bank deposit inquiry (Sec. 11) are extraordinary
provisional reliefs. Sec. 11, however, does not generally
▪ RTC where monetary instrument, property or authorize ex parte issuance of orders unless notice is
proceeds are located. [Villanueva, 1081] given to the owners of the account, allowing them
opportunity to contest the issuance.
What are covered?
▪ The general principle that all deposits are of confidential
The petition for civil forfeiture shall include other monetary nature remains. [Republic v. Eugenio, G.R. No. 174629, Feb.
instrument or property of equal value in cases where the 14, 2008]
monetary instrument or property that should be subject of
forfeiture: ▪ BSP may inquire into any deposit or investment when
made in the course of a periodic or special examination
a. Cannot be located despite due diligence; in accordance with the rules of examination of BSP. [Sec.
11, AMLA]
b. Has been concealed, removed, converted or
otherwise transferred; FOREIGN INVESTMENTS ACT
c. Located outside the Philippines or placed outside
(R.A. No. 7042, as amended by R.A. No.
the jurisdiction of the court; or 8179)
d. Has been commingled with other monetary POLICY

instrument or property belonging to either the
offender himself or a 3rd person, rending the same GENERAL RULE: No restrictions on extent of foreign
difficult to identify or segregate. ownership.
Note: EXCEPTION: Areas included in the negative list and

restriction imposed by the Constitution and relevant laws.
▪ No prior criminal charge, pendency of or
conviction for an unlawful activity or money Policies:
laundering offense is necessary for the
commencement or resolution of a petition for civil a. Attract, promote and welcome productive
forfeiture. [Rule XII, AMLA IRR] investments from foreign entities and governments

in activities which significantly contribute to c. Appointing representatives or distributors:

national industrialization and socio-economic
development; i. Domiciled in the Philippines; or
b. Encourage foreign investments in enterprises that ii. Stay in the country for a period
significantly expand livelihood and employment totaling of 180 days or more in any
opportunities for Filipinos; calendar year;
c. Enhance economic value of farm products; d. Participating in the management, supervision,

or control of any domestic business, firm,
d. Promote the welfare of Filipino consumers; entity, or corporation in the Philippines; and
e. Expand the scope, quality and volume of exports e. Any other act or acts that imply a continuity of
and their access to foreign markets; commercial dealings or arrangements and
contemplate to that extent:
f. Transfer relevant technologies in agriculture,
industry, and support services. [Sec. 2, R.A. No. i. Performance of acts or works;
7042, as amended]
ii. Exercise of some functions normally
incident to commercial gain or the
DEFINITION OF TERMS object of the business organization;
1. Philippine National: ▪ Excludes:
a. Philippine citizen; a. Mere investment as a shareholder by a foreign

entity in domestic corporations duly
b. Domestic partnership or association wholly owned registered to do business;
by Philippine citizens;
b. Exercise of rights as such investor;
c. Corporation organized under Philippine laws of
which at least 60% of the outstanding capital stock c. Having a nominee director or officer to
entitled to vote is owned and held by Philippine represent its interests in such corporation;
citizens; or
d. Appointing a representative or distributor
d. A corporation organized abroad and registered as domiciled in the Philippines which transacts
going business in the Philippines of which 100% of business in its own name and for its own
the outstanding capital stock entitled to vote is account.
owned by Filipinos or a trustee of funds for pension
or other employee retirement or separation ▪ Tests:
benefits;
a. Substance – whether the foreign corporation
Note: The trustee must be a Philippine national and is continuing the body of the business or
at least 60% of the fund will accrue to the benefit of enterprise for which it was organized;
Philippine nationals.
b. Continuity – continuity of commercial
2. Foreign Investment: dealings and arrangements and to that extent,
the performance of functions normally
a. Any equity investment made by a non-Philippine incident to the purpose and object of its
national in the form of foreign exchange; and/or organization; [Agilent Technologies v. Integrated
Silicon, G.R. No. 154618, April 14, 2004]
b. Other assets actually transferred to the Philippines
and duly registered with the Central Bank. ▪ Qualifications to Do Business in the Philippines:
Note: The Central Bank shall assess and appraise A foreign national may do business in the
the value of the assets. Philippines up to 100% of its capital, provided:
3. Doing Business in the Philippines a. It does domestic market enterprise business

outside the negative lists;
▪ Includes:
b. It is doing business as an export enterprise
a. Soliciting orders and service contracts; whose products or services do not fall within
Negative Lists A and B (except for defense-
b. Opening offices, whether liaison offices or related activities which may be authorized);
branches;

c. Provided further that, as required by existing 9. Manufacture, repair, stockpiling

laws, the country or state of the applicant and/or distribution of nuclear
allows reciprocity to Filipino citizens and weapons
corporations; [Villanueva, 1385] 10. Manufacture, repair, stockpiling
and/or distribution of biological,
4. Export Enterprise chemical and radiological weapons and
anti-personnel mines
a. Manufacturer, processor, or service (including 11. Manufacture of firecrackers and other
tourism) enterprise exports 60% or more of its pyrotechnic devices
output; or 20% Private radio communications network
25% 1. Private recruitment
b. Trader purchases products domestically and 2. Contracts for the construction and
exports 60% or more of such purchases; repair of locally-funded works (except
those covered by RA 7781 and projects
Note: which are foreign funded and int’l
competitive bidding is required)
▪ GENERAL RULE: Foreign investment in export 3. Contracts for the construction of
enterprises is allowed up to 100% ownership. defense-related structures
30% Advertising
▪ EXCEPTION: If the products and services fall 40% 1. Exploration, development and
within Lists A and B of the Negative List. [Sec. 6, utilization of natural resources
R.A. No. 7042, as amended] 2. Ownership of private lands
3. Operation of public utilities
4. Education institutions other than those
5. Domestic Market Enterprise established by religious groups and
mission boards
a. Produces goods for sale or renders services to the
5. Culture, production, milling,
domestic market entirely; processing, trading except retailing, of
rice and corn and acquiring by barter,
b. Consistently fails to export at least 60% of its
purchase or otherwise, rice and corn
output.
and the by-products thereof
6. Contracts for the supply of materials,
Note:
goods and commodities to GOCC,
company, agency or municipal
▪ GENERAL RULE: Foreign investment in domestic
corporation
enterprises is allowed up to 100% ownership
7. Facility operator of an infrastructure or
a development facility requiring a
▪ EXCEPTION: Unless prohibited or limited by
public utility franchise
existing law or the Negative List. [Sec. 7, R.A. No.
8. Adjustment companies
7042, as amended]
9. Ownership of condominium units
NEGATIVE LIST
LIST B: Foreign ownership is limited for reasons of security,
defense, risk to health and morals and protection of small
LIST A: Limitations mandated by the Constitution and
and medium-scale enterprises
Specific Laws
Foreign Industry/Work
Foreign Industry/Work
Equity
Equity
40% 1. Manufacture, repair, storage and/or
0% 1. Mass media except recording
distribution of products and/or
2. Practice of professions (pharmacy,
ingredients requiring PNP clearance
radiologic and x-ray technology,
(firearms, gunpowder, ingredients for
criminology, forestry and law)
explosives, etc)
3. Retail trade enterprises with paid-up
- PNP Chief may authorize foreign
capital of less than $2,500,000
nationals; Provided, a substantial
4. Cooperatives
percentage of output is exported and
5. Private security agencies
the extent of foreign equity allowed
6. Small-scale mining
must be specified in the clearance;
7. Utilization of marine resources in
2. Manufacture, repair, storage and/or
archipelagic waters, territorial sea, and
distribution of products requiring DND
exclusive economic zone as well as
clearance (warfare ammunition,
small-scale utilization of natural
missiles, vessels, etc)
resources in rivers, lakes, bays, and
- Secretary of DND may authorize a
lagoons
foreign national; Provided, a
8. Ownership, operation and
substantial percentage of output is
management of cockpits

exported and the extent of foreign and exchanges and storage of information through
equity allowed must be specified in the utilization of electronic, optical and similar
the clearance; medium, mode, instrumentality and technology
3. Manufacture and distribution of
dangerous drugs b. To recognize the authenticity and reliability of
4. Sauna and steam bathhouses, massage electronic documents related to such activities; and
clinics and other like activities
regulated by law because of risks to c. To promote the universal use of electronic
public health and morals transaction in the government and general public.
5. All forms of gambling except those [Sec. 3, R.A. No. 8792]
covered by investment agreements
with PAGCOR Sphere of Application
6. Domestic market enterprises with paid-
in equity capital of less than the The act applies to:
equivalent $200,000
7. Domestic market enterprises which a. Any kind of data message and electronic
involve advanced technology or document used in the context of commercial
employ at least 50 direct employees and non-commercial activities; and
with paid-in equity capital of less than
the equivalent of $100,000 [E.O. 184] b. All domestic and international dealings,
transactions, arrangements, agreements
LIST C: Areas of investment in which existing enterprises contracts and exchanges and storage of
already serve adequately needs of the economy and information. [Sec. 4, R.A. No. 8792]
consumers and do not require further foreign investments
- To be determined by NEDA. Key Terms
Note: Amendments to List B and C shall not be made more a. Electronic Data Message - information generated,
often than once every 2 years. sent, received or stored by electronic, optical or
similar means.
Effectivity
b. Electronic Signature - any distinctive mark,
▪ 12 days after publication in 2 news papers of neeral characteristic and/or sound in electronic form,
circulation. [Sec. 8, R.A. No. 7042, as amended] representing the identity of a person and attached
to or logically associated with the electronic data
REGISTRATION message or electronic document or any
methodology or procedures employed or adopted
GENERAL RULE: A foreign national may do business in the by a person and executed or adopted by such
Philippines up to 100% of its capital upon registration with person with the intention of authenticating or
the SEC or Bureau of Trade Regulation and Consumer approving an electronic data message or electronic
Protection in case of single proprietorship without need or document.
prior approval.
c. Electronic Document - information or the
EXCEPTIONS: representation of information, data, figures,
symbols or other modes of written expression,
a. Participation is prohibited or limited to a smaller described or however represented, by which a right
percentage by existing law; is established or an obligation extinguished, or by
which a fact may be prove and affirmed, which is
b. Registration with the Board of Investments is receive, recorded, transmitted, stored, processed,
necessary to avail of the incentives under the retrieved or produced electronically.
Omnibus Investment Code;
d. Electronic Key - a secret code which secures and
c. Same line of business as an existing joint venture defends sensitive information that cross over public
wherein the Filipino partners therein can prove channels into a form decipherable only with a
they are capable of making the necessary matching electronic key. [Villanueva, 1125]
investments. [Sec. 5, R.A. No. 7042, as amended]
Note: Facsimile is not an electronic data - There is no question
ELECTRONIC COMMERCE ACT then that when Congress formulated the term "electronic data
message," it intended the same meaning as the term
(R.A. No. 8792)
"electronic record" in the Canada law. This construction of the
term "electronic data message," which excludes telexes or
IN GENERAL
faxes, except computer-generated faxes, is in harmony with
Objectives the Electronic Commerce Law's focus on "paperless"
communications and the "functional equivalent approach"
a. To facilitate domestic and international dealings, that it espouses. In fact, the deliberations of the Legislature are
transactions, arrangements agreements, contracts replete with discussions on paperless and digital transactions.

Facsimile transmissions are not, in this sense, "paperless," but

verily are paper-based. [MCC Industrial Sales Corporation v. b. was affixed by that person with the intention of
Ssangyong Corporation, G.R. No. 170633, October 17, 2007] signing or approving the electronic document.
LEGAL RECOGNITION EXCEPTION: The person relying on the electronically signed

electronic document knows or has noticed of defects in or
Electronic Data Message unreliability of the signature or reliance on the electronic
signature is not reasonable under the circumstances. [Sec. 9,
Information shall not be denied legal effect, validity or R.A. No. 8792]
enforceability solely on the grounds that:
Rule on Original Documents
a. it is in the data message purporting to give rise to
such legal effect; or Where the law requires information to be presented or
retained in its original form, that requirement is met by an
b. it is merely referred to in that electronic data electronic data message or electronic document if:
message. [Sec. 6, R.A. No. 8792]
a. the integrity of the information from the time when
Electronic Document it was first generated in its final form, as an
electronic data message or electronic document is
Electronic documents shall have the legal effect, validity or shown by evidence aliunde or otherwise; and
enforceability as any other document or legal writing, and –
b. where it is required that information be resented,
▪ Where the law requires a document to be in that the information is capable of being displayed
writing, that requirement is met by an electronic to the person to whom it is to be presented.
document if the said electronic document
maintains its integrity and reliability and can be Note: This rule applies whether the requirement is in the form
authenticated so as to be usable for subsequent of an obligation or whether the law simply provides the
reference; consequences for the information not being presented or
retained in its original form. [Sec. 10, R.A. No. 8792]
▪ Applies whether the requirement is in the form of
an obligation or whether the law simply provides Authentication
consequences for the document not being
presented or retained in its original from; ▪ Electronic Signature - authenticated by proof than
a letter, character, number or other symbol in
▪ Where the law requires that a document be electronic form representing the persons named in
presented or retained in its original form, that and attached to or logically associated with an
requirement is met by an electronic document if – electronic data message, electronic document, or
that the appropriate methodology or security
▪ There exists a reliable assurance as to the integrity procedures, when applicable, were employed or
of the document from the time when it was first adopted by such person, with the intention of
generated in its final form; and authenticating or approving in an electronic data
message or electronic document;
▪ That document is capable of being displayed to the
person to whom it is to be presented; ▪ Electronic Data Message or Electronic Document
- authenticated by proof that an appropriate
▪ For evidentiary purposes, an electronic document security procedure, when applicable was adopted
shall be the functional equivalent of a written and employed for the purpose of verifying the
document under existing laws. [Sec. 7, R.A. No. originator of an electronic data message and/or
8792] electronic document, or detecting error or
alteration in the communication, content or storage
Electronic Signatures of an electronic document or electronic data
message from a specific point, which, using
An electronic signature on the electronic document shall be algorithm or codes, identifying words or numbers,
equivalent to the signature of a person on a written document encryptions, answers back or acknowledgement
if proved by showing that a prescribed procedure is followed procedures, or similar security devices.
which is not alterable by the parties interested in the
electronic document. [Sec. 8, R.A. No. 8792] Note: The Supreme Court may adopt other authentication
procedures, including the use of electronic notarization
Presumptions Relating to E-Signatures systems as necessary and advisable, as well as the certificate
of authentication on printed or hard copies of the electronic
GENERAL RULE: In any proceedings involving an electronic document or electronic data messages by electronic notaries,
signature, it shall be presumed that such signature: service providers and other duly recognized or appointed
certification authorities. [Sec. 11, R.A. No. 8792]
a. is the signature of the person to whom it correlates;
and Burden of Proof

The requirement in any provision of law that certain

a. The person seeking to introduce an electronic data documents be retained in their original form is satisfied by
message or electronic document in any legal retaining them in the form of an electronic data message or
proceeding has the burden of proving its electronic document which:
authenticity by evidence capable of supporting a
finding that the electronic data message or a. Remains accessible so as to be usable for
electronic document is what the person claims it be. subsequent reference;
b. In the absence of evidence to the contrary, the b. Is retained in the format in which it was generated,
integrity of the information and communication sent or received, or in a format which can be
system in which an electronic data message or demonstrated to accurately represent the electronic
electronic document is recorded or stored may be data message or electronic document generated,
established in any legal proceeding by: sent or received;
a. Evidence that at all material times the c. Enables the identification of its originator and
information and communication system or addressee, as well as the determination of the date
other similar device was operating in a and the time it was sent or received. [Sec. 13, R.A.
manner that did not affect the integrity of the No. 8792]
electronic data message and/or electronic
document, and there are no other reasonable COMMUNICATION
grounds to doubt the integrity of the
information and communication system; Formation and Validity of Electronic Contracts
b. Showing that the electronic data message GENERAL RULE: An offer, the acceptance of an offer and
and/or electronic document was recorded or such other elements required under existing laws for the
stored by a party to the proceedings who is formation of contracts may be expressed in, demonstrated
adverse in interest to the party using it; or and proved by means of electronic data messages or
electronic documents. No contract shall be denied validity or
c. Showing that the electronic data message enforceability on the sole ground that:
and/or electronic document was recorded or
stored in the usual and ordinary course of a. it is in the form of an electronic data message or
business by a person who is not a party to the electronic document; or
proceedings and who did not act under the
control of the party using the record. [Sec. 11, b. any or all of the elements required under existing
R.A. No. 8792] laws for the formation of contracts is expressed,
demonstrated and proved by means of electronic
Admissibility and Evidentiary Weight data messages or electronic documents.
In any legal proceedings, nothing in the application of the EXCEPTION: Except as otherwise agreed upon by the parties.
Rules on Evidence shall deny the admissibility of an electronic [Sec. 16(1), R.A. No. 8792]
data message or electronic document in evidence on the
ground that: Consummation of Transaction
a. it is in electronic form; or Electronic transactions made through networking among

banks, or linkages thereof with other entities or networks
b. it is not in the standard written form, and the shall be deemed consummated upon the actual dispensing of
electronic data message or electronic document cash or the debit of one account and the corresponding credit
meeting, and complying with the requirements to another, whether such transaction is initiated by the
under Sections 6 or 7 of the Act shall be the best depositor or by an authorized collecting party.
evidence of the agreement and transaction
contained therein. Note: The obligation of one bank, entity, or person similarly
situated to another arising therefrom shall be considered
Note: In assessing the evidentiary weight of an electronic data absolute and shall not be subjected to the process of
message or electronic document, due regard shall be given to: preference of credits. [Sec. 16(2), R.A. No. 8792]
1. the reliability of the manner in which it was Recognition by Parties

generated, stored or communicated;
Between the originator and the addressee of an electronic data
2. the reliability of the manner in which its originator message or electronic document, a declaration of will or other
was identified; and statement shall not be denied legal effect, validity or
enforceability solely on the ground that it is in the form of an
3. other relevant factors. [Sec. 12, R.A. No. 8792] electronic data message. [Sec. 17, R.A. No. 8792]
Retention Attribution

a. An electronic data message or electronic document The following rules shall apply where, on or before sending
is that of the originator if it was sent by: an electronic data message or electronic document, the
originator and the addressee have agreed, or in that electronic
1. the originator himself; document or electronic data message, the originator has
requested, that receipt of the electronic document or
2. a person who had the authority to act on electronic data message be acknowledged:
behalf of the originator; or
a. Where the originator has not agreed with the addressee
3. an information system programmed by, or on that the acknowledgement be given in a particular form
behalf of the original to operate automatically. or by a particular method - an acknowledgement may
be given by or through any communication by the
b. As between the originator and the addressee, an addressee, automated or otherwise, or any conduct
addressee is entitled to regard an electronic data of the addressee, sufficient to indicate to the
message or electronic document as being that of the originator that the electronic data message or
originator, and to act on that assumption, if: electronic document has been received.
1. in order to ascertain whether the electronic b. Where the originator has stated that the effect or
data message or electronic document was that significance of the electronic data message or electronic
of the originator, the addressee properly document is conditional on receipt of the
applied a procedure previously agreed to by acknowledgement thereof - the electronic data
the originator for that purpose; or message or electronic document is treated as
though it has never been sent, until the
2. the receipt of the electronic data message or acknowledgement is received.
electronic document resulted from the actions
of a person whose relationship with the c. Where no such condition has been stated by the
originator or with any agent of the originator originator, and the acknowledgement has not been
enabled that person to gain access to a method received by the originator within the time specified or
used by the originator to identify electronic agreed (or if no time has been specified or agreed, within
data messages as his own. the reasonable time) – then:
Note: This does not apply: a. the originator may give notice to the
addressee stating that no acknowledgement
a. As of the time when the addressee has has been received and specifying a reasonable
both received notice from the originator time by which the acknowledgement must be
that the electronic data message or received; and
electronic document is not that of the
originator, and has reasonable time to act b. if the acknowledgement is not received within
accordingly; or the time specified, the originator may, upon
notice to the addressee, treat the electronic
b. At any time when the addressee knew or document or electronic data as though it had
should have known, had it exercised never been sent, or exercise any other rights it
reasonable care of used any agreed may have. [Villanueva, 1130]
procedure, that the electronic data
message or electronic document was not Time of Dispatch
that of the originator.
GENERAL RULE: The dispatch of an electronic data message
c. The addressee is not entitled to regard electronic or electronic document occurs when it enters an information
data message of electronic document received as system outside the control of the originator or of the person
that which the originator intended to send when who sent the electronic data message or electronic document
the addressee knew or should have known, had the on behalf of the originator.
addressee exercised reasonable care or used
appropriate procedure that: EXCEPTION: Unless otherwise agreed upon by the
originator and the addressee. [Sec. 21, R.A. No. 8792]
1. the transmission resulted in any error therein
or in electronic data message or electronic Time of Receipt
document, when it enters the designated
information system; or GENRAL RULE: The time of receipt of an electronic data
message or electronic document is as follows:
2. it is sent to an information system which is not
so designated by the addressee for the a. If the addressee has designated an information system for
the purpose of receiving electronic data message or
purpose. [Villanueva, 1129-1130]
electronic document – receipt occurs at the time when
Agreement on Acknowledgment of Receipt the electronic data message or electronic document
enters the designated information system:

Note: If the originator and the addressee are both document, that requirement is met if the action is carried out
participants in the designated information system, by using one or more electronic data messages or electronic
receipt occurs at the time when the electronic data documents, thus:
message or electronic document is retrieved by the
addressee; a. a. furnishing the marks, number, quantity or
weight of goods;
b. If the electronic data message or electronic document is b. stating or declaring the nature or value of goods;
sent to an information system of the addressee that is not c. issuing a receipt for goods;
the designated information system - receipt occurs at d. confirming that goods have been loaded;
the time when the electronic data message or
electronic document is retrieved by the addressee; b. a. notifying a person of terms and conditions of the
contract;
c. If the addressee has not designated an information b. giving instructions to a carrier;
system - receipt occurs when the electronic data
message or electronic document enters an c. a. claiming delivery of goods;
information system of the addressee. b. authorizing release of goods;
c. giving notice of loss of, or damage to goods;
EXCEPTION: Unless otherwise agreed upon by the
originator and the addressee. d. giving any other notice or statement in connection
with the performance of the contract;
Note: These rules apply notwithstanding that the place where
the information system is located may be different from the e. undertaking to deliver goods to a named person or
place where the electronic data message or electronic a person authorized to claim delivery;
document is deemed to be received. [Sec. 22, R.A. No. 8792]
f. granting, acquiring, renouncing, surrendering,
Place of Dispatch/Receipt transferring or negotiating rights in goods;
GENERAL RULE: An electronic data message or electronic g. acquiring or transferring rights and obligations
document is deemed to be dispatched at the place where the under the contract.
originator has its place of business and received at the place
where the addressee has its place of business. This rule shall Note:
apply:
▪ Where one or more data messages are used to effect
▪ even if the originator or addressee had used a laptop any of the foregoing action, no paper document
other portable device to transmit or received his used to effect any such action is valid, unless the
electronic data message or electronic document; or use of electronic data message or electronic
document has been terminated and replaced by the
▪ to determine the tax situs of such transaction. used of paper documents, which shall contain a
statement of such termination.
EXCEPTION: Unless otherwise agreed upon by the
originator and the addressee. ▪ If a rule of laws is compulsorily applicable to a
contract of carriage of goods which is in, or is
Note: For the purposes hereof: evidenced by, a paper document, that rule shall not
be inapplicable to such a contract of carriage of
1. If the originator or addressee has more than one place of goods which is evidenced by one or more electronic
business - the place of business is that which has the data messages or electronic documents by reason of
closest relationship to the underlying transaction the fact that the contract is evidenced by such
or, where there is no underlying transaction, the electronic data messages or electronic documents.
principal place of business. [Villanueva, 1132-1133]
2. If the originator or the addressee does not have a place of E-Transactions in the Government
business - reference is to be made to its habitual
residence; or Notwithstanding any law to the contrary, within 2 years from
the effectivity of the Act, all departments, bureaus, offices and
3. The "usual place of residence" in relation to a body agencies of the government, as well as all GOCCs, that
corporate, means the place where it is incorporated pursuant to law require or accept the filling of documents,
or otherwise legally constituted. [Sec. 23, R.A. No. require that documents be created, or retained and/or
8792] submitted, issue permits, licenses or certificates of registration
or approval, or provide for the method and manner of
E-COMMERCE IN SPECIFIC AREAS payment or settlement of fees and other obligations to the
government, shall:
Carriage of Goods
1. accept the creation, filing or retention of such documents
In any of the following actions, where the law requires the in the form of electronic data messages or electronic
same to be carried out in writing or by using a paper documents;

b. making available to the public, or broadcasting of

2. issue permits, licenses, or approval in the form of protected material, electronic signature or
electronic data messages or electronic documents; copyrighted works including legally protected
sound recordings or phonograms or information
3. require and/or accept payments, and issue receipts material on protected works, through the use of
acknowledging such payments, through systems using telecommunication networks, such as, but not
electronic data messages or electronic documents; or limited to, the internet, in a manner that infringes
intellectual property rights. [Sec. 33(b), R.A. No.
4. transact government business and/or perform 8792]
governmental functions using electronic data messages
or electronic documents. Note:
Note: For such purpose, the aforementioned government a. Penalty for Hacking and Piracy - a minimum fine of
entities are authorized to adopt and promulgate, after Php 100k and a maximum fine commensurate to
appropriate public hearing and with due publication in the damage incurred and a mandatory
newspapers of general circulation, the appropriate rules, imprisonment of 6 months to 3 years.
regulations, or guidelines. [Villanueva, 1133]
b. Penalty for the Violation of the Consumer Act of the
PENALIZED OFFENSES Philippines and other relevant or pertinent laws –
the penalties provided for by such laws.
Offenses penalized by the E-Commerce Act:
c. Penalty for the Violation of the other provisions of
a. Hacking or cracking; the E-Commerce Act – a maximum penalty of Php
1 million or 6 years of imprisonment. [Sec. 33, R.A.
b. Piracy; No. 8792]
c. Violation of the Consumer Act of the OTHER PROVISIONS

Philippines (R.A. No. 7394) and other relevant
or pertinent laws through transactions Liability of Service Provider
covered by or using electronic data messages
or electronic documents; and GENERAL RULE: No person or party shall be subject to any
civil or criminal liability in respect of the electronic data
d. Violations of the other provisions of the E- message or electronic document for which the person or party
Commerce Act. acting as a service provider merely provides access if such
liability is founded on:
Hacking or Cracking
▪ the obligations and liabilities of the parties under
Refers to the: the electronic data message or electronic document;
a. unauthorized access into or interference in a ▪ the making, publication, dissemination or

computer system/server or information and distribution of such material or any statement made
communication system; in such material, including possible infringement of
any right subsisting in or in relation to such
b. any access in order to corrupt, alter, steal, or material.
destroy using a computer or other similar
information and communication devices, without EXCEPTION: If the service provider:
the knowledge and consent of the owner of the
computer or information and communications ▪ has actual knowledge, or is aware of the facts or
system; or circumstances from which it is apparent, that the
making, publication, dissemination or distribution of
c. introduction of computer viruses and the like, such material is unlawful or infringes any rights
resulting in the corruption, destruction, alteration, subsisting in or in relation to such material;
theft or loss of electronic data messages or
electronic documents. [Sec. 33(a), R.A. No. 8792] ▪ knowingly receives a financial benefit directly
attributable to the unlawful or infringing activity; and
Piracy
▪ directly commits any infringement or other unlawful act;
Refers to the:
▪ induces or causes another person or party to commit any
a. unauthorized copying, reproduction, infringement or other unlawful act;
dissemination, or distribution, importation, use,
removal, alteration, substitution, modification, ▪ benefits financially from the infringing activity or
storage, uploading, downloading, communication; unlawful act or another person or party.
or
Note: Nothing as mentioned shall affect:

Electronic Documents as Functional Equivalent of Paper-

a. Any obligation founded on contract; Based Documents
b. The obligation of a service provider as such under An electronic document is deemed to be included whenever
a licensing or other regulatory regime established a rule of evidence refers to the term writing, document,
under written law; or record, instrument, memorandum or any other form of
writing. [Villanueva, 1135]
c. Any obligation imposed under any written law;
Admissibility
d. The civil liability of any party to the extent that such
liability forms the basis for injunctive relief issued An electronic document is admissible in evidence if it
by a court under any law requiring that the service complies with the rules on admissibility prescribed by the
provider take or refrain from actions necessary to Rules of Court and related laws and is authenticated in the
remove, block or deny access to any material, or to manner prescribed by these Rules. [Villanueva, 1135-1136]
preserve evidence of a violation of law. [Sec. 30,
R.A. No. 8792] Privileged Communication
Lawful Access The confidential character of a privileged communication is

not lost solely on the ground that it is in the form of an
GENERAL RULE: Access to an electronic file, or an electronic electronic document. [Villanueva, 1136]
signature of an electronic data message or electronic
document shall only be authorized and enforced in favor of Best Evidence Rule
the individual or entity having a legal right to the possession
or the use of plaintext, electronic signature or file or solely for An electronic document shall be regarded as the equivalent of
the authorized purposes. an original document under the Best Evidence Rule if it is a
printout or output readable by sight or other means, shown
EXCEPTION: The electronic key can be made available to any to reflect the data accurately. [Villanueva, 1136]
person or party if there is consent of the individual or entity
in lawful possession of that electronic key. [Sec. 31, R.A. No. Copies as Equivalent of the Original
8792]
GENERAL RULE: When a document is in two or more copies
Obligation of Confidentiality executed at or about the same time with identical contents, or
is a counterpart produced by the same impression as the
GENERAL RULE: Any person who obtained access to any original, or from the same matrix, or by mechanical or
electronic key, electronic data message or electronic electronic re-recording, or by chemical reproduction, or by
document, book, register, correspondence, information, or other equivalent techniques which accurately reproduces the
other material pursuant to any powers conferred under the original, such copies or duplicates shall be regarded as the
Act, shall not convey to or share the same with any other equivalent of the original.
person.
EXCEPTION: Copies or duplicates shall not be admissible to
EXCEPTION: Except for the purposes authorized by the Act. the same extent as the original if:
[Sec. 32, R.A. No. 8792]
a. a genuine question is raised as to the authenticity of
Reciprocity the original; or
All benefits, privileges, advantages or statutory rules b. in the circumstances it would be unjust or
established under the Act, including those involving practice inequitable to admit the copy in lieu of the original.
of profession, shall be enjoyed only by parties whose country [Villanueva, 1136]
origin grants the same benefits and privileges or advantages
to Filipino citizens. [Sec. 39, R.A. No. 8792] Authentication of Electronic Documents
RULES ON ELECTRONIC EVIDENCE ▪ Burden of Proof - The person seeking to introduce

(A.M. No. 01-7-01-SC) an electronic document in any legal proceeding has
the burden of proving its authenticity in the
Scope manner provided in this Rule.
GENERAL RULE: The Rules shall apply whenever an ▪ Manner of Authentication - Before any private
electronic document or electronic data message is offered or electronic document offered as authentic is
used in evidence in all civil actions and proceedings, as well received in evidence, its authenticity must be
as quasi-judicial and administrative cases. proved by:
EXCEPTION: Unless as otherwise provided. [Villanueva, a. evidence that it had been digitally signed by
1135] the person purported to have signed the same;

b. evidence that other appropriate security In assessing the evidentiary weight of an electronic document,
procedures or devices as may be authorized the following factors may be considered:
by the Supreme Court or by law for
authentication of electronic documents were a. the reliability of the manner or method in
applied to the document; or which it was generated, stored or
communicated, including but not limited to
c. other evidence showing its integrity and input and output procedures, controls, tests
reliability to the satisfaction of the judge. and checks for accuracy and reliability of the
electronic data message or document, in the
Note: A document electronically notarized in accordance light of all the circumstances as well as any
with the rules promulgated by the Supreme Court shall be relevant agreement;
considered as a public document and proved as a notarial
document under the Rules of Court. [Villanueva, 1136] b. the reliability of the manner in which its
originator was identified;
Electronic Signatures
c. the integrity of the information and
▪ Manner of Authentication - An electronic communication system in which it is recorded
signature or a digital signature is admissible in or stored, including but not limited to the
evidence as the functional equivalent of the hardware and computer programs or software
signature of a person on a written document, when used as well as programming errors;
authenticated by:
d. the familiarity of the witness or the person
a. evidence that a method or process was who made the entry with the communication
utilized to establish a digital signature and and information system;
verify the same;
e. the nature and quality of the information
b. any other means provided by law; or which went into the communication and
information system upon which the electronic
c. any other means satisfactory to the judge as data message or electronic document was
establishing the genuineness of the electronic based; or
signature.
f. other factors which the court may consider as
▪ Related Disputable Presumptions – Upon affecting the accuracy or integrity of the
authentication, it shall be presumed that: electronic document or electronic data
message. [Sec. 1, Rule 7, Rules on Electronic
a. the electronic signature is that of the person to Evidence]
whom it correlates;
Business Records as Exception to the Hearsay Rule
b. the electronic signature was affixed by that person
with the intention of authenticating or approving ▪ When Excepted - A memorandum, report, record
the electronic document to which it is related or to or data compilation of acts, events, conditions,
indicate such person's consent to the transaction opinions, or diagnoses are excepted from the rule
embodied therein; and on hearsay evidence when:
c. the methods or processes utilized to affix or verify ▪ made by electronic, optical or other similar means;
the electronic signature operated without error or
fault. ▪ at or near the time of or from transmission or supply of
information by a person with knowledge thereof; and
d. the information contained in a certificate is correct;
▪ kept in the regular course or conduct of a business
e. the digital signature was created during the activity, and such was the regular practice.
operational period of a certificate;
Note:
f. no cause exists to render a certificate invalid or
revocable; a. The foregoing must be shown by the testimony of
the custodian or other qualified witnesses.
g. the message associated with a digital signature has
not been altered from the time it was signed; and b. The presumption may be overcome by evidence of
the untrustworthiness of the source of information
h. a certificate had been issued by the certification or the method or circumstances of the preparation,
authority indicated therein. [Villanueva, 1136-1137] transmission or storage thereof. [Villanueva, 1137]
Factors for Assessing Evidentiary Weight Method of Proof

All matters relating to the admissibility and evidentiary person who was a party to the same or has personal
weight of an electronic document may be established by an knowledge thereof.
affidavit:
EXCEPTION: In the absence or unavailability of
▪ stating facts of direct personal knowledge of the such witnesses, other competent evidence may be
affiant or based on authentic records; and admitted.
▪ affirmatively showing the competence of the affiant Note: If the foregoing communications are recorded or
to testify on the matters contained therein. embodied in an electronic document, then the rules for
electronic documents will apply. [Villanueva, 1135]
Note: The affiant shall be made to affirm the contents of the
affidavit in open court and may be cross-examined as a matter FINANCIAL REHABILITAION AND
of right by the adverse party. [Villanueva, 1138]
INSOLVENCY ACT
Electronic Testimony (R.A. No. 10142)
After summarily hearing the parties, the court may authorize CONCEPT
the presentation of testimonial evidence by electronic means.
Insolvency
Note:
It is a financial condition wherein a debtor is generally unable
a. Before so authorizing, the court shall determine the to pay its or his liabilities as they fall due in the ordinary
necessity for such presentation and prescribe terms course of business or has liabilities that are greater than its or
and conditions as may be necessary under the his assets. [Sec. 4(p), FRIA]
circumstances, including the protection of the
rights of the parties and witnesses concerned. Rehabilitation
▪ It refers to a restoration of the debtor to condition

b. When examination of a witness is done
of successful operation and solvency, if it is shown
electronically, the entire proceedings, including the
that its continuance of operation is economically
questions and answers, shall be transcribed by a
feasible and its creditors can recover by way of the
stenographer, stenotypist or other recorder
present value of payments projected in the plan,
authorized for the purpose, who shall certify as
more if the debtor continues as a going concern
correct the transcript done by him.
than if it is immediately liquidated. [Pacific Wide
Realty v. Puerto Azul Land, G.R. No. 178768,
c. The transcript should reflect the fact that the
November 25, 2009]
proceedings, either in whole or in part, had been
electronically recorded.
▪ Rehabilitation is available to a corporation who,
while illiquid, has assets that can generate more
d. The electronic evidence and recording thereof as
cash if used n intis daily operations than when sold.
well as the stenographic notes shall form part of the
It should be denied to corporations whose
record of the case.
insolvency appears to be irreversible and whose
sole purpose is to delay the enforcement of the
e. Such transcript and recording shall be deemed
rights of the creditors which is indicated by the
prima facie evidence of such proceedings.
following:
[Villanueva, 1138]
a. Absence of a sound and workable business
Audio, Photographic, Video, and Ephemeral Evidence
plan;
a. Audio, Photographic, and Video Evidence -
Audio, photographic and video evidence of events, b. Baseless and unexplained assumptions,
acts or transactions shall be admissible when: targets and goals;
▪ shown, presented or displayed to the court; c. Speculative capital infusion or complete lack
and thereof for the execution of the business plan;
▪ identified, explained or authenticated by the d. Cash flow cannot sustain daily operations;
person who made the recording or by some and
other person competent to testify on the
accuracy thereof. e. Negative net worth and the assets are near full
depreciation or full depreciated. [Wonder Book
b. Ephemeral Electronic Communications – v. Philippine Bank of Communications, G.R. No.
187316, July 16, 2012]
GENERAL RULE: Ephemeral electronic
communications and recordings of a telephone Purpose
conversation must be proven by the testimony of a

Enable the company to gain a new lease on life and thereby

allow creditors to be paid their claims from its earnings. This ▪ Majority vote of the board of
is in consonance with the state’s objective to promote a wider directors/trustees; and
and more meaningful equitable distribution of wealth to
protect investments and the public. [Metrobank vs. ASB, G.R. ▪ Authorized by the vote of at least
no. 166197, February 27, 2007] 2/3 of the outstanding capital stock
or of the entire membership; [Sec.
Nature of FRIA proceedings 12, FRIA]
a. In rem – jurisdiction over all persons affected by the 4. Group of debtors

proceedings is acquired upon publication of the
notice of the commencement of the proceedings; ▪ One or more of its members foresee
the impossibility of meeting debts
Note: Includes creditors or other persons holding as they fall due; and
assets of the debtor which should be reflected in its
audited financial statements; ▪ Financial distress would adversely
affect the operations or financial
b. Summary and non-adversarial – court may decide condition of other members or their
matters on the basis of affidavits, counter-affidavits participation is essential under the
and other evidence, conducting clarificatory proposed rehabilitation plan. [Sec.
hearings when necessary; 12, FRIA]
Note: Any order issued by the court is immediately Note: The petition must be verified with allegations
executory. [Villanueva, 1264-1265] establishing the (1) insolvency of the debtor and (2)
viability of its rehabilitation. [Villanueva, 1279-1280]
Debtor and Group of Debtors
b. Involuntary Proceedings
a. A debtor shall refer to any of the following:
▪ Persons who may petition for involuntary
1. DTI-registered sole proprietorship; rehabilitation:
2. SEC-registered partnership; Any creditor or group of creditors with a

claim of, or the aggregate of whose
3. Corporation duly organized and existing claims is, whichever is higher of:
under Philippines laws; or
1. At least Php 1,000,000.00;
4. Individual insolvent debtor. [Sec. 4(k), FRIA]
2. At least 25% of the subscribed
b. A group of debtors refers to: capital stock or partners’
contributions. [Sec. 13, FRIA]
1. Corporations that are financially related to
one another as parent, subsidiaries or ▪ Grounds:
affiliates;
1. There is no genuine issue of fact or law
2. Partnerships owned by more than 50% by the on the claims of the petitioners and that
same person; and the due and demandable payments
thereon have not been made for at least
3. Single proprietorships owned by the same 60 days; or
person; [Sec. 4(n), FRIA]
2. Debtor has failed generally to meet its
TYPES OF REHABILITATION PROCEEDINGS liabilities as they fall due; or
A. Court Supervised 3. At least one creditor, other than

petitioners, has initiated foreclosure
a. Voluntary or Debtor-Initiated Proceedings proceedings against the debtor that will
prevent the debtor from paying its debts
▪ Persons who may file a petition for voluntary as they become due or will render it
rehabilitation: insolvent. [Sec. 5, Rule 2, FR Rules of
Procedure]
1. Sole proprietorship – owner;
c. Common provisions
2. Partnership – approved by a majority of
the partners; ▪ Venue: RTC which has jurisdiction over the
principal office of the debtor as specified in its
3. Corporation articles of incorporation or partnership or

registration papers. [Sec. 6, Rule 2, FR Rules of provisions for their payment. [Sec. 68,
Procedure] FRIA]
▪ Court action upon filing: ▪ Period for confirmation: 1 year from the
date of filing of the petition;
1. Issue a Commencement Order within 5
days from filing if petition is found to be ▪ The proceedings may be converted into
sufficient in form and substance; one for liquidation if the Plan is not
confirmed within the said period. [Sec.
2. Give petitioners a maximum of 5 72, FRIA]
working days from receipt of notice
within which to amend or supplement B. Pre-Negotiated
the petition or submit necessary
documents; ▪ Petition for approval of Pre-Negotiated
Rehabilitation Plan – Any insolvent debtor, by
3. Dismiss if deficiency not complied itself or jointly with any of its creditors, may file a
within the extended 5-day period. [Sec. 7, verified petition endorsed or approved by creditors
Rule 2, FR Rules of Procedure] holding at least 2/3 of the total liabilities of the
debtor which includes:
▪ Court action on petition within 10 days
from receipt of the report of the a. Secured creditors holding more than 50% of
rehabilitation receiver: the total secured claims of the debtor; and
1. Give due course upon a finding that b. Unsecured creditors holding more than 50%
debtor is insolvent and there is of the total unsecured claims; [Sec. 76, FRIA]
substantial likelihood for the debtor
to be successfully rehabilitated; ▪ A secured claim is one secured by a lien. [Sec. 4(jj),
FRIA]
2. Dismiss upon a finding that:
▪ If the court finds the petition sufficient in form and
▪ Debtor is not insolvent; substance, it shall issue an order within 5 working
days from the date of filing which shall:
▪ Petition is intended to delay
the enforcement of the rights a. Identify the debtor, its principal business and
of creditors; its principal place of business;
▪ Petition, Plan and attachments b. Declare the debtor is under rehabilitation;

thereto contain materially false
or misleading statements; c. Summarize the grounds for the filing;
▪ Debtor has committed acts of d. Direct the publication of the order in a

misrepresentation or fraud of newspaper of general circulation in the
its creditors; Philippines once a week for at least 2
consecutive weeks;
3. Convert the proceedings into one
for liquidation upon a finding that e. Direct the service by personal delivery of a
debtor is insolvent and there is copy of the petition on each creditor holding
failure of rehabilitation. [Sec. 25, at least 10% of the total liabilities of the debtor;
FRIA]
f. State that copies of the petition and the Plan
▪ Confirmation: The court shall issue an are available for examination and copying by
order confirming the Rehabilitation Plan any interested party;
if:
g. State that the court shall approve the Pre-
1. No objections are filed within the Negotiated Rehabilitation Plan if there is no
relevant period; verified objection to the petition or
Rehabilitation plan within 8 days from the
2. Objections are lacking in merit; date of the second publication of the order;
3. Basis for objection has been cured; h. Creditors and other interested parties may
submit their comments within a period of not
▪ The Plan may be confirmed later than 20 days from the second publication
notwithstanding unresolved disputes of the order;
over claims if there are adequate

i. Appoint a rehabilitation receiver, if not

provided in the Rehabilitation Plan; ▪ Standstill Period – A period agreed upon by the
debtor and creditors to enable them to negotiate
j. Impose a Suspension or Stay Order; [Sec. 2, and enter into an agreement or Rehabilitation Plan.
Rule 3, FR Rules of Procedure] [Sec. 5, Rule 1, FR Rules of Procedure]
▪ Effectivity of order – It shall retroact to the date of ▪ Requisites for standstill period:
filing and shall be effective for 120 days from the
filing of the petition unless earlier lifted due to: a. Approval by creditors representing more than
50% of the total liabilities of the debtor;
a. Approval of the Pre-Negotiated Rehabilitation
Plan; or b. Publication of notice in newspaper of general
circulation in the Philippines, once a week for
b. Termination of the rehabilitation proceedings; 2 consecutive weeks;
[Sec. 4, Rule 3, FR Rules of Procedure]
c. Cannot exceed 120 days from date of
▪ Court action: effectivity; [Sec. 2, Rule 4, FR Rules of Procedure]
a. Convert rehabilitation proceedings into ▪ Expiration of standstill period:

liquidation if court determines that:
a. Lapse of 120 days from the effectivity;
1. Debtor or creditors supporting the Pre-
Negotiated Rehabilitation Plan acted in b. Effectivity of the OCRA; or
bad faith;
c. Termination of the negotiations for OCRA as
2. Objection is non-curable; declared by creditors representing more than
50% of the total liabilities. [Sec. 3, Rule 4, FR
b. Approve the Rehabilitation Plan within 120 Rules of Procedure]
days from the filing of the petition;
▪ An OCRA approved pursuant to an informal
c. Rehabilitation Plan deemed approve if: workout framework shall have the same legal effect
as a confirmation of a Plan under Court-Supervised
1. Objection has no merit or has been cured; Rehabilitation. [Sec. 86, FRIA]
2. Inaction within 120-day period; Court ▪ No amendment of modification shall be valid

shall certify that no action was made and unless it conforms to the terms specified by the
the Plan is deemed approved; [Rule 3, FR parties for its modification and it complies with the
Rules of Procedure] basic requirements of OCRA. [Sec. 6, Rule 4, FR
Rules of Procedure]
▪ Effect of Approval – Same legal effect as
confirmation of a Plan under Court-Supervised ▪ Venue: RTC has jurisdiction over a petition for
Rehabilitation. [Sec. 82, FRIA] court assistance to execute a standstill agreement
and a petition for annulment of the standstill
C. Out of Court or Informal Restructuring Agreements or agreement or OCRA.
Rehabilitation Plans (OCRA)
▪ Only the Court of Appeals can issue a temporary
▪ Requirements: restraining order or preliminary prohibitory
injunction. [Sec. 7, Rule 4, FR Rules of Procedure]
a. Approval by:
▪ The insolvent debtor and/or creditor may seek
1. Debtor; court assistance for the execution or
implementation of the OCRA. The court may issue
2. Creditors representing 67% of the a writ of execution to enforce its terms or any other
secured obligations; form of additional assistance as may be necessary.
[Sec. 9-10, Rule 4, FR Rules of Procedure]
3. Creditors representing 75% of the
unsecured obligations; ▪ The debtor or creditor may file a petition to annul
the standstill agreement or OCRA based on the
4. Creditors holding at least 85% of the total following grounds:
liabilities, secured and unsecured; and
a. Non-compliance with the requirements;
b. Publication of notice of OCA once a week for
at least 3 consecutive weeks in a newspaper of b. Vitiation of consent due to fraud,
general circulation in the Philippines. [Sec. 1, intimidation, or violence committed against
Rule 4, FR Rules of Procedure] such number of creditors required for the

approval of the agreement. [Sec. 11, Rule 4, FR will not prejudice their right to receive distributions
Rules of Procedure] if recommended by the rehabilitation receiver and
approved by the court;
COMMENCEMENT ORDER
j. Direct all creditors, BIR, and all interested parties to
The rehabilitation proceedings shall be deemed to have file and serve on the debtor a verified comment on
commenced from the date of filing of the petition. The Order or opposition with supporting affidavits and
shall: documents;
a. State the following: k. Prohibit the debtor's suppliers from withholding

the supply of goods and services in the ordinary
1. Name, address, and business of the debtor; course of business for as long as the debtor makes
payments for the services or goods supplied after
2. Nature of the business and principal activities; the issuance of the commencement Order;
3. Summary of grounds for initiating the l. Authorize the payment of administrative expenses
proceedings; as they become due;
4. Relief sought and any requirement or m. Set the case for initial hearing at a date no later than
procedure particular to the relief sought; 40 days from the date of filing of the petition for the
purpose of determining whether there is
5. Legal effects of the Commencement Order; substantial likelihood for the debtor to be
rehabilitated;
b. Declare that the debtor is under rehabilitation;
n. Make available copies of the petition and
c. Direct the the publication of the notice of the rehabilitation plan for examination and copying by
Commencement order and the Commencement any interested party;
Order in a newspaper of general circulation once a
week for at least 2 consecutive weeks; o. Indicate exact addresses at which documents
regarding the debtor and the proceedings may be
d. If petitioner is the debtor, direct service by personal reviewed and copied;
delivery, a copy of the petition on:
p. State that any creditor or debtor who is not the
1. Each creditor holding at least ten percent 10% petitioner, may submit the name or nominate any
of the total liabilities of the debtor; other qualified person to the position of
rehabilitation receiver;
2. BIR; and
q. State that all contracts not confirmed in writing by
3. Appropriate regulatory agencies such as the the debtor within 90 days following the issuance of
SEC, BSP and HLURB within 5 days from the the commencement order shall be considered
issuance of the order; automatically terminated; and
e. If petitioners are creditors, direct service by r. Include a Stay or Suspension Order. [Sec. 8, Rule 2,
personal delivery a copy of the petition on the FR Rules of Procedure]
debtor within five 5 days from the issuance of the
order; Effects of Commencement Order
f. Direct the petitioner to ensure that foreign creditors a. On the rehabilitation receiver – vest the
with no known addresses in the Philippines be rehabilitation receiver with all the powers and
served a copy of the Commencement Order at their functions provided for by FRIA;
foreign addresses in such a manner that will ensure
that the foreign creditor will receive a copy of the b. On claims and proceedings against the debtor
order at least 15 days before the initial hearing; outside of the rehabilitation proceedings – prohibit
or otherwise served as the legal basis rendering
g. Appoint a rehabilitation receiver; void the following which occurred after the
commencement date:
h. Summarize the requirements and deadlines for
creditors to establish their claims against the 1. Results of any extrajudicial activity or process
debtor; to seize property or otherwise attempt to
enforce a claim against the debtor;
i. Direct creditors to file their verified notices of
claims with the court at least 5 days before the 2. Set-off of debt;
initial hearing date, with a warning that their
failure to do so on time will bar them from 3. Perfect of any lien against the debtor’s
participating in the rehabilitation proceedings but property;

4. Has operating knowledge in management,

c. Consolidates the resolution of legal proceedings by finance and rehabilitation of distressed
and against the debtor to the rehabilitation court; companies;
d. Waiver of taxes and fees – All taxes and fees due to 5. Has a general familiarity with the rights of
the national government or LGUs are waived until creditors subject to suspension of payments or
the approval of the Rehabilitation Plan or dismissal rehabilitation and a general understanding of
of the petition, whichever is earlier. [Villanueva, the duties and obligations of a rehabilitation
1285-1286] receiver;
GENERAL RULE: The Commencement Order shall be 6. Not been earlier dismissed as a rehabilitation
effective for the duration of the rehabilitation proceedings receiver;
EXCEPTIONS: Unless – 7. No conflict of interest; and
a. Earlier lifted by court; 8. Willing and able to file a bond in such amount
as may be determined by the court.
b. Rehabilitation plan is seasonably confirmed or
approved; or b. Juridical Person –
c. Rehabilitation proceedings are terminated. [Sec. 11, 1. Duly authorized to do business in the
Rule 2, FR Rules of Procedure] Philippines for at least 6 years prior to its
appointment;
REHABILITATION RECEIVER
2. Of good standing as certified by the
Definition appropriate regulatory agencies;
It refers to the person or persons, natural or juridical, 3. No conflict of interest;

appointed as such by the court pursuant to the Act and which
shall be entrusted with such powers, duties, and 4. Not been earlier dismissed as a rehabilitation
responsibilities as set forth in the law. Where the receiver;
rehabilitation receiver is a juridical entity, the term includes
the juridical entity's designated representative. [Sec. 5(p), Rule 5. Submit the name of the representative
1, FR Rules of Procedure] designated to discharge the responsibilities
and powers of a rehabilitation receiver and the
Note: names of the persons authorized to assist the
representative, together with a sworn
▪ He shall be deemed an officer of the court; [Sect. 26 certification that these persons possess the
Rule 2, FR Rules of Procedure] qualifications and none of the
disqualifications enumerated above;
▪ The court shall initially appoint the rehabilitation
receiver, who may or may not be among the 6. Submit a sworn undertaking binding itself to
nominees of the petitioner; However, creditors and be solidarily liable with the persons
debtors who are not petitions may nominate other designated by it to discharge the functions and
persons. [Villanueva, 1296] responsibilities of a rehabilitation receiver;
Qualifications 7. Willing and able to file a bond in such amount

as may be determined by the court;
a. Natural Person –
8. Not disqualified to discharge the duties of a
1. Citizen of the Philippines or a resident of the rehabilitation receiver under the Constitution
Philippines for at least 6 months immediately and other relevant laws.
preceding his nomination;
c. Designated Representative of Juridical Person –
2. Of good moral character and with The designated representative must be:
acknowledged integrity, impartiality and
independence; 1. Be duly designated and authorized to act for
and on behalf of the juridical entity;
3. As far as practicable, he has expertise and
acumen to manage and operate a business 2. Be a director, officer, stockholder or partner of
similar in size and complexity to that of the the juridical entity; and
debtor;
3. Submit a sworn undertaking that he shall be
solidarily liable with his firm for all the
obligations and responsibilities of a

rehabilitation receiver. [Sec. 21, Rule 2, FR Any time by the court, either motu proprio or upon motion by
Rules of Procedure] debtor or creditors holding more than 50% of the total
obligations. Grounds may include but not limited to:
Principal Duties
a. Incompetence, gross negligence, failure to perform
a. Preserving and maximizing the value of the assets or failure to exercise the proper degree of care in the
of the debtor during the rehabilitation proceedings; performance of his duties and powers;
b. Determining the viability of the rehabilitation of the b. Lack of a particular or specialized competency
debtor; required by the specific case;
c. Preparing and recommending a Rehabilitation Plan

to the court; and c. Illegal acts or conduct in the performance of his
duties and powers;
d. Implementing the approved Rehabilitation Plan.
d. Lack of qualification or presence of any
Note: The receiver is also tasked to study the Rehabilitation disqualification;
Plan proposed by the debtor or any other Plan submitted
during the proceedings. [Sec. 26, Rule 2, FR Rules of Procedure] e. Conflict of interest that arises after his
appointment;
Conflict of Interest
f. Manifest lack of independence that is detrimental
Refers to a situation wherein one is so situated as to be to the general body of the stakeholders;
materially influenced in the exercise of judgment for or
against any party to the proceedings. Deemed conflict of g. Failure, without just cause, to perform any of his
interest: powers and functions; or
a. Creditor, owner, partner or stockholder of the h. On any of the grounds for removing a trustee under
debtor; the general principles of trusts. [Sec. 27, Rule 2, FR
Rules of Procedure]
b. Engaged in line of business which competes with
the debtor; Note: In case of vacancy, the court shall direct the debtor and
creditors to submit nominees to the position. [Sec. 35, FRIA]
c. Director, officer, owner, partner, or employee or
auditor or accountant of the debtor within 5 years MANAGEMENT COMMITTEE
from the filing of the petition;
Composition
d. Underwriter of the outstanding securities of the
debtor within 2 years from the filing of the petition; One nominee by the debtor, another by creditors holding
more than 50% of the total obligations of the debtor and the
e. Related by consanguinity or affinity within the 4th last member nominated by the first and second members; The
civil degree to any individual creditor, owner/s of court shall appoint a member in case of failure to nominate.
a sole proprietorship-debtor, partners of a [Sec. 34, Rule 2, FR Rules of Procedure]
partnership-debtor, or to any stockholder, director,
officer, employee, or underwriter of the Role
corporation-debtor; or
a. Take custody and control all assets and properties
f. Any other direct or indirect material interest in the owned or possessed by the debtor;
debtor or any creditor.
b. Take the place of the management and governing
Note: Conflict of interest must be disclosed at all times body of the debtor;
through the proceedings to the court and to the creditors. [Sec.
22-23, Rule 2, FR Rules of Procedure] c. Assume the powers, rights and responsibilities of
the debtor. [Sec. 33, Rule 2, FR Rules of Procedure]
Compensation
Qualification
a. Reasonable fees and expenses according to terms
approved by the court after such notice and ▪ Same as a rehabilitation receiver.
hearing;
REHABILITATION PLAN
b. Prior To Hearing – Quantum meruit. [Sec. 28, Rule
2, FR Rules of Procedure] Definition
Removal of the Rehabilitation Receiver It refers to a plan by which the financial well-being and
viability of an insolvent debtor can be resorted through:

e. Claims arising after its approval not treated by the

a. Various means (such as debt rescheduling, Plan are not subject to any Suspension Order. [Sec.
reorganization, debt-equity conversion, sale and 69, FRIA]
dacion en pago) as a going concern;
CRAM DOWN EFFECT
b. Setting-up of a new business entity; or
▪ The court may approve a rehabilitation plan even over
c. Other similar arrangements as may be approved by the opposition of creditors holding a majority of the total
court or creditors. [Sec. 4(ii), FRIA] liabilities of the debtor if the rehabilitation of the debtor
is feasible and the opposition is manifestly unreasonable.
Creditor Approval
▪ Rehabilitation Plan shall be deemed rejected unless ▪ The court shall consider the following:
approved by all classes of creditors whose rights
are adversely modified or affected by the Plan. a. That the plan would provide the objecting class of
creditors with compensation greater than that
▪ It is deemed approved by a class if the members which they would have received if the assets were
holding more than 50% of the total claims of the sold by a liquidator;
said class vote in favor of the Plan. [Sec. 62, Rule 2,
FR Rules of Procedure] b. That the shareholders lose at least their controlling
interest as a result of the plan; and
Objections to a Rehabilitation Plan
c. The rehabilitation receiver has recommended the
a. Creditor’s support was induced by fraud; approval of the plan. [Sec. 62, Rule 2, FR Rules of
Procedure]
b. Documents or data relied upon are materially false
or misleading; ▪ The cram-down clause is necessary to curb the majority
creditors’ natural tendency to dictate their own terms
c. The Rehabilitation Plan is not supported by the and conditions to the rehabilitation, absent due regard to
voting creditors. [Sec. 66, FRIA] the greater long-term benefit of all stakeholders. [BPI v.
Sarabia Manor, G.R. No. 175844, July 29, 2013]
Objections to a Pre-Negotiated Rehabilitation Plan
STAY OR SUSPENSION ORDER
Shall be limited to the following:
▪ An order issued in conjunction with the commencement
a. Allegations or attachments to the petition are order that shall:
materially false or misleading;
a. Suspend all actions or proceedings for the
b. Majority of any class of creditors do not support the enforcement of claims against the debtor;
Rehabilitation Plan;
b. Suspend all actions to enforce any judgment,
c. Rehabilitation Plan fails to accurately account for a attachment or other provisional remedies against
claim against debtor and claim is not categorically the debtor;
declared as a contested claim; or
c. Prohibit the debtor from selling, encumbering,
d. Support of creditors was induced by fraud; [Sec. 79, transferring or disposing in any manner any of its
FRIA] properties except in the ordinary course of
business; and
Effects of Confirmation of Plan
d. Prohibit the debtor from making any payment of its
a. Plan is binding upon the debtors and all persons liabilities outstanding as of the commencement
who may be affected by it, whether or not such date except as may be provided. [Sec. 16, FRIA]
persons participated in the proceedings; or their
claims have been scheduled; ▪ The issuance of a stay order does not affect the right to
commence action of proceedings in order to preserve ad
b. Debtor shall comply and take all actions necessary cautelam a claim against the debtor and to toll the
to carry it out; running of the prescriptive period to file the claim. [Sec.
8, Rule 2, FR Rules of Procedure]
c. Payments shall be made to creditors in accordance
with the provisions of the Plan; ▪ EXCEPTIONS: The Order does not apply to:
d. Any compromise on amounts or rescheduling of a. Cases already pending appeal in the SC as of

payments by the debtor shall be binding on commencement date; Any final and executory
creditors regardless of whether or not the Plan is judgment thereon is referred to the rehabilitation
successfully implemented; and court;

b. Subject to the discretion of the court, cases pending a. Juridical Debtors –

or filed at a specialized court or quasi-judicial
agency which is capable of resolving claims more 1. Voluntary Liquidation:
quickly, fairly and efficiently; Any final and
executory judgment thereon is referred to the ▪ Insolvent debtor may file a petition for
rehabilitation court; liquidation containing the following:
c. Enforcement of claims against sureties and other ➢ Schedule of debtor’s debt and
persons solidarily liable with the debtor, and third liabilities and list of creditors;
party or accommodation mortgagors as well as
issuers of letters of credit when the property is ➢ Inventory of all its assets;
necessary for the rehabilitation of the debtor;
➢ Names of at least 3 nominees as
d. Any form of action of customers of clients of a liquidator;
Securities Market Participant (SMP) to recover
moneys and securities entrusted in the ordinary ▪ Debtor may file a motion to convert the
course of the latter’s business as well as any action rehabilitation proceedings into
of such SMP or the appropriate agency or liquidation proceedings at any time
organization to settle such claims. during the pendency of the rehabilitation
proceedings. [Sec. 90, FRIA]
e. Actions of a licensed broker or dealer to sell
pledged securities of a debtor pursuant to a 2. Involuntary Liquidation:
securities pledge or margin agreement for the
settlement of securities transactions in accordance ▪ A petition for liquidation or a motion to the
with the SRC. convert rehabilitation proceedings is filed by 3
or more creditors, the aggregate of whose
f. Clearing and settlement of financial transactions claims is at least either (a) Php 1,000,000 or (b)
through the facilities of a clearing agency or similar 25% of the subscribed capital stock or
entities duly authorized, registered or recognized partner’s contributions, whichever is higher.
by the appropriate regulatory agency as well as
their actions to reimburse themselves for ▪ Petition must show that:
transactions settled for the debtor;
➢ There is no genuine issue of fact or law
g. Any criminal action against individual debtor or on their claims and:
owner, partner, director, or officer of a debtor.
[Villanueva, 1287-1288] o Demandable payments thereon not
made for at least 180 days; or
h. Sale of debtor’s assets due to its nature as
perishable, costly to maintain, susceptible to o Debtor has generally failed to meet
devaluation or it is otherwise in jeopardy; its liabilities as they fall due; and
Note: There must be an application filed by the ➢ There is no substantial likelihood that the
rehabilitation receiver, with notice to the debtor debtor may be rehabilitated. [Sec. 91,
and creditors. [Sec. 48, Rule 2, FR Rules of Procedure] FRIA]
▪ The court may also authorize the disposal of b. Individual Debtors

encumbered property of debtor and 3rd party assets held
by debtor upon a showing that: ▪ A petition to be declared in state of suspension
of payments may be made by an individual
a. Application by rehabilitation receiver; debtor who possesses sufficient property to
cover all his debts but foresees the
b. Consent given by the affected owner or secured impossibility of meeting them when they fall
creditors; due.
c. Necessary for continued business operations; ▪ The petition must include:
d. Debtor has made arrangements to provide a ➢ a schedule of debts and liabilities;

substitute lien or ownership that provides an equal
level of security. [Sec. 49, Rule 2, FR Rules of ➢ an inventory of assets; and
Procedure]
➢ a proposed agreement with his creditors.
LIQUIDATION [Sec. 94, FRIA]
A. Kinds of Debtors

▪ The court may, upon motion, issue a hindering or delaying the liquidation or
suspension order against any pending execution of defrauding his creditors;
against the debtor:
▪ Procured his property to be taken on
➢ Properties held as security by secured legal process with intent to give a
creditors shall not be the subject of such preference to one or more of his creditors
suspension order; and thereby hinder or delay the
liquidation or defraud any one of his
➢ The suspension order shall lapse after 3 creditors;
months without acceptance of the
proposed agreement by the creditors; ▪ Made any assignment, gift, sale,
conveyance or transfer of his estate,
➢ The suspension order shall lapse as soon property, rights or credits with intent to
as the proposed agreement is denied. hinder or delay the liquidation or
[Sec. 96, FRIA] defraud his creditors;
1. Voluntary Liquidation – A petition to be ▪ Made any payment, gift, grant, sale,

discharged from debts is filed by a debtor conveyance or transfer of his estate,
whose: property, rights or credits in
contemplation of insolvency;
▪ Properties are insufficient to cover
liabilities; and ▪ Being a merchant or tradesman, he has
generally defaulted in the payment of his
▪ Debts exceed Php 500k. current obligations for a period of 30
days;
Note: A schedule of debts and liabilities and an
inventory of assets must be attached. The filing of ▪ Failed after demand to pay any moneys
such petition is an act of insolvency. [Sec. 103, FRIA] deposited with him or received by him in
a fiduciary for a period of 30 days; and
2. Involuntary Liquidation – Creditors with
claims aggregating to at least Php 500k may ▪ Found to be without sufficient property
filed a petition for liquidation, alleging at least subject to execution to satisfy the
one of such acts on of insolvency of the debtor: judgment after execution having been
issued against him on final judgment for
▪ Debtor is about to depart or has departed money.
from the Philippines, with intent to
defraud creditors; Note: Petitioning creditors must post a bond and
pay for all costs occasioned by the proceedings in
▪ Remains absent from the Philippines, the event that the debtor is not declared an
with intent to defraud his creditors; insolvent. [Sec. 105, FRIA]
▪ Conceals himself to avoid the service of B. Procedure

legal process for the purpose of
hindering or delaying the liquidation or a. Conversion of Rehabilitation Proceedings to
of defrauding his creditors; Liquidation Proceedings
▪ Conceals or removes any of his property ▪ The court may order the conversion of court-
to avoid its being attached or taken on supervised or pre-negotiated rehabilitation
legal process; proceedings to liquidation proceedings
during their pendency.
▪ Property of debtor to remain under
attachment or legal process for 3 days for ▪ Grounds:
the purpose of hindering or delaying the
liquidation or of defrauding his 1. Debtor is insolvent, no likelihood for
creditors; successful rehabilitation and failure of
rehabilitation; [Sec. 17, Rule 2, FR Rules of
▪ Confessed or offered to allow judgment Procedure]
in favor of any creditor or claimant for
the purpose of hindering or delaying the 2. Debtor acted in bad faith or it is not
liquidation or of defrauding any feasible to cure the defect with respect to
creditors or claimant; objections made by creditors to the
Rehabilitation Plan; [Sec. 65, Rule 2, FR
▪ Willfully suffered judgment to be taken Rules of Procedure]
against him by default for the purpose of

3. No Rehabilitation Plan is confirmed date shall not be less than 30 days nor
within 1 year from the date of filing of the more than45days from the date of the last
petition; [Sec. 70, Rule 2, FR Rules of publication. [Sec. 112, FRIA]
Procedure]
c. Effects of the Liquidation Order
4. Termination of rehabilitation
proceedings due to breach or failure of 1. Juridical debtor deemed dissolved and its
Rehabilitation Plan; [Sec. 73, Rule 2, FR existence terminated;
Rules of Procedure]
2. Legal title and control of all the assets of the
5. Debtor or creditors supporting the Pre- debtor, except thoseexempt from execution,
Negotiated Rehabilitation Plan acted in shall be deemed vested in the liquidator or,
bad faith; pending his election or appointment, with the
court;
6. Objection to Pre-Negotiated
Rehabilitation Plan is non-curable; [Sec. 3. All contracts of the debtor shall be deemed
7, Rule 3, FR Rules of Procedure] terminated and/or breached, unless the
liquidator, within 90 days from the date of his
7. Motion for the liquidation of insolvent assumption of office, declares otherwise and
juridical debtor; [Sec. 90-91, FRIA] the contracting party agrees;
▪ Conversion may also be done at any other 4. No separate action for the collection of an
time upon the recommendation of the unsecured claim shall be allowed:
rehabilitation receiver that rehabilitation of
the debtor is not feasible. [Sec. 92, FRIA] ▪ Pending actions will be transferred to the
Liquidator for him to accept and settle or
b. Liquidation Order contest.
▪ Liquidator contests or disputes the claim
▪ The liquidation order shall: – Court will resolve such contest except
when the case is already on appeal.
1. Declare the debtor insolvent;
5. No foreclosure proceeding shall be allowed
2. Order the liquidation of the debtor and, for a period of one hundred eighty 180 days.
if juridical debtor, declare it as dissolved; [Sec. 113, FRIA]
3. Order the sheriff to take possession and d. Rights of Secured Creditors

control of all the property of the debtor,
except those exempt from execution; ▪ The Liquidation Order shall not affect the
right of a secured creditor to enforce his lien in
4. Order the publication of the petition or accordance with the applicable contract or
motion in a newspaper of general law. A secured creditor may:
circulation once a week for 2 consecutive
weeks; 1. Waive his right under the security or lien,
prove his claim in the liquidation
5. Direct payments of any claims and proceedings and share in the distribution
conveyance of any property due the of assets; or
debtor to the liquidator;
2. Maintain his rights under the security or
6. Prohibit payments by the debtor and the lien:
transfer of any property by the debtor;
▪ Value of property may be fixed by
7. Direct all creditors to file their claims the creditor and the liquidator;
with the liquidator within the period set
by the rules of procedure; ▪ Value < claim – liquidator may
convey the property to the secured
8. Authorize the payment of administrative creditor who will still be admitted
expenses as they become due; the proceedings as a creditor for the
balance;
9. State that the debtor and creditors who
are not petitioners may submit the names ▪ Value > claim – liquidator may
of other nominees to the position of convey the property to the creditor
liquidator; and and wavier debtor’s right of
redemption upon receiving the
10. Set the case for hearing for the election excess from the creditor;
and appointment of the liquidator, which

▪ Liquidator may sell the property 5. Settle all accounts between the debtor and his
and satisfy the secured creditor’s creditors, subject to the approval of the court;
entire claim from the proceeds of
the sale; or 6. Recover any property or its value,
fraudulently conveyed by the debtor;
▪ Secured creditor may enforce the
lien or foreclose on the property. 7. Recommend to the court the creation of a
[Sec. 114, FRIA] creditors' committee which will assist him in
the discharge of the functions and which shall
e. Powers, Duties, and Responsibilities of the have powers as the court deems just,
Liquidator reasonable and necessary; and
▪ Election: Creditors entitled to vote will elect 8. Upon approval of the court, to engage such
the liquidator in open court. The nominee professional as may be necessary and
receiving. Only creditors who have filed their reasonable to assist him in the discharge of his
claims within the given period and whose duties. [Sec. 119, FRIA]
claims are not barred by the statute of
limitations are allowed to vote f. Determination of Claims
▪ A secured is not allowed to vote, unless he: (a) ▪ Registry of Claims - The liquidator shall
waives his security or lien; or (b) has the value prepare a preliminary registry of claims of
of the property subject of his security or lien secured and secured creditors:
fixed by agreement with the liquidator, and is
admitted for the balance of his claim. [Sec. 115, 1. Unsecured creditors include secured
FRIA] creditors who (1) waived their security or
(2) have a fixed value of the property
▪ Court appointment – The court may appoint the subject of their security and are admitted
liquidator if: as creditors for the balance;
1. Creditors do not attend the election; 2. Registry is available for public

inspection;
2. Creditors who attend fail or refuse to elect a
liquidator; 3. There must be publication notice to
creditors, individual debtors/owners of
3. Elected liquidator fails to qualify; or the sole proprietorship-debtor, the
partners of the partnership-debtor and
4. Vacancy occurs. shareholders or members of the
corporation-debtor, on where and when
▪ A rehabilitation receiver may also be appointed as they may inspect it;
liquidator. [Sec. 116, FRIA]
▪ All claims must be duly proven before being
▪ Qualifications – Same as rehabilitation receiver: paid. [Sec. 123, FRIA]
▪ Powers, duties and responsibilities – The ▪ Right of Set-Off – One debt shall be set off
liquidator has the right and duty to take all against the other if the debtor and creditor are
reasonable steps to manage and dispose of the mutually debtor and creditor of each other.
debtor’s assets with a view of maximizing the Only the balance, if any, shall be allowed in
proceeds: the liquidation proceedings. [Sec. 124, FRIA]
1. Sue and recover all the assets, debts and ▪ Opposition or Challenge to Claims – The
claims, belonging or due to the debtor; debtor and other interested parties may
submit a challenge to the claims.
2. Take possession of all the property of the
debtor except property exempt by law from 1. Made within 30 days from the expiration
execution; of the period for filing of applications for
recognition of claims, creditors and
3. Sell, with the approval of the court, any debtors;
property of the debtor which has come into his
possession or control; 2. The rehabilitation receiver shall submit
to the court the registry of claims
4. Redeem all mortgages and pledges, and so containing the undisputed claims that
satisfy any judgement which may be an have not been subject to challenge;
encumbrance on any property sold by him;
3. Claims become final upon the filing of
the register. They are set aside only on

grounds of fraud, accident, mistake or GENERAL RULE: Management-in-Place or management of

inexcusable neglect. [Sec. 125, FRIA] the juridical debtor shall remain with the existing
management. Any act affecting title or interest in property,
▪ The liquidator shall resolve disputed claims however, shall be subject to the approval of the rehabilitation
and submit his findings thereon to the court receiver and/or the court. [Sec. 47, FRIA]
for final approval. The liquidator may
disallow claims. [Sec. 126, FRIA] EXCEPTION: Displacement of Existing Management –
The court may appoint and direct the rehabilitation receiver
g. Liquidation Plan to assume the powers of management of the debtor or appoint
a management committee upon clear and convincing
▪ The liquidator submits a Liquidation Plan evidence of any of the following circumstances:
within 3 months from his assumption into
office. a. Actual or imminent danger of dissipation, loss,
wastage or destruction of the debtor's assets or
▪ Contents: other properties; or
1. Enumeration of all the assets of the b. Paralyzation of the business operations of the
debtor; debtor; or
2. Schedule of liquidation of the assets; and c. Gross mismanagement of the debtor, fraud or other
wrongful conduct on the part of, or gross or willful
3. Schedule of payment of claims. [Sec. 129, violation of the Act by the existing management of
FRIA] the debtor or the owner, partner, director, officer or
representative/s in management of the debtor. [Sec.
▪ Exempt Property – A petition may be filed to 31, Rule 2, FR Rules of Procedure]
exempt and set apart, for the use and benefit of the
said insolvent, such real and personal property as TERMINATION OF REHABILITATION PROCEEDINGS
is by law exempt from execution and also a
homestead. ▪ The court orders the termination of proceedings, upon
motion by any stakeholder or the rehabilitation receiver,
▪ No such petition shall be heard until it is first either declaring a successful implementation of the
proved that: Rehabilitation Plan or a failure of rehabilitation.
1. Notice of the hearing of the application has ▪ There is failure of rehabilitation in the following cases:
been duly given by the clerk;
a. Dismissal of the petition by the court;
2. Notice was posted to at least 3 public places in
the province/city at least 10 days prior to the b. Debtor fails to submit a Rehabilitation Plan;
time of such hearing; [Sec. 130, FRIA]
c. Under the Rehabilitation Plan submitted by the
▪ Sale of Assets in Liquidation – The liquidator may debtor, there is no substantial likelihood that the
sell the unencumbered assets of the debtor at a debtor can be rehabilitated within a reasonable
public auction. period;
▪ Private sale may be allowed with the approval of d. Rehabilitation Plan or its amendment is approved
court if: by the court but in its implementation, the debtor
fails to perform its obligations thereunder or there
1. Goods to be sold are of a perishable nature; is a failure to realize the objectives, targets or goals
set forth therein, including the timelines and
2. Goods are liable to quick deterioration in conditions for the settlement of the obligations due
value; to the creditors and other claimants;
3. Goods are disproportionately expensive to e. Commission of fraud in securing the approval of

keep; the Rehabilitation Plan or its amendment; and
4. Private sale is for the best interest of the debtor f. Other analogous circumstances as may be defined
and his creditors. by the rules of procedure.
▪ Unencumbered property of the debtor may also be ▪ Upon a breach of, or upon a failure of the Rehabilitation
conveyed to a creditor in satisfaction of his claim or Plan the court, upon motion by an affected party may:
part thereof. [Sec. 131, FRIA]
a. Issue an order directing that the breach be cured
GOVERNANCE within a specified period of time, falling which the
proceedings may be converted to a liquidation;

b. Issue an order converting the proceedings to a

liquidation;
c. Allow the debtor or rehabilitation receiver to

submit amendments to the Rehabilitation Plan, the
approval of which shall be governed by the same
requirements for the approval of a Rehabilitation
Plan under this subchapter;
d. Issue any other order to remedy the breach

consistent with the present regulation, other
applicable law and the best interests of the
creditors; or
e. Enforce the applicable provisions of the

Rehabilitation Plan through a writ of execution;
[Sec. 74, FRIA]
▪ Effects of termination:
a. Discharge of rehabilitation receiver subject to his

submission of a final accounting; and
b. Lifting of Stay Order and any other court order

holding in abeyance any action for the enforcement
of a claim against the debtor; [Sec. 75, FRIA]

5 - Mercantile Law Green Notes 2018 PDF

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

5 - Mercantile Law Green Notes 2018 PDF

Enviado por

Direitos autorais:

Formatos disponíveis

DE LA SALLE UNIVERSITY COLLEGE OF LAW

Lasallian Commission on Bar Operations 2018

Pat Costales Louise Dadivas

Keren Del Rosario

Jiro Dela Rosa

Lasallian Commission on Bar Operations 2018

Parties to whom Presentment for Payment Hazard ...........................................................53

Lasallian Commission on Bar Operations 2018

Cancellation of Non-Life Insurance Policy Carriage of Goods by Sea Act (COGSA –

Lasallian Commission on Bar Operations 2018

Number and Qualifications of Remedial Rights .........................................132

Lasallian Commission on Bar Operations 2018

Parties/Entities Involved ......................... 156 Responsibility and Primary Objective of the

Lasallian Commission on Bar Operations 2018

Novelty and Non-Prejudicial Disclosure Limitations of Copyright ..........................196

Lasallian Commission on Bar Operations 2018

Liquidation ................................................. 220

Lasallian Commission on Bar Operations 2018

DEFINITION AND NATURE

A letter of credit is an instrument issued by a bank that

A letter of credit is a financial device developed by merchants

To break the impasse, the buyer may be required to contract

1. Issued in favor of a determined person and not to order;

2. Amount must be:

a. Fixed and specified; or

b. Indeterminate but within a maximum sum, the

Non-compliance with the essential conditions renders the

1. Period fixed by parties;

a. 6 months from its date if used in the Philippines;

Lasallian Commission on Bar Operations 2018 1

b. 12 months from its date if used abroad. [Art. 572,

PARTIES AND CONTRACTS INVOLVED a. Reimburse issuing bank;

CONTRACTS INVOLVED b. Obtain shipping documents to claim the goods

Other parties: b. After negotiation – Contractual relationship with

Lasallian Commission on Bar Operations 2018 2

DOCTRINE OF INDEPENDENCE Seller must demonstrate by Beneficiary must certify

2. Independence only as to the justification aspect like in a

Commercial L/C Standby L/C

Lasallian Commission on Bar Operations 2018 3

DEFINITION AND CONCEPT

A trust receipt is a commercial document whereby the bank

A trust receipt transaction is any transaction between an

a. The entruster, who holds absolute title or security

b. The entrustee executes and delivers to the entruster

(1) Deliver to the entruster the price of the sale

Return the GDI if unsold (devolvera) [Sec. 4,

LAW P.D. No. 115]

When both parties enter into an agreement knowing that the

No violation of the right against imprisonment for non-payment of

A trust receipt is considered as a security transaction intended

There are two features in the transaction:

a. Loan – Bank (entruster) extends a loan, represented

Lasallian Commission on Bar Operations 2018 4

OWNERSHIP OF THE GOODS, DOCUMENTS, AND Notice must be:

Lasallian Commission on Bar Operations 2018 5

documents or instruments, and the satisfaction of the

PENAL SANCTION Intent to defraud is presumed when:

Lasallian Commission on Bar Operations 2018 6

the depositor of all charges which the depositor has

A warehouseman’s lien is a lien over the goods deposited

a. Lawful charges for storage and preservation of the

b. Lawful claims for money advanced, interest, insurance,

c. Reasonable charges and expenses for notice, and